Tube Lines has today been told that it can spend a maximum of £4.4bn over the next seven and a half year review period, down on the £5.75bn it had asked for.
Chris Bolt, the Arbiter for the London Underground Public-Private Partnership (PPP) Agreements, today published his draft directions and guidance on Tube Lines’ costsfor the 7½ years from 1 July 2010. He proposes to set the figure at £4.4bn.
This compares with Tube Lines’ revised bid of £5.75bn and London Underground’s figure of £4.0bn.
Bolt said: “I have reviewed carefully the submissions from Tube Lines and London Underground, and taken expert advice.
“On the basis of my analysis, I consider that a company operating in an overall efficient and economic manner and in accordance with Good Industry Practice – the test in the PPP Agreement – could deliver its obligations at a substantially lower cost than projected by Tube Lines, though not as cheaply as suggested by London Underground.
”A key difference between the Arbiter’s proposed costs and those of Tube Lines arein respect of line upgrades. The Arbiter has taken the view that Tube Lines, operating in effective partnership with London Underground, could have delivered the Jubilee Line upgrade on time and to budget, and could now be progressing well with the Northern Line upgrade.
However, the Arbiter recognises that Tube Lines has made significant contractual claims against London Underground, including inrespect of the Jubilee Line upgrade, reflecting its view of the impact of London Underground’s approach to the contract. London Underground is likely to robustly defend these claims.
If these claims are successful, the Arbiter would expect Tube Lines to make further claims relating to the upgrade projects which would add to its future income.The next stage in the Periodic Review is for Tube Lines and London Underground to make representations on the Arbiter’s draft directions. He will finalise his directions on costs in early March. These final cost figures will then form the basis of draft directions on future charges and on financing.
Bolt added: “Before I make draft directions on charges, I am seeking an assurance from London Underground that it is able to afford the cost figure I propose to direct. If it cannot give that assurance, it will need to review the scope of its requirements for the next 7½ years. I am also seeking its views on whether it would offer better value for money for any additional financing to be raised by Tube Lines or by Transport for London. TfL has already agreed to provide finance for the purchase of new Piccadilly Line trains because this provides better value.”
Tube Lines has received the Arbiter’s draft determination and disagrees with its conclusions. It said that by the Arbiter’s own assessments it was demonstrably more efficient than London Underground (LU) which is the only true comparator. “The figure of £4.394 billion is very demanding for the work that has to be undertaken by us,” it said.
Tube Lines chief executive Dean Finch, who is leaving the company to lead National express, said: “A settlement at this level is not conducive to private sector involvement in the Underground, nor does it reflect the reality of the Underground working environment. The Arbiter recognises that LU is a difficult client, but rather than including a costed assessment of that impact, he expects Tube Lines to cover its costs by making claims against LU now and more in the future.
“The Arbiter has acknowledged even at this level that LU has a stark choice to make - either to do less work or raise additional finance. However, this document is a draft and we have a further six weeks to make representations which we will do robustly.”
Costs for the Tube Upgrade
The PPP Agreements contain provisions for a Periodic Review to take place every 7 1/2 years.
On 8 December 2008, London Underground issued restated contract terms for Tube Lines and set an Affordability Constraint; Tube Lines responded to this on 30 June 2009 with updated pricing.
The contract allows time for a period of negotiation or for a reference to the Arbiter for directions on future pricing, prior to the start of the second 7½ year review period for Tube Lines on 1 July 2010. London Underground submitted such a reference on 23 September 2009.
The draft direction provides guidance on the following:
- Performance revenues;
- Infrastructure Service Charge payments; and
- Financing requirements.