[A-List] UK state: London mayoral election

["Michael Keaney" <michael.keaney@xxxxxx>]

PFI firms in a dark tunnel as Tube deal gets the green light
By Heather Tomlinson
The Independent on Sunday, 06 October 2002

Last week, the European Commission waved through the largest public-private
partnership (PPP) deal in history. The £14bn part-privatisation of London's
Tube has now cleared all regulatory hurdles and is almost at the finishing
line. Soon the private sector will look after the trains, track, stations
and signalling, while the state will remain in charge of overall strategy,
staff, timetables and fares.

Meanwhile, at the Labour Party conference, trade unions stepped up their
campaign to thwart the involvement of the private sector in public services.
Delegates voted by around two to one for an independent review of the
private finance initiative (PFI), the sister of PPP.

Tony Blair didn't take a blind bit of notice. But he will have to listen to
the complaints of the companies involved because PFI is not the goldmine it
once was. "Most companies say that financial returns have fallen compared to
the early schemes, although they are still very reasonable," says Michael
Parkinson, an analyst at Brewin Dolphin Securities.

Some companies involved in PFI are talking of pulling out, and their City
valuations have dropped significantly.

Although it is one of the players in the Tube deal, Amey is the most public
of the detractors. It still wants to manage contracts like the maintenance
of Edinburgh's schools and two mental health hospitals in Birmingham, but it
has put a "for sale" sign over the PFI deals that it owns. Its problem is
that it has to put too much money upfront into some of the projects, such as
building or refurbishing schools and hospitals, and the rewards are only
paid over time.

The long-term financial benefits can be significant - when Amey said it
could get a return of 20 per cent on its London Underground investment, the
revelation prompted an outcry - but the company can't afford to wait that
long. In May it had to restate its financial results due to a change in
accounting rules. The costs of bidding for PFI deals can be onerous, and a
new standard meant they had to be accounted for immediately. The change
meant the difference between an £18m loss and a profit of £53m. Amey's
finance director, David Miller, departed a few months afterwards.

Amey, alongside other PFI companies like Mowlem, publicly complained about
the length and costs of bidding, and said the Government had to change the
process to keep companies interested. Deputy Prime Minister John Prescott
has ordered an inquiry into the issue.

Jarvis, a fellow member of the Tubelines consortium, has also run into
trouble. Its chief executive, Paris Moayedi, came under fire for the size of
his pay cheque when his salary rose by 66 per cent to a total package of
£595,000. The increase was announced not long after the rail crash at
Potters Bar - a section of track maintained by Jarvis through a contract
with Railtrack. The company is still being investigated for its role.

The other member of Tubelines, Bechtel, has not had the PFI involvement in
the UK of its partners. In fact it has a good reputation as a
troubleshooter. But it has a thorn in its side in the "Big Dig"
road-building project in Boston, America. This is a year behind schedule and
its £10bn cost is well over the original 1985 estimate of £1.5bn, although
that was for a smaller specification.

For the larger Metronet consortium, which oversees the rest of the Tube
network, there have also been fires to fight. One of its members, Balfour
Beatty, looked after the maintenance of rail at the site of the Hatfield
rail crash, and its role is still being investigated. Trade unions have been
particularly angry over its involvement in hospital PFI projects. The
University Hospital of North Durham, where it had a PFI deal for building
and maintenance, has been criticised, and Balfour Beatty's work is said to
have meant fewer beds. It has also been reported that staff have had to
endure over-heated kitchens and even floods of sewage in the pathology
department. The company says the number of beds is a decision for the NHS
Trust, while the other problems are being rectified.

WS Atkins, another Metronet member, has also had a rough ride recently. Last
week its shares dived when it admitted that internal errors in a new billing
system meant it wasn't getting paid on time, and that its debt had climbed
to unsustainable levels. If it doesn't sort out the problem by March, it
could have to renegotiate its banking facilities. Its chief executive, Robin
Southwell, had to make a rapid exit.

Bombardier Transportation, a Canadian company that makes trains, is a
consortium member with less experience of PFI in the UK. But it has had its
own issues, particularly with its new high-speed trains on a line run by US
transport company Amtrak. Passengers on the Boston-New-York-Washington route
have endured delays and cancellations at a level the British could empathise
with. Bombardier says the problems are due to the specifications that Amtrak
insisted on, against its better judgement.

However, this is an issue in the realm of PFI. The Government has to be very
careful what it writes in the fine print so that companies cannot gain by
providing a poorer service.

"It's a myth that companies can just cut back service to give a level of
profit; it is that service that they are being paid to do," says Jonathan
Scott, a director at KP Corporate Finance. "It is possible that in the early
days, the private sector thought this was all very easy, 30 years of
profits. The fact is that it isn't, and they have to work hard to make
money."