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News Release from: Chartered Institute of Building [CIOB] | Subject: Metronet
Edited by the Buildingtalk Editorial
Team on 21 April 2005
Metronet shake-up not enough
Metronet shake-up doesn't go to root of the problem says Robert Kiley.
After compiling its recent reports on the start-up of the London Underground rebuild, the National Audit Office put forward two questions: are the Public Private Partnerships set up to do the job good deals, and are they likely to work successfully? The answer from the audit office to both these questions was that only time will tell That non-committal comment also applies to the question, whether the PPP will be worth the eventual price the government pays for it
This article was originally published on Buildingtalk on 24 Mar 2005 at 8.00am (UK)
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The audit office said that if the consortia undertaking this task deliver performance at bid levels, the private sector shareholders stand to receive nominal returns of 18 to 20 per cent a year.
This, they said, was about one-third higher than on recent Private Finance Initiative deals, but London Underground considered that this was in keeping with the risks being borne.
If the private companies achieve the lower performance levels set by benchmarks, their real returns would be between 10 and 17 per cent per year.
These forecasts are more or less in line with the results published by the Metronet group for the year 2003-04 which are the latest available.
The Tube builders are however coming under increasing criticism from clients and users alike over delays and disruption to services, and this does the reputation of their shareholders no good.
Recently they have taken firm action to reorganise the top management of Metronet Rail which has a massive contract covering 12 of London Underground's lines, admitting that delivery of the promised new trains, track and stations has fallen behind schedule.
The company says it is spending GBP 1 billion a year in the Tube, of which almost GBP 00 million has been spent on routine maintenance alone.
"Tube users are paying the price" Robert Kiley, London's Transport Commissioner, has never liked the PPP arrangements and once more made his opinion plain after Metronet Rail announced the departure of John Weight from the management leadership and the appointment of Andrew Lezala as the new chief executive, with Keith Clarke of Atkins as non-executive chairman.
Having received a week or two earlier a report which showed that Metronet was well behind schedule with its program to upgrade 32 stations this year, and that the track replacement program was subject to similar delays, Mr Kiley spoke of the situation as bordering on disaster.
"Today's announcement", he said, "does not resolve the fundamental issue, which is that London's Tube users are paying the price for Metronet's failure to deliver." The company countered that by saying that a recovery program has been put in place to correct the admitted shortfall in performance.
This should result for example in 45 stations on the London Underground being upgraded by the end of this year compared with the 32 originally planned.
Mr Kiley took the opportunity to put three questions to the new chief executive and the shareholders, which in fact boil down to one question: in the light of the fact that Metronet has fallen well behind the original projections for delivery, what are they going to do to ensure that the commitments of the Public Private Partnership will be delivered on time and on budget? It looks as though the answer will lie in thorough reorganisation of the whole enterprise.
Complainants have included not only Transport for London, but the House of Commons Transport Committee and the London Transport Users Committee.
This last body is known as the passenger watchdog for London.
The chair of this body is asking London Underground in view of intense frustration with engineering overruns and other disruptive events on the Tube whether the infrastructure companies could be said to be in breach of their contracts.
If the Public Private Partnership is to work, he says, the level of enhancement activity on the Underground needs to be dramatically increased so as to deliver the improvements that Londoner are entitled to expect.
Looked at from the angle of construction economics however the Tube contracts are proving very successful.
Metronet Rail BCV is responsible for the upgrade on the Bakerloo, Central, Victoria and Waterloo and City Lines of London Underground.
For the period ended 2004-03-31 this element of the enterprise on a turnover of GBP 293 million in round terms enjoyed an operating profit or gross margin of GBP 41 million.
This is what is accountants describe as EBIT, earnings before interest and tax.
That's a margin of 16 per cent, whittled down to 9.5 per cent when (again in round terms) some GBP 17.5 million interest and GBP 3 million taxation had been paid.
A similar gross margin was earned by the Metronet SSL (subsurface lines) company.
That, as the National Audit Office pointed out, is performance delivered at the bid levels.
Comparable figures for 2004-05 are not yet available, but an indication of the way in which profitability is moving was given by Mike Welton, the retiring Balfour Beatty chief executive, in his report for the first half of 2004, when he spoke of Metronet's GBP 10 million contribution to half-year operating profits compared with GBP 4 million in the previous year.
London Underground and the Government agreed to all these arrangements at the time the contracts were settled.
There are a lot of other things they agreed to at the time, such as the tendering policy of the Metronet group in passing bidding opportunities to their shareholders in the first instance such as Balfour Beatty, Atkins and Bombardier, whereas Tube Lines go out to competitive tender for capital items.
As a spokesman for Metronet told CIOB International, they won contracts for two infracos on this basis, whereas Tube Lines got only one.
London Underground's growing losses.
Let's look at the other side of the picture.
In the year ended 2003-03.31, the last set of accounts to be released by Transport for London, London Underground's gross deficit was, in round terms, GBP 420 million (25 per cent negative margin).
This was the difference between revenue - fares, rents, advertising etc- at GBP 1,246 million and cost of operations at GBP 1,667 million.
Moreover that was before charging depreciation; including that would have taken running expenses to about GBP 2 billion.
The burden of the GBP 750 million-odd deficit after charging depreciation was relieved by GBP 650 million grants.
There was no EBIT for London Underground in that year; the loss of GBP 122 million after taxation was precisely the same as the loss before taxation.
This capital intensive enterprise is virtually interest free.
If in the next financial year (2003-04) the outcome was somewhat similar, it implies that keeping London Underground more or less solvent is costing the Treasury and the local authorities combined something like GBP 1,600 million a year.
That of course brings into account the GBP 1 billion paid to meet the infrastructure service charges.
It may seem strange that a transport network which provides such an important service to London's business community, including the City of London and Canary Wharf, has to operate on the basis of such absurd economics.
But there is a ready answer to all those who raise questions as to how this came about: it's all in the bids!.
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