| Metronet's tied supply chain
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| 1. | We are not persuaded that Metronet's shareholders had any inclination to address the problem of the tied supply chain nor, as the intended beneficiaries of the system, did they have very much incentive to do so. (Paragraph 16)
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| 2. | When the bids for the PPP contracts were being assessed, it should have been possible for the Government and London Underground, then under national control through London Regional Transport, to foresee that Metronet's proposed tied supply chain model, which guaranteed the lion's share of work to its parent companies, did not include the necessary safeguards. The fact that such a management structure was judged to be capable of efficient and economic delivery seems extraordinary now that Metronet has collapsed but the ultimate recipients of the money which was paid to the company have walked away with limited losses. The Government must not allow this blurring between the roles of shareholder and supplier in future bids to carry out work by the private sector. Bids where competitive tendering for sub-contracts is proposed are likely to ensure that the best price is obtained. (Paragraph 18)
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| Risk borne by Infraco shareholders
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| 3. | The return anticipated by Metronet's shareholders appears to have been out of all proportion to the level of risk associated with the contract. The parent companies were effectively able to limit their liability to the £70 million they each invested in Metronet at the outset. Had Metronet survived, they would also have borne the cost of their own inefficiency along with a minimal amount—£50 million—of any other cost overruns. In the face of this very limited liability it is difficult to lend any credence to the assertion that the Metronet PPP contracts were effective in transferring risk from the public to the private sector. In fact, the reverse is the case: Metronet's shareholders, had the company been operated effectively, stood to make quite extravagant returns. Now that it has failed, it is the taxpayer and the Tube passengers who must meet the cost. (Paragraph 25)
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| Risk borne by Infraco lenders
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| 4. | In terms of borrowing, the Metronet contract did nothing more than secure loans, 95% of which were in any case underwritten by the public purse, at an inflated cost—the worst of both possible worlds. As with the shareholders, what minimal risk was borne by Metronet's lenders was disproportionately well rewarded, at the expense of tax- and fare-payers. Public sector negotiating parties must be hard-headed in their determination to achieve the best possible terms for financing private sector delivery organisations. The banks should be required to take on substantial risk to reflect the large sums of money available. Additional risk would also increase the incentive for lenders to look after their debt properly. A proper assessment should be made of the cost of higher-risk lending against that of guaranteeing large quantities of private sector debt in the event of a company's failure. If finance cannot be secured at reasonable terms without guaranteeing the vast majority of the debt, loans direct to the Government, which would enjoy the highest credit rating and significantly lower costs, would seem to be the more cost-effective option. (Paragraph 29)
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| The Materiality Threshold |
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| 5. | Metronet's inability to operate efficiently or economically proves that the private sector can fail to deliver on a spectacular scale, although Tube Lines' performance provides an example of private sector innovation and efficiency. The evidence is clear: it cannot be taken as given that private sector involvement in public projects will necessarily deliver innovation and efficiency, least of all if the contracts lack appropriate commercial incentives. Future assessments of the comparative value for money of private sector-managed models for infrastructure projects should not assume a substantial efficiency-savings factor; a detailed assessment should be made of the suitability of the proposed structure of delivery organisations, of bidders' specific expertise and of the strength of the incentives to efficiency. It is worrying that the Government's confidence in such savings appears to stem from a belief that inefficiency is more endemic and irreversible in the public than the private sector. (Paragraph 32)
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| 6. | It is clear that in negotiating future agreements the Government should seek as high a Materiality Threshold as possible in order that public liability is minimised in the event of an overspend by the private sector. The level of the Materiality Threshold is crucial in encouraging efficiency and innovation. If it is set so low as to be, in effect, a cost-plus contract, this encourages the contractor to hold out for ever-larger payments over and above what was originally bid. (Paragraph 34)
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| Inefficient costs and the principle of the PPP
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| 7. | Now that TfL is in control of the Metronet contract, there is a danger that private contractors brought in to upgrade the network will not be alive to its future maintenance needs, which will be met by TfL. This is not an insurmountable problem but it means that careful attention must be paid to the future maintenance of the underground network at a very early stage in the process of commissioning upgrade work. It might be that, for part or all of the network, letting combined contracts for upgrading and maintenance offers the best value for money. (Paragraph 39)
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| Value for money |
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| 8. | The Government should not enter into any further PPP agreements without a comprehensive and accurate assessment of the level of risk transfer to the private sector and a firm idea of what would constitute an appropriate price for taking on such a level of risk. If it is not possible in reality to transfer a significant proportion of the risk away from the public purse, a simpler—and potentially cheaper—public sector management model should seriously be considered. (Paragraph 45)
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| Reporting on the performance of the Infracos
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| 9. | We consider that the gathering and publication of information by the PPP Arbiter will generally tend to benefit all interested parties: London Underground as client, the Infracos as suppliers and the public as users. The Government should also find such information useful for assessing the benefits and costs of similar proposals in the future. There is some evidence to indicate that an earlier review could have mitigated the impact of Metronet's collapse, if not averted it entirely. However, it is important that any reporting process is seen as neutral and is designed to provide the information that both the Infracos and London Underground require to address performance issues and to prepare for Periodic Review. It would have been wiser to make the annual review an automatic process rather than one which had to be initiated by a party to the contract. (Paragraph 55)
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| 10. | Though we have not sought to evaluate Tube Lines' performance in the course of this inquiry, we believe that, in principle, annual reports on Tube Lines would be just as valuable as it could have been in the case of Metronet. An independent report from the Arbiter in 2008 on the performance of Tube Lines to date would be timely, particularly in the absence of a 2006-07 London Underground report on the performance of the Infracos. (Paragraph 56)
