Imperial College London
TU 1001
Weimar 22 March 2012
The London Underground PPPs: Why Did They Fail?
Dr Sheila Farrell
Imperial College London
Imperial College London
TU 1001
Weimar 22 March 2012
Why did London Underground go down the PPP route?
• Urgent need for refurbishment of elderly infrastructure
• Long history of public sector under-funding + variable expenditure allocations
• Desire to keep CAPEX off balance sheet
• Weak management of major investment projects by London Underground Ltd
Solution: private management of infrastructure + public management of operations
TU 1001
Weimar 22 March 2012
Imperial College London
Started 2002
Failed 2007-8
Private sector:
upgrading and maintenance of infrastructure & rolling stock
Network split between three contracts, assigned to
Two private sector consortia
Public sector:
operation of trains
London Underground Ltd to continue as before
Supervision & control
Day-by-day control
Policy control
ownership
Financial control
money
Contract adjustments
Independent
Arbiter
TU 1001
Weimar 22 March 2012
Imperial College London
Private sector partners were selected by competitive tendering
Bombardier, Balfour Beatty,
Atkins, Thames Water, Seeboard
BCV contract
Bakerloo
Central
Victoria
Waterloo &City
Jarvis, Amey, Bechtel
SSL contract
District
Circle
Metropolitan
East London
Hammersmith &City
JNP contract
Jubiliee
Northern
Picadilly
Expected capital investment over 30 year contract was £15.7bn (€19bn)
•
4 x 7.5 year periods, with firm bids for the first 7.5 years (£9.7bn)
- core investment programme defined in advance
- costs recovered through monthly Infrastructure Service Charge
- other works carried out on a cost plus basis
• Terms for later periods to be negotiated with the Independent Arbiter
Imperial College London
TU 1001
Weimar 22 March 2012
Low level of private sector risk
•
High equity returns
- 18-26% return on equity, guaranteed for 4 x 7.5 year periods
•
High proportion of debt
- 85% of CAPEX debt-funded
- equity requirements only £350m for Metronet and £315m for Tube Lines
• Government guarantees
- 95% of debt under-written by Government
- 30 year profit guarantee in event of “unreasonable behaviour” by London Underground
• Capped liabilities
- liability for cost over-runs in first 7.5 years capped at £50m per contract for Metronet and
£200m for Tube Lines
High price of risk transfer
TU 1001
Weimar 22 March 2012
Imperial College London
Performance requirements
Engineering
Technical standards
- pass/fail monitoring of work carried out
Asset condition
- removal of maintenance backlog by 2026
Residual life
- 50% of asset life remaining at end of contract (2033)
Long-term engineering targets difficult to enforce because of unknown condition of assets
Operations
Key Performance Indicators
-
complex & detailed monitoring system
measured impact of PPP on customers
rules for allocating blame between public & private partners
linked to monthly payments
Operational KPI’s more important than monitoring of large engineering contracts
TU 1001
Weimar March 2012
Imperial College London
Key performance indicators - linked to monthly Infrastructure Service Charges
Availability
- customer hours lost or saved travelling through network
compared with performance before PPP
£6 per hour lost (normal)
£9 per hour lost (severe)
£3 per hour saved
Capability
- maximum number of people per hour that could be moved
between different pairs of stations if services were available
Ambience
- cleanliness, lighting, passenger information, staff attitudes
points system based on “mystery shopper” surveys
Service points
- penalty points for failing to carry out day-to-day repairs
within fixed time limits
£ 50 per penalty point
Performance-related payments
- accounted for only 3% of Infrastructure Service Charges
- absorbed management time
- gave false impression of success
TU 1001
Weimar 22 March 2012
Imperial College London
Project outcome
Refusal of Independent Arbiter to
authorise further cost increases
Failure of PPPs
Construction cost escalation
Programme delays
Changes to scope of work
Bankrupt
2007
Why?
Declined second
7.5 year contract
2008
TU 1001
Weimar 22 March 2012
Imperial College London
Private sector causes of failure
Metronet
• 60% of work subcontracted to consortia members
without competitive bidding
Tube Line
• Use of sub-contractors selected by competitive tendering,
increasing ability to benchmark costs for standard jobs
• Lack of cost monitoring by consortium management
- member firms responsible for own cost control
• Project management team more independent of consortia
members + lower turnover of senior managers
• Requests for additional work generally accepted
- revenues went straight to member forms
• Stronger commitment to “core” investment programme
- less accommodating of requests for additional work
• Changes in scope of work negotiated individually
• Network wide procedures for changing scope of work
• Dispersed interactions with many different LUL staff
• Single “full team” meetings involving all LUL staff
Common problems
• Lack of proper asset register + unknown condition of assets
• Ambiguity + lack of detail in original contracts
• Changing technical standards as work progressed
•
Limited number of suppliers for more difficult work
TU 1001
Weimar March 2012
Imperial College London
Public sector causes of failure
London Underground
• Weak project management skills
- yet responsible for a very complex
procurement contract
Independent Arbiter
• Responsible for monitoring BUT
- no powers to intervene
Transport for London
• Strong political opposition
to PPPs
• Conflict of interest between contract
administration and train operations
• Only required to determine fair costs
- in event of dispute
- at 7.5 year reviews
• Transport Strategy for London
- significant influence on
subsidy requirements BUT
• Commitment to PPPs did not filter
down to lower-level employees
• Limited access to independent data
for benchmarking
• Limited responsibility for
monitoring & funding PPPs
Department for Transport
• Rush to complete PPPs before handover of London Underground to Transport for London
•
Ideological commitment to separation of infrastructure from operations
•
Not a signatory to PPP contracts, although the main source of funding
- no supervisory or monitoring role
- payments not conditional on achievement of construction targets
•
Belief in the power of “the market” to resolve problems automatically
TU 1001
Weimar 22 March 2012
Imperial College London
Two questions for COST TU -1001
Q.1
Could a PPP ever work for a project as complex as London Underground?
Q.2
How should the engineering contracts have been monitored?
THE END
TU 1001
Weimar 22 March 2012
Imperial College London
Department for Transport
£1.0bn pa
London Mayor
Policy
control
Transport for London
£1.0bn pa
fares policy
London Underground Ltd
Net farebox revenue
approx £0.3-0.4bn pa
mediation
Infrastructure service charges
Arbiter
Infrastructure service charges
JNP InfraCo
BCV InfraCo
SSL InfraCo
Expenditure
Expenditure
ISC surplus
Banks
£1.80 bn
debt
£2.115bn Investment
Tube Lines
£2.65 bn
debt
Metronet
Banks
£0.35 bn equity
£0.315 bn equity
Jarvis, Amey, Bechtel
ISC surplus
£3.0 bn investment
Bombardier
(trains)
Balfour Beatty
(track)
Trans4M
(stations)
contracts
competitive tendering
Sub-contractors
Balfour Beatty
Atkins
Thames Water
Seeboard
(EDF)