FAQs - PPP

The London Underground PPP (Public-Private Partnership)

Here are answers to Frequently Asked Questions (FAQs) on the PPP scheme to get private management into London Underground maintenance and refurbishment while leaving operations and ownership in the public sector.

What is it? - What's the set-up? - Why is PPP happening? - What are the advantages? - Will the government pay anything? - Who will run the operations? - Will things improve? - Will safety be affected? - Will there be less overcrowding? - Will there be value for money? - What about those famous formulae? - What next? - Further reading.

What is it?

The PPP (Public Private Partnership) is a way of introducing private management and commercial finance into London Underground, coupled with a scheme to reduce the Government's financial burden in funding London Underground. The proposal is based on the idea that private sector companies will be paid a 4-weekly fee for looking after the infrastructure and train assets of London Underground. Additionally, if the assets need replacing, they will replace them, still within the cost of the fee.

Ownership of the assets will still stay in the public sector but the private sector will look after them.

What's the set-up?

London Underground has been divided into four sections - three "Infracos" (Infrastructure Companies) and an "Opsco" (Operations Company). The Opsruns the trains and stations and collect fares. They oversee the safety and engineering standards of the system and are effectively the customer of the Infracos. The Infracos do the maintenance and renewal of the Underground system, which has been divided into three, with an Infraco taking over each. The takeover has been completed with Metronet taking control of The BCV and SSL Infracos while Tubelines has taken over the JNP Infraco.

The 4-weekly fee paid to the Infracos is called an Infrastructure Service Charge (ISC). The companies have agreed with LUL the level of ISC to match both the maintenance and investment costs required to look after the system and to buy the replacements needed. The contracts are for 30 years but they will be reviewed every 7½ years. Against the income they receive from the ISC, the Infracos have borrowed money to pay for the refurbishment of the Underground. They have put in some of their own money too - it’s called equity - about £300 million for each of the three Infracos. It’s their equivalent of the deposit on a mortgage.

Why is PPP happening?

Two reasons. The first reason is because the British government has had no sensible transport policy for the past 70 years and they have allowed the UK rail industry to fall into a dangerous state of disrepair and disorganisation. Most of this blame can be placed in the hands of the Treasury and the succession Prime Ministers who have failed to manage it properly.

The second reason is because public sector management is generally weak and poorly motivated. This is a world-wide problem, not just a feature of the UK. Public sector managers have, in general (although there are exceptions), allowed previous government grants and financial support to be wasted or badly managed. The evidence of past attempts by LU management to build new lines or replace worn out assets shows that they don't do it well. The Central Line refurbishment package saw the introduction of new trains, new signalling and upgraded power supplies in the 1990s. The project took twice as long as expected and the line is still very unreliable compared with other lines.

The cost overruns (30%) and lateness of the Jubilee Line extension project (two years), together with its subsequent poor reliability, have been used by the government in its arguments for PPP as a classic example of a badly run public sector project. Not only that but it was planned to provide a service of 36 trains per hour (tph) but actually the line only gets 22 at present and will never get above 24 without substantial expenditure on modifications.

What are the advantages?

The UK government sees the introduction of private sector management and finance as a solution to both the management and financial problems. They believe that a privately run infrastructure maintenance company will provide more reliable equipment and will be efficient than a public sector one. In general, history shows that they are right. Most (but not all) of the public sector conversions to the private sector have shown an improvement in management, value for money and service to the public. In addition, by raising the finance through the commercial sector, the government gets the financial liability off its accounting books and this makes the country’s finances look better.

Although the government could borrow the money for refurbishing the Underground at a cheaper rate than the private sector, the risks of public sector management are assumed by those evaluating the proposals to be worse, so this risk would probably, they say, outweigh the cheaper finance. How the government can freely admit that it can't rely on its own employees to do a job reliably and efficiently beggars belief but that's what they say and the public knows it's true - yet they still vote for them. Strange, isn't it?

Will the government pay anything?

Originally it was suggested that, after a few years, all the funds needed to pay the ISCs would be generated by London Underground through the farebox. At the moment, LU gets some 23% of its operating costs from a government grant, plus an annual project finance grant to keep the infrastructure from collapsing. According to the new idea, the 23% and the grant will be replaced by increased income from fares. The increased income would be because of the greater efficiency of the system provided by the PPP contractors and through more people travelling.

