it was a contract which gave Metronet very little in the way of leverage.
It was a building-type contract, not a PPP output-based contract. There was an issue that the tied supply chain was a major contributing factor to the failure of Metronet. It was unable to penalise underperformance and lack of delivery and could not hold back funds. The hon. Member for Manchester, Blackley (Graham Stringer) made the point that Mr. Pimlott said in his evidence to the Committee that when he tried to exercise that influence, he was threatened with litigation. Of course, that would be so, given that the contract was structured in that way. However, it is clear that Metronets shareholders, along with the Government, are at the heart of its failure. Responsibility for the cost overruns and the lack of delivery to Transport for London lies principally with the management and shareholders. But if the tied supply chain is a problem for Metronet, another problem for it is that, as it argued to the Committee with some pertinence, part of its overspend and lack of delivery to Transport for London was due to TfL itself.
If the Mayor can be credited with having opposed TfL at the beginning, he can certainly be culpable for the way in which he acted in the operation of the Metronet contract. The Mayor and Transport for Londonthe Mayor tells everyone that they are interchangeablewere guilty of continual specification change. Mr. Pimlott gave the example of the upgrade of
Lancaster Gate station. Metronet was asked to repaint it three times in different shades of grey because the board of Transport for London could not make up its mind. Mr. Lezala, Metronets chief executive, said that that was indicative of London Undergrounds wasteful approach. He also said
there are lots of examples... where we are spending twice as much as planned.
Harry Cohen: The hon. Gentleman is making up history, or giving us his own version of it. The PPP independent arbitrator blamed Metronet, not Ken Livingstone or the docklands light railway, for the cost overruns.
Stephen Hammond: Let us be accurate. The arbitrator split the costs, although I agree that he moved the balance of the costs towards Metronet. Metronet claimed £992 million; his view was that an efficient company might have required between £140 million and £470 million. The version of the truth that the hon. Gentleman has just given is not entirely accurate either. There was a splitting of the responsibility and the blame, and it seems to me that Transport for London was happy to play Russian roulette with taxpayers money. It knew that if the arbitrator did not support its position, Metronet would not bear the costs and the taxpayer would. It is the fault of Transport for London, the Mayor and Metronet that an extraordinary review did not take place earlier. Transport for London and the Mayor can also be blamed for stating that there was no room for negotiation and no chance of a negotiated settlement. It is clear that the extraordinary review, had it occurred earlier, would have involved less cost to Londoners and to the overall public purse.
Susan Kramer: Is the hon. Gentleman aware that the contracts did not give Transport for London power to give extensive specifications and changes of specification? Perhaps such measures can be proposed, but they must be accepted by the infraco partner.
Stephen Hammond: It is clear to me that at the heart of the problem is an ill judgedon both sideslack of understanding of what the contract meant. Metronet believed that it was providing a contract that was output based, while Transport for London believed that it was inheriting a fixed-price contract allowing it to respecify continually. The contract failed because Metronet spent too much money and did not deliver. Part of that was undoubtedly due to the tied supply chain, but another factor was the conflict between Transport for London and Metronet.
Metronet went into administration on 18 July last year, which has been described by the Secretary of State as a terrible failure. A number of people may think that it is a rather spectacular failure. On 6 February the Secretary of State was forced to admit that the cost of the failure to the taxpayer was £1.7 billion, which was paid to Transport for London to cover the 95 per cent. debt guarantee, and £300 million to cover the costs of administration. Those costs are ongoing.
I believe that the PPP principle is sound, although it is not always a universal panacea; but it is not the principle that is being debated tonight, and it is not the
principle that is under threat from the report. It is a failure of the network and of Metronets shareholders and management, but it is at heart a failure of the PPP contract that was set up and those who were responsible for thatand the person responsible for that contract was the Prime Minister.
The Minister of State, Department for Transport (Ms Rosie Winterton): This has been an interesting debate, and I am sure it would have been even more lively if my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody) had been present. We all wish her a speedy recovery, but my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman) did a very good job in leading off the debate in her place. I wish to reiterate what my right hon. Friend the Secretary of State for Transport said to the Transport Committee in November last year: she welcomed the Committees consideration of the tube public-private contracts and, in particular, of the background to the failure of Metronet. My hon. Friend the Member for Liverpool, Riverside set out the Committees views and asked that the Government learn lessons from the failure of Metronet. I assure her that it is of great importance to the Government that we understand why Metronet has failed so we can learn the appropriate lessons for the future.
