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Imperial College London Weimar 22 March 2012 TU 1001 The London Underground PPPs: Why Did They Fail? Dr Sheila Farrell Imperial College London.

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Presentation on theme: "Imperial College London Weimar 22 March 2012 TU 1001 The London Underground PPPs: Why Did They Fail? Dr Sheila Farrell Imperial College London."— Presentation transcript:

1 Imperial College London Weimar 22 March 2012 TU 1001 The London Underground PPPs: Why Did They Fail? Dr Sheila Farrell Imperial College London

2 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

3 Imperial College London TU 1001 Weimar 22 March 2012 Started 2002 Failed 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 controlPolicy controlFinancial controlContract adjustments Independent Arbiter moneyownership

4 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 contract Bakerloo Central Victoria Waterloo &City SSL contract District Circle Metropolitan East London Hammersmith &City JNP contract Jubiliee Northern Picadilly

5 Imperial College London TU 1001 Weimar 22 March 2012 Low level of private sector risk High equity returns % 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

6 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 KPIs more important than monitoring of large engineering contracts

7 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

8 Imperial College London TU 1001 Weimar 22 March 2012 Failure of PPPs Construction cost escalation Programme delays Changes to scope of work Bankrupt 2007 Declined second 7.5 year contract 2008 Why? Project outcome Refusal of Independent Arbiter to authorise further cost increases

9 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

10 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

11 Imperial College London TU 1001 Weimar 22 March 2012 Two questions for COST TU Q.1Could a PPP ever work for a project as complex as London Underground? Q.2How should the engineering contracts have been monitored? THE END

12 Imperial College London TU 1001 Weimar 22 March 2012 Department for Transport Transport for London London Underground Ltd JNP InfraCo BCV InfraCoSSL InfraCo MetronetTube Lines Arbiter Jarvis, Amey, BechtelBombardier (trains) Balfour Beatty (track) Trans4M (stations) Balfour BeattySeeboard (EDF) Thames WaterAtkins Banks Sub-contractors £1.0bn pa Net farebox revenue approx £ bn pa London Mayor Policy control £1.80 bn£2.65 bn mediation £0.315 bn equity competitivetendering £2.115bn Investment £0.35 bn equity £3.0 bn investment contracts policyfares Infrastructure service charges ISC surplus debt Expenditure


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