Blood on the tracks

The long slow death of Metronet had an air of inevitability ever since the arbiter, Chris Bolt, announced late last year that the company was spending more money than expected and that some of this might not be ‘economic and efficient’. It was Bolt who ensured that the company was finally put out of its misery when, on July 16th, he announced in an interim finding that only £121m out of the £551m which the company thought was due for extra work would be payable, and even that would not go to Metronet until January 2008.

Given that the five owners – Balfour Beatty, WS Atkins, Bombardier, EDF and Thames Water – only had £350m worth of equity, and that there was at least another £1bn in dispute, administration was inevitable. Metronet had two of the three infrastructure contracts for the London Underground, worth some £17bn over a 30 year period, and these are now the responsibility of the administrators, Ernst & Young.

There are countless interesting questions raised by this enormous collapse which has not attracted as much attention as it might have done because it coincided with the arrival of the new government, the floods and a host of government announcements.

The London Underground is indeed the largest and the most complex PPP, having cost £500m, on the government’s own admission, to set up. Now its collapse suggests that there are limits to what type of investment schemes can be included in a PFI type deals, especially those involving old and unquantifiable assets such as the 140 year old London Underground system.

The key question is whether the collapse of the company was due to its particular structure or whether it is an indictment of the PPP system itself. There is no doubt that Metronet’s peculiar set up, by which it was owned by its suppliers, was an unsatisfactory arrangement that was open to abuse. London Underground sources point to the contract with Balfour Beatty which was given what they call a ‘sweetheart’ deal to maintain all the tracks on its eight lines. These internal contracts were not transparent and seemed to favour the shareholder/supplier rather than Metronet. The arbiter has highlighted the fact that costs on Metronet contracts were far higher than would have been borne by an ‘economic and efficient’ company and, indeed, were greater than those of the other infraco, Tube Lines.

However, the PPP is an unwieldy beast including various major contracts such as day to day maintenance, line upgrades and station refurbishment. The latter, which are let more or less on conventional asset improvement contracts, were, in fact, the cause of Metronet’s demise which suggests it was not so much the nature of the PPP contract which was their undoing, but sheer incompetence.

Treasury sources remain adamant that the PPP remains a good idea which has saved taxpayers money. According to calculations carried out for the Treasury, the PPP contract has already saved more money than any potential losses, though the assumptions which bear that out are not being made public.

Moreover, they point to the other PPP contractor, Tube Lines, which has not encountered the same problems as Metronet. This is because Tube Lines is a more conventional arrangement, not dependent on its shareholders as suppliers, and, moreover, it includes Bechtel, the giant US project manager, in its consortium which, according to insiders, has ensured there is far greater discipline in the way the contract has been managed. Tube Lines has been much better at standing up to the often changing requirements of London Underground and, moreover, has had the same chief executive, Terry Morgan, since taking over the contract four years ago, unlike Metronet which got through no less than four in that period.

The future is uncertain. Transport for London, while highly critical of the PPP contract, is unlikely to want to take back the contract. It does not have the available project managers and, most crucially, there is great concern about the behaviour of the unions: ‘we run the one big remaining public railway in the country, and the unions have more strikes against us than anyone else’, groaned a senior source.

Indeed, Gordon Brown has already intimated that a Metronet Mark Two will emerge but it is difficult to see how the various contracts included in the PPP will be held together. The day to day maintenance, particularly of Metronet’s three deep tube lines – Bakerloo, Central and Victoria – will attract Tube Lines since it carries out similar work on the Jubilee, Northern and Piccadilly. However, line upgrades, which involve new trains from Bombardier, are a far more complex output based contract – i.e. paid for through a complex formula based on journey time savings – and it is doubtful whether a new contractor would be prepared to take on sufficient levels of risk to create a genuine PPP.

Above all, it is difficult to see how the new contracts overall will include sufficient amount of risk in order to be deemed a PPP rather than a straightforward output based procurement arrangement. Yet, if insufficient risk is transferred, then they will effectively be publicly run contracts on the government’s books, something Gordon Brown has tried to avoid.

There is no doubt, though, that as Tony Travers director of the London Group at the LSE says, ‘it places a big question mark over the ability of the government to use PPP for large scale investment projects’. Moreover, even though the demise of Metronet has only meant the loss of £350m equity by the private sector, this is still a considerable sum and potential PFI contractors may bid more conservatively as a result. However the new contracts for the work on the London Underground are sorted out, the repercussions of the Metronet collapse will extend far beyond London, and deep into the Treasury’s procurement programme.

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