Even by the standards of Britain’s many rail fiascos, the implosion of Tube contractor Metronet is spectacular. Metronet announced this morning that it will go into adminstration, relinquishing contracts to refurbish two-thirds of the Tube network. Having overspent by perhaps £1 billion on each of its two Tube contracts, it tried to claw back the money from Transport for London. But yesterday’s decision by the Public Private Partnership arbiter made it clear that he thought the company was to blame: Metronet was stuck with funding 80 per cent of the overspend. Today’s collapse was inevitable at that point.
This will have severe consequences for London. But it also threatens the Prime Minister – for the PPP which led to Metronet’s demise was Gordon Brown’s idea.
It was the Treasury, during Brown’s Chancellorship, that drove through the PPP. The scheme was developed as a way of meeting two conflicting objectives: the need to modernise the Underground without imposing any extra burden on the public purse. It was supposed to be a clever wheeze. The private sector would borrow billions to pay for the improvements on the basis that the cost of the scheme would be covered out of fares.
Under the deal, London Underground operations would remain in public hands while the maintenance and refurbishment would be handed to private contractors. The idea was that the risk of embarking on such a large and complex project would be transferred to the private sector – who, in exchange, would be rewarded by the state.
Yet the idea that there would be no need for public subsidy was always an illusion. No other system in the world operates on that basis and over the five years it took to draw up the contracts, at a staggering cost of £500 million, it became clear that the scheme would only work if around £1billion of taxpayers’ money was poured in annually.
Moreover, it soon became apparent that the private sector would take on only a limited amount of risk. Metronet, for example, has only £350 million-worth of equity in the scheme: its liability is effectively limited to that amount. So PPP failed to meet its own objectives of either paying for itself or transferring risk before the contracts had even been signed. Yet Brown was insistent that there was no alternative. He refused to negotiate or even meet Bob Kiley, the Transport Commissioner for London whose job it was to run the contracts once they were passed on to Transport for London.
Flawed at the outset, the contracts proved to be unworkable. Their sheer detail and complexity ensured that. They were full of enormously complex formula and ridiculous notions like rewarding contractors for moving toilets nearer the drivers’ cabs at the end of the lines so they would take less time going to the loo between journeys.
In that respect, it makes no difference that the other PPP contract, with Tubelines, for work on the Jubilee, Northern and Piccadilly lines, is working better. Tubelines have done a much better job at staying to budget. But the PPP remains an expensive way of bringing about improvements to the Tube network. It could have been done far more cheaply and with much better public oversight of the huge sums of money involved had it been carried out through conventional procurement contracts, where the public sector knew exactly what it was paying for.
Ironically, the genesis of the PPP was the £1bn cost overrun on the construction of the Jubilee Line Extension. The feeling among ministers was that this showed the public sector could not manage big contracts. Now that extra billion – mostly a result of the political imperative of finishing in time for the Millennium Dome – looks cheap by comparison to Metronet’s excesses.
This should be embarrassing enough for Brown – but it’s more serious than that. Metronet demonstrates the limits to which risk in public enterprises such as the London Underground can be passed on to the private sector. The Tube is an essential part of the infrastructure and cannot be allowed to close: it will be the taxpayer picking up the bill, either through the council tax or national taxes, both for uncompleted work and Metronet’s debts. The same happened after Railtrack collapsed five years ago – all because of dogmatic attempts to transfer risk to the private sector.
Tragically, the same mistake is about to be made with the replacement for high-speed trains on the national rail network. Instead of a simple purchase exercise, the Department for Transport is trying to be very clever and wants bids from consortiums involving train manufacturers and finance houses in a 30-year PPP scheme. In other words, all the risk of train failures, design problems and redundancy will be passed on to the private sector – which, not surprisingly will charge exorbitant amounts for taking it on. Then, if something catastrophic goes wrong, like a major design flaw or a sudden change in demand for rail journeys, it will undoubtedly be taxpayers who take the hit.
But Londoners will be angry not just because they and other taxpayers will foot most of the bill. Whatever happens now, the scope of the contracts is bound to be reduced: repairs and improvements will be delayed. Ken Livingstone will most likely appoint an administrator for a while; Metronet’s assets may well end up being sold to other firms, most obviously Tubelines. But it will inevitably delay work, and the Treasury, stuck with Metronet’s vast debts, will doubtless want the modernisation programme cut back. That will make Tube travel steadily more unbearable even than it is now – and it will, in time, start to hurt London’s economy.
We can only hope that Brown learns his lesson before money is spent on the similar schemes now in the pipeline. Facing up to the basic snags with his favoured model for funding public sector capital projects will create major headaches for the Treasury.
But more than that, he should now explain publicly why he forced through the PPP. The PPP is too complex and the various parties involved can all blame each other for its failure. Brown, though, should not be able to dodge the truth – which is that it was a catastrophic and very expensive mistake, for which Londoners will be paying for years.