London’s transport network suffers from
under-investment and muddled strategy
By Andrew Stevens
5 August, 2007: A key element of the long awaited modernisation of London’s underground rail network, the so-called Private-Public-Partnership (PPP) deal has been behind many headlines, not least when Metronet, one of the consortiums set up to undertake the work, collapsed in July 2007. Designed to transfer risk to the private sector in exchange for much-needed improvement to London’s creaking underground infrastructure, the process has been roundly criticised since the world’s largest public private partnership deal was first mooted.
Update 2011: Metronet and Tube Lines were both effectively nationalised by the Mayor of London in 2008 and 2010 and there is now no PPP
The London network clearly requires a massive injection of capital to fund desperately-needed modernisation after decades of under-investment, but few can agree on the best way to secure this. Those who prefer a bond issue or government funding are labelled unrealistic and politically inexpedient, while advocates of the PPP are rounded on for ‘dogmatically’ insisting on private sector involvement. It’s scarcely a question that vexes the public though, as few are ever interested in the mechanics of procurement, though everyone in the capital has an opinion on the tube’s reliability. Introduced to improve this, the evidence so far has pointed to a number of flaws in the contract, with routine disruption for commuters on a number of lines.
When Tony Blair’s Labour Party entered government in 1997 it had the considerable headache of paying for its promises to end under-funding in the public services after almost two decades of Conservative government. Having seen the Conservatives’ early 1990s experimentation with private financing for roads deliver beyond expectation and confound critics (new roads built ahead of schedule and on budget), the Treasury under Gordon Brown as Chancellor set about considering the use of private finance across the public services, from the Private Finance Initiative (PFI) for new schools and hospitals to the privatisation of the air traffic control. With the then recent experience of the Jubilee Line extension firmly in mind (completed behind schedule and much over budget) contrasted with that of the Docklands Light Railway (a private sector project, very much the opposite), the Treasury used the introduction of the new Greater London Authority and its Transport for London agency (the successor to central government’s London Transport) as the delivery vehicle for the PPP scheme to finance tube modernisation. However, the process from legislation to contract delivery was far from orderly.
What is the history behind PPP in the UK?
The attractiveness of PPP manifested itself to many western governments when budgetary pressures and public debt saw a decline in investment in infrastructure and public services, at least adversely disproportionate to post-war growth levels. Offsetting such improvements from the balance sheet by transferring the initial cost to the private sector had obvious political appeal, as noted with the early PFI schemes of the Conservatives under John Major. A common feature of both PFI and PPP is the creation of a Special Purpose Vehicle (SPV) consortium to both carry out the work of and isolate financial risk of the private sector partners on behalf of the commissioning public authority.
Why has the tube network suffered from decades of under-investment?
Since the introduction of strict monetary controls in the 1970s, government resourcing of infrastructure improvements has declined from its post-war peak and the Conservative governments of Margaret Thatcher and John Major (1979-1990/1990-1997) were particularly averse to providing state funding for such projects, preferring instead to rely on the private sector. In 1984, London Transport was centralised from the elected Greater London Council (itself abolished in 1986) to the Department of Transport within the central government. In 1985 London Underground Limited was established as the operator of the tube network and the Conservatives certainly viewed it as a candidate for possible privatisation in the 1990s, having already done so with London’s iconic red buses in 1993. While the creation of Transport for London in 2000 saw responsibility for regional transport repatriated to elected London government, municipal governments in the UK have in recent years been restricted from borrowing on the open market or issuing bonds, central government citing past profligacy as its justification for legislative bars.
The Mayor of London’s transport strategy promised a number of key improvements aimed for delivery by 2016, not least because of the 2012 Olympic Games and assurances made as part of that bid. These included two new tram schemes in West London. One, from Uxbridge to Shepherd’s Bush, has now been abandoned and the other, from Camden/Kings Cross to Brixton/Peckham, is far from being finalised. The extensions to the East London Line, as well as the somewhat ill-fated Crossrail project (from Heathrow airport to Essex) still haven’t been given the go-ahead. The fact that central government has not been able to secure funding for Crossrail since the project was first mooted by the Conservative government in the early 1990s gives an indication of how averse Britain is to providing government money to finance infrastructure improvements, regardless of need. The latest proposal to rescue Crossrail is the Treasury’s proposed supplementary business rates for firms in London as a last-ditch attempt to finance the ill-fated scheme.
