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The Role of the Arbiter
Statutory Provisions
Duties and Objectives
Provision of Information
Contractual Provisions
Periodic Review
Extraordinary Review
Guidance to the Parties
Guidance from the Parties
The role of the PPP Arbiter was established by the Greater London Authority Act 1999 (GLA Act). The Secretary of State appointed Chris Bolt as the first Arbiter, for a four year term from 31 December 2002, the date of commencement of the Tube Lines contract. This term was extended on 18 May 2006 for a further four years to December 2010. Under the terms of the GLA Act, the Arbiter is independent of Government and of the PPP Parties and can only be dismissed on grounds of incapacity or misbehaviour, or for unreasonable delay in the discharge of his functions.
The PPP Arbiter's role is principally to ensure that any differences between the PPP Parties (Parties) about the price to be paid to the Infracos or about economy and efficiency can be resolved independently, swiftly and with certainty. The remit of the PPP Arbiter is set out in the GLA Act but is supplemented by contractual provisions included within the PPP Agreements.
Statutory provisions
Under the provisions of the GLA Act, the PPP Arbiter has two principal functions:
- to give directions on matters specified in the PPP Agreements, when referred to him by one of the Parties to a PPP Agreement; and
- to give guidance on any matter relating to a PPP Agreement, when asked to do so by either (or both) of the Parties to a PPP Agreement.
In addition the PPP Arbiter also has further powers 'for the purposes of the proper discharge of the functions' conferred on him by the GLA Act. For example the PPP Arbiter may do 'all such things as he considers appropriate for or in connection with the giving of a direction or guidance and ... do such other things as he considers necessary or expedient ... for purposes preparatory or ancillary to the giving of directions or guidance generally ... notwithstanding that there is no matter in relation to which a direction or guidance is required'. The powers conferred on the PPP Arbiter are exercisable therefore on the giving of directions and guidance or in circumstances preparatory or ancillary to the giving of a direction or guidance.
The PPP Arbiter's function in respect of directions is limited by the terms of the PPP Agreements: if there is no specific provision in a PPP Agreement for the PPP Arbiter's involvement then disputes are dealt with through contractual dispute resolution. Even on matters within his remit he is only brought in if the Parties fail to agree and seek a direction from him.
The PPP Arbiter therefore has no unilateral power to change, or propose to change, provisions in the PPP Agreements. Even where he has made a direction on a disputed matter within his remit, the Parties may, under the provisions of the GLA Act, jointly agree to set it aside.
Under the GLA Act, the PPP Arbiter's second function is to issue guidance on any matter relating to a PPP Agreement, although again only at the request of one (or both) of the Parties.
Duties and objectives
In giving directions or guidance, the PPP Arbiter is under a statutory duty to 'act in the way he considers best calculated to achieve' four objectives. These are:
- to ensure that LUL has the opportunity to revise its requirements under the PPP Agreements if the proper price exceeds the resources available;
- to promote efficiency and economy in the provision, construction, renewal, or improvement and maintenance of the railway infrastructure;
- to ensure that if a rate of return is incorporated in a PPP Agreement, a company which is efficient and economic in its performance of the requirements in that PPP Agreement would earn that return; and
- to enable the Infracos to plan the future performance of the PPP Agreements with reasonable certainty.
The GLA Act does not prioritise between these objectives. In principle, the PPP Arbiter will need to consider the interaction between them in exercising his functions. In practice, however, the PPP Arbiter considers that there is unlikely to be significant conflict between them.
In giving directions or guidance, the PPP Arbiter is also under a duty to take account of any factors which are notified to him by both Parties, or are specified in the relevant PPP Agreement, as ones to which he must have regard.
Provision of information
The GLA Act gives the PPP Arbiter power to seek from the Parties, their associates and any PPP related third party such information as he considers relevant to the proper discharge of his functions. Any failure to provide information can lead to enforcement action in the High Court.
Any information provided to the PPP Arbiter which relates to a particular individual or business can only be disclosed with the consent of the relevant individual or business or in specific circumstances set out in the GLA Act. These circumstances include facilitating the Secretary of State, the Mayor, Transport for London or the PPP Arbiter himself to carry out their functions under the GLA Act or to facilitate Ministers, the Mayor and other regulators to carry out statutory functions under other Acts such as the Railways Act.
