Rail 644: Why the PPP was doomed from the start

 

This column was going to be an analysis of the new government’s likely position on rail policy and the prospects for the next few years. Fat chance. The voters having delivered the verdict which Mystic Wolmar predicted, the politicians at the time of writing are still in smoke-free rooms from which very little is emerging. Mystic is convinced, however, that the Libdems will hold their noses and throw their lot in with the Conservatives, but an analysis of what transport and rail policies are likely to emerge will have to wait for the next issue.

 Which in one way is great, because it gives me an opportunity to highlight the other event of the first week in May, the demise of the Public Private Partnership for the London Underground. This deal was negotiated during the purdah period of the election hustings and therefore only came out once the voting had finished, but clearly had been in negotiation for some time.

 The bare bones of the arrangement are that London Underground is buying Tube Lines from its two owners, Bechtel and Ferrovial, for £310m and since the only role of the company is to maintain and upgrade the infrastructure of the Tube through a contract with London Underground, clearly the PPP will no longer exists when the deal is finalised at the end of June since Metronet, which had the other two contracts of the PPP, went under in 2008 

 I do not intend to turn this column into a lengthy ‘I told you so’ diatribe since much of this was predicted in my book, Down the Tube, but it is worth looking back at why the PPP happened, its purpose and demonstrating why its premature death was inevitable

 Of course it was not all bad. Given that around £1bn per year of public money has been spent on the Tube during the first – and now it will be the only – 7.5 year initial period of the PPP, clearly there has been some benefit. Not only has there been far more investment in  the system than would otherwise have been the case, but there is no doubt that the experience of bringing in outsiders has sharpened up the London Underground management. Tube Lines, for example, managed to replace escalators far faster than before and the performance of its lines, for the most part, improved greatly during its tenure.

 However, a very heavy price was paid for these improvements. The PPP was dysfunctional and unworkable, and it proved to be neither, as that ghastly management speak expression goes, ‘fit for purpose’, nor value for money. When the PPP was originally conceived, the money for investment was supposed to come from the profits of running the Tube and no subsidy was envisaged. That was laughably optimistic and it was clear very early on that there would have to be a huge subsidy. Under the PPP, the infrastructure was divided into three and contracted out, on a 30 year basis, to private consortia while the operations remained in the public sector. This led to bizarre anomalies like the trains belonging to the infrastructure companies at night but being leased during the day to the operators.

 There was no logic for this structure. In the national railways, the opposite situation was created with the infrastructure essentially remaining in the public sector and the operations being privatised. The core mistake, though, was to impose the separation at all since metro systems are inherently integrated businesses. The result was a constant tension between the two parties, most notably over the enormous number of closures at weekends. For the infracos, closures save money but for the operator, they inconvenience passengers and cost revenue. There were numerous other aspects of the split which inevitably led to tensions and every small bit of work could end up needing arbitration.

 The principal purpose of the PPP, valued at £30bn, was twofold: to get the huge refurbishment of the London Underground system off the books, and to ensure that the work was carried by the private sector, bypassing the London Underground management which was seen as incompetent. That, however, was to be the heart of the problem with the PPP. When I interviewed the boss of London Underground Tim O’Toole just before his departure last summer, that was at the root of his frustrations. If something was going wrong, or the contract needed amending, he did not have the power to do it. That effectively gave the private sector infrastructure companies a free rein and led to countless disputes and arbitration. Tube Lines, for example, had claims of a staggering £327m rejected earlier this year and there were still others outstanding, while Transport for London was claiming for delays in carrying out work on the Northern Line. The PPP was never a partnership, but rather a constant battle between the two parties. 

  As I point out in Down the Tube, the PPP was based on a series of false assumptions and happened as a result of political imperatives, rather than because it was a well-worked out idea. It was unique and groundbreaking, which meant that the cost of setting it up was astronomical, at least £450m on the government’s own admission. The history is instructive. It had been accepted for a long time that the Underground was in a state of decay and desperately needed major refurbishment. Money for investment, though, was dependent on the whim of the Treasury. In the book I recount the story of how London Underground bosses had to turn up at the Department for Transport in November and be was presented with an envelope, rather like in those quiz games, which they had to open in front of the Secretary of State. One of them, Peter Ford, told me: ‘The first time I did not realise I had to open it and just sat there. Then I learnt that I had to open it and read the first line of the second paragraph which gave me the budget for the year’.

 That is a ludicrous way to run a railroad and explains why many in London Underground supported the idea of the PPP. But it was the government which put forward the PPP as the only game in town. Labour was elected in 1997 on the basis of no extra spending for the first two years but John Prescott, the Secretary of State for Transport (and lots of other things) did a deal with Gordon Brown by accepting the part privatisation of the Tube in exchange for the promise of considerable investment. Prescott had been against any privatisation but accepted the compromise, because Brown refused to give money directly to London Underground pointing to its alleged incompetence with the £1bn cost overrun on the Jubilee Line Extension. However, much of that had arisen because of the imperative of opening the Extension in time for the Millennium – remember those queues of VIPs getting security checked – and delays as a result of insisting on a private sector contribution which in the event proved minimal.

 Nevertheless, London Underground management was never to be trusted again, which is why we got the PPP. The strange result, though, was that the Byzantine structure meant there was very little accountability particular as Metronet was a company made up of its own suppliers, a recipe for overcharging and opaque – or even invisible – accounting. Eventually the Arbiter effectively called time on the company by pointing out that its costs were far too high. So much for the private sector’s legendary efficiency.

 The other reason for creating PPP also turned out to be a mirage. The infracos were supposed to raise funds on the private money market but in a late concession the government agreed to underwrite all but 5 per cent of those sums. Therefore, not only was very little risk transferred to the private sector, but most of the money was underwritten by the state. Yet, worse, it was borrowed by the private companies and therefore cost more than had the state raised the loans. When the Arbiter, Chris Bolt, who was charged with assessing how much the next 7.5 year period of work should cost, decided last month that it was better if TfL raised the finance rather than Tube Lines, the very basis of the PPP was undermined and its days were numbered.

 So this massive scheme, the biggest ever PPP, has ended with a whimper at a cost of a further £310m of public money. Technically the deal does not go through till the end of the month but it seems inconceivable that, having announced it, Transport for London is not convinced that it is going through. Certainly an incoming Tory Liberal government is not going to do anything to prevent the demise of a scheme dreamt up by Gordon Brown and loathed by Boris Johnson.  Indeed, there is a wonderful irony in that the PPP is coming to grief at precisely the same time as Gordon Brown, its chief – but silent, since he has never given us an explanation of why he supported the idea – protagonist is meeting his nemesis. The new government should use this opportunity to launch a full scale enquiry into the PPP, and assess the lessons which can be gleaned from the experience. Oh, and point the finger at who was to blame.

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