‘Onerous contract’ destroyed Tube Lines PPP

The collapse of the 30-year Tube Lines PPP deal with Transport for London has been blamed on an “onerous” and “expensive” contract.

Experts claim the reasons for the breakdown were specific to the London Underground deal and have little consequence for other PPP deals.

The comments follow a decision last week by London mayor Boris Johnson to buy Tube Lines for £310m, after the two parties reached a stalemate on their negotiations over a price for the next seven-and-a-half years of upgrade work.

An adviser on the winding up of now defunct PPP Tube contractor Metronet, who will also advise on the Tube Lines takeover, spelled out two key reasons for the demise: “The first was that it was a highly onerous contract, in which lawyers and professionals tried to allow for every possibility. It would have been much better if it had reflected a spirit of agreement.

“The second was that it was far too expensive. For the next seven-and-a-half years Tube Lines was willing to do the work for £1.3bn less than the originally estimated £5.7bn. That tells you a lot.”

Tube Lines, which was upgrading the Northern, Jubilee and Piccadilly lines, will now become 100% owned by Transport for London (TfL). At present it is two-thirds owned by Spanish firm Amey and one-third by US outfit Bechtel.

The adviser added: “Now TfL will have control of its capital spending, rather than being locked in.”

The first quarter of the 30-year contract had already been carried out, and the breakdown came during negotiations for the second quarter. Tube Lines initially suggested a price of £5.7bn, which the arbiter reduced to £4.46bn. TfL still wanted a further £600m taken off the price.

Neil Rutledge, a government and infrastructure adviser at financial services firm Grant Thornton, said: “I don’t think the collapse has any wider implications for PPP, as the markets have always understood that this [Tube contract] was an unusual case.

“People couldn’t do the due diligence they’d usually do [because of the nature of the underground network] and there were restrictions on when work could be done – a lot of the problems were about working on the Tube rather than PPP. Deals that are well-structured and involve building new assets will carry on as normal.”

The TfL deal will be finalised on 30 June, after which Amey, a subsidiary of Spanish construction giant Ferrovial, will continue to provide management and maintenance services at a reduced rate. Bechtel will remain for an “interim period” before handing capital works to TfL.

It is unclear how many of the 3,000 Tube Lines staff will be made redundant, but Bob Crowe, general secretary of the RMT union, has already warned of industrial action.

The London Underground’s only other PPP deal collapsed when Metronet entered administration in 2007.

Boris Johnson set out his transport plan for London on Monday, detailing the city’s strategy for the period up to 2031. Among the list of proposals was making sure Crossrail is delivered by 2017 without any scaling back. The project will employ up to 14,000 people between 2013 and 2015.

Three sides to every story

What Boris said:

“Freed from the perverse pressures of the Byzantine PPP structure, I am confident that London Underground and a private contractor are more than capable of delivering the improvements to London’s transport network we need, on time and on budget.”

What he meant: “What idiot came up with this PPP?”

What Amey said:

“We are proud of our record over the past seven-and-a-half years and the results we have achieved – these include a significant reduction in delays, increased reliability, improved safety and reduced costs. We look forward to building on these achievements and further strengthening our partnership with TfL.”

What it meant: “It was Bechtel’s fault.”

What Bechtel said:

“We are extremely proud to have played an important role in delivering the substantial improvements on the Jubilee, Northern and Piccadilly lines, while transforming safety for people working on the network. These achievements are a tribute to the dedication and hard work of Tube Lines’ employees.”

What it meant: “Get your P45s ready.”