Imperial College London Weimar 22 March 2012 TU 1001 The London Underground PPPs: Why Did They Fail?...
Transcript of Imperial College London Weimar 22 March 2012 TU 1001 The London Underground PPPs: Why Did They Fail?...
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 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
Imperial College London TU 1001
Weimar 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 1001
Weimar 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 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
Imperial College London TU 1001
Weimar 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 1001
Weimar 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 1001
Weimar 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 1001
Weimar 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 1001
Weimar 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 1001
Weimar 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 1001
Weimar 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 MayorPolicy
control
£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