A well-intentioned mess

Public-private partnerships on the London Underground have provided a cure worse then the disease, a

You must buy what you don't want. You must pay more than you should. You must endure delays to the work. And you must assume the ultimate risk of failure. It is a special kind of partnership to be sure.

The infamous PPP, the Public Private Partnership, for the maintenance and rebuilding of London Underground is a well-intentioned mess. To be fair, the Labour Government deserves great credit for recognising the need to rebuild the Tube and for embarking on a program of sufficient scale to meet the need. Previous governments had allocated funds to make the system safe and had authorised some new investment, but the core of the system was neglected to the extent that unreliability became chronic. This Government faced up to the need to transform the Tube in order to support London's growth and quality of life.

One must also acknowledge that the investment in the Tube since the PPP began in 2003, especially the improvement in train reliability and track quality, has helped to deliver record levels of service and quality. The problem is, that improvement has cost an outrageous premium and is less than what it should have been. Indeed, the premium may be so high that it could become an excuse to curtail the rebuilding program, which would be disastrous for London.

The Tube PPP was a shotgun wedding from the start. Management accepted and championed the structure because it was supposedly the only way to secure funding for the Tube. The London local government welcomed it with litigation and derision. In turn, the private companies formed to rebuild the Tube, Metronet and Tube Lines, seemed to view their client as an untrustworthy and diseased patient. It was not a promising start.

PPP's and PFI's have been used by governments around the world to deliver infrastructure - schools, hospitals, roads, transport systems - but the acronyms comprise such a variety of structures and situations that blanket statements about them are facile and misleading. Some have been successful, others less so, but most have been adopted in hopes of applying private capital, risk and innovation to the delivery of a public investment project, sometimes involving maintenance and even operations. The conventional wisdom behind PPP/PFI is that public needs can be delivered more efficiently using a structure that utilises the discipline and competence found in the private sector. The public sector is thought to lack the skill sets and self-control, particularly a willingness to resist change orders throughout a project, to deliver efficiently.

The London Underground's history illustrates the conventional wisdom. LU supposedly failed to deliver two projects, the Jubilee Line Extension and the Central Line upgrade, efficiently and on-time, thereby justifying the use of a PPP. One can argue the fairness of that characterisation of those two projects, but even accepting it were true, the Tube PPP has proved a cure worse than the disease.

Under a PPP, the private company or consortium typically raises the funds for the project, but since they finance at a spread above government borrowing, that additional cost must be borne by the project. That is a premium usually justified by risk transfer from the public sector and risk management by the private sector. In this case, the situation approached the absurd because the private borrowing was subject to a 95% government guarantee. When Metronet, the company responsible for maintaining two-thirds of the Tube, collapsed, TfL paid off the 1.7 billion in private borrowing. So much for risk transfer; so much for risk management. The premium was not limited to higher rates of borrowing but manifested itself in various ways: the lack of competitive bidding in allocating work over 30 years results in inflated costs and preferential fees to the involved private companies; negotiations over future or new work are conducted without the ability to introduce market discipline, resulting in higher costs; in place of competitive bidding, the structure relies on record-keeping, derivative measurements and man-marking, all at additional administrative expense; the asymmetry of information in favour of the private companies leads to a claims culture, resulting in future unpleasant budget overruns.

That premium or set of premiums supposedly pays for performance. Tube Lines, the company responsible for maintaining one-third of the network and that has managed to stay in existence, must be credited with its delivery of rebuilt stations on time and with improved performance on the Piccadilly and Northern Lines. It is impossible to compare that performance with what would have been delivered under a conventional contracting structure. What is undeniable, however, is Metronet's spectacular collapse and the spectre of Tube Lines' late delivery of the line upgrades, which are the heart of the investment program. That level of performance cannot support the level of funds expended, and the premium becomes scandalous when budgetary pressures necessitate cutting back the scope of the overall program.

In absence of an obvious return for the excess costs of the PPP, a conventional financing and contracting structure should be preferred. Financing is cheaper; flexibility is retained to adjust work for changes, such as the Olympics, and new imperatives, such as climate change; and the private sector can still deliver the projects but subject to market disciplines. Moreover, the private sector can be forced to consider new ways of working, such as delivering line upgrades without years of weekend line closures.

There is no panacea. The record of large, urban civil projects is spotty at best under any structure, and success is most dependent on good people. Yet, when resources are dear and government must sort priorities, one is best advised to adopt a structure that is transparent and simple. That should be the North Star for the rebuilding of the Tube and Crossrail.