Everyone knows that Boris Johnson is the Mayor of London, but fewer know what powers he has. The answer seems to be transport and some influence on the Metropolitan police. When his predecessor, Ken Livingstone, was elected as the first mayor of London on 4 May 2000 as an independent, albeit a long-standing Labour party member (having been MP for Brent East from 1987 to 2000 and leader of the Greater London Council from 1981), he was hated and distrusted by the New Labour leadership, who apparently regarded him as an old Labour dinosaur.
New Labour was determined not to allow him any real power and refused to allow him to issue bonds to fund the decades overdue modernization of London’s transport system. But it was equally unwilling to provide the necessary billions by government borrowing, so it decided to use its favourite technique of stealth borrowing.
The government was unwilling to allow Livingstone to control the process, so it supervised the negotiation of the PPP contracts for renewing and maintaining the underground network. Two private sector “infracos”, Metronet and Tube Lines, entered into 30-year agreements of formidable complexity (2,800 pages) which cost over £455 million in legal and consulting fees simply to organize and negotiate.
The Metronet contract was the larger, covering all of the 12 tube lines except the Jubilee, Northern and Piccadilly lines. The private sector “partners” were WS Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water. The 30-year agreement covered 155 stations, 471 miles of track and 77 miles of deep tunnels and would cost around £17 billion, roughly half a billion a year. After four years, in early 2007, Metronet was behind on the work and claiming it would need billions in extra payments to make up for unavoidable cost overruns.
The Greater London Authority Act 1999 provided (s225-239) that disputes about cost overruns should ultimately be settled by the “PPP Arbiter” who was Chris Bolt, an experienced civil servant, who had worked in the government Economic Service and for several regulators, including the Office of the Rail Regulator. In 2007 he allowed Metronet just £121 million of its immediate claim for £551 million. Shortly afterwards Metronet declared itself insolvent. Its undertaking was transferred across to London Underground - in effect the maintenance/renewal work on 9 out of 12 tube lines was unprivatized.
The National Audit Office (NAO) has now issued three reports on this mess. The first in December 2000 “The Financial Analysis for the London Underground PPPs”, available as a .pdf from here, looked at the evaluation of the initial bids. The second in June 2004, “London Underground PPP: Were they good deals?”, .pdf here, looked at the deals that had finally been agreed in 2003. The last, which came out in June, “The failure of Metronet”, .pdf here, reported on the insolvency of Metronet and the subsequent events.
There have also been three reports by the London Assembly Transport Committee: “The PPP: Two Years In” in June 2005; “A Tale of Two Infracos” in January 2007 a few months before the final collapse of Metronet; and “Delays possible” in March 2009, all available as .pdfs here.
The London Assembly is a talking shop. Its members are elected but seem to have no powers whatever except to advise and embarrass the mayor. Of course, it is always difficult to create democratic institutions overnight by fiat. They have to grow organically and gradually establish themselves. Where there are no existing democratic institutions (as in Iraq and Afghanistan) it is just ludicrous to pretend you can establish them in a few years. The whole silly exercise there seems to be more intended for domestic consumption in the USA and UK. Things seem to have got off to a much better start in Scotland, but one has to remember that the process by which Holyrood got real power was a lengthy one, going back at least as far as Callaghan’s struggles in the late 1970s.
The pressure for a London mayor which led to the referendum in 1998, following a manifesto commitment by Labour, was far weaker than the pressure for Scottish devolution, so Labour felt able to get away with weak institutions.
There are two aspects to PPP/PFI. One way of regarding such arrangements is that they are simply an expensive way to borrow money. The government replaces a stream of contractual debt service payments with a stream of contractual payments for services. It is simply a smokescreen which allows the government to pretend that public sector borrowing is lower than it is in reality.
But that is not the whole story. There is also an element of privatization - services which used to be managed by the public sector are now contracted out to the private sector. The theory was that inherited from Mrs Thatcher, that the private sector is more efficient. The snag is that the private sector is driven by the profit motive. It is certainly efficient at reducing its own risks and garnering profits for itself. Whether this redounds to the public benefit is another matter.
The central problem about the typical PPP/PFI project is that it is inherently monopolistic. It typically lasts for an extended period - 30 years in the case of the two tube contracts - and so the private sector partner is effectively being given a 30 year monopoly in providing those particular services.
The government showed some awareness of that problem and tried to deal with it by complexity. The contracts were 2,800 pages long, quite apart from the new legislation (such as that in the Greater London Authority Act). That probably made things worse. First, there was an enormous cost in fees setting the whole thing up - £455 million in legal and consulting fees. Second, the private sector proved to be better at gaining the advantage in that complex process than the government.
The public benefit was certainly not helped by the fact that the project fell under John Prescott, one of the great mysteries of the Blair administration. He showed little flair for running a government department, an amazing ability to commit gaffes of one kind or another, and an even more amazing ability to avoid any serious criticism. Blair would just laugh at the hostile questions and say it was “just John”. His well-known “verbal dyslexia”, which meant that his sentences were often tangled and completely meaningless, somehow only added to the general feeling that behaviour which would have been unacceptable in anyone else was forgivable, or even amusing, in his case.
The contractual complexity was not solely for the purpose of pulling wool over government eyes. There was also a serious difficulty in that the tube infrastructure, particularly the track and signalling was in a parlous state, but no one had any clear idea of quite how parlous, so it was tough to make sensible estimates of the cost of fixing it. Similar problems are not unfamiliar in civil engineering. It is often the case that unexpected problems emerge and some mechanism is needed for deciding whether it is unexpected enough that the customer should pay more, but they are never easy to devise.
The Metronet structure was that five large contracting companies became the shareholders in Metronet (putting up about 1% of the contract value in equity) and then awarded all the work to themselves. In many cases they apparently paid themselves without any proper check of whether the work had in fact been done - whereas the fundamental principle of civil contracting is that work must be inspected and certified as completed by the customer before payment is made. Their modest equity risk could clearly have given them large profits if things had turned out well.
In the event the NAO (in its last report) estimates that the taxpayer suffered a total loss of around £300 million +/- 50% and the five contracting companies around £500 million.
None of the six reports really does justice to the saga, probably because all of them were aimed at specific aspects, rather than taking a cold look at the overall benefits and drawbacks of a PPP/PFI approach.
