On the right lines

As the race to win the franchises to run London's underground system hots up, Anne Mizzi reports on the issues behind the Tube lines' partial privatisation.

The train crash at Paddington in which 30 people died has turned the spotlight on the planned break-up of London Underground, and particularly the likely role of Railtrack.

The Government's London Underground public-private partnership (PPP) intends to carve up the Tube system into public and privately-owned elements.

This reorganisation will split the London Underground (LU) operation into two basic parts: its operational function (rolling stock, line maintenance etc) and the customer services/ticket sales administration. London Transport, of which LU forms a part, will retain the latter role.

The Tube lines are to be divided into three groups, or “intracos”, and offered as separate contracts. They are: the Central, Victoria and Bakerloo lines (CVB); the Jubilee, Northern and Piccadilly lines (JNP); and the Circle, District, Hammersmith & City and Metropolitan (CDH&CM) lines, the so-called sub-surface lines.

These contracts are for a fixed term with the freehold of the assets to remain in public hands and the lease reverting to the Government at the end of the contract.

Six groups are bidding for the operational contracts, advised variously by Slaughter and May, Clifford Chance, CMS Cameron McKenna, Lovell White Durrant, Linklaters and Simmons & Simmons (see box).

London Transport's in-house legal department is headed by Frances Lowe, with Nicholas Evans as employee law manager, Patricia Dryden filling the head of litigation role, and Valerie Chapman, Betty Morgan and Sarah Atkins leading the 20-lawyer commercial side.

Freshfields is advising London Transport on corporate and commercial work and Hammond Suddards does a substantial amount of its litigation.

Lowe says: “London Transport uses a combination of in-house and external expertise. Clearly with something as huge as the PPP we foresaw the need for substantial external resources and expertise. Although we were not obliged to use a public tendering process we did so, issuing a notice in [the Official Journal for the European Community] in spring 1998.

“After the subsequent beauty parade, we appointed Freshfields to work with us and the Government on the main PPP contract.

“We appointed other firms on the non-core work and specialist aspects of the PPP, for example Slaughter and May advised us on pensions aspects.”

Jeffrey Rubinoff and corporate partner Richard Phillips are leading the Freshfields team of 24 advising London Transport and the Department of the Environment, Transport and the Regions (DETR) on the deal.

The majority of the contracts should be agreed in 2001.

Rubinoff says the winning contracts will be reviewed every seven-and-a-half years, calculated on a quarterly period for the full length of the contract, which is referred to as a 30-year term.

He says: “The balance of the investment is thought to be taking place in the first 15 years.

“What we are talking about is businesses with a lease and service contract. It is different from a PFI in the nature of the risk transfer.”

Mary Bonar, Nabarro Nathanson's head of energy and infrastructure, who advised Team London Consortium, a group which failed to secure an invitation to tender when the offer went out to bidders early last week, says that the line-up of City firms which have been appointed by the various consortia invited to tender for the contract is just the tip of the iceberg.

“Each of the pre-qualified billing consortia has a law firm advising, and the individual organisations will have their own independent advisers,” Bonar says.

“In addition, all these PPPs are going to need financing and that will involve a list of law firms advising the loan arrangers,” she adds.

Rubinoff says he only has direct contact with the law firms advising the consortia, but he concedes: “The total number could be quite large.”

However, CMS Cameron McKenna corporate banking partner Andrew Ivison says his firm is representing the Metronet intraco, which includes five seperate organisations.

He says: “As of [21 October] the members have indicated they will not be using the independent legal advisers with regard to the joint venture or other subcontracts.”

But he warns against second-guessing how the work for the consortia will pan out. “I would hesitate to say what the individual members of our consortium consider they will do in the future.

“When the various consortia have been through the various stages in relation to the bid, they may then feel that there is a need for independent advisers, but at this stage they will be evaluating their bids. It is much too early to come to any conclusions.”

Firms may be hoping that they are set for the business bonanza that followed the privatisation of the rail system. But they may be disappointed.

Bonar says the London Underground partial privatisation will be different from the British Rail sell-off, due to its structuring as a PPP, rather than a full privatisation. She says: “The Conservative government didn't mind talking about rail privatisation, but the current government is committed to PPP.”

British Rail had an 80-lawyer legal department prior to privatisation. But Railtrack, which owns the vast majority of the UK's rail infrastructure, has a legal team of less than 20 lawyers (see box). London Transport has around 30 lawyers in its legal department now and it is not immediately clear how PPP will affect their numbers.

The DETR expects Railtrack to win the sub-surface line contract early next year, provided discussions go according to plan.

Rubinoff says a process agreement between LU and Railtrack was signed in the first week of October. But he adds: “They are still to confirm how they are going to finance their proposal and they are also thinking over the potential integration of the rail network. There haven't been any advanced discussions.”

And a DETR spokesman says the agreement between LU and Railtrack is only a preliminary arrangement. “The sub-surface line position is that Railtrack and London Underground are in discussions. They have signed the heads of terms, which is a process agreement,” he says.

Of course, the events of the last few weeks could well affect the outcome of the company's bid. Lawyers are among those campaigning against Railtrack's involvement.

The solicitor acting for the families of the victims of the Paddington and Southall train crashes, Louise Christian, a partner at Christian Fisher, has been examining the safety implications of transport privatisation and Railtrack's safety record.

“It is amazingly insensitive and quite wrong. I think there ought to be a rethink about the plans for the Tube,” she says.

Rubinoff says it is impossible to say whether the Railtrack bid will be affected by the Paddington crash.

The Health and Safety Commission (HSC) appointed Lord Cullen to chair the Paddington inquiry on 7 October, two days after the crash.

The inquiry is to be held under Section 14(2b) of the 1974 Health and Safety at Work Act. Lord Cullen previously chaired the inquiry into the Piper Alpha oil rig disaster in 1988-90, and the inquiry into the shootings at Dunblane primary school in 1996.

A public inquiry into the Southall crash was adjourned last week, but the HSC has insisted that Professor John Uff's inquiry into that accident will continue with a view to completion before the millennium, and will be taken into account in the Cullen Inquiry.

Bonar says the decision on Railtrack's bid may have been delayed because of the crash, which could have further implications for the structuring of the partnership.

She says: “It may well be that the safety case will be reviewed and the funding arrangements may now be done differently.”

The changes to the Tube system – whether it is referred to as privatisation, partial privatisation or any one of a number of acronyms – is one of the biggest and most complicated business deals of recent years, certainly the biggest such move by this Government.

There is set to be a large amount of work for firms both leading up to and during the restructure, but in the wake of the Paddington crash, firms may find themselves caught up in the politics of transport as well as the politics of privatisation.