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The Role of the Arbiter
Statutory Provisions (GLA Act sections 229 and 230)
Objectives (GLA Act section 231)
Further Powers (GLA Act section 232)
Provision of Information
Contractual Provisions
Periodic Review
Extraordinary Review
Guidance to the Parties
Guidance from the Parties
The role of PPP Arbiter was established by the Greater London Authority Act 1999 (GLA Act). The Secretary of State appointed Chris Bolt as the first Arbiter from 31 December 2002, the date of commencement of the Tube Lines contract.
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 Arbiter's role is principally to ensure that any differences between the PPP 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 Arbiter is set out in the GLA Act but is supplemented by contractual provisions included within the PPP Agreements.
Statutory provisions (GLA Act sections 229 and 230)
Under the provisions of the GLA Act, the 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.
The 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 Arbiter's involvement then disputes are dealt with through contractual dispute resolution. Even on matters within his remit, he is only brought in if one or both of the Parties seek a direction from him.
The 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 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 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. Where only one Party makes a reference, the Arbiter has discretion as to whether to give it; where both Parties make a reference, he is required to give guidance.
Objectives (GLA Act section 231)
In giving directions or guidance, the Arbiter is under a statutory duty to 'act in the way he considers best calculated to achieve' four objectives. These are:
- to ensure that London Underground 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, and taking into account matters specified in the 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 Arbiter will need to consider the interaction between them in exercising his functions. In practice, however, the Arbiter considers that there is unlikely to be significant conflict between them.
In giving directions or guidance, the 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.
Further powers (GLA Act section 232)
In addition, the Arbiter also has further powers conferred on him by the GLA Act 'for the purposes of the proper discharge of the functions'. For example, the Arbiter may carry out inspections, consult as he considers appropriate and 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 Arbiter are exercisable therefore either following a reference to him for guidance or directions or in anticipation of a reference.
Provision of information (GLA Act section 233)
The GLA Act gives the 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 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 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 Arbiter.
Contractual provisions
The PPP Agreements anticipate that the main input from the Arbiter will be at Periodic Reviews, which will take place every 7½ years, in any Extraordinary Review and in giving guidance to the Parties on any matter relating to a PPP Agreement.
Periodic Review
The principal issue that the Arbiter may be asked to determine at each Periodic Review is the price for which an Infraco should deliver the services required under the PPP Agreements for the subsequent Review Period(s). This is judged by reference to a 'Notional Infraco', which operates in an 'overall efficient and economic manner and in accordance with Good Industry Practice'. The Arbiter may be asked more specific questions for direction and guidance, related to the details of the Agreements. These include:
- the amount and terms of new finance required;
- whether new or varied obligations contained in London Underground '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 London Underground; 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.
In preparation for possible references to him in relation to the Periodic Review of Tube Lines' PPP Agreement, the Arbiter has issued various documents setting out his proposed approach. These are available in the Policy statements and consultations section of this website.
Extraordinary Review
The Arbiter may also become involved in an Extraordinary Review process which occurs if an Infraco considers that it has incurred or will incur economic and efficient costs in excess of its expected costs (as documented in the contract) and a further amount known as the Materiality Threshold. The Arbiter has published a document setting out his approach to Extraordinary Review, which is available in the Policy statements and consultations section of this website.
Guidance to the Parties
At any time either Party can refer to the Arbiter for guidance on any matter relating to a PPP Agreement. The Arbiter has published a document setting out his approach to requests for guidance not specifically anticipated in the PPP Agreements, which is available in the Policy statements section of this website.
Guidance from the Parties
In carrying out his functions the Arbiter must take account of any matters that are notified to him by the Parties as factors to which he must have regard.
In particular, the Parties have given the Arbiter guidance in Annex 2 of Schedule 1.9 on a range of matters concerning the exercise of his functions and the interpretation of certain contractual provisions relating to the Notional Infraco. The relevant extracts from the PPP Agreements are available in the PPP Agreement Extracts section of this website.
The PPP Agreements include a definition of Good Industry Practice and set out guidance from the Parties to the 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 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.
The Arbiter consulted in 2003 on how he should carry out his role and has stated 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.