As many Members have said, the underground is central to Londons economy, carrying approximately the same number of passengers per day as the entire heavy rail network of Great Britain. The hon. Member for Hammersmith and Fulham (Mr. Hands) talked about the increase in demand. That is true: since 1993, there has been approximately a 65 per cent. increase in people travelling on the underground, and London Underground expects demand to grow to 1.5 billion journeys a year by 2020.
When this Government came to power in 1997, the underground had suffered from decades of under-investment. As my right hon. Friend the Member for Greenwich and Woolwich (Mr. Raynsford) said, improvements to the Central and Jubilee lines had run both late and significantly over-budget. Given that backdrop, it was right that a Government committed to sustained investment in the tube should ask what structure was most appropriate to ensure successful delivery of the infrastructure work for passengers, at best value to all taxpayers. In arriving at their solution, the Government were guided by what had been learnt about effective public-private partnerships in others sectors and in other countries across the world.
As the hon. Member for Wimbledon (Stephen Hammond) said, at the core of the tube PPP was the desire for the parties operating, maintaining and improving Londons underground network to focus on what they did best. That meant London Underground focusing on operating and setting strategic priorities for the networks development and bringing in private sector project managers to oversee the delivery of essential maintenance and upgrades, with appropriate transfer of risk.
Pointing to the Transport Committee report, the hon. Member for Lewes (Norman Baker) and my hon. Friend the Member for Manchester, Blackley (Graham Stringer)
asserted that those principles were not tested. However, I can assure the House that those principles were rigorously tested as the PPP proposals developed. Considerable time and effort were expended in understanding the comparative value for money of the PPP versus conventional public sector-led procurement. That work, based on the public sector comparator, was independently scrutinised by KPMG and Ernst and Young, and subsequently the National Audit Office. Both found the methodology to be robust and fit for purpose.
The Government certainly recognise that Metronet has failed and that that has had a very real impact on the underground network and on passengers. They were, however, the corporate failings of Metronet and not failings of the entire PPP concept, as my hon. Friend the Member for Eltham (Clive Efford) said. Tim OToole, the managing director of London Underground, stated in July 2007:
This is more about Metronets structure than it is about the PPP.
Mr. Hands: The Minister is also Minister for Yorkshire and the Humber. Given the seriousness of the Metronet situation, will she tell us what discussions, if any, the Prime Minister has had with the Mayor of London in order to find a solution?
Ms Winterton: I wish to discuss the background to the original thinking on PPP and to emphasise that the House should not lose sight of the wider context of the tube PPPs. The hon. Gentleman talks about the Treasury, but it is worth while remembering that the PPP secured significant additional investment at a time of many competing priorities for the public purse, as my right hon. Friend the Member for Greenwich and Woolwich said. The hon. Member for Hammersmith and Fulham would not answer questions about his partys position on privatisation at that time, as my hon. Friend the Member for Eltham said, and I noticed that the hon. Member for Wimbledon did not try to resile from the comments that he made.
It is important to remember that the London Underground PPPs are delivering performance benefits against the background of continuing growth in demand. The hon. Member for Putney (Justine Greening) said that no improvement had been made to the underground, but that is not true. Some 247 stations are programmed to be modernised or refurbished by 2010-11, and work on 91 stations has been completed; Tube Lines was expected to deliver 47 stations by the end of August 2007 and has done so; more than 115 km of track has been renewed, with delivery on some lines ahead of schedule; a fifth train is now in service on the Waterloo and City line during peak periods; a £40 million upgrade
on that line has improved reliability and reduced journey times; the extension of the Piccadilly line to Heathrow terminal 5 has been completed; and work on a new signalling system on the Northern line is ahead of the contract date.
As my right hon. Friend the Member for Greenwich and Woolwich, my hon. Friend the Member for Eltham and the hon. Member for Putney said, and as Terry Morgan stressed in his evidence, Tube Lines has delivered the 47 stations required by the end of August and is delivering the required increase in Jubilee line capacity, and not a single programme is running late. That shows that with the right approach to project management and a rigorous pursuit of efficiency, the PPP delivers.
Having said that, major works remain outstanding. My hon. Friend the Member for Leyton and Wanstead (Harry Cohen) asked about those. The PPP contracts were always structured so that major capacity improvements to the network were not going to begin immediately. Such major capital works demanded careful planning and preparation, and were scheduled to deliver significant capacity improvements in the PPPs second periodbetween 2010 and 2017. That schedule remains for Tube Lines, and I can assure him that London Underground will work to ensure that Metronets work can be put back on track as quickly as possible.
