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Thursday, 17th April 2014

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Low-way robbery

21st Century capitalist economics in action: how the ‘Public-Private Partnership’ on the London Underground is used to siphon off huge amounts of money to the owners and executives of capitalist firms; in the process causing chaos and obstructing desperately needed improvements to the system.

08.15 on 12th January 2007, and not a bad start to a Friday morning. Although I had been squashed like a tinned sardine during my Victoria Line journey from Seven Sisters, I was able to find a seat on a Metropolitan Line train after my change at Kings Cross. My fellow passengers, though generally bored or stressed, were mainly relatively prosperous. There would be few minimum-wage workers on this train. The price of a weekly four-zones Tube travelcard had just gone up to £33.20 – nearly a day’s pay for a worker on the minimum wage.

When the announcement came- “Due to a train failure at Wembley Park, this train is terminating. All Metropolitan Line services are suspended” – nobody made a face or even shrugged. The service is getting worse; but we are used to it. Occasionally, frustrated travellers shout at or even assault the uniformed employees, but nearly everybody knows that it is not their fault. Helpfully, the management has put up posters on the platforms reminding us: “Don’t take it out on the staff!”

"A 21st Century Underground for London"
The words of the New Labour government’s stirring “offer to Londoners” in 2001 do not ring hollow in anybody’s ears, because nobody believed them at the time. They can, however, still be found on the Department for Transport’s website, assuring us of:

“A 21st Century Underground for London”, created by “massive investment… deliver[ed] sooner than any other way of working” and by the expertise of “some of the biggest and most respected construction and engineering firms in the world…”

“Services will be faster and more frequent… There will be fewer breakdowns and delays and more reliable services. The PPP will update technology… Every train on the Underground will be replaced or refurbished… Every London Underground - owned station will be refurbished or modernised… All these improvements are guaranteed under the PPP, locked in by contracts...”

The “offer to Londoners” carried a further guarantee: the government’s definition of itself:

“The Government is and will remain the guardian of the national interest, and is responsible for protecting the interests of the national taxpayer...”

Misery line

Londoners have for many years coped with an obsolescent and overcrowded underground railway system, highly expensive to use, suffering from decades of under-investment and blighted by frequent delays, breakdowns and line closures. Yet when the British Government made its “offer to Londoners”- that the creaking system would be massively upgraded - through a scheme of part-privatisation entitled Public-Private Partnership (PPP) - Londoners tried to reject the offer. They have twice elected as mayor a Labour Party dissident who campaigned against the PPP scheme, and have continued to express their opposition through opinion polls.

Four years after the inauguration of the PPP, hardly anybody is surprised that services on the ‘Tube’, as Londoners affectionately call their urban metro network, are perceptibly worse rather than better.

As Bob Crow, General Secretary of the RMT trade union, said on 31st December 2006:

“By last summer [the private consortia] Metronet and Tubelines had been handed more than £3.3 billion of public money and made nearly £300 million in profits, but by anyone's standards they have spectacularly failed to deliver,”

“The privatisation and fragmentation of Tube maintenance have resulted in deterioration in service, missed targets, infrastructure failure, engineering overruns, an alarming increase in safety problems and a massive increase in costs.”

Mr Crow presented a report put together by his union, which drew on eight different studies by official and independent agencies, all detailing the failure of PPP to deliver the specified improvements to services despite the enormous costs of the scheme.

The RMT has the largest membership among workers on the Underground.  Bob Crow is a left-winger, and the people he represents clearly have nothing to gain from privatisation. But the poor results of PPP are causing outrage even on the right.

On 10th January 2006, posted a report about the Northern Line, the Tube’s longest section, which has become known as the ‘Misery Line’ to its passengers:

“Roger Evans, Deputy Chairman of the London Assembly Transport Committee, has today reacted with disbelief at news that commuters on the Northern Line cannot expect improvements to their services until a new signalling system is installed, which will not be ready until 2011 at the earliest.

“During a Northern Line Stakeholder Meeting at London Underground Headquarters yesterday it was admitted that despite introducing a new timetable in October 2006, services had not improved and confirmed that the delays suffered on a regular basis due to signal failures would not be resolved until a new signalling system was installed…

“Reacting to the revelations, Roger Evans said: ‘We recognise that the Northern Line is a complex issue due to its age and lack of historical maintenance, however the thought that the hundreds of thousands of commuters who use the line on a daily basis have no prospect of an improved service until 2011 is genuinely shocking, especially at a time when they are asked to pay more.

“‘The fact that delays are increasing despite remedial works goes to show that commuters on the ‘Misery Line’ really are treated as second-class citizens.’”

Roger Evans is the Conservative Party’s Transport and Environment Spokesman for London.

