Rail 414: Déjà vu for the Underground as ‘unworkable’ PPP goes on

The much-vaunted Public Private Partnership scheme for the London Underground – complete with 30-year contracts for the consortia involved – threatens to repeat the mistakes of the privatisation of the surface rail network, warns CHRISTIAN WOLMAR.

There is another railway in the UK which carries about the same number of passengers every day as the National Rail network – two million people undertaking three million journeys. It has just 400 kilometres of route miles and has not had a major accident since 1987. There are plans to break up the unified structure of the organisation, separating the infrastructure maintenance from operation of services.

It is, of course, the London Underground which is experiencing just the same type of rise in usage as the national railway, demonstrating this growth has little to do with ownership or marketing efforts and all to do with the booming state of the economy. The Tube is still publicly owned but for the past three years the Government has tried to implement a Public Private Partnership (PPP) involving a complex break-up of the system. In a kind of reversal of what has happened on National Rail, there will be three infrastructure groupings of lines that will be privatised through 30-year contracts being let to consortia which include engineering and project management companies. The services will continue to be operated by the publicly owned London Transport, with control passing to the Mayor’s Transport for London (TfL) once PPP deals have been signed.

As even those of you living in Wick or Penzance will have noticed, there has been something of a political row over the imposition of the PPP. Ken Livingstone, the Mayor, does not like it. Nor does Bob Kiley, the fearsome American with more than a passing resemblance to Clint Eastwood who has been put in charge of TfL by Livingstone. Nor, indeed, does anyone else. The Evening Standard once tried to find any experts on transport who supported the scheme but failed to do so. Even the International Project Finance Association, which promotes such deals, examined the PPP project and found it wanting. Its members, while obviously supporting the concept, found that the scheme was in effect a privatisation by the back door. The chairman concluded that the scheme “threatens to repeat the same mistakes as the privatisation of the railways”. Oh dear.

After a long period of purdah which meant that only critics of the scheme were ever heard, London Underground has started hitting back, beginning to brief journalists on the virtues of the scheme. There is, of course, one big one. The Government has promised that once the PPP has been signed, London Transport will be getting between £700m and £1bn annually to support the investment programmes of the private companies. This was not always the case. Initially, those fantasists in the Treasury, the same ones who thought that, once privatised, the railways would not need any subsidy, seriously believed that under the PPP all the Tube investment could be raised from the private sector and the debt serviced out of fares. That might have been possible if everyone were paying Heathrow Express-type fares of £1 per mile. But then they would take black cabs instead.

Livingstone and Kiley have reiterated their opposition to the scheme, emphasising the safety risks of the new structure. In fact, they are wrong to concentrate on that issue even though it has the most resonance with the public. Sure, there are safety concerns in splitting up the integrated Tube into four parts, with potentially similar problems to those that were demonstrated so tragically at Hatfield. But the Tube has a superb safety record and has learnt the lessons of the King’s Cross disaster. It has developed a very impressive risk assessment and control system which has greatly reduced the hazards on the system. (Interestingly, when the exercise was first carried out, the principal danger to passengers was found to be something which had never been the cause of a major accident – flooding. In concentrating on that aspect of risk, the management has greatly reduced that danger and now the biggest hazard is the more obvious one of people falling off platforms.)

London Underground’s sophisticated risk control system has been applied to the PPP scenario and, according to managers, will ensure that none of the risks associated with the break-up of the railway will be introduced. While I remain sceptical that this is entirely true, London Underground is right when it argues that having four companies involved is nothing like as complex as the situation with the railways.

But the Mayor and his team are right to take issue with other aspects of the scheme which, other than being a way to get the investment off the Government’s balance sheet, make very little sense. While even PPP supporters accept that it costs more for the private firms to borrow money than the Government, the oft-repeated argument is that they are so much more efficient that this extra cost is more than offset by the gains. It is, however, an unproven argument. While it is probably the case that on the whole private enterprise is more efficient than the public sector, this is by no means a universal truth. There are countless examples of good public businesses and vice versa.

Moreover, handing over 30-year contracts to private firms is pure madness. The public sector may not be good at project management, but nor is it any good at project procurement. Look at what has happened with some of the Private Finance Initiative schemes. The purchasers of the schemes, the hospital trusts and education authorities, gave such good deals to the consortia that they have sold on the income stream at a massive profit, pocketing millions of pounds. Therefore 30-year contracts could turn out to be licences to print money. Or alternatively, they could bankrupt the consortia concerned, but then we know what happens: they will simply walk away from the deal.

