Rail 569: Brown may live to regret Tube PPP scandal

One of the first tasks in our new Prime Minister’s in-tray, CHRISTIAN WOLMAR believes, could be to defuse a crisis of his own making on the London Underground.

JUST as Gordon Brown ends his long wait to  move next door, one of his creations, the Public Private Partnership for the London Underground is sinking ever deeper into the mire. The PPP is a scandal that may cost taxpayers hundreds of millions of pounds in addition to the vast sums already wasted.

The PPP was drawn up on Brown’s insistence as a way of refurbishing the Tube. Instead of a conventional procurement, the work is carried out by infrastructure companies (infracos) on 30-year contracts with much of the payment determined by performance, such as reducing journey times and improving the ‘ambience’ of stations, rather than simply reimbursing the cost of the inputs with a mark-up. This has proved a ridiculously complex, expensive and unwieldy way of delivering a maintenance and refurbishment programme.

Now it is in deep trouble. Metronet, the infrastructure company which maintains nine of the 12 lines, has had to apply to the arbiter for an extraordinary review of payment for the work it has carried out. The original estimate of the excess cost was £750m, but now it appears that perhaps twice that amount is involved. However, because of the way the contract was drawn up,  precise figures are impossible to determine.

There is no doubt that Metronet has shown extraordinary levels of incompetence. Its managers admit as much in private, blaming its strange structure which involves its owners – Atkins, Balfour Beatty, Bombardier Transportation, EDF and T ames Water – also being its principal suppliers and it has now changed that, putting its work out to open tender.

“PPP has proved a ridiculously complex, expensive and unwieldy way of delivering maintenance and refurbishment.”

The other infraco Tube Lines, which has no such fixed supply chain, has performed relatively well, carrying out work that is on time and on budget. Metronet has fallen behind particularly with its station work, which for the most part is priced conventionally in the contract (as opposed to the line upgrades which are priced through improving the ‘journey time capability’).

Therefore it would seem to be a simple matter for the arbiter, Chris Bolt, to determine whether the work carried out by Metronet is ‘economic and efficient’. That is the crucial phrase which will determine how much of the £750m to £1.5bn overspend will be allocated to London Underground (in other words, Transport for London and therefore the taxpayer) or to Metronet. Any expenditure deemed not ‘e & e’ will be laid at Metronet’s door.

First, though, Bolt will  have to decide whether Metronet needs to be bailed out with an extra Infrastructure Service Charge, the regular payments, worth around £1bn, which sustain the contract. This decision will probably be made later this month and will give some indication of the way he is thinking on the more substantial matter of the allocation of overspending.

It will not, though, be simple. While it is clear that some of the bill will be laid at Metronet’s door, the company is fighting back hard. It will point out that the arbiter has to compare its performance with that of a ‘notional infraco’. And here it gets complicated. That ‘notional infraco’, according to the infraco, should not be Tube Lines with its diff erent – and more efficient – procurement system but a company like Metronet, with tied supply lines since London Underground knew, when it allocated the contract, that this was the structure with which it was dealing.

Then there is the way that the contract is stacked against the public sector. Logic would suggest that when the tender took place, the lowest bidder won the contract on the basis of a fixed amount of work. Not so. If there is work that Metronet has carried out, and it can show that this needed to be done, even if it were not in the original specification, then it should be paid for it. As one insider put it: “If they bid 1p for the contract and won it on that basis, and it cost £1bn, then they would get that billion if Metronet can show the money was spent economically and efficiently.” It is, in the jargon, “an output-based contract with a variable price”.

LU signed a contract under duress. Ken Livingstone was opposed to PPP but was forced to accept it as the deal had been signed before the Underground, which had been temporarily nationalised, was handed to him. The Treasury and Brown forced through this crazy deal. Now, though, Brown may live to regret it.

