UK: remunicipalising transport PPPs

(May 2012) Trade unions have been campaigning for many years against the use of Public-Private Partnerships (PPPs) by the government, under the private finance initiative (PFI). The campaigns have been vindicated by the spectacular failure of the biggest PPPs of all, which were set up for the underground rail system in London. Transport for London (TfL), the public authority for the UK’s capital city, terminated four major PPP contracts in all.

In 2003 the renovation of the London underground rail system was handed to two large private consortia, Metronet and Tubelines, under PPP contracts. This was against the wishes of the elected London mayor and assembly, who wanted the work to be done by direct labour, financed by government bonds. Both of these PPPs have now been terminated and remunicipalised and are now being financed and run by TfL.

Metronet



The first PPP to be terminated was Metronet, which collapsed in 2007. The UK parliament’s Transport Committee summarized the lessons in a series of statements that expose the realities behind many claims about the benefits of PPS:

“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….."

"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…."

"Metronet’s inability to operate efficiently or economically proves that the private sector can fail to deliver on a spectacular scale…. 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.”

Tubelines



The second major PPP for renovation of the system, Tubelines, worth £30 billion, was terminated in 2010. The contract included provision for reviews after seven years, with arbitration in case of disputes: TfL challenged the cost estimates of the consortioum for the next period, and won the arbitration award. As a result, Tubelines, which was already months behind in its work, went bankrupt, and TfL took over the financing and operation.

The process revealed that lawyers had been paid over £400million for one reason or another during the lifetime of the PPP. It also revealed the hopeless inaccuracy of consultants’ forecasts of private sector efficiency:

“As the partnership was being put together, PricewaterhouseCoopers, a consultancy, predicted that the private sector could extract savings of up to 30%, a figure that informed the entire project. But the consultancy published no adequate evidential basis for that figure”

Tramlink



In 2008 TfL also terminated a PPP contract for a light rail service in south London, Tramlink, which is an important new part of the system designed to attract people onto public transport and reduce use of cars. The contract was a 99-year concession, under which the company invested £80million while the government invested £125million.

The contracts was ended after the company refused to cooperate with a new ticketing system which would have generated more passengers but no more profit. It cost TfL £100m. to buy out the PPP, so the total investment by the public sector is already £25m. more than it need have been if the government had financed it directly from the start. The tram service is now run by TfL.

Oyster cards



Another PPP, for the system’s electronic ticketing system of ‘Oyster cards’, was also terminated in 2010. The decision to terminate was taken following two major failures of the system affecting hundreds of thousands of passengers for hours.

The PPP contract was for 17 years, but included ‘break’ clauses which allowed TfL to terminate the contract five years early, with effect from August 2010. Instead of the PPP, TfL itself has now taken on the £101m. debt which finances the work, but at much lower cost, because it pays lower interest rates than the private companies.

The savings are so great that TfL took over the debt six months early, in February 2010, which saved an extra £4million. The work has not been brought back inhouse, but re-tendered under a normal 3-year operating contract, which itself costs £10million per year less than the PPP deal, as well as requiring higher standards of work.

In total, the lower interest rates and lower payments for work together mean an annual saving of about 18% compared with the original PFI contract, which was costing just over £100million per year.

References and links



- House of Commons Transport Committee: The London Underground and the Public–Private Partnership Agreements Second Report of Session 2007–08 2007–08 HC 45 16 January 2008

- Christian Wolmar, 22 May 2010 Rail 644: Why the PPP was doomed from the start

- The Economist, May 15, 2010 Finis; The Tube upgrade deals

- The Lawyer, September 6, 2010 Does failure of TfL deals spell the end of the line for PPP bonanza?

- Croydon Tramlink quietly renationalised

- TFL: £30m saved as new Oyster contract begins, 17 August 2010

- Financial Times, 9 August 2008, Oyster card contractor fired after £1m failures

More like this