In a letter sent to Transport Secretary Lord Adonis, the Mayor calls on the Government to acknowledge the “evident failure” of the PPP system “to deliver the promised benefits” and said Ministers must now “make good the shortfall…in a way that has no adverse impact on Transport for London’s overall funding position.”
The call comes after PPP Arbiter Chris Bolt published draft findings in December which costed work to be carried out by Tube Lines in the second phase of the PPP contract at £4.4bn, £400m higher than TfL claims the work should cost but more than £1bn less than Tube Lines has indicated is the lowest possible price.
The determination led to Tube Lines expressing disappointment, insisting it had made “a very good offer that will bring the cost of work down to a level that [TfL] can afford whilst still being able to deliver the performance and upgrades that the underground needs.”
In his letter to Lord Adonis, a copy of which has been seen by this site, Mr Johnson warns that a failure to fully carry out the Tube upgrades risks repeating “the mistakes of the past which led to a decaying and unreliable public transport system and a serious drag on London’s prosperity and status as a world city.”
Johnson also calls on the Transport Secretary to prevent Tube Lines shareholders Ferrovial and Bechtel receiving what he describes as “huge sums” under “Secondment Agreements” which the Mayor claims allows the shareholders to loan staff to Tube Lines “at a very substantial premium to their real economic cost”. TfL insiders speaking on Tuesday suggested these arrangements could net the shareholders £1.1bn over fifteen years of which £800m would be profit.
The Mayor’s letter asserts that “Approximately £400mn of this profit will be paid in the second period, a sum roughly equal to what is required to meet the likely shortfall in London Underground’s funding.”
Describing the matter as “urgent”, the Mayor claims Adonis has “an obligation to intervene immediately to make good the likely funding shortfall faced by London to ensure that the Tube upgrades are delivered in full, either by funding the shortfall from Government resources or by persuading Tube Lines’ shareholders to give up their extraordinary returns in light of their abject failings.”
A meeting of the Transport for London board will today discuss the PPP Arbiter’s findings and agree TfL’s response. A briefing paper for board members reveals that London Underground “believes that its further Representations to the PPP Arbiter make a clear case for a reduction in his cost assessment of over £700m, thus achieving an affordable outcome” but warns “should the Arbiter’s determination of costs remain in the region of £4.4bn, this will leave a shortfall given LU’s available funds.”
The paper sets out three options in the event that the Arbiter’s final determination is consistent with his draft costings:
The Government is responsible for the construct of the PPP contract and purposefully designed it to deliver a scope of work with a Review point to re-assess the fair costs to achieve that scope. LU has fulfilled its role by holding down scope as far as possible, and successfully reducing TLL’s excessive cost claim by over £2bn (compared with its June submission). Government should therefore now provide funding to address the remaining gap.
If Government is unwilling or unable to provide direct funding then the Arbiter should allow the Contract to operate as intended (as described in 4.2) with TLL now asked to raise the finance required, and the Government should allow TfL’s borrowing requirement to increase accordingly.
If neither of these routes is available to LU, despite it being entirely contrary to the intention of the PPP contract for that to be the case, then there is one further route by which the affordability issue can be resolved without LU having to cut into its core work programme. As argued elsewhere in the paper, TLL’s shareholders – Bechtel and Ferrovial – earn excessive and unjustified fees under their Secondment Agreements with TLL that are over and above their handsome (26%) return on equity. As things stand, the expected payments by TLL under the Secondment Agreements, over and above any directly incurred costs associated with actual secondees, are estimated to be around £400m over RP2. The Arbiter should disqualify these payments, but in any case they should now be foregone by the shareholders.
Echoing the Mayor’s letter, the paper notes that “The removal of these excessive fees would alone be sufficient to remove virtually all of the potential gap between the costs determined by the Arbiter and what LU can afford” but warns that a failure to reduce these costs “could otherwise mean that core LU upgrade programmes would have to be sacrificed simply in order that the TLL shareholders, Ferrovial and Bechtel, continue to receive unjustified and inflated payments. As an outcome for London this would be devastating.”