LU have told the government that they will get a 40% increase in fares income over the first 15 years of the PPP. This is very optimistic - to the point of being fanciful. The only way they could do this (without raising fares) is with a substantial increase in off-peak travel. There is no extra capacity in the system at peak times - in fact it is operating with levels of patronage above the design limits on most lines in the central area already. Even if the improvements in capacity (by introducing new trains and new signalling) offered by the Infracos do provide the 10% extra on existing lines that they suggest, this would only absorb some of the excess demand currently on the system. To expect the system to get 30% more passengers (40% more passenger trips less 10% more capacity provided by the PPP) in off-peak periods without any increases in the present peak traffic levels is naïve, even negligent, in terms of designing a financial model. Why anyone believes this is a mystery.

Although the PPP in now in place, the government will continue to pay some grants over the next few years. They will be hoping that the fares income will increase as planned. However, by the time the grant is supposed to be replaced by the larger fare income, the present government will have been replaced. Whoever takes over will hope that everyone will have forgotten that the PPP proposal was based on the fact that they believed LU would get a huge increase in off peak travel without any increase in peak travel. If they are of an alternative political persuasion, they will simply blame the previous incumbents. Either way, the government (i.e. the taxpayer) will have to pay the shortfall. Yes, there will be a shortfall. You heard it here first.

Who will run the operations?

While all this is going on, LUL continue to operate the railway - staff the stations and trains, look after safety, collect fares and manage the contracts. Some cynical souls (who Tubeprune?) ask whether the Opsco can run the Infraco contracts any better than they ran the Central Line and Jubilee Line contracts. Doubtful, since some of the performance measures are almost impossible to measure with any accuracy, some will allow a lot of discussion and dispute before they are agreed and some are so easy that only a low level of management improvement can make a difference. No, it is not good value for money.

The government has insisted that the offers from the private sector to run the Infracos must offer value for money. They have said they will use the Public Sector Comparator (PSC) to compare the PPP offers with what would happen with a publicly run refurbishment. It was a very close race. LUL had to cut out certain improvements they originally wanted in order to get the PPP to work for the government.

Regardless of all this, much of what the passenger sees relates to what the operator does on a day to day basis. Currently the LUL Opsco doesn’t do well. There is no evidence to suggest that things will get better under the PPP system, or any other system for that matter.

Will things improve?

Probably not that much unless some other things happen as well as the PPP. There is a considerable shortfall in the present performance of the operations management of London Underground. Train operations statistics issued by LU show that only around 94% of scheduled train kilometres are operated, whereas a good system should be able to operate 99.75% of scheduled kilometres.

There are those who suggest that LU management itself is happy to let things bumble along as they are. They can blame their poor performance on the state of the infrastructure and rolling stock and accuse governments of having neglected them for too long. In part, they are right but it is strange that the reliability of the 1967 Tube Stock on the Victoria Line has remained constant at around one failure per 6,500 kilometres of running since the early 1980s but the service performance has consistently declined. This leads to the conclusion that, even if lots of new trains and new signalling systems are delivered to the Underground, it is still up to the Opsco to deliver the service and, on present evidence, they are not going to. This means a lot of money will be wasted. Of course, there will be some improvement in reliability but only if enough drivers are recruited and retained, supervision, discipline and attendance is improved and safety is managed properly instead of being used as an excuse for inertia.

Will safety be affected?

In spite of the scare mongering by those against the PPP, there is no reason to believe that safety will get worse as a result of the PPP. LU itself, the Opsco, will still be responsible for the safety case. It will have the power to require that things are done properly by the Infracos and indeed, it will be in breach of the law if it does not. With the right level of audit by HMRI (Her Majesty’s Railway Inspectorate), safety should improve. This doesn't mean shutting down the railway every time there is a minor accident like the Chancery Lane derailment of 25 January 2003.

Will there be less overcrowding?

The PPP will not reduce overcrowding by very much. In the case of the Victoria Line, where passenger numbers are already 40% over the design level, the 10% improvement offered by the PPP is not going to absorb much. Some lines may see some reduction in overcrowding but substantial improvements will not come as a result of the PPP.