The consortia will always be in a position of strength simply because the London Underground will have to keep functioning. The Government will have to step in if there is a crisis. Therefore, if they find there are unexpected financial difficulties, the consortia will simply hand back the keys, as MTL and Prism already have from franchises and, effectively, Railtrack has from the results of its own incompetence. However cleverly the contracts have been written, at the end of the day they are just bits of paper and you can’t flog a dead horse, whatever dear Tom Winsor tries to do with Railtrack. Worse, consortia have been already selected as preferred bidders for two of the groupings of lines. They now have the Government over a barrel since the details of the contracts have not been signed but Transport Secretary Stephen Byers has announced the Government will go ahead with the scheme. The lessons of the National Rail network haven’t been learnt.

In fact, Byers is in an almost impossible situation. London Underground has spent nearly four years drawing up the PPP and to abandon it now would undoubtedly mean a further delay for the massive investment requirement on the Tube. However, pressing on with a scheme that is, to put it mildly, sub-optimal and – from what the International Project Finance Association is saying – pretty much unworkable, will leave the Government open to criticism when things go wrong. And if there is an accident, any accident, guess who will get the blame?

There should be room for a compromise but there is a fundamental rift that seems impossible to heal. Mr Kiley has insisted he wants a unified management structure that would ensure he had control over the infrastructure companies. But not only would the consortia balk at this, but it would also mean that a public-sector organisation was in charge of the Tube and therefore that it would still be on the Government’s balance sheet. There is no way round that impasse so a compromise is unlikely.

Mr Kiley has not played the game entirely straight either. When he agreed to become Chairman of London Underground in May, he still kept the court case for a Judicial Review alive. This meant he was not taken seriously by the bidders and, in any case, it was hardly an ace up his sleeve: he is expected to lose the review, which was being held this week, and therefore it will solve nothing.

The ultimate scenario is likely to be that the Mayor will have to learn to live with the PPP. He has already said as much. It will be an expensive way of bringing in much-needed investment and it is highly likely that Mr Byers’ successors will rue the day that he agreed to the deal. But politicians have a much shorter lifespan than transport systems and that is perhaps why their decisions on such schemes are nearly always wrong.

Remember Refranchising?

While the Government is busy trying to set up a 30-year deal to run the London Underground, the idea of 20-year franchises for the railways has been shown to be unworkable. Indeed, Stephen Byers’ announcement that the SRA should extend existing franchises by a couple of years means that Sir Alastair Morton’s two year old notion of 20-year franchises is effectively dead.

And good riddance. As mentioned before in this column (RAIL 409), it was always strange that train operators who own neither the trains nor the stations, should be expected to invest massive amounts of money in return for a longer franchise. Any long term asset built on the railways would not belong to them and would pass to their successor anyway, and so it seemed unclear why franchisees should be expected to invest. There were other disadvantages, too. Twenty year deals gave the companies far too much leeway unless the contracts were extremely tightly written. And the Hatfield accident exposed the difficulties in drawing up such contracts.

Problems over the precise nature of the contracts is one of the reasons why no franchise deal has actually been signed off. The other reason is, of course, the Treasury’s reluctance to commit itself to long term investment in the railways. Even relatively cheap schemes, like the expansion of the Chiltern line, have gone into the Treasury quicksand.

While Mr Byers’ pragmatism is welcome, extending franchises by a couple of years to get quick gains will not be as easy as he might think since the incumbent operators are in an extremely strong position to drive a hard bargain knowing that, as Mrs Thatcher used to say, ‘There is no alternative.’ Moreover, this announcement does nothing to address the long term issues facing the railway – in particular the financial problems of Railtrack, the SRA and many operators – which cannot be wished away by Mr Byers’ optimism. He would do well by trying to be consistent. If 20-year deals do not work on the railways, why are 30-year contracts the answer for the Tube?

  • Ben Hughes

    It’s highly ironic. Six years later, you were proved correct. Metronet collapsed. Tube Lines now needs far more money than it thought it would. At least it has been doing well in getting the Jubilee line set up for ATO, but not all is well.

    And this escalation of costs has meant that other transport schemes like Cross River Tram have had to be cancelled due to all the funds being swallowed up.

  • Ben Hughes

    I still remember reading that article 7 years ago (aged 11) – I think I still have it!

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