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London Underground Partnership

Free essayPublic Private Partnerships (PPP) is a type of partnership that brings together public sectors and private sectors in the long-term partnerships for providing a public service or an asset. If well-structured, Public Private Partnerships guarantee mutual benefit to the public organisation and the private sector organisation. However, the private partner bears significant management responsibility and risk in PPPs. Thus, governments should only enter into partnership deals with the private sector when a project is a long-term one. This can also be advisable if the partnership will offer “value-for-money” to the government (HMSO 2000, p.8).

PPPs are increasingly becoming important in the public service delivery. The past twenty years have witnessed rapid development of a worldwide market, which allows for the provision of public infrastructure partnership deals (Deloitte n.d., p. 1). Countries are being faced with numerous challenges owing to the ever increasing world population. The challenges facing governments include demands from the society despite budgetary constraints and greater expectations with regards to quality. On the other hand, the services that governments are increasingly under pressure to deliver include: provision of new and improved infrastructure such as roads, bridges, and railways for transport and coordinated collection, treatment, and distribution of water. Others are well-developed hospitals, clinics, and treatment centres for the provision of quality healthcare services; proper collection and disposal of wastes; quality education; and government accommodation among other essential services (IPFA n.d., p. 1).

The confidence of citizens in their government and leaders is normally attached to the quality of these essential services. However, in many countries, available resources cannot sufficiently cater for the financing requirements of both current and prospective infrastructure needs. Nevertheless, meeting these needs is critical to each and every government in order to ensure continued process, development, as well as economic growth of the country (IPFA n.d., p. 1). This puts governments under pressure to find more urgent and innovative ways such as combining private and public financing in order to meet the mounting demand for essential services, thereby necessitating Public Private Partnerships (The World Bank 2010, p. 1).

Leadership and Strategic Planning

Budgetary constraints coupled with acknowledgement of private sector know-how and efficiencies are the two major reasons that inform most decisions made by most governments to undertake political as well as economic decisions to adopt Public Private Partnership models. Most governments across the world are increasingly using private sector finance in adopting these models to enable them effectively deliver infrastructure projects. Previously, such projects would be built by the public sector and the finances used are drawn from the same sector. Partners make collaborative endeavours and pool resources from the private and public sectors in order to deliver efficient services to the public (IPFA n.d., p. 1).

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London Underground Limited (LUL) is the London public sector organisation that is responsible for operating as well as maintaining the underground system in the country (PWC Network n.d., p. 1). Generally, the London Underground network is among the major urban transport networks across the world (Lonergan 2004, p. 1). The failure of most public corporations such as London Underground with regards to delivering quality services arises from poor leadership structure and poor strategic planning. For a long time, London Underground Limited (LUL) has suffered from persistent understaffing by the London central government. In addition to understaffing, LUL could not perform well owing to long-term poor planning that characterised the institution (Lonergan 2004, p. 1). There was a general agreement by the late 1990s to prioritise securing investment in London Underground so as to improve its services and ensure that the network was brought up to modern standards (Butcher 2012, p. 1).

Initially, the previous Conservative Government intended to privatise the network, but this changed when Labour Government took office in 1997 (Butcher 2012, p. 1). The new Labour Government instead opted for the development and implementation of the Public Private Partnership that was announced by the government in 1998 (Yardley 2012, p. 1). Under this partnership, London Underground Limited would be in charge of provision and safe operation of services to the public (“London underground case study” n.d., p. 1).

Notably, Public Private Partnerships have proved to be effective in dealing with these inefficiencies that have been of great challenge to the public sector. Public Private Partnerships may encourage project leaders to direct investment to the best available technology. Afterwards, the private sector remains responsible for the infrastructure’s operation over the whole life cycle. It is this change of leadership that the Labour Government embraced in order to achieve its desired goals. This explains why the Labour Government did not buy the idea of privatising the London Underground as had been intended by the previous government. Although it acknowledged the fact that there were some things, which the private sector did best, some were better done by the public sector (HMSO 2000, p. 8).

Essentially, PPP for London Underground combines the strength of the government with that of the private sector. On the one hand, London Underground has the responsibility of ensuring the provision of efficient transport services to the public; on the other hand, the private sector has the ability to move swiftly and deliver timely and high-quality services (The World Bank 2010, p. 1). In order to achieve a swift change in its operation, London Underground made the decision in favour of the partnership rather than privatisation of London Underground Network. This partnership provides for collaboration between the state and private partners when decisions concerning projects to be undertaken are made.

The London Underground Public Private Partnership is the world’s largest and most high-profile deal that was signed to manage and develop the infrastructure of the London Underground (PWC Network n.d., p. 1). The deal was signed in line with the Government’s strategy for ensuring that it delivered modern as well as high quality public services in a bid to promote the United Kingdom’s competitiveness. The Public Private Partnership for London underground granted LUL’s partners, the private sector, long-term concessions in order to upgrade and modernise the tube infrastructure (HMSO 2000, p. 8).