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| 11. | We recommend that a mechanism be put in place to allow the PPP Arbiter to report annually on the performance of the Infracos, including Tube Lines, whether or not he is called on to do so; this might require the granting of additional powers to the Arbiter under the Greater London Authority Act 1999. (Paragraph 57)
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| 12. | As long-term arrangements for upgrading the Tube are devised, the Government should ensure that there is a mechanism to guarantee independent reporting of progress and value for money, no matter what delivery vehicle takes the place of Metronet's PPP Agreements. (Paragraph 59)
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| The performance of London Underground
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| 13. | A contractual arrangement which fails to incentivise efficiency in the private sector and at the same time fails to deter poor planning, lack of forethought and gold-plating in the public sector is one which is pretty much useless. Metronet alleges that part of its overspend is a consequence of decisions by London Underground, such as changes to the specification of ongoing works. We recommend that in the future the Arbiter, alongside reporting the performance of the Infracos, reports the effectiveness of London Underground as client during the modernisation of the Tube network. (Paragraph 63)
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| The Extraordinary Review |
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| 14. | As with the annual report, there is evidence that had the Extraordinary Review been initiated at an earlier stage, it might have mitigated the worst effects of Metronet's failure. We recommend that, for future PPP Agreements, the Government extend the power to trigger an Extraordinary Review to both contract parties, rather than only the Infracos. Such a change could reduce the possibility that an overspend would be allowed to get as far out of control as it did in the case of Metronet. (Paragraph 66)
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| 15. | The uncontrolled spiral of cost overruns, without any assessment being made of its causes or of the respective liabilities of the parties to the contract, must never be allowed to happen again. A mechanism similar to that which is built into the Tube Lines contract to ensure an early examination of any cost increases should be included as a matter of course in any future contracts. (Paragraph 69)
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| Costs to the public |
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| 16. | We recommend that the Government, as a matter of urgency, make a full assessment of the additional costs that have been incurred as a result of the failure of Metronet—including the cost of work that has been inefficiently undertaken and the cost of administration. The Secretary of State should then come to the House to make a statement on what proportion of these costs are to be met by central Government and what proportion she expects residents of London and Tube passengers to pay. The Government should also consider its contribution to efficient increases in costs as a result of the unknown condition of the infrastructure, in order that London Underground is not forced significantly to reduce the scope of the upgrade programme during the second Review Period from 2010. (Paragraph 79)
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| 17. | We hope that, in its discussions with Transport for London as to the future of Metronet's PPP Agreements, the Government makes full use of the Arbiter's analysis for the partial Extraordinary Review of Metronet BCV and for a potential Extraordinary Review of Metronet SSL, and that his insights are utilised to minimise the chance that further unexpected and wasteful costs to the public purse might be incurred. (Paragraph 82)
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| Employee safety |
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| 18. | To maintain the highest standards of safety for employees in the longer-term, the Government must work with Transport for London and the unions to identify existing communication deficiencies and ensure that the future structure of the contracts does not contain inherent safety weaknesses. Where it is necessary for employees of different organisations to work together, the utmost effort must be made to ensure the clarity of procedures for reporting safety concerns. (Paragraph 87)
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| Passenger safety |
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| 19. | During the transition of Metronet's ownership from its shareholders to Transport for London and for the duration of Transport for London's stewardship of the Infracos, as well as in the longer-term under whatever vehicle is chosen to deliver the upgrades, passenger safety must be the primary concern of everyone who is involved. A key role for the Government in its discussions with the Mayor and Transport for London will be to ensure that future contracts incentivise the actions that are necessary to guarantee the highest standards of safety on the network. (Paragraph 92)
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| Conclusion |
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| 20. | The Government should bear the Metronet debacle in mind if and when its parent companies—Atkins, Balfour Beatty, Bombardier, EDF Energy, and Thames Water—next come to bid for publicly-funded work. (Paragraph 95)
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| 21. | The Government should remember the failure of Metronet before it considers entering into any similar arrangement again. It should remember that the private sector will never wittingly expose itself to substantial risk without ensuring that it is proportionally, if not generously rewarded. Ultimately, the taxpayer pays the price. (Paragraph 96)
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| 22. | If the Government is again tempted by a seemingly good deal from the private sector, it should recall Metronet's pathetic under-delivery and the deficiencies in the contracts that allowed it to happen. We recommend that the Government publishes a candid analysis of the events preceding Metronet's collapse and its consequences, both in terms of increased costs to the public and delays to the work programme. (Paragraph 97)
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| 23. | Whether or not the Metronet failure was primarily the fault of the particular companies involved, we are inclined to the view that the model itself was flawed and probably inferior to traditional public-sector management. We can be more confident in this conclusion now that the potential for inefficiency and failure in the private sector has been so clearly demonstrated. In comparison, whatever the potential inefficiencies of the public sector, proper public scrutiny and the opportunity of meaningful control is likely to provide superior value for money. Crucially, it also offers protection from catastrophic failure. It is worth remembering that when private companies fail to deliver on large public projects they can walk away—the taxpayer is inevitably forced to pick up the pieces. (Paragraph 98)
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| 24. | Finally, now that the Government is considering the future of the Underground upgrade programme, it should prioritise transparency and clarity to taxpayers and ensure that any future contracts result in clear accountability to national or regional Government, thereby providing the public with the opportunity of applying sanctions in the event of poor performance. (Paragraph 99)
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