Tube Lines chief executive Terry Morgan said that its three members could make £256m in the first 7.5 years of their contract, which is £80m more than first forecast. After tax Morgan said profits would work out at around £148m or £19.7m a year, a return of 11%.
Consortium members Jarvis, Bechtel and Amey could also boost their profits by seconding their staff to Tube Lines and winning contracts to carry out the upgrade work. If the majority of the tenders are awarded to the consortium members, total profits could exceed £500m.
Such high returns would embarrass the government, which claims that the public–private partnership offers the best value to the taxpayer: it wasn’t intended to be a licence for contractors to print money.
The completion of the deal, described by Transport for London chief Bob Kiley as “the most complicated contract system in the history of Western civilisation", means the consortium members can start to claim back their £140m bid costs. These have risen by £31m since June because of the delay caused by Ken Livingstone’s legal challenge to PPP.
The reimbursing of these costs will come as a relief to Amey whose finances are in dire straits. It has issued two profit warnings in just over a month and has parted with its chief executive Brian Staples as a result.
In a bid to improve its financial position Amey sold its £60m stake in the Tube to Jarvis and Bechtel. It has until June to raise the money to buy its stake back: many in the City predict that the company will be broken up by then.
Morgan went some way this week to reassure investors that Amey’s predicament would not affect the consortium’s ability to carry out work on the Tube. "I employ 12 people from Amey out of 2500. I would like to keep them in the deal but if they are not able to, it isn't an insurmountable problem," said Morgan.
If the consortium does fail to refurbish and maintain the Tube adequately it will be subject to stiff penalties. The financial penalties for train delays and uncleaned stations are twice the size of the incentives offered to for improving the current level of service. If all three lines were shut on one day, the resulting penalty fine would be around £6m.
Despite the penalties, Tube Lines will be relieved to be starting work on the project. To start with it is pledging to cut delays by 10% in the first 12 months of operation – after the struggle to secure the deal, the upgrade of the oldest, most run-down underground system in the world will seem like a walk in the park.