To reduce overcrowding, more lines need to be built. You wouldn’t see these for 7 years minimum, even if the government was planning on providing the money for them, and there’re not. Of course, another option for reducing overcrowding is to increase fares. Although passengers complain about high fares now, they still pay them. It was proved in the mid-1980s that if fares are lowered, more people travel and overcrowding gets worse. If fares were increased, the number of passengers would fall and there would be less overcrowding - for a time anyway.

However, this doesn’t really solve the problem, since the congestion overflow would just move onto the roads. What is needed is an increase in capacity - more lines - now.

Will there be value for money?

The main reason for the introduction of the PPP scheme is to try to get an improvement in the way London Underground is maintained and upgraded. There are almost as many opinions about whether the PPP represents value for money as there are passengers on an Underground train. In reality, the arguments are close and now, after all the money which has been spent on preparing for it, the PPP may be the best that can be got under the restrictions which prevail in the UK. Most of these restrictions are due to the UK Treasury and the way it manages public expenditure.

Don’t let anyone kid themselves. We will not get value for money without substantial changes in the way LU is managed - especially the Opsco. It is obvious that the management which presides over the system now is not going to do much better, especially if there are no changes and they have a set of three huge PPP contracts to manage. Government needs to set serious targets and penalties for the Opsco to get real benefits for Underground users.

What about those famous formulae?

Following the publication on 14th November 2001of Mr Kiley's letter to Malcolm Bates of LUL, much was made in the London press of the complicated formulae devised by LUL for assessing the performance of the PPP contractors. Well, they are very complicated. They were devised to try to make a performance model of the London Underground, both in terms of physical improvements to the system and as reflected in the day to day performance. The idea was to show how well the Infracos were performing in terms of maintenance - making sure trains didn't lose time through slow doors or failed signals - and to show how the system was improving - better trains and stations. They (LU) wanted to check they were getting reliability and that things were improving in terms of faster trains, easier movement from ticket hall to platform and more trains per hour.

Looking at reliability first, the LU bureaucrats devised a model which produces NACHs (Nominal Accumulated Customer Hours) to show the time lost by passengers through delays. This works by taking a delay to a train, say 10 minutes, and working out how many people were inconvenienced by that delay. If it happened at Oxford Circus at 9 am, lots of people would be inconvenienced but if it was at Northolt at 9 p.m., not many would be inconvenienced. Using these principles, the model works out the lost time in proportion to the location, time of day and length of delay. The busier the place and time, the worse the NACHs. The formula also has to take into account such things as whether speed restrictions are due to a fault caused by the Infraco or due to an already agreed upgrade project. It is very complicated.

Another model relates to the upgrades offered by the PPP bidders in an attempt to meet new system capability targets set by LU to improve the speed, capacity, ambience and controllability of the Underground. In the case of the targets for train speed and capacity, these are represented by a scheduled journey time capability (SJTC) number - expressed as the average number of minutes of a journey by the average passenger, to two decimal places. The number is calculated by a series of inputs relating to train design, inter-station run times and track layouts at stations and junctions. The inputs include the train door openings, seating and standing areas and the number of trains per hour derived from the locations of signals and train performance details. Added to these are the inputs for the numbers of passengers boarding and alighting at each station.

The model is run to develop the calculations for each of a series of steps in improvement over the life of the PPP contracts. ISC payments for succeeding and penalties for failing are to be calculated from the results of tests which are supposed to take place when each of these improvements are due. The tests themselves are complicated and are described in a 200-odd page document called the Performance Measurement Code. They can only be carried out during non-traffic hours under an engineer's possession. How on earth they will be done for the 90 stations on the sub-surface lines Infraco defies the imagination.

What next?

The PPP deals are now complete. Transport for London (TfL) and the local trades unions are still against the idea but they have no option but to get on with it. Many people (informed or otherwise) have the feeling that the Railtrack debacle will repeat itself on the London Underground but no one has been able to come up with a politically acceptable alternative approach. What it will do to London Underground is anyone's guess but it will be a long time before you see any improvement.