Analysis: Money down the Tube?

London's big journey into the unknown: After four years, two judicial reviews and £400m worth of consultancy, London Underground is about to pass into 'public-private' hands

"I'm not giving up; we got beat." With just seven little words, Ken Livingstone finally accepted yesterday that he could no longer stand in the way of the Government's public-private partnership for London Underground.

The £20bn project, equal in worth to all the other PFI schemes combined, will go ahead in April after the Mayor of London agreed to end his legal battle against it. Under a deal struck with Alistair Darling, the Secretary for Transport, Mr Livingstone and his Transport for London body are expected to take over responsibility for the Tube once contracts are signed.

After four years, two High Court judicial reviews and £400m in consultants' fees, one of the longest running political sagas of recent times is at an end. The project's backers say the PPP will improve a network that has been stretched to breaking point by decades of under-investment.

Hundreds of new trains, miles of new track and signalling and scores of refurbished stations will appear, they say, with the private sector using its expertise to keep costs under control and deliver on time.

But critics claim the generous terms of the contracts give the private firms a licence to print money, with their liability for cost overruns capped and negligible transfer of risk. Tube stations will be tarted up before new trains are bought – a curious priority. Only 12 more trains will be in place by the end of the first seven-and-a-half year review period.

Although there is a blizzard of performance targets set for the companies over the 30 years in which they will control the track and trains, the investment programme is a glorified maintenance project and not a radical network upgrade, the PPP's opponents say.

The statistics covering the scheme are gargantuan. The contracts were among the most complex produced by Whitehall, with 2,800 pages consisting of 135 volumes and two million words of legalese, works specification and financial jargon.

The size of the project has not been helped by the repeated delays to what was originally a flagship example of New Labour's big investment idea: a public private partnership that took the best of private expertise while stopping short of outright privatisation.

Although backed strongly by John Prescott's Department of Transport, Environment and the Regions, the Tube PPP was the brainchild of the Treasury. But from the moment Mr Livingstone declared his interest in becoming Mayor in 1998, it was clear Gordon Brown would have a fight on his hands. When the former GLC leader won on a platform of outright opposition to the PPP, the collision course was even more apparent. Mr Livingstone warned that private profit would be put before safety.

The arrival of Stephen Byers as Transport Secretary saw further delay, although it led to a new promise from the Government that the project would only go ahead if it passed a value for money test against the public sector, and if the Health and Safety Executive approved it. Both tests were passed, despite protests that the analyses were rigged.

Yet despite the legal challenges by Mr Livingstone and Bob Kiley, his Transport Commissioner, the die was cast by a crucial clause in the Greater London Act. This stated that the Underground would not be handed over to the Mayor until the contracts were signed. For all the talk of devolution, London's first directly elected leader had no say in the matter.

Yesterday, Mr Livingstone said he could no longer sustain the cost and effort of a new legal challenge, a threatened appeal to the European Court of Justice. The key reason was Mr Darling's announcement the Government would foot the bill for the private firms if the European Court found in the Mayor's favour.

With Amey, part of the Tube Lines consortium, in serious financial trouble in recent months, its share price plummeting 91 per cent, the Transport Secretary's comfort letter was vital. It meant the firm could raise from City banks the large chunks of cash it needed to fund the works.

Under the deal announced yesterday, Mr Darling in effect guaranteed that Londoners would not have to pay Tube fares above inflation for the foreseeable future. Nicky Gavron, the deputy mayor of London and Labour candidate for the mayoral elections in 2004, is understood to have had a key role in the compromise. The Government will allow TfL to keep about £200m underspend when the Tube is transferred, probably in the spring.

This will help to close the £1.5bn funding gap in the first two years. The Government has also pledged that any unexpected costs will not be borne by Londoners. "This is the best we could have done since we got defeated twice in the courts," Mr Livingstone said.

He warned passengers not to expect any "dramatic improvements" on the Tube within a year because the contracts limit changes that can be made in the first seven-and-a-half years. Improvements would be noticeable through better quality management, he claimed.

The Mayor intends to have the last laugh with the management of the Tube, however. Having described Underground bosses as "dullards" and worse, Mr Livingstone said the person he has chosen as LU's new managing director will be announced this week. "Safety will be his number one concern," he said.

The Mayor also promised Tube drivers he would "immediately refer" to Acas a settlement to try to increase pay once he had control of the Tube. Tube drivers abandoned their crippling strikes on the network last year after Mr Livingstone made them this offer. It remains to be seen how Mr Kiley will handle the unions. As a hard-nosed negotiator, he was famous in the US for not tolerating union militancy.

