London mayor takes the Tube back into public hands

The public-private partnership (PPP) on London's underground rail system has been scrapped. So is this the death knell for the whole PPP scheme? Simon Wilson reports.

What has happened?

On the day after the general election, all but unnoticed by the media amidst all the excitement of the result, one of Gordon Brown's principal financial legacies was quietly being scrapped. Transport for London (TfL) controlled by London's mayor, Boris Johnson announced that it is to buy out the shareholders of Tube Lines, one of the private firms contracted to upgrade the underground under an enormous £30bn public-private partnership (PPP). The £310m buyout deal is the final nail in the coffin for the Tube PPP, and brings the whole of London Underground's operation and maintenance back into the public sector.

What went wrong?

The sale marks the end of an increasingly acrimonious relationship between TfL and the two Tube Lines shareholders, Amey (owned by Spain's Ferrovial) and the US project management specialist Bechtel. Tubes Lines wanted to charge TfL £4.4bn for the next stage of maintenance and upgrade of the three underground lines it is responsible for, the Jubilee, Northern and Piccadilly lines. For its part, TfL insisted the cost should be £4bn. But even the figure of £4.4bn meant Tube Lines would be working for the next seven and a half years on a budget of £2.8bn less than it was expecting. The two firms sold up because they couldn't see a profit in the long term, grabbing the chance of a negotiated exit, with compensation, when the Tube PPP arbiter ruled that TfL, rather than Tube Lines, should raise the shortfall. Nor would they have been encouraged by the trenchant opposition to the PPP of London's political leaders.

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What is the London mayor's view of the PPP?

Two months ago the Conservative mayor described the "Byzantine" contracts governing the PPP as permitting "daylight robbery". Tube Lines' chairman, David Begg, had accused TfL of trying to undermine the PPP by refusing to co-operate fully with Tube Lines. Whether or not that's true and the two sides have been negotiating over a possible sale and compensation terms since last autumn there's no doubting the political mood had turned. Johnson claimed angrily that under the terms of the contracts Ferrovial and Bechtel would be paid management fees alone, amounting to £400m by 2017. "In other countries that would be called looting; here it is called the PPP."

What does it mean for London?

According to the mayor and TfL, it's a win-win. Bringing Tube Lines' work back into public control won't cost the public a penny, because the £310m compensation will be paid for with savings on fees. It gives London Underground more control and flexibility over planned closures, leading to less disruption. And it removes the threat that Tube Lines could ultimately collapse, just as its bankrupt fellow contractor, Metronet, did back in 2007 leading to a government bail-out to the tune of £2bn.

Was the PPP really that bad?

Yes. A report to the then mayor in 2001 concluded that "implementation of the PPP would be unsafe, inefficient, and prohibitively expensive". The idea was to harness the efficiency of the private sector and transfer risk to big business in return for healthy profits. In the case of the Tube, that risk transfer proved illusory: Metronet went bust and had to be bailed out, and now Tube Lines better managed and more successful has been bought out. As for private-sector efficiency a PricewaterHouse Coopers study predicted that the private sector could extract savings of 30% that appeared to be strangled at birth just as soon as the ink was dry on the ludicrously complex 30-year contracts. In the case of Metronet, its creative juices went into providing exclusive contracts to the companies that owned it, such as train-maker Bombardier, Atkins, the engineers, and Balfour Beatty.

What next for other PPPs?

The new chancellor, George Osborne, has been a vociferous critic of the Tube PPP in the past. But it is not yet clear whether that antipathy will colour the Conservatives' whole approach to the funding of major infrastructural projects. What he has said so far is, "we need a new approach to PPP that's transparent and puts value for taxpayers' money first" a phrase that leaves plenty of room for manoeuvre. He has also pledged to bring all PFI liabilities back on to the national balance sheet as part of the new Office for Budget Responsibility. Many people in the PFI world believe the Tube contracts were doomed from the start. However, they point to other much simpler projects that have provided new hospitals, prisons and schools, as well as transport infastructure. Doubts remain over whether the Tories could ditch the model entirely.

Why did the tube PPP fail?

London Underground's ex-MD, Tim O'Toole, summed it up in the New Statesman last autumn: "The lack of competitive bidding in allocating work results in inflated costs and preferential fees for private companies. Negotiations over future or new work are conducted without the ability to introduce market discipline, resulting in higher costs.

In place of competitive bidding, the structure relies on record-keeping, derivative measurements and man-marking, all extra cost. The asymmetry of information in favour of the private companies leads to a claims culture, resulting in unpleasant budget overruns." In short, taxpayers and users might as well have been told, "you must buy what you don't want. You must pay more than you should. You must endure delays. And you must assume the ultimate risk of failure."