The decision, which was due to have been announced on Tuesday, is crucial to contractors. Of the £7bn of work needed on the Tube, they estimate that £1.6bn will be spent on stations: will they be able to control this work themselves or will they find themselves bidding for work from the Railtrack empire? As one bidder says: “It’s very big, very complicated and very politically sensitive.” But at least the complicated scenario gives consultants employed on the project some extra work to justify their huge fees.
London Transport chief executive Denis Tunnicliffe has already admitted that £65m will be paid out in fees, but another LT director this week told Building that the figure has now risen to £85m.
Management consultants Arthur Andersen and PA, accountant PriceWaterhouseCoopers and law firm Freshfields are among those clocking up hourly fees at a rate construction consultants can only dream of. And one party likely to pay the price is Labour – Prescott spent years chiding the Conservatives over the £100m-plus fees that were spent on rail privatisation.
So, what are the government’s options? It has already been decided that LU will operate the trains. The rest of the network will be split among three infrastructure companies, or infracos, that will be responsible for three lots of lines. Railtrack is due to be given control of the “sub–surface” lines, including the District and Circle (which are partly subterranean and partly on the surface).
There had been a plan to allow Railtrack to bid for further “deep-tunnel” Tube lines – London Transport last week prepared draft prequalification documents that awarded Railtrack the sub–surface lines and allowed it to bid for one more set. Now the firm is expected to withdraw from consideration for the deep lines – and is possibly relieved to be concentrating on the sub–suface package, rather than overstretching itself.
This last consideration is a serious one: the firm’s balance sheet may be strong enough to take on the whole of the Tube, but the construction industry believes its project management capability is not.
Mark McVicar, a transport analyst with bank Societe Generale Strauss Turnbull, says: “One of the biggest risks for Railtrack is that one of its major projects will go wrong. The West Coast Main Line, Channel Tunnel Rail Link phases one and two and the Underground’s sub–surface lines would crack most organisations. Two Tube lines might be too much, even for a company the size of Railtrack.” There is speculation that as much as 90% of Railtrack’s senior construction people are bought into the company from outside consultants, calling into question their long-term commitment.
And with the West Coast Main Line struggling to get off the ground, one rival bidder says: “It’s disappointing to see Railtrack so involved, given its track record.” There is anger about the cosy relationship Railtrack has built up during months of exclusive talks over the sub–surface lines. And one of Railtrack’s team is David Hornby; he is now general manager for Railtrack’s “Project Submarine” – the London Underground deal. Not so long ago, he was LU’s director of engineering But if the industry is annoyed by Railtrack’s privileged treatment, there is some good news emerging about the process.
The good news is …
At first, the idea was to attempt to get the private sector to take on as much risk as possible, but surveys have so far failed to give LT all the information it needs to do this.
It recognises that an affordability study still to be undertaken would be futile if it attempted to get the private sector to price for unknown risks across the network, because the bids it would get would be simply too high.
One risk is that one of its major projects will go wrong. Two Tube lines might be too much, even for Railtrack
Analyst Mark Mcvicar
As one bidder says, no amount of information could be enough: “I’d like to know everything. On tunnels, I want to know about the membrane, the leaking and behind it, the type of soil and the subsidence and seepage trends over five years around it.
“If it’s a station, I want to know about the floors, the escalators, the lifts and to see the plans going back to when they were built.
A lot were built between 1910 and 1950 on London clay, so the effect of that interests me.” So, the source on the LT board says the company has decided that, rather than ask contractors to price the risk of unknown problems, perhaps in deep tunnels, LU will take liability for these issues itself.
There has also been a shift in emphasis on penalties to be charged to infracos if something goes wrong on their lines. The initial idea was for payment to be mainly linked to the availability of the lines to LU’s services, but they will now be mainly linked to the throughput of passengers.
This means that, rather than an infraco being penalised heavily if part of the system is out of use, it will be well rewarded if more passengers are delivered to their destinations. This, it is thought, will provide an incentive for efficiency and innovation, perhaps using faster trains or even ones with double decks.
Funding the improvements
And a longer-term worry for bidders, that London Underground may not be able to fund the improvements out of its own revenues, as planned, is also to be allayed. The LT director told Building that Transport for London, an arm of the new Greater London Authority, will be given a special covenant to fund the investment.
The Treasury is moving to give TFL government guarantees that would give it a “triple-A” debt rating, similar to a guarantee given on the money Railtrack will be repaid by the government to fund the Channel Tunnel Rail Link. This way, affordability for the public sector is again protected, because bidders will be unlikely to submit higher bids to cover the risk of LU being unable to pay for the improvements they make.
One other feature of the deal was also addressed this week – the pensions of 6000 of London Underground employees, who will be transferred to the infracos.
With the Rail, Maritime and Transport Union boasting 80% membership among these maintenance, engineering and procurement staff, there is concern within LU about the part-privatisation plan. The concern stretches as far as Tunnicliffe, who is forcing through the plan but who, according to other LT executives, is philosophically opposed to it.
The pensions problem
There are significant people issues. A lot of people at the highest level don’t want this to happen
A Bidder, on LU’s attitude to the deal
One bidder says: “There are some significant people issues. A lot of people at the highest level don’t want this to happen and the delays over Railtrack’s role have made it worse. It makes people think it will be put it off for some time.” But it is not surprising that the position is sensitive internally, because pensions at LU are at good terms, which the private sector would be unlikely to match.
Although private sector bidders would not be allowed to tamper with pensions already accrued, they can change the rate at which they build up in future. The RMT says LT now puts in 15% of an employee’s pensionable pay, with employees adding 5% of this into an employee’s pension.
But it argues that infracos would not make any contribution to employees’ pensions.
This week, Treasury minister Alan Milburn announced that all staff transferred through the PFI process are to be given packages “broadly comparable” with their current deals.
How much will the bids cost?
The recent hiatus has been tough for all concerned. Major contractors have formed powerful consortia and been dealing with their own expensive advisers for a year. They expect to have to spend £4m on bidding for one infraco, £6m on bidding for two; and if they close a deal, success fees will push this up to £12m-14m.
But at least with Railtrack being out of the equation for the time being, contractors will feel they are operating on a level playing field for the deep Tube lines. In the meantime, with the timetable for the part-privatisation expected to slip way beyond its already-delayed spring 2001 target date, maintenance of the Tube network needs to go on.
The part-privatisation may seem out of the stratosphere of many in the industry, but its slow progress is starting to have an effect. Vernon Clough, managing director of £30m-a-year Mabey Construction, which does £15m of LU work every year, is one medium-sized contractor that is concerned.
He says: “To start with, LU was probably given an unrealistic timetable, but now that has been moved back there is a danger of a black hole in the funding for maintenance arrangements opening up.
“Money the government had anticipated would come from the private sector will now not be available for some time, and we are seeing early indications that funding is slowing down. On some projects, LU is having a second look before starting; some are delayed in different ways.
