MPs slam DoT naivety over London Underground PPP contract losses

The Department for Transport was guilty of naivety and flawed assumptions when it set up long-term contracts for the upgrading of London's underground, MPs have said.

A highly critical report by the Public Accounts Committee examined the setting up of 30-year contracts in 2003 and the subsequent collapse into administration of two of the three contractors (Metronet BCV and Metronet SSL). The committee estimated that the loss to the taxpayer was between £170m and £410m.

“The Department's oversight, and management of risk on the Metronet contracts were inadequate, especially given that it provided a £1bn a year grant, was ultimately responsible for delivery and carried the majority of risk of failure,” the MPs said. This was despite a clear warning in 2004 from the National Audit Office of the dangers of adopting “a hands-off” approach to oversight.

The MPs said the root cause of the loss to the taxpayer lay in the way the devolved delivery arrangements were set up and in the Department's “flawed assumptions” about how they would work.

The report's key findings included:

• the Department's assumption that Metronet would put in place robust financial management and strong corporate governance was “naive and, unsurprisingly in the circumstances, did not hold”
• the Department undermined its assumption that lenders would exercise strong oversight by assuring them that it would meet 95% of the outstanding debt in the event of failure. Such an assumption was “extremely naive”
• the Department's assumption that London Underground, Transport for London and the Mayor of London would exercise strong oversight “also fell when the public sector parties to the contract were unable to obtain the information they needed to oversee the contract effectively”. This was “unacceptable”, the committee said.

The MPs also identified as “a serious weakness” the fact that the independent Public Private Partnerships Arbiter, set up by the Greater London Authority Act 1999 to provide insight into the contracts, could act only if invited to do so by the parties.

“He [the PPP Arbiter] was not invited to act at the earliest opportunity, rendering him largely ineffective,” the report said, adding that the DfT had no formal right of access to the PPP Arbiter and could not direct him to carry out an investigation.

According to the report, the government has admitted that the PPP Arbiter's powers are inadequate and has suggested alternatives “although it will not be drawn on its plans to implement them”. The role of the PPP Arbiter must be clarified and he should be given powers to protect public investment, the MPs said.

The committee called on the government to learn from its mistakes, not just in terms of formulating its plans in relation to the long-term arrangements to replace the Metronet contract, but also in respect of the other upgrading contractor (Tube Lines) and for the Cross Rail scheme.

It added: “More broadly, the government needs to play a more proactive role in managing risk when it devolves the management of high value, long-term contracts. Departments need, for example, to have the right commercial skills in place and perform robust risk analysis when negotiating such contracts, to monitor the risks thereafter, and be prepared to intervene where necessary.”