Money down the Tube?

24 Nov 06
TONY TRAVERS | The public-private partnership for the London Underground remains the mother of all such deals.

The public-private partnership for the London Underground remains the mother of all such deals.

Costing £30bn over 30 years, and with negotiations clocking up £500m in consultancy fees, the PPP was pushed through by the Treasury in 2003.

It was supposed to renew and improve the Tube through contracts that required two infrastructure companies (‘infracos’) to maintain assets while purchasing signalling and rolling stock. The government would then fund Transport for London to pay a service charge of more than £1bn a year to the infracos.

This, at least, was the theory. Ken Livingstone bitterly opposed the PPP, arguing that he, as London’s mayor, should have determined the level and type of re-investment in the Tube, funding the cost by issuing bonds.

In the end, Chancellor Gordon Brown prevailed and the PPP was forced through. We are now three-and-a-half years into the 30-year contracts.

The Underground PPP was not the only private finance deal that attracted opposition. The opaque costs, contractual complexity and long-term nature of Private Finance Initiative contracts for hospitals, schools and prisons have aroused much suspicion. Many local and health authorities believed they had to use the PFI to acquire assets. Indeed, a successful City export industry has developed off the back of domestic PPPs and PFIs.

Until now, there has been little by way of a detailed assessment of the success or failure of a particular contract of this kind.

But last week, the PPP arbiter’s report on Metronet, the biggest of the two infracos, was published. The arbiter, Chris Bolt, is an independent figure whose views provide a fair and objective judgement about this particular private finance deal.

Despite the international standing of the major companies that own Metronet, and the vast sums spent on writing the PPP contracts, the arbiter concludes there has been ‘poor delivery’ of maintenance and renewals. Metronet, from 2003 to 2006, has not carried out its activities ‘in an overall efficient and economic manner and in accordance with good industry practice’.

London commuters this week experienced first hand the direct result of such failures, as whole Tube lines were paralysed by engineering overruns and system failures.

A key table in the arbiter’s report summarises the extent of Metronet’s underperformance. Whereas the company’s bid document suggested that station modernisations on the so-called ‘sub-surface’ lines would cost £2m each, they have actually come in at an average of £7.5m. Track renewals on the same line have cost double the bid estimate. Deep Tube ‘reconditioning’, which was expected to cost £3m per kilometre, has cost £5.7m.

These figures suggest Metronet has grossly under-performed. In signing the contracts, Metronet and the other infraco, Tube Lines, were supposed to have an incentive to deliver improved and new assets.

The arbiter’s report shows Metronet received more than £3bn in service charges from 2003 to 2006. Abatements for poor performance are derisory by comparison.

Last week’s Public Finance carried an article by Mark Hellowell suggesting that PFI is ‘back from the dead’. There is surely a need to undertake a comprehensive analysis of whether or not a full sample of earlier projects are providing value for money.

Some hospitals are paying 20% of their turnover in PFI service charges. The Tube PPP service charge represents more than 40% of all Underground expenditure — and this is for assets that, overwhelmingly, have not yet been delivered.

Of course, one company’s incompetence does not mean all PPP and PFI deals are similarly poor value for money. But the arbiter’s work suggests the need for the National Audit Office to take a long, hard look at this kind of deal.

In the short term, it looks as if public sector intervention might be needed to sort out the Tube PPP. With the Olympics ahead, it would be a national embarrassment if the expected improvements in Tube performance do not materialise. Presumably the chancellor could put pressure on Metronet and Tube Lines to renegotiate their contracts so as to give the mayor of London control over what is delivered where and at what cost. The infracos and their owners need to keep the government sweet if they are to win future government contracts.

Part of the awkwardness of the PFI/PPP policy has been the government’s ‘no U-turn’ approach to any suggestion that sometimes traditional (or other kinds of) public sector procurement might be a better way to deliver new hospitals, schools, prisons and railways.

There are almost certainly projects where the private finance approach is the correct one. But there are others where it won’t be. The arbiter’s report on Metronet should be a salutary warning to both government and the private finance industry.

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