London Underground’s Privatization Experiment Dead as Remaining PPP is Bought Out

» Mayor Boris Johnson instructs Transport for London to purchase controlling shares of Tube Lines, the PPP process’ remaining private infrastructure manager.

Former London Mayor Ken Livingstone sued the government twice in the early 2000s to prevent the full-scale contracting out of maintenance and work on the London Underground, which then-Chancellor of the Exchequer and soon-to-be-former Prime Minister Gordon Brown imposed on to the city beginning in 2003. The U.K. government, which provides financial sponsorship for most of the reconstruction of this city’s huge transit network, forced a series of public-private partnership (PPP) agreements through, giving big contracts to private enterprises Tube Lines and Metronet in exchange for the city getting big bucks from the national government to rebuild its decaying subway.

To Livingstone, a Labour politician, the multi-billion-pound PPP deals were undermined by a “fatal flaw” that kept public sector ownership of the system but gave private entities control over it. As a report to the Mayor put it in 2001, “Implementation of the PPP would be unsafe, inefficient, and prohibitively expensive.” The PPP process allegedly cost £500 million in consultancies and fees just to set up.

Livingstone must feel relieved in his vindication. In 2007, Metronet fell into administration (bankruptcy) and was subsequently absorbed by Transport for London (TfL), the public authority that runs the region’s rail and bus system. This put two-thirds of the Underground maintenance and renovation contracts back in government hands. Now, in the shadow of the British national elections last week, Livingstone’s replacement, conservative Mayor Boris Johnson, decided to buy out Tube Lines, which held the remaining third of contracts, after a public conflict over whether the company was being reasonable in its cost estimates for work to be done.

One of the largest forays into re-privatization of a public transportation entity in the West has come to an end, less than a third of the way into what was supposed to be a thirty-year commitment.

I’ll be the first to admit that I’ve been a repeated critic of significant private involvement in the creation of what is supposed to be public infrastructure, so I may come at this discussion with a bias.

But the facts here speak for themselves: The history of the London Underground’s journey in and out of private stewardship should put a damper on what is increasingly frequent talk from the United States to Uganda of expanding PPP models into the provision of a whole series of public services. That is — I say this with a degree of self-imposed moderation — at least until the reasons for London’s failures are understood and appropriate precautions are taken to prevent similar problems from occurring in the future.

Otherwise, we may see a whole lot of wasted spending.

It’s worth reviewing the way the London PPP process was set up: three contracts were written, each covering the renewal and maintenance of about a third of the system’s 250 miles of track for a period of thirty years. The government let the contracts out to bid, and two companies won: Metronet took the Bakerloo, Central, Victoria, Waterloo & City, Circle, District, East London, Hammersmith & City, and Metropolitan Lines while Tube Lines took the Jubliee, Northern, and Piccadilly Lines. TfL would continue running the trains, but these companies were to be paid to do the work keeping stations, trains, and track up to par — under the direction of TfL management. This went far further than the usual government agency/contractor relationship by giving almost complete control over the system to the private companies rather then just bits and pieces of work to be done, as is more typical.

After the 30-year contracts were signed in 2003, there wasn’t much room for maneuver, though a “Tube Arbiter,” Chris Bolt, was supposed to guarantee that the cost estimates of work to be done by the private consortia and to be paid out by TfL were accurate reflections of reality. Theoretically, the involvement of private contractors would reduce overall costs by inducing the supposed “creativity” of the private sector.

Unfortunately, that “creativity” was motivated by profit and insider deals, particularly in the case of Metronet, which gave exclusive contracts to the companies that owned it, including Bombardier, the train maker, Atkins, an engineering specialist, and Balfour Beatty, a construction firm, increasing costs substantially. Because the PPP contract spread out over a 30-year period, the “competitive” nature of private involvement in the reconstruction of the Tube was abandoned as soon as the deal was signed.

And then Metronet fell apart beginning in 2007, forcing TfL to pay back £1.7 billion in borrowing, of which the taxpayer lost £410 million — not exactly chump change. The government had bet on private sector productivity, and lost.

The problem for the public sector, of course, is that it can’t allow investments like those in the London Underground to be simply thrown away: The system must be upgraded, no matter the cost. Thus the government gave the PPPs a 95% guarantee on their borrowing, virtually eliminating any risk. It was the public’s responsibility to clean up the mess when Metronet broke down: It had no other choice.

Tube Lines was in better shape financially; the decision by Mayor Johnson to buy it out had a lot more to do with a conviction that the public sector could do the work better than private companies than a fear that Tube Lines would go bankrupt. TfL will spend £310 million to buy out the shares of Tube Lines’ owners, contractors Bechtel and Grupo Ferrovial, funds that the mayor’s office claims it can make up by eliminating shareholder profits, cutting “middle management fees,” reducing the amount of duplicated work, and taking out debt at cheaper rates than was possible by a private company.

