City law in practice

Case Study 3: PPP and the Tube explained


With an increasing number of public sector bodies using Public Private Partnerships (PPP) to remove the burden of fundraising from the tax payer, more and more lawyers will be getting to grips with this most complicated of commercial transactions.

On 11 April 2001 the Department of the Environment, Transport and the Regions (DETR) presented Londoners with a plan that would finally provide them with an underground system worthy of the 21st century.

The DETR suggested that ownership and operation of the Underground remain in the public domain, but that private companies improve and maintain its crumbling infrastructure. Londoners were assured that any PPP for the Underground would guarantee improved services and safety, with every train being replaced or refurbished during the course of the partnership, and every station being refurbished or modernised within the first seven years.

What is a PPP?

PPP is an umbrella term used to describe private investment in the public sector. PPP agreements are contracts under which companies or consortia take over public sector services – for example, the building of hospitals. They also usually involve a transfer of financial risk from the public to the private domain. Although, by definition, PPPs demand substantial commitment from the private sector, they are quite unlike the privatisation that marked the Thatcher years, when ownership of public services was transferred fully into the private sector. Nowadays, private companies enter a PPP by agreeing to supply a public service for a pre-determined period and at a fixed cost. Although the company will be entitled to retain any profit gained under the PPP, they will also be responsible for any overspending or delay. At the end of the contract, the service reverts to the public sector.

The Government’s stance

Behind the DETR’s PPP proposals was an urgent need for cash to modernise and improve the Underground and face its escalating overcrowding problems. The DETR pledged that a sum of 13 billion would be invested in London’s Underground over a period of 15 years.

The public sector’s list of improvements to the Underground is not an impressive one: the last major project, the Jubilee Line extension, was completed over two years late and 1.4 million over budget. The government claims that under a PPP agreement taxpayers will not foot the bill for any overspend or delay, although the final public/private apportionment of risk has yet to be agreed.

On 16 June 1999 John Prescott made a statement to the House of Commons setting out his vision of PPP as a much-needed investment tool for the Underground. He explained that management of the Tube lines would be divided between three different companies. The private sector would then be invited to bid for contracts to build, maintain and improve infrastructure via those companies. The government has repeatedly stated that PPP will not remove the operation of the Underground from the public sector and that the Health and Safety Executive (HSE) will continue to regulate safety – indeed, the partnership will only proceed if the HSE is completely satisfied with any health and safety implications the project raises.

The government buzz word surrounding PPP is ‘best value’, and competition for preferred-bidder status for the three contracts was fierce. Metronet, a consortium of private companies, is the preferred bidder for two of the contracts and another consortium, Tube Lines, is the preferred bidder for the third. Final bids will be evaluated against a public service comparator that will be independently audited by the National Audit Office before any contracts can be signed, the aim being to secure best value for the taxpayer by determining whether PPP really is the best-value option.

The legal players

CMS Cameron McKenna is advising Metronet, while Tube Lines is advised by Lovells. London Transport’s PPP work is conducted by a combination of its in-house legal team and Freshfields Bruckhaus Deringer. Transport for London, a Greater London Authority body with responsibility for transport, is being advised by Baker & McKenzie.

The legal battles

PPP for the Tube has been strongly opposed by both Ken Livingstone and Bob Kiley, the Commissioner for Transport for London, and both have tried to block the move through the courts. In July 2001 Transport for London challenged the legality of the proposals by way of judicial review. Mr Justice Sullivan in the Administrative Court held that although the proposed agreements were not consistent with the Mayor of London’s transport strategy, that did not render them unlawful. This has now opened the door for the proposals to proceed.

In their next attempt to block the proposals, Livingstone and Kiley mounted an attack on the government’s two pre-conditions to PPP, safety and value for money, by commissioning a report by accountants Deloitte & Touche that was highly critical of the government’s value-for-money exercise. London Underground sought to prevent publication of the report, however, the Court of Appeal ruled that it was in the public interest for an edited version of the report to be published.

The next step

Despite Deloitte & Touche’s criticisms and an unsupportive report from the Transport Select Committee, Stephen Byers, Secretary of State for Transport, announced on 7 February 2002 that he intended to proceed with the PPP for the Tube. In support of his decision, he cited a value-for-money assessment conducted by accountants Ernst & Young.

So what next? A period of consultation with Ken Livingstone and Transport for London will follow, during which the draft PPP contracts, which run to 135 documents, will be finalised. After legal threats in the form of a letter sent by Baker & McKenzie, Ken Livingstone has succeeded in extending the consultation period beyond the 20 days initially envisaged until 22 March 2002. London Underground will then meet in April to ratify the deal and the final PPP contracts will be scrutinised for approval by the HSE. In the absence of further legal wrangling, PPP looks set to go ahead this summer.

The outcome: hit or miss?

The government has frequently stressed that the only way to meet the modernisation needs of the London Underground is through the provision of skilled and specialised private-sector resources that are not currently available to the delay-stricken network. And, on the face of it, the prospect of a well-managed and efficient underground transport system will do much to lift the spirits of the commuter dealing with inefficient trains, broken escalators and the like on a daily basis. However, with news leaks suggesting that any noticeable changes will take years to materialise (station upgrades will not take place for at least seven years, there will only be 12 new trains on the entire network by 2008), it remains to be seen whether the commuting public will be satisfied in the end…

Jargon Buster

Consortium

Group of private companies

Judicial review

Legal challenge to a decision of a public body

National Audit Office

Public spending watchdog

Private Finance Initiative (PFI)

A type of PPP in which a public service is contracted out to the private sector

Public-Private Partnership (PPP)

A collaboration between the public and private sectors

Public services comparator

Public service model of investment used to assess whether a proposed PPP provides best value for the taxpayer

Transport for London

Greater London Authority body responsible for delivering the mayor’s transport strategy. Will take over control of the Tube at the end of the PPP agreements.

Case notes

R v (1) London Underground Ltd (2) London Regional Transport, ex parte Transport for London (2001) LTL 1/10/2001

Transport for London’s application for judicial review.

Richard Gordon QC, Alan MacLean and Martin Chamberlain of Brick Court Chambers instructed by Baker & McKenzie for Transport for London. John Howell QC of Blackstone Chambers, and Rabinder Singh and Kate Cook of Matrix Chambers instructed by LRT for the respondents.

(1) London Regional Transport (2) London Underground Ltd v (1) Mayor of London (2) Transport for London (2001) LTL 17/10/2001

Court of Appeal decision to allow publication of an edited version of the Deloitte & Touche report.

Elizabeth Appleby QC of 4-5 Gray’s Inn Square and Janet Kentridge of Matrix Chambers instructed by LRT for the claimants. Lord Lester QC and Thomas de la Mare of Blackstone Chambers instructed by Baker & McKenzie for the defendants.