1 Introduction
1. The Transport Committee and our predecessor committees
followed closely the process which led to the London Underground
Public Private Partnership (PPP) agreements in 2003. Over the
last seven years we have continued to monitor the performance
of the PPP and we have, on a number of occasions, placed on record
our judgement that the PPP is flawed. In 2005, we concluded that
"on the evidence we received, improvements in facilities
and performance are not in proportion to the huge sums of money
flowing through the PPP."[1]
We stand by that judgement which was reinforced in July 2007 when
Metronet, one of the two infrastructure companies (infracos) in
a PPP agreement with Transport for London (TfL), went into administration
with significant debts and having failed to meet its obligations
for network improvements.[2]
Our 2008 Report, The London Underground and the Public-Private
Partnership Agreements, recommended that, "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."[3]
2. Our previous reports have described the PPP agreements
in detail and what we consider to be their failings; it is not
our intention to reiterate our full analysis here.[4]
The purpose of this short report is to provide an update on the
remaining PPP agreement between TfL and Tube Lines. We consider
whether the remaining PPP agreement has been working in the interests
of taxpayers and passengers since the failure of Metronet. We
also consider the performance of London Underground (LU) since
May 2008 when it took over responsibility for the Underground
lines formerly managed by Metronet. Finally, we provide an update
on the first periodic review which will establish the context
for the PPP until 2017.
3. We are grateful to the organisations and individuals
who submitted written evidence and to the nine witnesses from
whom we took oral evidence in December 2009 and January 2010.
In connection with this inquiry, we visited London Underground
in December 2009. The visit provided us with an insight into the
work being undertaken by LU in introducing new trains, replacing
signalling and renovating stations on the Victoria line. We are
grateful to those who helped arrange our visit.
The demise of Metronet
4. LU entered into three separate PPP Agreements—with
Tube Lines in December 2002 and with Metronet (two separate Agreements)
in April 2003. Under the agreements, which were due to run for
30 years, the infracos would maintain, renew and upgrade parts
of LU's infrastructure in return for a set price agreed between
TfL and the infraco. Any additional work carried out would be
for an amount agreed by both parties. LU remained responsible
for delivering services to customers. The Government predicted
that the PPP agreements would realise over £16 billion of
investment in the Underground and £4 billion of savings through
efficiency gains whilst utilising the expertise of the private
sector.[5]
5. It soon became clear, however, that the PPP agreements
were not delivering many of the improvements to the network that
the Government had hoped. In 2005, we concluded that:
Availability is the most important factor for Tube
travellers. All the infracos needed to do to meet their availability
benchmarks was to perform only a little worse than in the past.
On most lines, they did not even manage that. We hope that they
will be able to meet the more demanding targets for availability
expected in future; we have no confidence that will be the case.
[6]
6. In addition, the claim that the PPP would result
in value for money for the taxpayer was undermined when Metronet
went into administration in July 2007. Metronet had overspent
its budget for renovations and refurbishment, and was refused
additional loans by its creditors. In our detailed analysis of
Metronet's failure, The London Underground and the Public-Private
Partnership Agreements, we concluded that "the PPP model
was flawed" and that the failings of Metronet's management
had led to its downfall.[7]
Our report, and the July 2009 report by the National Audit Office
(NAO), The failure of Metronet, ascribed the infraco's
failure to:
a) Metronet's poor corporate governance and
leadership;
b) Metronet's shareholders also acting as suppliers
in a tied supply chain with management structures which gave power
to the suppliers, rather than the management of the business;
c) London Underground's limited ability to manage
the contract in a way that prevented costs from escalating, and
d) the inability of the PPP Arbiter to initiate
an Extraordinary Review of the PPP Agreement with Metronet when
it was clear that the infraco was experiencing difficulties,[8]
but before it entered Administration (under the terms of the PPP,
the Arbiter could intervene only if invited to do so by one of
the parties involved).[9]
7. Although Metronet's failure was largely of its
own making, the terms of the PPP agreements meant that it was
taxpayers who footed most of the bill for its demise. According
to the NAO, the total cost of Metronet's collapse was £1.75
billion. Of that figure, Metronet's parent companies—Atkins,
Balfour Beatty, Bombardier, EDF Energy, and Thames Water—were
liable only for £70 million each. The taxpayer was liable
for approximately £1.7 billion, equivalent to 95% of Metronet's
debt obligations. However, the NAO concluded that the overall
direct loss to the taxpayer was in the range of £170 million-£410
million. The remaining loss was "an unanticipated upfront
cost to the taxpayer and equivalent to paying off a mortgage early"an
obligation on the taxpayer through a grant from the DfT to TfL
which would have fallen due at a later date in any case.[10]
8. The Mayor of London, Boris Johnson, argued that
the cost to TfL of Metronet's demise was in fact £550 million
because, he argued, the NAO estimate did not take into account
work left undone by Metronet, which LU has addressed subsequently,
or work outstanding which needs to be completed by LU in the future.[11]
TfL's submission to this inquiry stated that "LU has also
had to deal with the financial legacy of Metronet's collapse—the
result of poor programme management and system integration, ineffective
cost control, a lack of forward planning and inefficient fiscal
management". [12]
9. All witnesses to our inquiry accepted that Metronet's
failure cost the taxpayer millions of pounds and that the structure
of the PPP left the taxpayer to bear a large financial risk. The
Mayor, Boris Johnson, described Metronet's PPP agreements as "a
system that was not operating in the interest of taxpayer value,
that ballooned until the point of explosion".[13]
10. As we stated
two years ago, the failure of Metronet demonstrates the flawed
nature of the PPP agreements which placed an unacceptable burden
of risk on the taxpayer. Metronet's demise, which cost the taxpayer
at least £170 million, has cast a long shadow of doubt over
the remaining PPP agreement with Tube Lines.
1 Transport Committee, Sixth Report of Session 2004-05,
The Performance of the London Underground, HC 94 Back
2
Transport Committee, Second Report of Session 2007-08, The
London Underground and the Public-Private Partnership Agreements,
HC 45 Back
3
HC (2007-08) 45 Back
4
For a detailed explanation of the principles of the PPP see HC
(2007-08) 45 and HC (2004-05) 94. Back
5
HC (2004-05) 94 Back
6
Ibid. Back
7
HC (2007-08) 45 Back
8
The PPP Arbiter, established by the 1999 Act, has two principal
statutory functions:- to give directions on matters specified
in the PPP Agreements, when asked to do so by one of the Parties
to a PPP Agreement, and to give guidance on any matter relating
to a PPP Agreement, when asked to do so by either (or both) of
the Parties to a PPP Agreement. Back
9
The National Audit Office, The failure of Metronet, HC
512, 5 June 2009 Back
10
The National Audit Office, The failure of Metronet, HC
512, 5 June 2009 Back
11
Q 18 Back
12
Ev 46 Back
13
Q 2 Back
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