Arbiter publishes his initial view of future costs for by hrs16503


									Press Notice 02/08
9 September 2008

Arbiter publishes his initial view of future costs for Tube Lines

Chris Bolt, the statutory Arbiter for the London Underground Public-Private
Partnership (PPP) Agreements, today published his assessment of the costs that
Tube Lines could incur in the second 7½ years of its PPP Agreement with London
Underground. This followed the request for guidance from London Underground
made in April 2008.

Chris Bolt said:

“My assessment is that costs are likely to be in the range £5.1 – 5.5 billion for the
second 7½ years of the contract. I have reached this view on the basis of a detailed
review of the figures put forward by Tube Lines and London Underground, and other
evidence including benchmarking with other metros.

Chris Bolt added:

”One of the objectives of this reference was to make it more likely that the Periodic
Review would be successfully concluded by 30 June 2010. It is vital, therefore, that
lessons are learned from the work that has been undertaken. I intend to continue
work with Tube Lines and London Underground over the next few months to try to
reduce uncertainties further, and to clarify the procedures for the remainder of the
Periodic Review.”


For queries, contact:

Anthony Silverman
020 7379 5151/07818 036579

                                One Kemble Street London WC2B 4AN
               Tel: 020 7282 2170 Fax: 020 7282 2180 Email:

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Notes to editors:

1. The PPP Agreements contain provisions for a Periodic Review to take place
   every 71/2 years. By 31 December 2008, London Underground must restate
   contract terms for Tube Lines and set its Affordability Constraints; Tube Lines
   then responds to this by 30 June 2009 with updated pricing. The contract allows
   time for a period of negotiation or for a reference to the Arbiter for directions on
   future pricing, prior to the start of the second 7½ year review period on 1 July
2. The current reference sought guidance on:
   (i)    “the Arbiter’s best estimate of certain of the cash flows of Infraco set out in
          paragraph 7.2 of Schedule 1.9 of the PPP contract calculated as if the
          Reference for Guidance were a reference for Directions on these matters at
          Periodic Review:
          • For the second Review Period only
          • For the JNP PPP Contract only
          • Based on existing Infraco Obligations
          • Assuming compliance by Infraco with its first Review Period obligations
              and an absence of claims
          • Making allowance for such costs of access as the Arbiter judges
              necessary to achieve stated performance levels.
   (ii)   “the Arbiter’s assumptions as to the level of performance in respect of
          Capability, Availability, Ambience and Service Points of a Notional Infraco
          during the second Review Period, based on what might reasonably be
          expected to be achieved given current Tube Lines’ performance levels and
   (iii) “the appropriate treatment of performance revenues of a Notional Infraco in
         light of paragraph 7.3 of Schedule 1.9 of the PPP Contract.”
3. As indicated above, the Arbiter’s range of costs for the second 71/2 year Review
   Period is £5.1- £5.5bn. In their original submissions, Tube Lines projected a total
   cost of £7.2bn and LUL projected £4.1bn. The LUL projections excluded
   differential inflation which Tube Lines set at £1.2bn and which the Arbiter
   considers will be around half a billion pounds over the course of the next Review
4. In determining its Affordability Constraints, London Underground will need to
   take account of the costs of existing finance, as specified in the PPP
   Agreements, performance revenues (also covered by this reference) and the
   scope for meeting some costs through additional financing by Tube Lines.
5. The reference has been handled in accordance with the Arbiter's Procedural
   Framework for Use in the Giving of Directions and Guidance and his Procedural
   Approach to the receipt of an unanticipated request for Guidance, both of which
   are published on the Arbiter’s website.
6. The role of the PPP Arbiter was established by the Greater London Authority Act
   1999 (GLA Act). The remit of the PPP Arbiter is set out in the GLA Act and is
   supplemented by contractual provisions included within the PPP Agreements.
   Under the terms of the GLA Act, the Arbiter can be asked by a PPP Party to give
   directions on matters specified in the PPP Agreements or guidance on any
   matter relating to a PPP Agreement. Where only one party makes a reference
for guidance, as in this case, the Arbiter has discretion about whether to give
guidance or not.

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