The provisions of the GLA Act have been amended (through the Railways and Transport Safety Act 2003) to allow, for example, Ministers and the economic regulators to disclose information obtained under their statutory powers to the PPP Arbiter.
Contractual provisions
The PPP Agreements anticipate that the main input from the PPP Arbiter will be at Periodic Reviews, which will take place every 7½ years, in any Extraordinary Review and in giving guidance to the Parties.
Periodic Review
The principal issue that the PPP Arbiter may be asked to determine at each Periodic Review is what is the economic and efficient price for which an Infraco should deliver the services required under the PPP Agreements for the next Review Period? In practice the PPP Arbiter is likely to be asked more specific questions for direction and guidance, related to the details of the Agreements. These include:
- the economic and efficient price for the delivery of services, i.e. the likely future operating and capital costs of a Notional Infraco in particular having regard to the risk of the individual activities and the portfolio effect;
- the amount and terms of new finance required;
- whether new or varied obligations contained in LUL's revised requirements at a Periodic Review involve an increase in risk for the Infraco;
- whether a Notional Infraco would be capable of financing the revised performance requirements;
- the size and appropriate rate of return of new equity, including forming a view of any change in the general perception of the Infraco's risk, the market risk premium and the appropriate risk free rate, and changes to the capital structure of the Infraco for the new finance raised;
- the cost associated with any previously uncompensated and unavoidable adverse events for the Infraco and how these are to be funded by LUL; and
- whether, in specified circumstances, a specific distribution can be made to the Infraco's shareholders which would still leave it in a position after the distribution to be able to perform its activities under the contract properly.
Extraordinary Review
The PPP Arbiter may also become involved in an Extraordinary Review process which will occur if, through no fault of its own, an Infraco incurs economic and efficient costs in excess of its contingencies and a further amount known as the Materiality Threshold. If the PPP Arbiter agrees that an Extraordinary Review is justified, he will work with the Parties to find a way of keeping the PPP process operating until the next Periodic Review when the costs and scope issues will be finally addressed. As part of any Extraordinary Review the Parties will consider the provision of additional money to the Infraco and/or changing the scope of its obligations such that further funds are not required.
Guidance to the Parties
In addition, at any time either Party can refer to the PPP Arbiter for guidance on any matter. The PPP Agreements anticipate that Metronet will ask for specific guidance each year from 2006 in relation to the economy and efficiency of its two Infracos.
Guidance from the Parties
In carrying out his functions the PPP Arbiter must take account of any matters that are notified to him as factors to which he must have regard. These include expectations that:
- the PPP Arbiter follows open and transparent procedures at a Periodic Review;
- LUL, the Infracos and their respective stakeholders (including the Mayor and TfL) will be invited to submit representations on the matters in question;
- the PPP Arbiter will take expert advice on matters where he would be better informed by expert opinion and he would make available to the Parties the terms of reference of those advisers and a summary of their advice;
- the PPP Arbiter will provide the Parties with provisional conclusions on the matters referred and that the Parties would then be given the opportunity to respond to those provisional conclusions;
- the PPP Arbiter will have regard to the credit rating of the Infraco immediately prior to the Review;
- the PPP Arbiter will consider joint advice from a financial adviser appointed by the Parties in relation to the likely levels of finance available in the market; and
- the PPP Arbiter recognises that there are alternative procurement approaches including fixed price contracting to coincide with a Review but also procuring works at appropriate points through the Review Period and performing operating and maintenance activities in house.
The PPP Agreements also include a definition of Good Industry Practice and set out guidance from the Parties to the PPP Arbiter as to what should be expected of an Infraco (known as the Notional Infraco) working in this way. These factors include, for example, establishing and maintaining whole life asset planning and maintenance regimes, planning for operational, contractual and financial contingencies and effective planning and monitoring of projects. These concepts will be fundamental to the analysis that the PPP Arbiter carries out when asked to give guidance or direction as the Notional Infraco sets the standard against which the actual Infracos will be compared.
As described in section 4 of his initial consultation paper, the PPP Arbiter has consulted on how he should carry out his role. In the Policy Statement published following this consultation, the PPP Arbiter has indicated that he will give due regard to the guidance and has indicated a general intent to follow it insofar as it does not conflict with his statutory obligations.
