London Mayor trashes tube PPP

Boris Johnson, London’s Mayor, has strongly criticised the PPP contract to upgrade the London underground, calling contractors Ferrovial and Bechtel 'a bunch of rogue builders' and describing the PPP contract as 'larceny'. Tube Lines responds and urges Mayor to "stop playing games".

Tube Lines, the contractor responsible for upgrading London’s underground rail, has been dealt a further blow after London Mayor Boris Johnson severely criticised the efficiency of the public-private partnership contract.

Johnson: Tube
PPP is “larceny”

In an opinion article published in the Evening Standard yesterday, Johnson accuses the concessionaire – owned by Ferrovial-subsidiary Amey and San Francisco’s Bechtel – of gross incompetence in the way it has handled the upgrade process. But the Mayor goes further, referring to the contractors as “a bunch of rogue builders” and the PPP contract as a form of “larceny”, leaving the city “powerless to stop it”.

Tube Lines has been under fire ever since UK PPP arbiter Chris Bolt told the concessionaire in December last year that its capital expenditure programme for the next seven-and-a-half years was £1.35 billion too expensive.

The consortium wanted London Underground (LU) – the operator of the London underground network – to pay it £5.75 billion in public funds and fare payers’ money to cover the works, but Bolt said that amount should be no more than £4.4 billion. LU had wanted to part with the even smaller sum of £4 billion. However, if the arbiter’s final decision reaffirms his December proposals, then LU will have to pay the concessionaire the extra £400 million, or cancel some works.

That amount, Johnson argues, should be footed by the concessionaire. According to the Mayor, Tube Lines will earn exactly £400 million in pure profit over the next seven-and-a-half years from secondment fees. These are derived from the shareholders lending their own staff to the tube project at double the normal rate, which Johnson equates to a colossal siphoning of funds at the taxpayer’s expense.

In a letter to transport secretary Lord Adonis, obtained by website MayorWatch, Johnson highlights this point: “Tube Line’s shareholders – Becthel and Ferrovial – earn excessive and unjustified fees under their Secondment Agreements with Tube Lines that are over and above their handsome (26 percent) return on equity. The removal of these excessive fees would alone be sufficient to remove virtually all of the potential gap between the costs of the Arbiter and what LU can afford.”

As such, Johnson urges the government to “either [fund] the shortfall from government resources or by persuading Tube Lines’ shareholders to give up their extraordinary returns in light of their abject failings”.

Tube Lines signed a 30-year contract with the government to upgrade the world’s largest underground system. But its performance has been criticised as delays keep mounting. The contractor said it would take 50 weeks to upgrade one of London’s underground lines but has so far taken 125 weeks with no deadline for completion yet apparent.

Infrastructureinvestor contacted Tube Lines and they had the following to say:

“To suggest that Tube Lines should not pay for the contracted services provided to it is bizarre. These fees are no different to any contractual arrangement and these were part of the agreement between Tube Lines and London Underground at the time the contract was negotiated.   They accepted that they were in accordance with good industry practice.

“London Underground pays management fees to contractors directly under its control.  Take the Victoria line upgrade as an example.  LU pays 19 percent of the overall project costs in project management fees.  This compares to the more modest 4.5 percent we pay out to the seconding parties for similar services provided.  Presumably the Mayor will be asking all TfL contractors to work for no fee?

“In his draft determination the PPP Arbiter accepted our secondment fees as reasonable and we would urge the Mayor and Transport for London to stop playing games and negotiate funding for future upgrade work through the proper mechanism in place, which is through Periodic Review process.”