Memorandum from T Martin Blaiklock (PPP
02)
INTRODUCTION:
The Committee has asked for comment as to whether:
— the PPP is producing real benefits
for Tube passengers;
— ensures the maintenance of the highest
safety standards;
— provides value-for-money for the
tax-payer; and
— spreads the associated risk fairly
between the public and private sectors.
Professionally, I am not qualified to provide
an opinion on any of the above, although I have my own subjective
views as to value-for-money and the allocation of risks.
I can, however, provide a professional view
with respect to the Committee's final question, viz. "the
likely impact of Metronet Rail BCV and SSL going into PPP Administration",
as below. My comments focus solely on the financial impacts of
this event.
Finally, I should mention that I appeared as
a Witness before the Committee on my own account in the February
2002 Inquiry into the London Underground PPP.
COMMENTARY:
1. The underlying financial structure of
the Metronet BCV and SSL PPPs combined following Financial Close
in 2003 was:
| Equity: | Atkins
| = | £70mn
|
| Balfour Beatty | =
| £70mn |
| Bombardier | =
| £70mn |
| EdF (ie French state) |
= | £70mn
|
| Thames Water (RWE) | =
| £70mn |
| Senior Debt: | Commercial bank loans
| = | £1,000mn
|
| EIB | =
| £600mn |
| Bonds: | Index-linked (AMBAC wrapped): BCV
| = | £165mn
|
| Index-linked (AMBAC wrapped): SSL
| = | £165mn
|
| Fixed rate (FSA wrapped): BCV
| = | £350mn
|
| Fixed rate (FSA wrapped): SSL
| = | £350mn
|
| TOTAL | =
| £2,980mn |
[Source: NAO and Infrastructure Journal]
2. From the above it can be deduced that the debt-equity
ratio in the funding was 88.3% debt and 11.7% equity, ie "highly
geared".
Many UK PPP's, where the PPP Concessionaire receives payment
from Government measured against the "availability"
of the PPP assets for the provision of a public service, have
similarly high debt/equity ratios. However, the Underground PPP
comprises many additional inherent risks, which other PPP's do
not embrace, eg the construction risks associated with the need
to keep the Underground operational throughout the period.
Clearly, then, this particular PPP was too highly geared
at the outset [cf. Eurotunnel!!].
3. In effect, the Metronet BCV and SSL PPP's were financed
equally and in parallel, ie to cover estimated capital investment
costs for the first 7.5 years of the PPP of approx. £1.5
billion for both PPP's individually.
Against this one has to put the claims by Metronet under the Extraordinary
Review of around £1 billion additional funding for each of
these PPP's, ie cost over-runs of 60-70%, when only 5 years of
the first 7.5 years have been completed and much work remains
yet to be done!! An unqualified disaster!!
4. There are five possible parties financially impacted
by the Administration of the Metronet PPP:
— The Government, representing the Taxpayer;
— The shareholders of Metronet;
— The lenders to Metronet; and
— The suppliers contracted to Metronet.
5. "THE GOVERNMENT,
REPRESENTING THE
TAXPAYER":
Although the terms and conditions of the Metronet loans/bonds
are not in the public domain, it has been widely reported (eg
Euromoney, etc) that TfL received a "Letter of Comfort"
from Government that, in the event of Termination of either PPP
concession, the Government would ensure that lenders/bondholders
received back at least 95% of their outstanding debt. Indeed,
for some of the bonds, this lifebelt may have been even as high
as 98% of the outstanding debt.
Additionally, the Government has all along assumed that the
LUL PPP debt was "on balance sheet" and, therefore,
part of Government debt (ref. PwC comment Q120, PAC Report on
"London Underground PPPs", HC 446 2003-04).
Hence, if the lenders to Metronet called in their debt in
this event of Termination, Government/TfL would have to pay up.
This might create a cash-flow issue for HM Treasury to an amount
of £3 billion, but this is relatively small in the overall
scenario of UK Government finance.
What might be the incentive for the lenders to enforce Termination?
Possibly, very little, as the margins they currently receive on
Metronet debt might be better than they would otherwise get on
direct loans to Government for effectively the same security.
Hence, HM Treasury may be irritated and embarrassed by the
Metronet Administration—since they promoted and were instrumental
in concluding the LUL PPPs in the first place—but little
more.
There is, however, some cost to the public purse and, hence,
Taxpayers, as the Metronet Underground contractual commitments
and responsibilities will have to be transferred back to, and
restructured by, TfL, without too much disruption to the travelling
public. This will take time and money. Without detailed knowledge
of such deals, it is impossible to estimate the cost for this.
