Will Gordon learn the PPP lesson?

Now that Big Gordon is assured of the Premiership, unless he falls under that proverbial bus, it is worth reflecting on one of his biggest mistakes as Chancellor, the creation of the Private Public Partnership for the London Underground.

Having talked to both top and middle managers on both sides of the contract, nothing has changed my mind that the PPP is a complex, expensive and, ultimately, unworkable way of maintaining an underground system. At root the reason is simple. Trying to set down every variable on a 30 year contract involving assets whose condition was unknown at the outset and, in any case, are vast an ageing, is simply impossible. As one manager put it, ‘if you want to do say, a repair costing £20,000 but it is not in the contract, you can then spend the same amount negotiating over who should pay for what. And if you can’t agree, the bloody lawyers get sent in.’

Sure, the Underground is beginning to benefit from the enormous amount of spending but that would have happened anyway with £1bn worth of annual subsidy. And yes, the private infracos have driven down some costs and, for example, Tube Lines can now renew an escalator in 10 weeks, rather than 26, largely thanks to listening to staff suggestions on improving efficiency.

Interestingly, though, Tube Lines now employs 2,700, a 50 per cent increase on the number when the company started operating four years ago, which suggests it greatly underestimated the value of the work being carried out by London Underground staff and overestimated its ability to contract out core functions. A similar process took place when British Rail was privatised with the new companies disposing of staff, only to find they needed to reemploy them.

Perhaps Gordon Brown knows that the PPP has not delivered the efficiencies and value for money that he hoped for. Or perhaps, when he sees the ridiculous press statements from Bob Crow of the RMT about ‘privateers’, he is reassured that the PPP was the best solution for renewing the Tube  No, Gordon, just because some of your opponents have a wider political agenda, it does not mean that the attempt to transfer unquantifiable risk to the private sector at great expense and extra borrowing cost has been a success. You only have to look at the mega dispute between Metronet and Transport for London over whether spending amounting to £750m has been economic and efficient. Indeed, the amount in dispute , according to insiders, is probably twice that such a huge sum that it threatens the viability of the companies involved in the consortium and of Transport for London. The whole thing rests with the arbiter, Chris Bolt, who faces an impossible task in assessing why the contracts have gone so badly wrong. The answer lies, of course, in their very structure.

Yet, it seems that the Department for Transport has learnt nothing from this experience. It is about to start the procurement process for a replacement for the High Speed Trains which are the backbone of the InterCity services. But instead of merely buying them – or leasing them – the Department is looking to create a complex PFI deal that will include design, construction and maintenance over a 30 – 40 year period, the expected life of the trains.

The risks in the new Intercity Express Project contract will, of course, be enormous but the Department, driven by Treasury demands that this project must not be on the government’s books, says there is no alternative. Yet, the Alstom deal for trains on the Northern Line signed in the late 1990s, a much less complex rolling stock contract,  is causing enormous difficulties for all parties concerned and there have been numerous attempts to reformulate it.

So just as the PPP provided effective guarantees for the risks taken by the private sector, the Department is talking about providing ‘comfort’ for the companies involved. So again, we will have the private sector borrowing money more expensively than the government and taking little risk with their equity for relatively high returns. Yes, we all know that the public sector has occasionally made big mistakes which have hit the taxpayers hard, but the alternative seems to be that the government guarantees that lots of money will be wasted by signing daft deals with little real risk transfer. Or have I got something wrong?

Given his love affair with PFI, it is probably unrealistic to expect that Brown will rethink the concept of these expensive deals now that he is moving next door. But one can only live in hope.