Having set out the improvements made to the network, I reiterate that lessons must be learned from Metronets failure if we are to secure continued improvements for passengers in the future. The hon. Member for Wimbledon and my hon. Friend the Member for Manchester, Blackley raised the issue of tied supply changes. Those are a common feature of PFI projects in the UK and in international project finance projects, but they demand effective governance. As many hon. Members have pointed out, when Metronet ran into difficulties, it did not have the appropriate corporate governance in place to resolve the situation at a sufficiently early stage. Only when the scale of the problems facing Metronet became apparent to its individual shareholders did serious attempts to restructure the business begin. Ultimately, the changes were then too little and too late to avert the companys collapse.
My hon. Friends the Members for Liverpool, Riverside and for Manchester, Blackley referred to the level of risk transfer to the private sector. At least three of Metronets shareholding companies have already written off more than £300 million due to the failure of Metronet. Those losses are significant, but I do not dispute the fact that, as my hon. Friend the Member for Leyton and Wanstead and the hon. Member for Lewes pointed out, they failed to motivate Metronets shareholders to address the companys failings sufficiently early, earnestly or effectively. I assure the House that we will want to ensure that risk transfer is appropriate, meaningful and effective in future contracting arrangements.
However, I remind the House that we are in a very different place from when the contracts were first awarded. The hon. Member for Richmond Park (Susan Kramer) pointed out the difficulty of knowing what assets were available. That is true, but Transport for
London and London Underground now have a clearer understanding of the condition of the assets, so they should be able to bring more clarity to the specification and pricing of the contracts. The hon. Lady and the hon. Member for Lewes raised the issue of consultancy. I think that the hon. Lady was questioning not the need for consultants, but the need for different types of consultants.
My hon. Friend the Member for Liverpool, Riverside asked when Metronet will come out of administration. It is for the administrator for Metronet to decide how and when the Metronet business can be transferred out of administration. I can assure her that the Government stand ready to support the early transfer of Metronets businesses, to ensure that they can be put on a stable footing as soon as possible.
Several hon. Members asked about the next steps. I can tell the House that a joint steering committee, with officials from Transport for London, London Underground, the Treasury and Partnerships UK, has been set up to develop options for the long-term structure of the former Metronet businesses. It will report to the Secretary of State for Transport and the Mayor of London by summer 2008.
The hon. Member for Richmond Park asked about the consideration of alternatives, and the Government are working closely with Transport for London and London Underground to form a view on the best structure for delivering improvements on the network. We have made no presumption about the right structure, nor do we have a predetermined view on the best financing structures to support delivery. However, in making its recommendations, the committee will consider all of the lessons learned from the Metronet PPP contracts, including the Transport Committees views and todays very helpful debate.
I reiterate that the failure of the Metronet PPPs is a corporate failure, not a failure of the PPP contracts. However, we are working to understand the reasons for this failure and will ensure that the lessons learned from Metronet are understood and incorporated in any proposed long-term structure. That is a significant challenge, but my Department, Transport for London and London Underground are committed to ensuring the delivery of those essential improvements to the tube network is put back on track as soon as possible
That, for the year ending with 31st March 2008, for expenditure by HM Treasury
(1) further resources, not exceeding £7,092,000, be authorised for use as set out in HC 366,
(2) a further sum, not exceeding £11,841,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
(3) limits as so set out be set on appropriations in aid.
That, for the year ending with 31st March 2008, for expenditure by the Department for Transport
(1) further resources, not exceeding £2,059,473,000, be authorised for use as set out in HC 273,
(2) a further sum, not exceeding £1,859,129,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
(3) limits as so set out be set on appropriations in aid.
That, during the year ending with 31st March 2009, a number not exceeding 41,270 all ranks be maintained for Naval Service and that numbers in the Reserve Naval and Marine Forces be authorised for the purposes of Parts 1, 3, 4 and 5 of the Reserve Forces Act 1996 up to the maximum numbers set out in HC 264 of this Session.
That, during the year ending with 31st March 2009, a number not exceeding 122,870 all ranks be maintained for Army Service and that numbers in the Reserve Land Forces be authorised for the purposes of Parts 1, 3, 4 and 5 of the Reserve Forces Act 1996 up to the maximum numbers set out in HC 264 of this Session.
That, during the year ending with 31st March 2009, a number not exceeding 46,130 all ranks be maintained for Air Force Service and that numbers in the Reserve Air Forces be authorised for the purposes of Parts 1, 3, 4 and 5 of the Reserve Forces Act 1996 up to the maximum numbers set out in HC 264 of this Session.