Why did the Labour government insist on PPP for the London Underground?
On the question of private finance, Labour under Tony Blair with the full support of Chancellor Gordon Brown as finance minister was quite combative with opponents, arguing that past Labour governments had failed on dogmatic grounds when concerned with government spending. Until 9/11 and the subsequent governance and security agenda relentlessly pursued by Blair, most battles with his party were over the issue. For all intents and purposes, private finance proved politically appealing as a means to resource public sector improvement projects on a mass scale without incurring huge borrowing and offsetting the risk in terms of budgeting and timescale. However, the ownership and profit incentive for the private sector’s involvement was criticised as unfairly balanced in its favour against any possible service user improvement.
How does the PPP contract work?
The £17bn contract for the improvements to be carried out to the underground network in the form of infrastructure improvements, safety modernisation and station refurbishment work is a 30-year project by the Metronet Rail Group, a consortium of five shareholders Atkins, Balfour Beatty, Bombadier, EDF Energy and Thames Water. All are public listed companies and two (EDF and Thames Water) are former privatised utilities, which served London. Under the contract, Metronet must provide improvements, enhancements and refurbishment to an agreed standard, for which London Underground must pay a monthly service charge, which can be lowered if the work fails to meet the agreed standard (or increased if achieving above target).
Metronet’s performance has been roundly criticised by the travelling public, media, regulators and London’s Mayor Ken Livingstone. A number of operational deficiencies have not only plagued the effectiveness of the contract but led to severe disruption to services, while the standard of the work has been disputed, for instance of the 150 stations due to be refurbished only a handful have been completed in easy to undertake suburban surface level stations.
Metronet’s contract only covers nine of the lines on the Underground network, work on the remaining three lines being undertaken by Tube Lines Ltd, a consortium between Amey and Bechtel. The Tube Lines contract has been viewed as largely successful and free of controversy, an illusory lesson perhaps over the scale of contracts and numbers of partners.
In July 2007, due to falling revenues from failing to undertake work to the agreed standard and a projected £2bn overspend by 2010, Metronet went into administration, four years after commencing the contract. The partnership has secured sufficient funding (£750m) from administrators Ernst & Young, via Transport for London, to allow the contracted works to continue until a successor scheme is in place.
Who was opposed to it?
The PPP deal to some extent sealed the outcome to the first election for Mayor of London in 2000. Ken Livingstone, known for his firebrand leftism, immediately came out against the Treasury’s intentions while still in contention for the Labour nomination, which the party leadership ensured went to cabinet minister Frank Dobson. Dobson’s campaign fared poorly against Livingstone’s successful independent candidature, which Livingstone argued gave him a mandate against the introduction of the scheme. Livingstone sought to halt the scheme in a failed High Court bid in 2001, arguing that it was “fragmented, inefficient, uneconomic and ... unsafe.” The legislation which established the Greater London Authority and the London mayoralty delayed the transfer of responsibility for London Underground to the mayor until after the deal was signed, which finally took place in 2003. The deal was also heavily criticised by the rail trade unions, who actively campaigned against it.
What is the likely future for the contact?
The preferred option, for the Mayor of London and his Transport for London agency, would be a Network Rail-style takeover of the Metronet contract, citing when the failed privatised national rail company Railtrack went into administration and was replaced by the not-for profit company instigated by national government. The presence of former Railtrack administrator Alan Bloom as the designated administrator of Metronet points to this. However, the Department for Transport remains of the view that the potential exists for the contracts to be sold back to the private sector, not least to stave off any admission of failure on the part of the government for its much-vaunted political investment in the ability of PPP to deliver improvement at reduced cost to the public purse.