CIOB on Tube investment funding

Tube investment funding: public sector bearing largest part of burden.

Through the infracos the Public Private Partnership for rebuilding London's underground railway system introduces approximately GBP5 billion of long-term private finance which London Underground repays through the infrastructure service charge, consisting of a base payment adjusted by performance related-bonuses and abatements.

The overall cost to London Underground from the start of the PPP contracts to the end of the second year has been GBP2.3 billion.

Since the start of the contracts the infracos have spent GBP1.4 billion on capital works.

This broad picture of how the Tube rebuild is funded opens Transport for London's commentary on PPP financial outcomes to date.

The report says: "In order to effectively discharge our statutory obligations, London Underground requires information from the infracos to fully explain the variance in their actual and projected expenditure against the levels set at the start of the contract".

"In particular, we require a clear explanation of the utilisation of risk and contingency funds".

""Further information is also required for us to understand the management and status of the infracos' supply chains; for example, the information provided by Metronet does not yet adequately explain the difference between the milestone payments made and the value of work done by its key sub-contractors".

""An illustration of the need for clear financial information within the confines of the contract is demonstrated by looking at the financial information that is publicly available".

"Work on reconciling these differences is being progressed with Tube Lines, and although Metronet has promised to start a similar process, tangible and visible progress has yet to be achieved." Based on the available information, the document sets out the reported turnovers of the three infracos in the financial year 2003-04 and the margin each enjoyed before interest, taxes, depreciation and amortisation.

MetronetBCV Metronet SSL Tube Lines.

Turnover (millions) GBP296 GBP320 GBP597.

EBITDA GBP38 GBP51 GBP75.

Margin 12.9% 15.8% 12.6%.

Over the two years 2003-05 Metronet BCV received after performance adjustments payments of GBP609.2 m by way of infrastructure service charge; Metronet SSL, GBP716.9m, Tube Lines, GBP894.1m, a total ofGBP2,220.2m against the baseline ISC of GBP2.241.8m.

Overall, the report comments, the payments reflect improving performance.

The abatements incurred by Metronet BCV and Tube Lines were lower than in the first year.

Metronet SSL received more than double the bonus it received in the first year.

Capital investment by the infracos By contrast, the report sets out the capital investment by the three infracos, cumulative to the close of the second year.

The total for Metronet BCV, GBP434.7m against expectation of GBP472m.

at transfer; Metronet SSL, GBP390.9m against expectation of GBP451.5m; Tube Lines, GBP580.8m against expectation of GBP569.1m Total cumulative investment over two years,GBP1,406.4m against expectation of GBP1,492.6m (shortfall GBP86.2m.) Commentary in the TfL report: "Investment by Metronet falls well short of that promised in the bid for this stage of the contract".

"This may support the picture of Metronet falling behind schedule, provided by examples such as the late delivery of the first batch of station enhancements and the delay on the District Line fleet refurbishment".

"By contrast, Tube Lines has recorded a greater total of investment than it expected at this stage of the contract (though this partly represents differences in the classification of project management costs".

""While these figures are interesting they do not enable conclusive comment on the relationship between investment made and renewals delivered, particularly because the picture is blurred by the inclusion of significant payments to the infracos' supply chain, which may not represent actual work done.

This reinforces the need for the infracos to provide the programme and cost information required".

"At the end of the second year it is estimated that the majority of the funds required by both Metronet and Tube Lines have come from the infrastructure service charge, ie from the public sector, with around 30-40 per cent of funds provided through debt arrangements and only a small proportion from shareholder equity." The shareholders have done well from the PPP deals: Metronet shareholders are estimated to have received GBP51 million in 'success fees' arising from the contract award.

Tube Lines shareholders 'success fees' are estimated at GBP39 million, retained on the books as equity.

They have also received dividends of GBP7.1 million and a further special distribution of GBP20.2 million relating to the refinancing of Tube Lines' financial structure.

London Underground benefited from the refinancing to the tune of GBP42 million to be invested in the capital programme.

The report goes on: "In addition to receiving dividends and interest as shareholders, consortia members have supply relationships with the infracos".

"The arrangement differs between Metronet and Tube Lines".

"In the Metronet case, the shareholders are contracted to provide the majority of planned investment and maintenance.

"Payments made to Metronet shareholders do not necessarily relate to actual work done as some are based on contractual payment dates and not delivery.

For Metronet, such payments are estimated at over GBP500 million just for the 18 months to September 2004 (excluding success fees)".

"The Tube Lines structure differs, with the majority of investment sub-contracted on the basis of open competitive tender".

"The shareholders' role focuses on staff secondment arrangements to bring in specific expertise".

"To 2005-03-31 these arrangements are estimated to have earned the Tube Lines shareholders GBP135 million.

"In the first year both Tube Lines and Metronet recorded profits, and shareholders in both companies have received income from the infracos.

Across the PPP however, it remains unclear whether payments to sub-contractors and for secondment arrangements to the same companies that own stakes in the infracos, truly reflect the value of the maintenance and investment delivered." Spreading the workload in competition London Underground is now seeking to spread the huge workload created by the Tube rebuild to parties other than the infracos, partly because it wants to ensure competitiveness in pricing, and partly because "the infracos have yet to demonstrate their ability to handle the existing workload, let alone the additional projects in the investment programme.

To facilitate competitive tendering, over the last year London Underground has awarded framework agreements to Birse Metro, Taylor Woodrow and Gleeson MCL.

The Walthamstow Central congestion relief project was the first to be awarded to an alternative provider.

The contract was awarded to Birse, at a price offering a significant saving compared to the price submitted by the infraco responsible for this station, Metronet BCV.

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