London Underground PPP Still Holds Best Hope For Tube Improvements

LONDON – Despite all the shouting, the public private partnership (PPP) tasked with fixing much of the London Underground is clearly delivering the goods. It’s been a messy, rancorous and politically-charged experience, but seven years into the project, the record points to improved services and value for money.

The project was never going to be easy. London Underground is a Victorian sprawl of multi-gauge rail track, dilapidated stations and ancient power & communications networks. It was littered with nearly two centuries of accumulated kit that was frequently incompatible from line to line. For decades, neglect of maintenance left a system that was dangerously overcrowded and easily brought down by the slightest problem. This shambles was and remains the world’s most expensive for customers by far and it’s still losing money.

As if the engineering challenge wasn’t enough, the political backdrop was decidedly unsympathetic. The 30-year PPP contract was imposed in 2003 by the UK’s Department for Transport over the objections of London’s transportation authority, Transport for London (TfL), and public sector unions. London’s newly installed mayor, Ken “Red” Livingstone, did everything short of throwing himself on the tracks to block the PPP.

Fast forward to 2010, and the whole PPP experiment looks to be unravelling. Metronet Rail, the larger of the two consortia engaged to deliver the upgrade work, went spectacularly bust in 2007 after failing to control costs. Not only did the consortium’s five member companies take huge investment write-offs, but taxpayers were on the hook for up to £410 million of the losses. That wasn’t supposed to happen, according to the way risk transfer is designed on such deals.

The other consortium, Tube Lines Ltd., is some 10 months behind schedule on its upgrade of the Jubilee Line at a monthly cost to the company of about £4 million in penalties, plus additional costs for keeping subcontractors on the job. It would take a small miracle for Tube Lines, which is owned by Bechtel and a unit of Spain’s Ferrovial, to break even.

Meanwhile, negotiations on a second seven-and-a-half-year funding period from July 1are looking unpromising. The independent PPP Arbiter, Chris Bolt, priced upgrade work on the Jubilee and Northern Lines for this next period at £4.4 billion, or some £1.35 billion below Tube Lines’ estimate, a significant funding gap for the company. Tube Lines has also lost a £327 million compensation claim against London Underground relating to cost overruns on the Jubilee and Northern Line upgrades, creating concerns over its solvency. In a further setback, Mayor Boris Johnson last month called on the UK’s Transport Secretary to block the payment of £1.1 billion of secondment fees to shareholders of Tube Lines to help fill a funding shortfall at TfL.

Politics is complicating matters in other ways. The opposition Conservative Party originally gave tacit support to the Labour government’s embrace of Private Finance Initiatives (PFI), a moniker that was first introduced by the last Conservative government in 1992 for its own PPP program. With a general election imminent, though, the Tories have turned against the program, with shadow chancellor George Osborne pledging to end PFI as we know it in the UK if the Conservatives come to power.

Ancient infrastructure, years of neglect and high-octane politics all seem to have conspired to produce a truly British debacle that is so typical of this country’s infrastructure spending.

But there’s another side to the story: Tube Lines is actually doing what it was intended to do. The key performance indicators by which the PPP’s delivery of maintenance and upgrade work are measured are being achieved, and this publicly available information deserves more attention.

On track maintenance, for example, the costs per kilometer since Tube Lines took control of the Jubilee, Piccadilly and Northern Lines have fallen steadily. They are down some 20% since the 2003-04 measurement period and currently stand around £72,000 per kilometer. This compares with around £170,000 per kilometer for the other consortium, now consisting of the collapsed Metronet and London Underground itself. What’s more interesting is that Metronet/LU’s maintenance costs have risen during the comparable period and have shown no improvement in the latest 2008-09 period, which post-dates London Underground’s takeover of maintenance on the former Metronet lines.

Rolling stock costs are more difficult to compare from line to line because of wide variations in the fleets that need to be maintained. Nevertheless, Tube Lines’ costs are now on average some 30% below Metronet/LU per car. And while Tube Lines can claim to have scored significant cost efficiencies on the basis of its accounting procedures, it is difficult to determine whether any efficiency gains have been delivered by its public sector-run counterpart at all.

Efficiency gains are also coming through in station upgrades. At Tube Lines, work on all 96 stations that were scheduled will have been delivered on-time and on-budget by the end of the first review period. But station renewals on a scaled down program for the former Metronet lines were running 62% behind schedule in 2008/09. These differences reflect specific changes Tube Lines brought in to better manage staff and supply chains and to improve organization and logistics. One result is that the upgrade of Waterloo Station, a major interchange, cost Tube Lines only £18 million to complete, as little as one-fifth what it will likely cost the LU to deliver comparable improvements at Oxford Circus Station.

There have also been service improvements. Notwithstanding weekend outages, the number of lost customer hours on Tube Lines is down by 50% since 2003 because the private contractors target maintenance and upgrade work around problem hotspots rather than using a simple calendar based schedule. This is no accident: financial penalties on Tube Lines come straight off its bottom line when customer hours are lost during high passenger traffic hours. At London Underground, there are no meaningful financial penalties since it is all taxpayer money.

The improvements delivered by the private consortium to date suggest an even more compelling reason to continue with this and other PPP projects. Without the PPP, there would be no way to assess public sector performance on delivery, value for money or to even determine, let alone share best practice across the London Underground. There would simply be no performance standard against which  London Underground maintenance and renewal work could be judged, no basis for demanding more efficient delivery of public sector services and no way to control costs. Indeed, that lack of scrutiny over the decades is what got the Tube into such a mess in the first place.

At the end of the day, PPP is simply a model for improving delivery of public projects by using the best skills, financial resources and risk management capabilities of the private sector. The mixed experience of the London Underground PPP to date should be seen more as the front end of a steep learning curve than a failure. Anyone riding the Tube before PPP came along knows what a failure that was.