ON APRIL 1 London Underground's three Infrastructure Companies, BCV, JNP and Sub-Surface Lines, are to be incorporated as limited companies. Since the start of shadow running for the Public-Private Partnership on September 19 last year, these Infracos have been maintaining trains, stations and infrastructure for New London Underground, the operating company responsible for safety, train services and marketing (including revenue). By early 2001, the Infracos are to transfer to the private sector on the basis of contracts lasting between 25 and 30 years. New London Underground will remain in the public sector as a subsidiary of Transport for London, the successor to London Transport.
LT Chief Executive Denis Tunnicliffe reports good progress with the PPP and the restructuring it has required. 'We are surprised by how smoothly it is going', he says, with the prospects for the Infracos to incorporate as planned on April 1 'looking good'. Preparations for the start of shadow running created something of a distraction, with performance 'not as good as we would like', but 'the problems are being addressed'. Tunnicliffe says that advantages of the new structure are now 'rolling out', particularly the 'very sharpened focus' of the Infracos on meeting the standards of train availability and infrastructure quality required by the operator and ultimately the passenger.
These requirements will be defined in the service contract that New London Underground will sign with the successful bidder for each Infraco. Train service performance will be specified on the basis of capability (delivering a passenger journey time requirement), availability (measured in customer hours lost due to service interruptions) and ambience (measured by 'mystery shopper' surveys). The Infracos will be required to make stations available for use by the public as advertised, and will be set targets for ambience and the availability of lifts and escalators.
Separate provision will be made for major enhancements, and LT has indicated the programmes that it would have intended to undertake between 2001 and 2018. These include train replacement on the Bakerloo, Piccadilly and Victoria lines, but PPP Project Director Martin Callaghan says that LT will be 'agnostic' on the subject of rolling stock procurement, other than specifying the need to provide a travelling environment that meets customer expectations. The choice between refurbishment and new build will be entirely for the Infracos to decide, he says, which may leave innovative solutions such as LU's Space Train concept (RG 8.98 p521) on the shelf.
Infracos will be paid an Infrastructure Service Charge every four weeks, adjusted to incentivise good performance and deter poor performance. Bidders will be asked to specify a firm ISC for the seven to eight years up to the first Periodic Review, and a figure for the remainder of the contract. Three Periodic Reviews are expected to take place at broadly equal intervals during the life of the contract. Should it prove impossible to reach agreement on revisions to the ISC, the matter will be referred to an independent Statutory Arbiter.
Sharing the risk
During each review period, operating and maintenance cost risk (apart from that relating to major enhancements to the network) will be borne by the Infraco, which will have to make up the shortfall should its forecasts prove inaccurate. Tunnicliffe says that the PPP is starting from 'the right balance' of risk allocated between client and contractor, with the latter to shoulder as much as would deliver good value.
This 'proportionate' allocation of risk from the outset is different to LT's approach to previous projects involving private finance. In securing long-term contracts for the management and upgrading of its revenue collection, power supply and communications systems, Tunnicliffe says that LT tried from the outset to place as much risk as possible with the contractors, who 'fought us back' during contract negotiations.
The Infracos will not be expected to shoulder responsibility for 'catastrophic risks' such as a major tunnel collapse or London's rising ground water levels, and Tunnicliffe expects 'debate' with bidders on the others. He thinks that most of the risk, and also opportunity, for the Infracos will comprise less dramatic issues such as the efficient management of overnight line closures for maintenance work. The real leverage, says Tunnicliffe, will come through improving the efficiency of day-to-day management; 'if you get that right, you'll really make an impact'.
Callaghan thinks that there will be powerful incentives for the Infracos to be 'economic and efficient and follow standard industry practice'. With payments to the Infracos dependent on their performance, 'you'll bear penalties for doing badly as long as you do it', he says, and the same applies to the rewards. Efficiency improvements may take some time to deliver, and LT expects the costs for Infracos to be higher at the start of the contracts than at the end. External finance will therefore be required, and Callaghan expects the winning bidders to be subject to an 'intensity of gaze' from their backers that should prove a powerful stimulus to efficiency.
Although the disciplines of the market may bring their own efficiency benefits, Tunnicliffe acknowledges that the main driver behind the PPP is 'a government need to do things differently'. By signing long-term contracts with the private sector, which will provide the capital and bear the risk, it is hoped to provide a more secure basis for investment. To date, this has been largely at the mercy of government spending priorities, as established each year.
