Imperial College London Weimar 22 March 2012

TU 1001

The London Underground PPPs: Why Did They Fail?

Dr Sheila Farrell Imperial College London

Imperial College London TU 1001Weimar 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

Imperial College London TU 1001Weimar 22 March 2012

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 Financial control Contract adjustments

Independent Arbitermoneyownership

Imperial College London TU 1001Weimar 22 March 2012

Private sector partners were selected by competitive tendering

Jarvis, Amey, Bechtel

Bombardier, Balfour Beatty, Atkins, Thames Water, Seeboard

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

BCV contractBakerlooCentralVictoriaWaterloo &City

SSL contractDistrictCircleMetropolitanEast LondonHammersmith &City

JNP contractJubilieeNorthernPicadilly

Imperial College London TU 1001Weimar 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

Imperial College London TU 1001Weimar 22 March 2012

Performance requirements

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)

Engineering

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

Long-term engineering targets difficult to enforce because of unknown condition of assets

Operational KPI’s more important than monitoring of large engineering contracts

Imperial College London TU 1001Weimar March 2012

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

Key performance indicators - linked to monthly Infrastructure Service Charges

Performance-related payments- accounted for only 3% of Infrastructure Service Charges- absorbed management time- gave false impression of success

Imperial College London TU 1001Weimar 22 March 2012

Failure of PPPs

Construction cost escalation

Programme delays

Changes to scope of work

Bankrupt2007

Declined second7.5 year contract2008

Why?

Project outcome

Refusal of Independent Arbiter to authorise further cost increases

Imperial College London TU 1001Weimar 22 March 2012

Private sector causes of failure

Metronet• 60% of work subcontracted to consortia members

without competitive bidding

• Lack of cost monitoring by consortium management - member firms responsible for own cost control

• Requests for additional work generally accepted - revenues went straight to member forms

• Changes in scope of work negotiated individually

• Dispersed interactions with many different LUL staff

Tube Line• Use of sub-contractors selected by competitive

tendering, increasing ability to benchmark costs for standard jobs

• Project management team more independent of consortia members + lower turnover of senior managers

• Stronger commitment to “core” investment programme - less accommodating of requests for additional work

• Network wide procedures for changing scope of work

• 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

Imperial College London TU 1001Weimar March 2012

Public sector causes of failure

London Underground• Weak project management skills

- yet responsible for a very complex procurement contract

• Conflict of interest between contract administration and train operations

• Commitment to PPPs did not filter down to lower-level employees

Independent Arbiter• Responsible for monitoring BUT

- no powers to intervene

• Only required to determine fair costs - in event of dispute - at 7.5 year reviews

• Limited access to independent data for benchmarking

Transport for London• Strong political opposition

to PPPs

• Transport Strategy for London - significant influence on subsidy requirements BUT

• 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

Imperial College London TU 1001Weimar 22 March 2012

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

Imperial College London TU 1001Weimar 22 March 2012

Department for Transport

Transport for London

London Underground Ltd

JNP InfraCo BCV InfraCo SSL InfraCo

MetronetTube Lines

Arbiter

Jarvis, Amey, Bechtel Bombardier(trains)

Balfour Beatty(track)

Trans4M(stations)

Balfour Beatty Seeboard (EDF)

Thames WaterAtkins

Banks Banks

Sub-contractors

£1.0bn pa

£1.0bn pa

Net farebox revenueapprox £0.3-0.4bn pa

London MayorPolicycontrol

£1.80 bn £2.65 bn

mediation

£0.315 bn equity

competitive tendering

£2.115bn Investment

£0.35 bn equity

£3.0 bn investment

contracts

policyfares

Infrastructure service charges Infrastructure service charges

ISC surplus ISC surplus

debt debt

Expenditure Expenditure