The National Audit Office reported today that there was limited assurance that the price of the three Tube PPPs was reasonable, and some uncertainty about the eventual price although any price revisions have to meet tests of economy and efficiency. The complexity of the PPPs resulted from the scale of the deals, innovative output specifications and a limited knowledge of the condition of some assets. The resulting deals offer the prospect, but not the certainty, that improvements will be delivered.
- The planned spending to modernise and upgrade the Tube has a present value of £15.7 billion over 30 years (£9.7 billion in the first 7½ years) and, subject to tests of economy and efficiency, the volume of spending is likely to increase at review after seven and a half years. Greater price certainty at the outset would have resulted in a higher price.
- The terms of the deals changed markedly during prolonged negotiations with the eventual winning bidders. After competitive bidding, the prices all rose, adding £590 million to the 30 year cost of the deals. If they deliver performance at bid levels private sector shareholders stand to receive nominal returns of 18-20 per cent a year. This is about a third higher than on recent PFI deals but London Underground considered that it was in keeping with the risks being borne. If the private companies achieve the lower performance levels set by benchmarks, their real returns would be between 10 and 17 per cent a year.
- Although repayment is at least 95% guaranteed by the public sector, borrowing comes at a cost of some £450 million more than direct Government borrowing. London Underground had to weigh these extra costs against the potential risk sharing and other benefits to the Tube presented by the PPPs.
- Compared to London Underground’s pre-1997 investment regime, the resulting deals offer the improved prospect, but not certainty, that the expected improvements will be delivered. The work will start two years later than originally planned. Recovering the maintenance backlog is now expected to take over 22 years rather than the 15 years originally intended.
It is too early to judge how successful the PPPs will be. There are financial incentives to deliver better performance but possible limitations in their impact. Given the volatility inherent in operations, it is hard to determine whether the benchmarks are easy or difficult to achieve. In the first year, the performance of the companies against their contractual targets has been mixed, but in line with what the private companies forecast in their bids. In addition, a range of factors may affect some areas of performance.
Many of the factors which will decide the success of the deals are in place. The deal is clearly specified and understood and the parties are building a good partnership in most respects. But there are important tests ahead in managing ageing assets and ensuring effective oversight. The oversight mechanisms leave the onus on Transport for London to give sufficient protection of the public interest, and require good flows of information from the Infracos about how they are progressing with asset capability and condition improvement projects.
There are limits to what the signed deals in themselves can achieve. The price, scope and funding of the PPPs are reviewed every 7½ years and so could change. Moreover, there are a number of other PFI deals that provide Tube services that are critical to the success of the Underground – including a £1.2 billion, 30 year contract to deliver power upgrades for the network.