Tunnicliffe hopes that financial stability will allow long-term planning, with capital investment directed at schemes offering the best whole-life return. The previous line-based management structure had also run its course, he suggests, with new thinking on whole-life asset management making little impact despite a keen awareness of what is required from trains and stations. Restructuring for the PPP has already caused people 'to think quite differently', and shadow running is now 'getting the behaviours we wanted' as the Infracos and New London Underground mimic the full-blown contractual relationship that is to come.
The profit motive 'drives out its own efficiencies', although Tunnicliffe recognises that there is a trade-off between these efficiency benefits and the higher cost of private capital. Opponents of the PPP have argued that it would be cheaper for LT to borrow investment capital through a bond issue or similar mechanism, but Tunnicliffe says that the cost difference between public and private capital is 'minimal' and 'overwhelmingly offset' by efficiency gains. Callaghan adds that the aggregate risk of managing assets 'doesn't magically change when the private sector does it'. Any difference in the headline cost of finance genuinely reflects the transfer of risk. Accountants PricewaterhouseCoopers produced an illustrative comparison in December suggesting that the PPP would be cheaper for funding investment over the first 15 years (table).
Bids from prequalified consortia for the BCV and JNP Infracos are due by March 31 (below); prequalification for Sub-Surface Lines closed on February 21, and bids are to be evaluated this autumn. Prices in the bids will be evaluated against the cost of continued public ownership, and the government has made it clear that the contracts will not be awarded if the private sector does not offer better value for money.
The instrument for evaluating the bids is the public sector comparator, which is 'pretty much' based on shadow running according to Callaghan. This will establish the cost of operating as New London Underground and three Infracos. LT's own preference for continued public management of the infrastructure would have been for a single Infraco, but three were deemed necessary by the government to foster competition. Both structures will be costed in the comparator. Once the PPP contracts come into force next year, LT intends to publish the comparator which will be offered for scrutiny by the National Audit Office.
On July 3 this year the capital's new elected mayor and assembly will take office as the Greater London Authority, with Transport for London succeeding London Transport and assuming responsibility for the Docklands Light Railway and Croydon Tramlink as well as trunk roads and traffic control. A slimmed-down LT will however remain in place to run the Underground network until PPP contract negotiations are completed.
Some potential candidates for the post of mayor have voiced their opposition to the PPP. The most notable of these has been Ken Livingstone, who as leader of the Greater London Council until its abolition in 1986 presided over the most recent and certainly the most controversial period in which LT was controlled by local rather than national government. The mayor will be responsible for appointing the board of Transport for London and directing the organisation, as well as producing an integrated transport strategy for the capital in the context of national policy.
Between July 3 and the completion of the PPP, the mayor, Transport for London and the slimmed-down LT will be under a duty to consult with one another. The mayor 'won't destabilise the process' in Tunnicliffe's opinion, and it is his personal aspiration that New London Underground and the Infracos will do 'such a good job' that the mayor's attention will be focused on medium to long-term issues. These would include extensions to the Undergound network, such as those proposed for the East London line. Infraco bidders will be asked to price separately for these projects, and Tunnicliffe hopes to have them 'tied up' for handover to the new mayor who may decide to buy them one at a time. He also hopes that the mayor will become a 'passionate supporter' of the stalled CrossRail project, as he sees additional capacity on the Railtrack network serving London as a pressing issue.
Although fares revenue will provide around £1·3bn of Transport for London's total annual income projected at £1·83bn, Tunnicliffe says that for the Underground network 'some ongoing grant support is likely'. He expects this to be as low as possible as LT strives to secure 'the best deal in town' through the PPP, which will see government making a long-term commitment to the private sector that it is apparently unable to make to public bodies.
