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2001-04-26 Kiley Plan: 85% of Tube trains new or refurbished within seven-and-a-half years (Transport for London)

2001-04-17 TfL's Bob Kiley condemns haste on PPP (Transport for London)

2001-04-11 London Underground: Public Private Partnership. The Offer to Londoners (Department of the Environment, Transport and the Regions)

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date 26 November 2001
source Transport for London
type Briefing

Introduction:

In December 1999, accountants PricewaterhouseCoopers (PwC) published a summarised form of their financial analysis of the London Underground Public Private Partnership (PPP), commissioned by the Government.
The PwC analysis concluded that PPP would save the taxpayer £4.5bn over the first 15 years of the 30-year PPP, when compared with the Public Sector Comparator. The PwC analysis also served as the basis for the Government claim that under PPP £13bn will be invested in the Underground over the first 15 years of PPP.


TfL Concerns:

Having reviewed the PwC analysis, TfL has two major areas of concern:

1) It employs a valuation methodology that does not appear to conform to standard project evaluation techniques, nor to the methodology PwC and the London Underground are now using for the value for money calculations on the live bids. The presentation of this as a valid basis for the calculations is therefore misleading.

2) Its statement that PPP would produce £4.5bn of savings cannot be justified under a standard value for money calculation (much less is it supported from the backing schedules of the 1999 note); the claim vanishes when viewed against the first 7 ½ year period, the only fixed-cost period within the PPP contract.


Statements by Government:

The Deputy Prime Minister stated before the House of Commons in December 1999:
"The PricewaterhouseCoopers document informs the debate and gives a clear steer that PPP is the right choice. It would save £4.5bn, which could be spent on education, health and other priority needs."
Keith Hill, also in December 1999, said:
"I remind the House of the conclusions of the most recently commissioned independent report on the PPP. Despite frequent claims to the contrary, the report found that the PPP would not double the cost of borrowing, but would lead to improvements in efficiency in the order of 20 to 30 per cent, generating massive improvements efficiencies in the tube investment programme over 15 years."

TfL's Specific Conclusions:

Based on TfL's review of the PwC analysis, the following specific conclusions were reached:

As of 23 October, value for money analyses performed by LUL and PwC on the live PPP bids have failed to show any savings over the publicly funded and managed alternative. It is overwhelmingly clear that the £4.5bn savings to the taxpayer offered to Parliament are nothing more than a chimera.
TfL has learned that the first 7 ½ years of the PPP contracts are the only period for which the prices offered by the bidders are fixed. TfL found that once this period in the PwC analysis is restated to provide for an annual financing program and terms equivalent to the PPP value for money analysis, the grant required by the public sector alternative averages £9m per year less than the private PPP alternative.
Recent revelations by one of the preferred bidding consortia indicate that the levels of required government grant - funded by taxpayers - are likely to be at least four to seven times higher than the levels suggested to Parliament in 1999.
Accepting the 1999 PwC analysis, £12.5bn of investment over the first 15 years of the PPP will be met by £12.1bn of fares from passengers or (taxpayer funded) Government grant, amounting to 96% of the total spending. When the full weight of financing costs to the PPP are taken into account, total public funding would have to rise to £12.3bn, or 98% of the funding for the period.
It appears that the analysis employed by PwC in 1999 did not use the same value for money methodology that LUL will apply as part of any decision to go forward with the PPP. Specifically, the analysis ignores the time value of money to the Treasury and it has the effect of reversing the benefits of lower-cost public-sector borrowing.
Employing present value analysis on the investment and resulting finance costs, as now apparently intended by LUL in its value for money analysis, the infrastructure spending gap narrows to £633m, less than one seventh of the £4.5bn gap cited by the PwC analysis. Within this narrower range, even with anticipated savings (which have not appeared within the actual bids and are based entirely on questionable adjustments), the case presented in the PwC note for the PPP is much more susceptible to small changes in efficiencies, even to the discount rates employed on the resulting cash flows. The percentage level of savings appears, in present value terms, to be one fourth of the percentage cost differential calculated in the PwC note and cited by Ministers in support of the PPP.
When the value for money analysis is repeated for 7 ½ years, the only fixed period of the bids, the comparison with the public sector alternative shows a difference of £40m. Again, this narrow difference is based on questionable adjustments and not on a comparison of actual costs projected in the PPP and public sector alternatives, a comparison which favours the public sector alternative in all cases. Even based on LUL's current value for money methodology, there is no significant margin in costs in the public and private alternatives for investment.

Railhub Archive ::: 2001-11-26 TfL-002