PPPs do not always work well, and it is important to understand the reasons for failures. One of the most noteworthy failures of PPPs is that for the infrastructure of the London Underground (LU), often referred to as "the Tube." In 2003, London Underground Limited (later incorporated into Transport for London) signed three PPP agreements totaling £17.6 billion: two of these agreements were with MetroNet and the other with Tube Lines. Under these 30-year agreements, these consortiums were given responsibility for maintaining and upgrading key components of the London Underground's infrastructure, including trains, signals, tracks, tunnels and stations, as part of an effort to modernize the LU and bring it to a state of good repair. Operational responsibility was retained by the public partner, including operating trains and stations, collecting fares and ensuring public safety.
The project was financed privately, and the consortiums were paid with availability payments that were conditioned on meeting performance measures of capability, availability and ambience, with adjustments made based on an incentive and penalty mechanisms triggered by exceptional or deficient service. Because little data was available on the condition of the system when the deal was negotiated, costing out certain aspects of maintenance was troublesome. In addition, in the later stage of negotiation, the government agreed to guarantee the senior debt at 95 percent in the event of termination.96
The structure of the arrangement resulted in several challenges for the private operators. The sparse data available on conditions in the system proved to be a major impediment to completing work on time and budget; often, worked planned on sites where conditions were unknown resulted in unexpected challenges and major delays. Another key challenge was the need to perform improvements on a system that needed to operate everyday- and that was operated by another entity. For example, the private partners were responsible for renovating the tracks, but could not stop trains from running on them or reroute trains to accomplish the work.
The division of operational and maintenance responsibilities created complications that affected the ability to deliver on key aspects of performance - particularly those affecting availability. The results were detailed in annual performance reports. In the 2005 annual report, both consortiums were behind schedule on many projects and engineering overruns increased by 35 percent compared to the previous year.97 Despite limited achievements, problems continued, and the 2006 report showed that Metronet and Tube Lines were failing to deliver to the standards mandated by the contract. In particular, Metronet was far behind in station rehabilitation, with only 14 of the 35 scheduled stations delivered, and all delivered late. Both Metronet and Tube Line were issued corrective action notices to rectify their poor performance.98
The complications in undertaking work made it difficult for the private companies adequately to predict costs and be cost-efficient. In 2007, Metronet suffered £1 billion in cost overruns for one project - anticipating another £1 billion in cost overruns on its other contract - and filed for reimbursement of £551 million by Transport of London, citing changed demands as the major reason. The PPP arbitrator awarded £121 million to Metronet on the £1 billion claim.99 As a result, Metronet filed for bankruptcy, and went into a period of administration in July 2007. In May 2008, the Metronet lines were transferred back to Transport for London.
While Metronet lost the equity invested in the project, the government had guaranteed the debt and suffered a loss of £1 billion. Tube Lines has not declared bankruptcy, but the PPP arbitrator found that it is also facing a funding shortfall of £1 billion. Its contract terms are currently being renegotiated. 100
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96 House of Commons Committee of Public Accounts. "London Underground Public Private Partnerships." Seventeenth Report of the Session 2004-05. HC 446 (Incorporating HC783-I, Session 2003-04.) 31 March 2005. Available online at http://www.publications.parliament.uk/pa/cm200405/cmselect/cmpubacc/446/446.pdf.
97 Transport for London. "London Underground publishes second Annual PPP Report." Press Release. 27 July 2005. Available online at http://www.tfl.gov.uk/corporate/media/newscentre/archive/3550.aspx.
98 Transport for London. "London Underground publishes third Annual PPP Report." Press Release. 24 July 2006. Available online at http://www.tfl.gov.uk/corporate/media/newscentre/archive/3550.aspx.
99 The PPP Arbiter. "Reference for Directions from Metronet Rail BCV Ltd Interim level of ISC pending a direction on ISC at Extraordinary Review." Draft directions. 16 July 2007. Available online at http://www.ppparbiter.org.uk/files/uploads/o_direction/200771665446_Final%20draft%20directions.pdf.
100 Transport for London. "Transport for London responds to PPP Arbitrator's Guidance on Tube Lines second period funding." Press Release. 09 September 2008.