Three years ago, Livingstone described the imminent part-privatisation of the Tube as ‘folly’. Three years later, London Underground released a report that appeared to agree with him. Building analyses the evidence – and cross examines the Tube consortiums …
The Tube is a subject close to the hearts, and the spleens, of most Londoners. Every day, as many as 3 million journeys are made on it, many by people pressed so close together that they have to take turns breathing. And without it, London becomes an impossible city. So it would be hard to overemphasise its importance.
It would be hard, too, to overemphasise the bitterness of the three-year struggle that followed the decision to hand over the maintenance and upgrading of the Underground to two private sector consortiums. These were known as “infracos” to those involved in running the underground, and as “the worst scum of modern capitalism” to the man who later became their ultimate client, mayor Ken Livingstone.
Livingstone’s two main objections were that a public–private partnership was not the most effective or efficient way to invest in the network – he favoured raising money using a bond – and that the level of profit made by the private sector would be “obscene”.
Predictably, Livingstone’s voice was ignored by the government and three 30-year contracts were awarded to the private sector. The Tube Lines consortium, which comprised Amey, Bechtel and Jarvis (Ferrovial replaced Jarvis last year), was awarded a contract to maintain and improve the Jubilee, Northern and Piccadilly Lines. The remaining two contracts, which covered the rest of the Underground network, went to Metronet – a consortium made up of Balfour Beatty, Atkins, Bombardier, Seaboard and Thames Water.
Now that these infracos have entered their third year of operation, we have enough evidence to judge whether or not Livingstone was right.
Would a different delivery vehicle been better?
Although Ken argues yes, the short answer is that nobody knows, but it is difficult to see any other way to come up with £35bn of funding over 30 years. Nevertheless, judged on progress so far, the PPPs have not worked as well as they should have in their first two years. Nobody disputes this.
Both consortiums have received a public flogging from London Underground, although Metronet, which has the larger task, received more strokes. A report issued last month by Tim O’Toole, managing director of London Undergound, concluded that “performance is not good enough and is less than what was promised”.
One of the main problems faced by the infracos is the overrunning of night-time engineering, which increased 35% last year and now averages more than one occurrence a week. Keith Clarke, chief executive of Atkins and Metronet chairman, attributes the problem to poor decision-making, and says the situation is improving. Work takes place between 1.30am and 4.30am, and services start at 4.50am on most lines. “If we are two minutes late it is not so significant, but if it is 30 minutes to an hour it starts eating into the morning peak,” says Clarke.
Another issue is the late delivery of station refurbishments. Metronet failed to deliver any of its eight stations by its March 2005 deadline. Of the 26 stations with a deadline of March next year, it is confident of delivering about 20. Tube Lines delivered seven of its first nine stations on time.
Clarke says Metronet has turned the corner. It swept away chairman John Weight and replaced him with former Jarvis director Andrew Lezala. Clarke became non-executive chairman and the business was restructured. That resulted in the loss of 300 jobs last month, most of which were back-office roles. “We wanted to get the right people in the right seats,” says Clarke.
Howard Seymour, analyst at Bridgewell Securities, says there have been issues with certain parts of the contracts but that the PPP is broadly working. “If they didn’t do it as a PPP, how else would they have funded it? It is all well and good Ken Livingstone complaining about it, but that is slightly academic.”
But what was it like before?
In the face of criticism, Terry Morgan, Tube Lines’ chief executive, emphasises the poor state of the network when it was inherited by the private sector two years ago: “These assets were in a terrible state,” he says. “If I could have waved a magic wand over the assets I would have.”
The system is working. There is a profit incentive; we are the private sector
Terry Morgan, Tube Lines chief executive
O’Toole has emphasised the need to improve the service on the Northern Line, which is the worst performing on the network. Morgan says that is no simple challenge: 600,000 passenger journeys are made of the line every day.
The defence of the private sector’s involvement is the same for the Tube as it is for any other area of the public realm: it increases the amount of investment funds available. It is difficult to see the public sector coming up with a equivalent amount of money over 30 years, irrespective of changes in government. The private sector is expected to invest about £6bn in the Tube within the first seven-and-a-half years of the 30-year contracts.
Clarke argues that this guaranteed level of investment in the underground network helped London to secure the 2012 Olympics: “PPP helped us get the Olympics,” he says. “It wasn’t the cause but it sure as hell helped.”
And both Clarke and Morgan are proud of the way the PPP showed it responded to the 7 July bombings: the affected stations re-opened within five days of being handed back by the police.
Were profits ‘obscene’?
One of Ken’s biggest gripes was that the private sector would make too much money from the contracts. It looks as though his original claims, that consortiums could achieve returns of up to 45%, have been exaggerated. Neither Metronet nor Tube Lines will disclose the level of returns it has made so far, but Clarke said it is somewhere in the mid-teens.
Neither consortium apologises for making a profit – after all, that is why they are in business. “The system is working,” says Clarke. “When we perform well, we’re getting bonuses. When we are not, we are getting penalties. There is a profit incentive; we are the private sector.” In July, Metronet said that it was setting aside a £14m provision for penalties to be incurred after late station delivery, although on one of its contracts it received a £14.9m bonus.
Morgan says that Tube Lines is in it for the long term and that there is no reason for him to talk about whether a different structure might have been better: “I don’t need an opinion on whether they were right or wrong [to choose PPP]. That was the way the deal was struck. I’d like to think we are showing that we can deliver.”
LU has yet to be convinced. A spokesperson this week told Building: “These are extremely lucrative contracts. They are earning £50m a year and that is a lucrative contract.”
Livingstone remains unconvinced, although his language of late has been less scathing than it was. He told Building: “I expect the PPP companies to deliver what Londoners have been told to expect, on time and to budget. TfL is working closely with them to achieve this result. If it turns out that the companies are unable to deliver, I will ask the government to introduce legislation to strike down the contracts.”
Both Metronet and Tube Lines remain under intense scrutiny. Clarke says his aim is to get Metronet away from the headlines: “We need no press. Network Rail is out of the headlines because trains are working. Our job is to make ourselves invisible.”
The likes of Balfour Beatty and Atkins are helped by the fact that they are considered serious companies and are respected in the market. Shares in both have risen steadily in the past two years, because despite penalties to be incurred, the Metronet contracts are expected to generate good growth.
For its part, LU denies that its fundamental objection to the PPP will in itself prevent it from working in partnership. But it seems that Livingstone’s opposition is an important factor in hampering improvement. With client and private sector at odds, getting the Tube to work will be as difficult for the infracos as it is for their customers. But with only two years behind them out of 30, these have been teething problems rather than fundamental flaws.