Mr Darling said: "The Government, Transport for London and the Mayor have agreed to work together to secure the transfer of the Underground to TfL concurrently with, or as soon as possible after the completion of the PPP. This agreement will mean we can get on with the transfer of LU to TfL and £16bn of investment can go into the Tube. This is good news for Londoners."

Mr Kiley said last night: At last I can start the job that I came to London to do – putting the Tube back on track to being the best mass transport system in the world."

For better or worse, the PPP will go ahead in the spring. If it works out, Londoners could see a cleaner, faster, more reliable Tube and the Government may finally get some credit. If it goes wrong, the taxpayer could end up paying millions and accidents could increase.

The only certainty is that should that happen, Citizen Ken will say "I told you so".

PPP made simple

By Paul Waugh

When does PPP start?

The planned start-date is April. One contract began in December, the other two are expected to be signed by the spring. Ken Livingstone and Transport for London (TfL) will take over the running of the Tube as soon as possible after all contracts are signed.

The Greater London Authority Act 1999 must be amended by the Secretary of State for Transport, and the final agreement of the PPP consortiums and lenders must be signed before the go-ahead is given. This could take weeks or months.

Who will run the Tube?

TfL will be responsible for running the trains and stations, determining the service pattern, setting fares and employing drivers.

Two private consortiums (known as infracos) will be responsible for maintaining and refurbishing trains, stations, track and signals. The Tube is split into three contracts. Bakerloo, Central, Victoria, Waterloo & City lines (BCV); Circle, District, East London, Hammersmith & City, Metropolitan (SSL); and Jubilee, Northern, and Piccadilly lines (JNP).

Tube Lines, a consortium of Bechtel, Amey and Jarvis, is running the JNP contract. Metronet, made up of Bombardier Transportation, Seeboard Group, Balfour Beatty, WS Atkins and Thames Water, will run the BCV and SSL lines.

What benefits will the public see?

A total of 336 new trains by 2014 with an additional 42 by 2019. All rolling stock over 10 years old will be replaced by 2019 while all lines will have modern signal and control systems by 2016.

Eighty per cent of track will be replaced.

This means capacity will be increased: by 22 per cent on the Jubilee line; 15 per cent on the Victoria line; and 17 per cent on the Metropolitan and Circle lines. All within 10 years.

Ten of London's busiest stations will be modernised or refurbished by 2010, 60 more stations will be modernised and 139 refurbished, with stations refurbished again every seven and a half years.

What does the public pay?

The 30-year deal already signed with the infracos is worth £20bn. A total of £16bn is spent in the first 15 years, £11.4bn of it in the first seven and a half years. A review in 2010 could see contractors replaced if they fail to make the grade. Sixty per cent of funding will come from government grants, 15 per cent from Tube fares and 25 per cent from the infracos. Initial estimates put the Government's contribution over the first seven and a half years at £1bn a year.

What will the companies earn?

The contract encourages improvements in reliability and capacity in exchange for financial reward. The incentives (and penalties) are based on each customer's time saved or wasted. They will gain £3 an hour per passenger for improvements, and be penalised £6 an hour for a poorer service.

In the first seven and a half years, the bidders plan to spend £11.4bn, with £4.4bn from Tube Lines and £7bn from Metronet. The consortiums expect to return a profit of between 17 and 19 per cent. Their liability for losses will be capped at £50m for each period of the contract – with the exception of Tube Lines where it is £200m. Beyond that, any losses will be paid by the public purse.

The small print (edited down from two million words)

By Cahal Milmo

* The breakup of the Tube to private consortia has generated 135 separate volumes of contracts, two million words on 2,800 pages.

* To be paid, the contractors will have their performance calculated in 3,000 separate mathematical formulae.

* The contracts stipulate that if an item of litter is less than 5cm in width, it does not exist. So a discarded one-day Travelcard would be litter, and one torn in half would not.

* Another measure of performance is the distance between the driver's cab and the nearest toilet, to minimise the time needed for drivers' breaks.

* The Government has already spent £500m on the Tube PPP, £400m of which went to consultants. The sum would replace all the 35-year-old trains on the Victoria line.

* Deadline for a satisfactory infrastructure with track, tunnel and bridges (in PPP jargon, "fully adequate asset health") is 2025.