The history: profit versus service

If delays and breakdowns are nothing new, neither is private ownership. London’s Tube system started as in the late 19th Century as a collection of uncoordinated routes built and operated for profit by several separate companies. A Wikipedia entry notes the inefficiency of this arrangement:

“In the early 20th century, the presence of six independent operators running different Underground lines caused passengers substantial inconvenience; in many places passengers had to walk some distance above ground to change between lines.”

Monopoly ownership of the lines then began to emerge:

“The costs associated with running such a system were also heavy, and as a result many companies looked to financiers who could give them the money they needed to expand into the lucrative suburbs as well as electrify the earlier steam operated lines. The most prominent of these was Charles Yerkes, an American tycoon who between 1900 and 1902 acquired the Metropolitan District Railway and the as yet unbuilt Charing Cross, Euston & Hampstead Railway (later to become part of the Northern Line).”

But even under private monopoly control, it was impossible for the lines to be operated at a profit while at the same time opening new routes and maintaining existing services properly.  An article on the University of Illinois website explains that all privately-owned mass-transport services suffer from similar problems:

“A built-in hurdle is the difficulty, owing to heavy fixed costs, of earning a profit in the transit business without resorting to price-gouging fares or reduced service…

“In countries where private operations are sanctioned, safety has sometimes been compromised and transit users have fewer avenues to complain about poor service…

“The industry always has been hurt by the problem of ‘peaking,’ or the concentration of use during the morning and evening commuting hours. ‘The more severe the peaking, the more expensive it is to provide personnel and equipment without higher costs per passenger mile,’ [Professor] Due wrote. ‘Peaking produces a high percentage of empty seats, which is noted by critics of the present system as evidence of inefficiency and thus the need for a free market, when actually it is an inherent problem of urban transit.’”

The result was that, even in the USA:

“Following a long period of financial crisis, the bus and rail-transit lines that survived were consolidated under city and regional government authorities.”

Also in Britain, the government eventually  realised the necessity of taking the underground lines into public ownership and co-ordinating them, together with the buses and overground railways, into an integrated transport system in the capital. Tube services were taken over and put under the control of a public corporation, the London Passenger Transport Board in 1933, in an arms-length nationalisation; the tube was taken into full public ownership when the London Transport Executive was set up in 1948.

The shift in government transport policy in the 1960s, to subsidising the use of private cars by massive state expenditure on road-building and traffic control systems, left investment in the Tube and other means of public transport as an afterthought.  For a brief period in the 1980s, the Greater London Council (GLC), under a left-Labour leadership headed by Ken Livingstone (now our Mayor of London) reduced fares to make Underground travel affordable for all Londoners and sought to invest more money into the system. But Margaret Thatcher’s Conservative central government took control of the Tube away from the GLC, raised ticket prices, and then abolished the GLC itself.

Mayor Ken, opponent
of privatisation
By the early 1990s, London’s road network was saturated and passenger numbers on the Underground began to rise again, stretching the capacity of the system beyond its limits.  But ideology and the desire to create private-sector profits ruled out any solution involving direct state investment.

The first form of part-privatisation, known as PFI (Private Finance Initiative) involved a lease-back arrangement in which companies were given long-term contracts to upgrade some of the Tube’s ‘assets’. For example, in 1995 John Major’s Conservative government awarded the French firm Alstom a 20-year contract worth £429 million to design, build and maintain 106 trains on the Northern Line.

In 2005, after train brake failures led to weeks of disruptions including for two days the complete closure of the Northern Line, UK Government Transport Minister Alistair Darling admitted, “No one can regard the present situation as anything but unbelievably unsatisfactory. The Northern line is crucial to London.” He even hinted that the government would not prevent the London authorities from terminating the contract with Alstom. However, according to the Evening Standard, “…sacking Alstom would be a legal nightmare and could cost taxpayers tens of millions of pounds.”

The PFI deals were piecemeal arrangements, and small change compared with what was to come.

Alice in Underland

A return to full private ownership regulated by the operation of market forces would be impossible without causing a complete breakdown of London’s transport system; also, the operating and investment costs of the Tube are far higher than the revenues which can be brought in by passenger fares. So the usual arguments in favour of capitalist ownership, that competition stimulates efficiency and innovation and removes the need for government subsidies, have no relevance. Nevertheless, the British government has been determined to find a way to privatise the network.

The London Underground PPP, the result of this quandary, is an immensely complicated and expensive arrangement. The previously unified system has been dismantled into four organisations: three infrastructure companies (‘infracos’) and one operating company (‘opsico’).  The infracos, each of which is assigned to several routes, are supposed to maintain and improve the physical assets of the Underground – the trains, tracks, tunnels, signals, escalators and stations - while the opsico actually runs the network, collects fares and is responsible for safety.

