PPP RIP? Probably not

Metronet, the consortium holding a contract to maintain about two-thirds of the London Underground, filed for bankruptcy this week after an arbitrator refused to award it extra funds for carrying out the work. Metronet's bankers had previously said they would not extend its line of credit unless it could squeeze more money out of Transport for London (aka TfL, aka the taxpayer).

I last wrote about this as recently as June 29. In brief, Metronet has spent way over budget while massively underperforming its obligations under the contract. In fact it's done even worse than that, since it has admitted that it was responsible for the recent derailment of a Central Line train, which hit a tarpaulin that Metronet staff had left in a dangerous spot.

Media reactions to Metronet's collapse are interesting. In an editorial, the Times admits that Metronet has only itself to blame for its failures. However, it argues that this does not invalidate the principle of "public private partnerships" (PPPs), and it comes close to throwing responsibility back onto TfL. According to the Times, the test will be whether TfL can readily find someone else to take on the work. I'm not sure if this is a principle that can be applied very widely: "I'm sorry that your meal cost more than it said on the menu and that you were sick for two days afterwards. No, you can't have your money back, and we're not paying your medical bills, but there's another restaurant down the street that you can try when your appetite returns".

Jeremy Warner in the Independent's business section has a more reasoned view. He admits that the Metronet fiasco has driven a coach and horses through two of the supposed benefits of the whole PPP approach to public works: that the private sector will do the work more efficiently/cheaply than the public sector, and that if it fails to do so, it will bear the cost. He observes that it seems that the City has, as usual, run rings around the public servants in putting the deal together.

To me, this last point -- that the private sector will try to bamboozle the public sector in these deals -- almost amounts to sufficient reason not to continue with the whole PPP approach. (I say "almost" because the Government has shown itself quite capable of playing fast and loose with contracts -- take a look at the experience of GNER with its contract to run the East Coast Main Line). There isn't much hope that the Government will abandon PPPs, but we should at least ask if there are any lessons that can be drawn from this episode.

One that occurs to me is that the Government should choose its partners carefully. Metronet isn't a real company -- it's a consortium put together by five engineering companies solely to bid on the Underground contracts. These shareholders all appear to have limited liability for Metronet's doings. Apparently the Government's negotiators either never heard of, or at any rate did not insist on, things like guarantees, deficiency agreements, covenants or even comfort letters that would have made the partners liable for Metronet's failings. In these circumstances, it was misleading for the Government ever to suggest that the private sector would be on the hook for any cost overruns. In fact, when you consider the huge sums that have already been paid to Metronet under the contract, it's likely that the losses incurred by the partners are quite limited -- and, of course, deductible from earnings elsewhere.

The next question is this: TfL, and particularly Mayor Ken Livingstone, never wanted this deal in the first place. Will the Government, which rammed it down their throats, now step in to defray the costs? I know which way I'm betting.