But Johnson’s main concern — the situation that got him into this buyout deal in the first place — had been the fact that while TfL had scheduled £4 billion to pay for seven years of upgrades for the routes covered by Tube Lines, the company claimed to the PPP arbiter that they would cost £4.46 billion — £460 million of which TfL did not have on hand. So the only choice was to reduce the amount of work planned to be done — or simply purchase the company’s commitments, eliminating direct private involvement in the London Underground, exactly the choice Mr. Johnson’s TfL made.

The problem, suggested former London Underground Managing Director Tim O’Toole last year, is four-fold:

“The lack of competitive bidding in allocating work over 30 years results in inflated costs and preferential fees to the involved private companies; negotiations over future or new work are conducted without the ability to introduce market discipline, resulting in higher costs; in place of competitive bidding, the structure relies on record-keeping, derivative measurements and man-marking, all at additional administrative expense; the asymmetry of information in favour of the private companies leads to a claims culture, resulting in future unpleasant budget overruns.“

It is unclear whether TfL will be able to maintain its infrastructure for a cheaper price than have the PPP companies: The claimed reason for involving private actors in the first place was that the government-performed upgrade of the Jubilee Line, done in the 1990s, had been a fiscal disaster, going over budget by one billion pounds. And PPP Arbiter Chris Bolt suggested this year that TfL’s work was more expensive than that of Tube Lines.

Yet the experience with Metronet, which probably had far too much on its plate — was an unforgivably colossal failure: That company had £17 billion worth of improvements planned over a thirty-year period, but was £2 billion over budget just five year in. Before it was put into administration, it had refurbished only four stations, versus the seventeen it had been expected to complete by that point. Moreover, TfL claims it is improving the Victoria Line more efficiently than is Tube Lines on equivalent work elsewhere in the system; that company had been very late in completing its own work on the Jubilee Line.

Administrative costs will go down, as the “partnership” between public and private entities was marked more by disputes over costs than agreements. TfL and the PPP companies sued one another repeatedly over the course of the past ten years. Former Mayor Livingstone has suggested that the difference in cost estimates between Tube Lines and TfL could be accounted for by the outrageous salaries the former pays its staff — 150 from Bechtel and Grupo Ferrovial, for example, are paid an average £500,000 each annually, compared to the £90,000 they might receive in the public sector. Mayor Johnson agreed, suggesting that the price difference was the result of management fees: “In other countries this would be called looting,” he said. “Here it is called the PPP.”

And it is definitely true that the public sector is able to take out loans at lower interest rates than were the PPP companies.

No matter what, London continues to set records in terms of how much money it spends on improvements. Arbiter Bolt has demonstrated that peer systems from New York to Hong Kong cost 20 to 40% less than London — in terms of purchasing-power parity — to complete similar work. This, however, may have more to do with work conditions specific to the United Kingdom than anything else.

If Mayors Livingstone and Johnson are correct — that the PPP process resulted in increasing costs for construction that would be better managed by a publicly-controlled entity — the decision to pull leadership of the Tube renewal program back into the heart of TfL makes a lot of sense. Indeed, the example of Metronet suggests that the limited risk assumed by the private companies at least under the terms of this process has yielded few if any tangible benefits for the London public, actually costing the government millions of pounds that would have been better spent on construction. Peter Hendy, current Commissioner of TfL, expects to save hundreds of millions of pounds over the course of just a few years, and he argues that TfL will be able to complete renovations to the Northern Line (so far very late) faster and with fewer disruptions than had the PPP company.

The more recent controversy with Tube Lines demonstrates the failure of a massive 30-year contract with a single organization. There is little motivation for improved performance and there are too many ways in which the private sector can orient its decision-making inappropriately around profit creation, often with the goal of generating huge salaries for its upper-level employees — spending that wouldn’t occur similarly in government.

The London Underground has improved significantly over the past decade: its renovated stations look modern and its operations reliability has significantly increased. But the public likely would have benefited from similar upgrades at a lower cost had TfL remained in charge. Indeed, the positive differences in the system are the result of a vast expansion in public contributions for its maintenance thanks to a national government effort to expand support for transit, not some sort of private-sector ingenuity. The latter seems mostly to have resulted in delays and cost overruns — all at a cost to the taxpayer, not private industry, which has mostly gotten away unscathed.

Tim O’Toole, the former Tube Managing Director, suggests a more conventional financing structure, which would include shorter-term contracts for smaller work commitments. This would allow TfL to adapt to changing circumstances more rapidly and adjust spending based on needs, not profits or the broader economic environment, notoriously difficult for the private sector to adapt to, unlike the far more steady hand of government.

The involvement of private firms in fulfilling specific, project-based contracts rather than an attempt to literally pass off the running of the network to corporate entities seems to be the appropriate future for London. The ideologically charged vision of a “business-oriented” approach to transportation investments pushed by Gordon Brown a decade ago has been debunked as misleading and expensive. There are things an efficient public sector can be good at, and mass transport may be one of them; the next stage of the London Underground’s history, back in public hands, will provide definitive evidence for that assertion’s validity. Other cities considering such a significant PPP process should get to know this example well before moving forward.

In related news, Boris Johnson released the Mayor’s Transportation Strategy yesterday. Image above: London Underground sign, from Flickr user jessicamelling (cc)