PPP Fail

The United Kingdom leads the world in the number and range of operational public-private partnership (also called P3 or PPP) projects. Upgrading London’s complex underground mass transit system, comprising three separate contracts, has been one of the largest and, arguably, most important of these projects. Yet each of these P3 contracts have been terminated early.

They were signed in 2000 by the U.K. government immediately before responsibility for London Underground (LU) was transferred to the mayor of London. Because then mayor, Ken Livingstone—and for that matter all mayoral candidates for the election that year—opposed the deal, the government completed the final negotiations to ensure signature before the handover date.

In July 2007, Metronet BCV and Metronet SSL, two of the three successful bidders, went into administration because they couldn’t meet their spending obligations. Their failure meant that LU had to buy 95 per cent of Metronet’s outstanding debt obligations from its private sector lenders in February 2008, rather than repaying this debt over the 30 years of the contract.

The U.K. National Audit Office (NAO) reported that the main cause of Metronet’s failure was its poor corporate governance and leadership. Too many decisions had to be agreed upon unanimously by its five shareholders, all of which were Metronet suppliers with conflicting motivations. Additionally, the executive management changed frequently, making it difficult to manage the work being carried out by its shareholder-dominated suppliers. These suppliers had power over some of the scope of work, expected to be paid for extra work undertaken, and had better access to cost information than the management.

The NAO noted that the poor quality of information available to management meant that Metronet was unable to monitor project costs and, consequently, couldn’t prove that they had performed work economically and efficiently in accordance with the contract.

In May 2010, LU took control of Tube Lines, the other successful bidder, when the PPP Arbiter ruled that Tube Lines should not have to raise all of the money needed for the next phase of works on the relevant lines. There had been disagreement between LU and Tube Lines over the estimated cost of these works.

Having asked the Arbiter to rule on the dispute, LU were given three weeks either to find the money or reduce the scope of work required for the next phase of improvements. They declined to do either and bought Tube Lines from the owners.

The result is that the 8,000 staff members who used to work for Metronet and Tube Lines now work for LU, which has also taken back all the upgrading risks.

Lessons learned

This failure makes several points clear, and should be seen as a lesson for future proponents of P3 projects.

First, failure by government to invest considerable effort in communicating the advantages and disadvantages of a complex scheme leads to unnecessary conflict born of ignorance.

Second, procuring and delivering a large program of upgrades from a small number of companies leaves considerable political and operational risk with the public sector. This risk would be more easily managed if a large program were broken down into a greater number of individual projects.

Third, hastily completing complex negotiations in order to meet a deadline rarely leads to a satisfactory outcome. It’s better to consider time constraints in the initial business case and structure the project accordingly.

Fourth, failure by the private sector to thoroughly understand and manage the political, as well as commercial, risks of large P3 projects can lead to damaged reputations and loss of profits.

Finally, and underpinning all of the above four, training of individuals involved in major P3 projects seems to be inadequate. In mature P3 markets, such as the United Kingdom and Canada, there is a collective and somewhat abstract sense of familiarity with the model. Standard documents and standard procedures exist, but most individuals in the public and private sector doing the next project will have little or no practical experience. In addition, it seems difficult for public sector employees to pass experience on, whether it’s from one ministry to another or from central to local government.

Without effective on-the-job learning and the transfer of that learning, there will be a higher than necessary risk of project failure. The United Kingdom still has a long way to go to minimize this risk. Will Canada do any better?

David is a leading international expert on PPP who provides P3 procurement advice and training to a number of public bodies. He was recently appointed as a member of Faculty of the Commonwealth Business School to provide P3 training to senior managers of the National Highways Authority of India.