PPP – a costly mistake

Le Rail is a French magazine. The article was translated into French for publication.

The controversial £30bn Public Private Partnership contracts for the maintenance London Underground are now three years old but there are still a host of teething problems resulting from their pioneering nature. The 30 year contracts are an incredibly complicated and unprecedented way of managing infrastructure on a railway and, as predicted, have raised a wide range of issues that have not been satisfactorily resolved.

The PPP arrangement was created by the Labour government elected in 1997 as a way around two problems of managing the London Underground. First, traditionally, investment money for the Underground had been allocated by government on an annual basis and fluctuated widely depending on the overall state of the Treasury’s finances, which was not a sensible way to run a capital programme. The PPP provided certainty with a 30 year contract that had 7.5 year break points at which the cost, but not the contracts themselves, would be reassessed by an arbiter.

Secondly, the management of the Underground always found it difficult to manage projects within budget and cost overruns almost always occurred. In particular, the cost of the 16 km Jubilee line extension completed at the end of 1999 rose from £1.8bn to £2.8bn and this angered the Treasury, which was one of the prime movers behind the PPP concept.

Therefore John Prescott, the then transport manager looked at new ways of funding infrastructure. Consultants PriceWaterhouseCoopers came up with a scheme that would involve part privatising the London Underground, handing over the track, the rest of the infrastructure and rolling stock to private companies who would be responsible for maintaining and upgrading it, while the operations remained in public control. The Underground was packaged up into three sections – Jubilee Northern Piccadilly; Bakerloo Victoria Central; and the older, sub surface, lines, Metropolitan, District and Circle – which were then the subject of a tendering process to be passed on to infrastructure companies (infracos).

There was a considerable battle to get the scheme through with transport experts lining up to say the idea was too complex and was likely to prove unworkable. Originally the scheme was sold to the public on the basis that the private companies would pay for all the maintenance out of the fare box, but this proved to be wildly optimistic. In fact, once the tenders were in, the annual subsidy required for the maintenance of the system is around £1bn per year, far more than London Transport was receiving. Of course there is a huge backlog of maintenance required, but the PPP is proving to be a very expensive system. Moreover, the cost of establishing it required £500m on legal and other consultancy fees, a quite remarkable sum. Perhaps the extra money would be worth paying if the scheme worked well. But it does not. Reports by the London Assembly, the body which scrutinises the work of Transport for London, which has responsibility for the Underground, have found the infracos, notably Metronet which won two of the three contracts, wanting.

The latest report, looking at the first two years (available at http://www.london.gov.uk/assembly/reports/transport/ppp_report.pdf) found that while the Tube is in better shape than when the contracts started, this was scant consolation given the poor state of the system at that time. The Commissioner for Transport, Bob Kiley, told the Assembly that Metronet’s performance was ‘bordering on disaster’ and even Metronet’s own chief executive, John Weight, (who has now been replaced) that certain aspects of its performance were ‘unacceptable’. One source of anger has been the engineering overruns. Maintenance on the Underground can only be carried out between 1am and 5am when it is shut down, but the number of overruns, which cause chaos to London’s rush hour, has increased dramatically since the start of the PPP.

This shows a fundamental flaw in the contracts. They are supposed to be output-based. In other words, London Underground does not pay a fixed amount for work carried out but instead there are targets for the companies on factors such as journey times and ambience of stations which determine the level of payments. Therefore, if the companies are overrunning to a greater extent, it suggests, as Tim O’Toole, the American who is managing director of the Underground, admitted to the Committee: ‘if overruns keep happening, one would fairly conclude the penalties are not sufficient.’

This highlights the fundamental issue of risk. The whole idea of the PPP was to transfer risk from the public to the private sector, but there is very little evidence that this has happened. Indeed, during the negotiation period after the preferred bidders had been selected, much of the potential risk to the infracos was written out of the contract. Metronet was also, at the time, four months behind in its station refurbishment programme and has had difficulties catching up. Moreover, the complexity of the contracts means that there is constant redefinition of precisely what is included and this leads to constant disputes between London Underground and the infracos.

All this means that Londoners have been left with an expensive mess. Of course, given the huge sums being paid, the Tube will improve to some extent but at a completely disproportionate cost. Indeed thee PPP is one of the great scandals of recent British political history but because of the complicated nature of the contracts, it has never really been properly exposed. The whole idea of 30 year contracts for engineering work, based on 181 performance indicators is just a ridiculous nonsense dreamt up by people who were too clever for their own good. Everyone I have talked to on all sides of the contract reckon that it is pretty much unworkable and that they would prefer to be working in a more conventional setting. When PWC developed the concept, it hoped that other cities would follow suit but one thing is certain: no one will look to London’s PPP as an example to follow.