The Labour government signed the PPP in order to guarantee London Underground Network that an efficiency gain would be accrued by incorporating the private sector investment and expertise. In April 2000, London Business School’s Professor David Currie presented to the transport committee the evidence arguing that the Public Private Partnership could produce cost saving of approximately 20% and more. He argued that the savings that PPP would guarantee LUL would by far be above what the public sector would be able to achieve. This is due to the fact that the introduction of private capital into previously state-owned institutions such as London Underground would bring considerable benefits. It was based on the fact that the lines of management, the risks, as well as incentives were much more prominent (Butcher 2012, p. 34).

Commercial incentives that characterise the private sector are normally higher than that of public sectors. Organisations in the private sector often operate in a fluid and first moving environment. In order to survive, organisations must be able to generate profitable business. The realities of the market-place that face the private sector exert a very powerful discipline on the management of the private sector and its employees. They have to take a full advantage of arising business opportunities in addition to maximising efficiency. Notably, these disciplines that streamline operations in the private sectors can never be fully replicated in the public sector. This is due to the fact that the public sector has multiplicity of policy objectives as well as a more risk-averse culture, which is partly due to the desire to ensure that it safeguards the taxpayers’ money. Therefore, the public sector can be less equipped, in comparison to the private sector to challenge outdated working practices, inefficiency and to develop imaginative approaches that would effectively assist in delivering public services and managing state-owned assets (HMSO 2000, p. 9).

The private sector is generally better than public sectors in terms of the business and management expertise. With regards to running business activities and some elements of service delivery, the private sector is more skilled compared to the public sector. The sector has a better capacity in managing complex investments within the limits of time and budget. Moreover, the private sector has robust skills in assessing the commercial opportunities in order to avail potential new business ventures (HMSO 2000, p. 10). The government’s intention of the Public Private Partnership was to provide a long-term commitment in order to improve the Tube by making use of the private sector’s expertise, while solving financial constraints at the same time. In addition, the partnership was aimed at reducing the backlog of investment that was necessary for the network (Mayor of London 2010, p. 7).

Currently, the Public Private Partnership for London Underground Limited effectively ended following the acquisition of Tube Lines by Transport for London. The LU management currently has full control over LU upgrade and maintenance programme. However, LU has prioritised efficiency in costs and delivery in addition to improving service for its customers in this new post-Public Private Partnerships era. Tube Lines service providers became a fully owned subsidiary of Transport of London in 2010 (Transport for London 2013, p.1).

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The remaining two infrastructure companies covering sub-surface lines (SSL) or Circle, District, Hammersmith and Metropolitan and Bakerloo, Central, Victoria and Waterloo, and City lines (BCV) were initially the responsibility of Metronet, but are currently a part of London Underground (Transport for London 2009, p. 1). Metronet entered administration in 2007 after it had failed due to the lack of leadership and poor governance. (Transport for London 2009, p. 1). Despite this, exercising effective leadership by London Underground Limited in implementing the Public Private Partnership has been important for achieving early results. Generally, proper leadership is crucial in forming the foundation for further growth of the partnership and in ensuring a smooth transition in the early stages of the partnership (Maurer 2013, p. 1).

Contractual Management

The PPP in LUL has been involved in projects since its inception in 1997 (PWC Network n.d., p. 1). In 2003, the responsibility of upgrading the infrastructure of the London Underground Network was contracted to two private consortia. This marked the beginning of the three 30-year PPP contracts. The Public Private Partnership contracts divided the London Underground Network into four parts, three of which would be transferred to private infrastructure companies (Infracos). The forth one, referred to as operation company (Opsco), would be responsible for the running of the service and was not transferred to private players. This allowed the management of the network to effectively remain under London Underground (Roebuck 2009, p. 1). These include Jubilee, Northern and Piccadilly lines (JNP contact); the Sub-Surface lines (SSL contract); and Bakerloo, Central, Victoria and Waterloo & City lines (BCV contact). Metronet was awarded the SSL contract and the BCV contract, while Tube Lines was awarded the JNP contract. At the time of signing the deal, Tube Lines Company was co-owned by Jarvis, Bechtel, and Amey (Mayor of London 2010, p. 7).

The Public Private Partnership for LU involved ?37.7 billion of investment that would be spread over thirty years and ?4.6 billion from the private sector. The remainder of the required annual payments would be obtained from payment to the infrastructure company (PWC Network n.d., p. 1). Given the high-profile nature of services involved at the Public Private Partnership for LU, proper arrangements have been included in order to ensure that protection of the public sector is effectively in place (PWC Network n.d., p. 1). On the other hand, in order to provide an opportunity for London Underground Limited to carry out periodic reviews, the contract was split into four 7.5 year periods. This was deemed necessary in order to allow the network review the requirements and costs for the better delivery of services (Transport for London 2013, p.1).

In the contract, it is stipulated that disputes arising during the Periodic Review would be settled by a “statutory arbitrator”. The position has been created by the new legislation. The PPP deal actually includes aspects that are borrowed from the regulations governing privatised utilities. Apart from commercial structures in this deal, the financial instruments employed are also ‘firsts’ for a Public Private Partnership transaction. For instance, the Tube Lines deal is the very first example of bank debt that is underwritten by a monocline credit insurer for the use in a transaction by Public Private Partnership (PWC Network n.d., p. 1).