Whatever Bolt decides, it will be bad news for the government. If most of the extra cost is the responsibility of London Underground, then Livingstone will be knocking on his door straightaway asking for the money. He will have a strong case – and a huge financial crisis over transport in London with the added ingredient of the Olympics, is not what Brown will want on his agenda. Moreover, a victory to Metronet will lay the door open for it to claim huge sums. As Tony Travers, of the London School of Economics, an expert on PFI deals, put it: “The £30bn PPP will become a £50bn PPP.”

On the other hand, if Metronet is landed with most of the bill, it will probably go under, requiring a renegotiation of the contract. When contractors go bust, it is not good news for any of the parties involved and Brown will end up with a lot of egg on his face. Indeed, his whole PFI programme could be threatened.

In a country where the last Prime Minister lied – or made such a terrible mistake as to make no difference – about the threat of weapons of mass destruction in Iraq, and yet was allowed to stay in office for four more years, it would be too much to expect that the new one will ever be brought to account over the scandal of the PPP. The only hope is that the lessons have been learnt and that no attempt will ever be made again to draw up such complex contracts in the face of virtually universal advice from independent experts.

Yet, in the distance, lurks the scenario for another similar disaster, the procurement exercise for the Intercity Express Programme. Instead of just buying a number of these trains, the Department for Transport is intent on thrashing out a deal with a consortium consisting of a train manufacturer and a bank in order to create a PFI contract with as much risk as possible handed over the private sector. The successful bidder, who will be expected to sign up in two years’ time, will supply the fleet of new trains, maintain them for around 30 years, and raise the finance necessary to undertake these activities. Ministers never seem to understand that passing on the considerable risks involved in such a complex contract will inevitably send the cost soaring. Moreover, as appears the case with the PPP, the private sector is much better at understanding these contracts and wriggling out of any commitments. Creating 30-year contracts when there are so many variables involved is unrealistic. It is a way of trying to pass the risk on from government but in practice, as the PPP has shown, responsibility for most overruns will remain with the taxpayer.

Having had, for many years, nothing but good experiences on trains, with no substantial delays or mishaps, it now seems that I cannot step on a train without things going wrong. On a trip to Sunderland via Newcastle from London, I suffered not only a delay of more than an hour but endured the worst of GNER’s service. So here, I’m afraid, is another bit of a rant.

The problem was not of GNER’s making but caused by an earlier collapse of the wires at Huntingdon. All the Leeds trains were cancelled and therefore three lots of people crammed on to the 1400 Aberdeen train at King’s Cross. There was chaos as people found their reserved seats full and many had to stand all the way to York.

I was fortunate to find mine as I had a lot of work to do but had the misfortune of being in coach D which had no air-conditioning. It was insufferably hot but no water was distributed until nearly two hours into the journey.  Moreover, the conductor never came out of his garret, merely reiterating at every station the cause of the delay but never emerging to check tickets, sort people out or ask if they needed help. He also failed to say how late the train was at each station and, indeed, suggested wrongly that we would make up some of the lost time.

To his credit, he did advise people to change at York for Leeds, not Doncaster, and told them of precisely what service and platform they needed. But overall, people would have been gratified to see someone come out and offer help in the very difficult circumstances of that journey.

Most crucially, there was no announcement about compensation. According to GNER’s excellent website, passengers delayed for between an hour or two are entitled to a 50% rebate in vouchers. Yet I seemed to be the only person to ask for a form.

This is a disgrace. With 500 people on the train, and maybe 20 other services who paid, say, a £30 fare each, GNER saved itself perhaps £150,000 by not making announcements. TOC managers oft en moan to me about operators being micro- managed, but given such a strong financial incentive to break rules, what alternative is there?

Clearly TOCs should face very heavy penalties for not alerting their passengers to their rights. On the way back to London, the train was late starting because of a crane hitting a bridge at Chester-le-Street. We were eventually 20 minutes late into King’s Cross, but here another issue is raised. Why do the train companies not seek compensation off  the insurers of the vehicles involved in these incidents? Again, the sums involved are enormous but the bridge-bashers  seem to get away with it at no cost to themselves.  Surely, the train operators and Network Rail  should work together to recover these  sums.

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