The City knows a gravy train when it sees one coming, and the Government’s plan to privatise the London Tube has proved to be one of the juiciest gravy trains in recent history. While commuters sweat in 90F heat, reading posters advising them to carry bottles of water in case the real train breaks down, Tube bosses have been paying Freshfields, PricewaterhouseCoopers and other City firms for advice that should have been equally unnecessary: how to create a bewilderingly complex system of new infrastructure companies. While it is easy to poke fun at the advisers who reaped eye-watering fees, more blame should lie with a State which is so often a hopelessly inefficient commissioner of tricky projects.
The figures in this week’s National Audit Office (NAO) report are staggering. The £455 million bill to taxpayers before significant improvement has been made would have built half of the East London Line Extension that ministers have recently put back on the shelf. London Underground ended up almost seven times over budget through a typical combination of confusion and back-covering. The NAO describes the “delay and drift” as Whitehall failed to realise the extent of the work needed, and set over-optimistic timetables. The original budget for Freshfields and PricewaterhouseCoopers was £4 million apiece. In the end Freshfields was paid £29 million and PWC £21 million, despite both firms having started out agreeing to cap the number of hours they could charge. Freshfields had even agreed an average hourly rate for all its lawyers irrespective of seniority. But it eventually upped fees back to standard commercial billing rates: not just out of opportunism, but also out of frustration.
The political need to justify privatisation, coupled with the unexpected persistence of London’s Mayor in challenging the project’s legality, led Whitehall to duck, weave and commission gold-plated analysis to make its case. London Underground felt that it was on such shaky political ground that it carried out 20 rounds of “consultation” and commissioned an extraordinarily detailed “public sector comparator” to try to show that privatisation would be cheaper than keeping the Tube in public ownership. The NAO concludes that this expensive analysis, including a shiny-sounding “Monte Carlo simulator” was unnecessary. Common sense disappeared in an orgy of spreadsheets and statistics.
The Government’s reluctance to let the project fail also meant that at one stroke it added £275 million to the bill by underwriting the bidders’ costs. It also guaranteed to return at least 95 per cent of investor cash in the event of termination. This failure to transfer risk is a repeated feature of many large public projects.
The Tube PPP is uniquely complicated and politicised. But similar mismanagement has afflicted many other public projects. The Jubilee Line Extension went £1.4 billion over budget and cost £250 million in consultants’ fees. Ministry of Defence and technology projects are repeatedly dogged by cost overruns. Advisers benefit from failures as well as from successes: last year, the Government admitted that it had not even requested fee estimates from the three banks and two law firms involved in restructuring British Energy.
Advertisement
Most worryingly for the Tube, the NAO concludes that there is no certainty that part-privatisation will bring the promised improvements, even after all the expense. A new London Underground report concludes that Tube passengers will have to wait until 2025 for the network to be returned to a good state of repair. Unless the Government spends our cash more wisely, the Tube could run into the budget buffers before it has even set off.