Having fragmented the management of the system, the government thoughtfully devised a set of contractual and regulatory relationships to re-connect the various parts. The opsico (London Underground Limited) is connected to the infracos by PPP contracts, and to other organisations (eg, the power company and the British Transport Police) by PFI contracts; the infracos are connected to each other by contracts known as ‘scarce resource agreements’; there is also a body called the PPP Arbiter which moderates the tense relationship between the opsico and the infracos. The opsico is controlled by Transport for London (TfL) which is responsible to the mayor and the Greater London Assembly and also to the government’s Department for Transport (DfT); The DfT also sets targets, eg for delays and cancellations.  

After a bidding process from 2002 to 2003, for which the companies involved were paid £275 million (not including a further £109 million paid by London Underground to external advisors), a private cartel called Metronet was given two of the infracos (entitled BCV and SSL) and a smaller cartel entitled Tube Lines was given the other one. Metronet is a consortium of Atkins, Balfour Beatty, Bombardier Transportation, EDF Energy and RWE Thames Water; Tube Lines is comprised of Amey and Bechtel. The infracos have 30-year contracts, reviewed after 7½ years.

"Services will be faster and more frequent"
One of the claims for PPP is that the scheme would bring in billions of pounds for investment, which are without any doubt desperately needed. According to a TfL report:

“The one observation with which everyone would agree is that London Underground suffers from a range of deep-seated problems resulting from decades of under-investment. This under-investment produced persistent asset failures that, in turn, led to an acceptance of inadequate performance. Management grew to accept doing more with less while perfecting the art of apology and passengers’ expectations were driven down… After much debate and dispute, the Government adopted the PPP as its antidote to this spiral of inadequate investment.”

But the impression created by the government that billions would come from in from the private sector is illusory: the infracos have borrowed money, but the interest and capital on that debt is paid back entirely from cash provided by the government and the passengers, together with enough to provide a tidy profit - on condition that the infracos’ performance indicators are only slightly worse than when the infrastructure was controlled by the public sector. As the paper issued by the RMT states:

“In September 2000 the Industrial Society report, The London Underground Public Private Partnership, an Independent Review, explained that the PPP was offering a guaranteed 15.3% return on equity for 30 years with benchmarks for performance set 5% below the levels expected of the publicly owned London Underground.”

Jim Cohen, board member
of Metronet and director of Balfour Beatty
The infracos derive their income, called the infrastructure service charge (ISC) from two sources: firstly, a government subsidy of almost £8.9 billion over the first 7½ year period; this is three times the level of government funding for investment in the Tube before the PPP. The second source of cash for the cartels is from revenue collected from passengers by the opsico.  In 2004-5, the infracos received a total ISC of over £2.2 billion, net of abatements. Although LUL was allowed to fine the infracos £18.9 million in ’04-5 for failing to meet service standards, this was a pinprick against the enormous sums flowing in the other direction.

The inefficiency of capitalism

Of course, some of the money is being put to good use. Graffiti has been cleaned up, and, slowly and inefficiently, technology is being upgraded and stations re-furbished. But even the PPP Arbiter could not express much satisfaction when considering the issue of value for money.  According to the RMT report:

“On 16 November 2006 the Office of the PPP Arbiter published the first review of Metronet performance. The Arbiter found that between April 2003 and March 2006 Metronet BCV and Metronet SSL had not performed in an overall efficient and economic manner and in accordance with good industry practice. The Arbiter found that Metronet's station programme across BCV and SSL was behind schedule, with only 14 of the 35 station upgrades completed. Only 12.7km of the expected 30km track renewals on the sub-surface lines had been carried out.

“Despite being behind with key infrastructure upgrades, unit costs have proved to be more expensive than expected in the bids submitted by the Metronet Infracos. The Arbiter report explains: ‘In summary, Metronet has delivered significantly less than was expected in its bid, at higher unit costs and has earned less performance revenue than expected.’

“The result is that the consortium is on line to overspend by some £750 million by 2010. It is not yet clear if Metronet shareholders will have to pay for this shortfall or whether the burden will fall on the tax-payer through additional payments or the scaling back of the renewals programme.”

Either way, the millions of workers who use the tube every day will be inconvenienced and frustrated, but not disappointed. Even in Europe’s richest city, the world’s biggest centre of financial capitalism, the people never believed that privatisation would help them get to work on time.

No trains today.
(Photo  by Rohan Talip)


The ‘Offer to Londoners’


Mark Gannon, University of Westminster, report on Tube financing

House of Commons Select Committee Report

University of Illinois

London Underground Business Plan

Evening Standard

The Londoner