The review of the options available for funding, development, as well as management of LUL was initially done by PWC (PWC Network n.d., p. 1). The 30-year period was adopted to allow for time for initiated projects to be carried out to completion. However, once the thirty-year period lapses, all assets would be returned to London Underground Limited stewardship. The contract signed with Tube Lines was reviewed on December 31, 2002 (Transport for London 2013, p.1).

London Underground Limited publishes performance reports, which cover the entire Underground network. Each report details performance and carries out assessment of what is to be done in order to ensure that delivery of improved services is guaranteed (Transport for London 2013, p.1). Essentially, the contract between London Underground and the private companies is largely output specified. This is aimed at realising positive outcomes in the London Underground PPP. LU subjects the private organisations to a rigorous performance regime by setting out the required performance and devolving the responsibility of meeting the specified requirements to the Infraco. The regime specifies the quality of work required from the engaged private sector organisations to ensure that London Underground steadily delivers improving levels of service. The private sector partners receive payments depending on the achievement of standards stipulated by the performance regime, thereby acting as an incentive for the private sector partners to invest more (Mayor of London 2010, p. 7).

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The Infracos receive their payments for the provision of infrastructure through the Infrastructure Service Charge (ISC) on a four-weekly basis. The payment is often adjusted each financial period to incorporate any additional bonuses due to good performance or financial penalties referred to as abatements due in case of poor delivery of services. The performance of the Infracos, which is used to monitor the Public Private contracts for maintenance as well as upgrading of the underground network, is divided into three main measures: availability, capability, and ambience (Mayor of London 2010, p. 7).

Availability is considered as the day-to-day reliability of the necessary assets and whether the assets are available for use. On the other hand, capability is the potential that can effectively be delivered by available assets (Cogitare 2008, p. 1). This is particularly with reference to the capacity of the line as well as the estimated journey time for London Underground Customers. Lastly, ambience is the quality of the travelling environment for customers. Payment benchmarks had been set for each performance measure before the PPPs contracts commenced (Mayor of London 2010, p. 10).

In terms of availability, the benchmark for payment was set with regards to Lost Customer Hours (LCH). It factors in the total additional time for the journey experienced by the customer due to Service Descriptions. The Journey Time Capability (JTC), which measures an average journey in minutes, is employed for Capability while quarterly scoring out of one hundred in measuring ambience. The measure for ambience relates performance to several assets as well as attributes that contribute to the service that customers experience. Setting of the benchmarks was done after a period of shadow running so as to allow LUL to establish an achievable minimum level for each line’s expected performance, which determined each Infraco’s payment in terms of bonuses (Mayor of London 2010, p. 10).

This funding arrangement has proved to be better than the one that was designed for the national railways under the previous administration when they were privatised. Tying service delivery with payment mechanisms is beneficial to the public organisation as this encourages faster construction as well as better continued maintenance over the contract life of the assets (HMSO 2000, p. 36). Notably, the initial performance measure did not tell much about the capability of Metronet. Despite measuring at the set benchmark, the company proved to be unsustainable, thereby prompting its dissolution even before the end of the first quarter of the contracted 30 years. Nevertheless, Tube Lines’ bid has remained an important benchmark up until the final year set for the process of Periodic Review. Consequently, its contract has been revised for the Second Review Period.

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Asset Management

After the signing of the PPP deal by London Underground, the management of Tubes projects and assets has been recognised with the attainment of two important accreditations. London Underground has become the first United Kingdom railway operator of PAS55 certification, which it received after full assessment by the Lloyd’s Register undertaken from January through May 2011. PAS55 is an internationally recognised British Standard on proper management of assets. The fact that the management achieved PAS55 certification is a clear indication that London Underground is effectively investing in the Tube Upgrade programme. In addition, it shows that LU is taking a whole-life method of approaching to asset management (Transport for London n.d., p. 1).

The certification the LU management received applies to such operational assets as track, station systems like fire protection, and civil structures like embankments. Apart from the PAS55 certification, London Underground has registered improvement to level three of the Office of Government Commerce’s P3m3 Maturity Model. This achievement basically resulted from the growth of a consistent single Project Management Framework within which the management of all projects falls (Transport for London n.d., p. 1).

Conclusion

The efficiency of Public Private Partnerships in providing public assets and services explains why several public sectors are increasingly embracing this kind of partnerships. The improvement of the quality services witnessed by London Underground Limited is effective due to Public Private Partnerships. Infracos has been subjected to financial incentives and/or penalties based on the quality of work they deliver against the benchmarks set out in the PPP contracts. This has helped the London Underground industry to make strides with regards to service delivery. Each Infraco has been working round the clock to ensure that they do not suffer penalties, while in the process delivering quality services to the network’s customers. Since the management has remained under London Underground Limited, the public corporation has been able to track the development with regards to service delivery by the Infracos. The strategic plans that have jointly been laid down by the partners have enabled cooperation to be much easier, thereby ensuring that services are greatly improved.

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