15 November 2002
Livingstone's remark may have been deliberately provocative, but the multibillion-pound 30-year Tube deal may indeed be crucial to the continued buoyancy of the two firms. Its collapse could leave either or both without a paddle, whichever creek they are up.
Amey is part of the Tube Lines consortium, still hoping to sign its contract to upgrade the Jubilee, Northern and Piccadilly lines on December 7. Metronet, which includes Atkins, may not be able to complete on its contracts for the rest of the network until February next year.
The troubles of Amey and Atkins are rippling across much of the Private Finance Initiative and PPP contractors' sector. Amey's share price has fallen by 91% since the beginning of the year and Atkins' has dropped by 84%. Amey, which has had three finance directors in six weeks, has suspended payment of a promised dividend. Atkins is shedding 400 jobs after announcing a loss.
But, in truth, the problems afflicting the two companies differ. Atkins says the PFI market has helped sustain it: falling demand from private sector clients in the US is the difficulty. In Amey's case it is more a combination of over-ambition and over-exposure to the PFI market.
Amey's downturn began when it anticipated changes in accounting standards, which turned a profit for 2001 of £55.7m into a loss of £18.3m. The adoption of new practices caused immediate anxiety in a jittery stock market. Until then, Amey – and some other PFI contractors – had counted tendering costs as assets when they reached preferred bidder status.
This was not, though, Amey's only problem. Companies in the rail sector are generally under-performing in terms of share price, if not necessarily in profits. Amey has had to write off much of the value of its assets in the Croydon light rail scheme. It is also facing write-downs on many of its other, non-transport, assets, and has just lost preferred status on a £375m contract with Redcar & Cleveland Borough Council.
Having put the bulk of its existing PFI business up for sale, Amey's most vital asset is the Tube contract, representing guaranteed revenue over a 30-year period.
Its biggest mistake was that, with the prospect of massive profits in the PFI sector, it went for it hook, line and sinker. 'They are no longer in a normal market, governed by rational decisions,' says Tony Travers, director of the Greater London Group at the London School of Economics. 'They are in the mad, mad, mad world of the public sector.'
In this new dimension, the contractor can become powerless. It is waiting for things to happen, while the meter clicks up constant extra costs (£1.25m a month for the Tube deal in Amey's case).
Paradoxically, the government's way of helping Amey to overcome this problem – guaranteeing to repay the bidding costs on the deal – could open the door to another, potentially fatal, legal challenge to the contracts from Livingstone.
Amey's travails have wider significance. The harsher rules on treatment of bidding costs and the delays to the Tube PPP are causing other contractors to bid for fewer contracts, and probably to bid higher. 'I think the government has a supply-side problem with PFI generally,' says Colin Talbot, professor of public policy and management at the University of Glamorgan.
Shortages of contractors and labour have caused the government's investment underspend, says Talbot. As a new rush of PFI/PPP contracts flows through the system, costs could soar, with a real question mark over the capacity of the private sector to deliver major capital projects.
Yet the PFI still offers very attractive margins. The question is whether the potential long-term profit is outweighed by the uncertainties of the political process. For Travers the answer is clear: 'If I were a shareholder in a private company, I would say don't get involved with the public sector with a bargepole.
PFnov2002