Finally, in addition to this cost one needs to add the incremental
costs of undertaking the PPP in the first place over a conventional
contracting and funding structure. For Metronet BCV and SSL this
could be estimated as around £300 million, two-thirds of
the £430 million the PPPs cost overall to implement [ref.
A. Darling, Trans Ctee 10 Sept 2003, Q35-40]
6. LUL/TFL:
Given that Government underpins LUL PPP debt, LUL/TfL's prime
"cost" under this Administration will be for restructuring
and re-resourcing Metronet operations, as quickly as possible.
The extent and complexity of this problem is unknown. Hopefully,
the new basis for undertaking BCV and SSL work will be simpler
than the previous PPP structure!
7. METRONET SHAREHOLDERS:
The shareholders invested £350 million of equity in
the PPP. Most of them, it is assumed, have written off their investment
in the current circumstances of Administration. This gives an
actual loss of £250 million (£350 million, less Corporation
Tax at 30%).
On the other hand, it is understood that some of the contracts
placed by Metronet for Underground construction and rehabilitation
were placed with individual shareholder companies. Given that
it is quite possible that Metronet BCV and SSL have awarded overall
at least £2 billion, if not £3 billion—plus even
more if their claims to the PPP Arbitrator are substantiated,—of
such contracts, many of them to themselves at supposedly 20-25%
profit margin, it is most likely that overall the shareholders
may not have lost any money on the PPP at all (eg 20% of £2
billion is £400 mn.)!! It will be just that they—the
shareholders—have made less money on the PPP than they originally
hoped! They also might be somewhat ashamed of their role in this
debacle!
What will be interesting will be whether the Government/TfL
will recognise the components of any loans that might have been
used to pay for Metronet subcontracts, including those to shareholders,
for work which was not properly approved by TfL as being under
the PPP. This could leave lenders somewhat exposed, as Government
might not underpin the repayment!! In such circumstances, recourse
to Metronet shareholders might have little value, unfortunately,
as their exposure to Metronet will, most probably, be limited
to their original investment.
8. METRONET LENDERS:
As mentioned earlier, the lenders are largely protected by
the "Letter of Comfort" to TfL from Government.
The only uncertainty is, as mentioned above, some contracts
funded under these loans may not be recognised by TfL/Government
as valid for funding under the PPP, leaving lenders exposed.
It should also be mentioned, however, that under the PPP
structure in this case lenders and bondholders had limited incentive
to monitor closely Metronet and its contracting practices, not
least because lenders received 95-98% of their debt back, paid
by Government, in the event of Termination of the PPP. Indeed,
it is understood in the City/PPP community that, if lenders had
not received such Government support when the PPP funding was
being arranged, then they would not have provided the debt in
the first place!
It is also said that the lenders received such generous up-front
negotiation fees that any potential 2-5% loss on Termination was
offset against these fees!
As mentioned before, therefore, the lenders may be just as happy
to see their PPP debt stretch out to maturity, as the terms are
better than they might otherwise get in the market. Further, the
hassle and cost of renegotiating the bond finance could be very
expensive and complex (ref. the British Energy restructuring in
2004).
Overall, the lenders may not be too unhappy, but they may
be somewhat embarrassed to be a stakeholder in this debacle!!
9. SUPPLIERS CONTRACTED
TO METRONET:
Suppliers to Metronet will wish to ensure payment, whether
or not their contracts were officially approved or not. Those
contracts, however, awarded by Metronet to its shareholders, will
indubitably be scrutinised in some detail by TfL, et al., before
any payment is effected. In the end, it will be a question of
commercial negotiation: part of the cost to TfL of restructuring
the PPP.
Details of these contracts are not in the public domain,
but a major contract could be for rolling stock with Bombardier
of Canada, which could stretch over many years. This could represent
the biggest stumbling block to smooth restructuring.
10. Finally, one might question, given the absence of
major losers apart from Taxpayers, who else might have gained
or lost out?
One group, in particular, have gained! The lawyers and financial
advisers who created the PPP edifice on this occasion!! They orchestrated
the birth and death of this PPP, and will be needed again for
the re-birth too!!
CONCLUSION:
In the end, the losses which have been generated by this
PPP saga have fallen, as always, at the feet of the Taxpayer.
Whilst much of the public focus of blame will be on Metronet and
its management of this PPP, Government cannot absolve themselves
of responsibility for these losses to the Taxpayer either, as
it was, in particular, HM Treasury, who were promoting this PPP
against much widespread advice. Such complex PPPs should be avoided,
whatever the forecast "value for money" may be!
August 2007
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