Lines: Bakerloo, Central, Victoria, Waterloo & City
Track-km maintained: 298
Stations maintained: 76
Number of cars: 1296
Staff allocation: 2153
Annual operating and maintenance expenditure: £91m
Projected investment expenditure, 2001-02 to 2015-16: £2·07bn
Required improvements with indicative cost and timescale:
Refurbishment of 40 stations ú600m 2001-15
Renewal of 100 km of track ú350m 2001-15
Victoria line train replacement andsignalling upgrade ú500m 2002-08
Central line train refurbishment andcontrol system replacement ú250m 2012-16
Bakerloo line train replacement andsignalling upgrade ú300m 2013-18
Lines: Jubilee, Northern, Piccadilly
Track-km maintained: 370 (excludes Jubilee Line Extension)
Stations maintained: 100
Number of cars: 1512
Staff allocation: 1978
Annual operating and maintenance expenditure: £97m
Projected investment expenditure, 2001-02 to 2015-16: £2·42bn
Required improvements with indicative cost and timescale:
Refurbishment of 80 stations ú700m 2001-15
Renewal of 140 km of track ú450m 2001-15
Northern line signalling upgrade ú350m 2001-07
Piccadilly line train replacement andsignalling upgrade ú650m 2008-14
Lines: Circle, District, East London, Hammersmith & City, Metropolitan
Track-km maintained: 366
Stations maintained: 96
Number of cars: 1184
Staff allocation: 2223
Annual operating and maintenance expenditure: £98m
Projected investment expenditure, 2001-02 to 2015-16: £2·87bn
Required improvements with indicative cost and timescale:
Refurbishment of 80 Circle, District, andMetropolitan line stations ú600m 2001-15
Renewal of 180 km of track ú400m 2001-15
District line train refurbishment,control system upgrade ú250m 2001-06
Metropolitan and Circle line signallingupgrade, additional Circle line trains ú200m 2002-05
Metropolitan and Circle line signalling upgrade, new Metropolitan line trains ú750m 2008-14
District line train and signallingreplacement ú600m 2012-18
Bidders may also be required to price separately for building the Whitechapel - Dalston and Surrey Quays - Old Kent Road extensions of the East London line, and for installing junctions with Railtrack routes at Dalston, New Cross Gate and Peckham to enable services to run to Highbury & Islington, West Croydon and Wimbledon. Prices for building a link to Railtrack's Croxley Green branch from the Watford branch of the Metropolitan line, to allow services to run to Watford Junction, may also be sought.
Illustrative comparison of finance costs
(all figures in £bn) Public LU PPP
Assumed investment requirement 16·5 16·5
Long term stable funding (bond finance) -1·0 -1·0
Innovation and incentives - -3·0
Net fare income available for investment -10·0 -10·0
Financing gap before cost of finance 5·5 2·5
Public sector bond @ 5·75% (nominal) 3·5 -
Private sector debt and equity @ assumed average of 10% (nominal) - 2·0
Net total cost to the public sector 19·0 14·5
Bidding for the Public-Private Partnership formally began on June 21 1999, with the publication of a notice in The Official Journal of the European Communities inviting interested parties to prequalify for all three Infracos. Five consortia were subsequently shortlisted for either BCV, JNP or both, (see below), with Invitations to Tender issued on October 20.
Discussions with Railtrack over using the Sub-Surface Lines to run cross-London rail services came to nothing, and on December 21 expressions of interest in the Infraco were invited once again. Invitations to Tender for Sub-Surface Lines are expected to be issued this month.
- LINC: Bombardier Prorail, Mowlem, Fluor Daniel, Alcatel Telecom and Anglian Water.
- Metronet: Adtranz, WS Atkins, Balfour Beatty (BICC), Seeboard, Thames Water, Westinghouse Signals.
- TubeRail: Brown & Root, Alstom Transportation Projects, AMEC, Carillion.
- NewMetro: Siemens Transportation Systems, Taylor Woodrow Construction*, Innisfree, Gibb, Mott MacDonald.
- Tube Lines Group: Bechtel/Halcrow, Amey, Hyder Investments, Jarvis.
* Subsequently withdrew. Other consortium members withdrew from BCV competition, but submitted a request to prequalify for Sub-Surface Lines
- CAPTION: Now approaching its centenary, the Bakerloo line station at Baker Street typifies the ageing state of much of central London's deep-level tube network
- CAPTION: Alone amongst the Sub-Surface fleets, the District line's D78 stock has yet to be refurbished; replacement is now envisaged as part of the PPP
- CAPTION: Track maintenance in the cramped tube tunnels is difficult to programme around LU's long hours of operation
- CAPTION: LU's East London line was closed for four years to allow extensive infrastructure renewal; the trains have also been refurbished, but are nearing 40 years of service
- CAPTION: The JNP concessionaire will take over responsibility for LU's 10-year contract with Alstom to maintain the Jubilee line rolling stock, supplied as part of the extension to Stratford (above), and the train service provision contract under which Alstom owns and maintains similar stock for the Northern line
- CAPTION: The Metronet consortium expressed optimism when submitting its PPP prequalification bids on August 19