Stephen Rees's blog

Thoughts about the relationships between transport and the urban area it serves

London switches from PFI to conventional contact

with 8 comments

TRANSPORT for London (TfL) has ended its Prestige public finance initiative (PFI) contract with the TranSys consortium of Cubic Transportation Systems and HP Enterprise Services and replaced it with a conventional contract with Cubic.

The PFI contract was awarded in 1998 for a period of 17 years to install new fare collection equipment and so introduce the Oyster smart card system in 2003.

TranSys took on £190 million of debt to fund the PFI and TfL has repaid the outstanding £101 million. TfL has also purchased the rights to the Oyster brand for £1 million. TfL says the new contract with Cubic for all transport ticketing will save about £10 million a year.

That’s the complete story from the International Railway Journal.

We don’t call them PFI – we call them P3s – butt he idea is the same. And in London, they have been a disaster and this is just the latest in a series of decisions to save money by going to a conventional contract. The savings, as noted, are significant.

BC has a politically dogmatic approach that says that while they recognize that it does cost the private sector more to borrow for capital projects, the private sector is so much more efficient that there are savings. Of course they do not have an objective private sector comparator requirement as part of the project evaluation – a British requirement. There could well be objective data that shows that the P3s are very good for the private sector bottom line, but at the expense of the taxpayer. That is certainly the experience of most of these arrangements.

Translink is of course forced into such deals – and as we have seen with the Canada Line – there is more than just the cost of capital to be concerned about. Contracts that are so inflexible that it is not possible to utilize the available capacity when demand rises faster than original expectations – that should have been the story yesterday, not cupcakes given away. It should also be of concern that the funding gap on the Evergreen Line is still not yet filled – and a P3 is supposed to be part of that too. Even though the majority of the funding in place  comes from the public sector it means that the contractor will have a disproportionate amount of power. Just like the way that Translink now cannot divert empty trains from the Airport branch to serve Richmond, where demand is much higher.

I do not think it is likely that the current administration will change its policy with respect to P3s, but the longer they stick with it, the dumber it is going to look.

Written by Stephen Rees

August 18, 2010 at 7:21 am

8 Responses

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  1. “I do not think it is likely that the current administration will change its policy with respect to P3s..”

    Even if the NDP or the Greens won (only with the help of a benevolent or mischievous God)they too are so ignorant of what is going on in the rest of the world, especially transit-wise, that hardly anything would change….

    Red frog

    August 18, 2010 at 11:34 am

  2. Stephen ran as a Green Party candidate last election so they have at least one person who is qualified to be Minister of Transportation.


    August 18, 2010 at 12:52 pm

  3. A few weeks ago, doing some research about the Canada Line, I was told that because YVR was a financial player with the Canada Line, they were guaranteed ‘X’ amount of trains servicing the airport every day; this is on top of the P-3 contract which you mentioned.

    The Canada Line P-3 has kept much information secret and trying to get information through FOI, confirming the statement, is all but impossible.

    The RfV consultant has been regaling me in the absolute horrors of the Transport for London Underground/Tube P-3’s!

    Just a few days ago, a contractors train coupling broke sending a (unfitted?) broken train coasting along the Northern Line unattended at the start of the morning’s revenue operation. Evidently this is not a unique happening since the onset of P-3’s!

    D. M. Johnston

    August 18, 2010 at 6:22 pm

  4. The lower cost of borrowing for the government vs. the private sector reflects the guarantee provided by the taxpayers. A common mistake is to assume that this guarantee comes with no cost attached.

    The borrowing rate / cost of capital issue is a red herring. The true (potential) downside risk with P3 deals is the contract risk. It only takes one 407 style screw-up to undo the gains from a number of well-crafted deals.

    Last I heard all P3 deals in BC had a private comparator, but I’m not sure what you mean by objective.


    August 20, 2010 at 10:00 pm

  5. Actually, it’s a public sector comparator, just for the record (i.e. what would the p3 have cost if done by the public instead of via the p3).


    August 20, 2010 at 10:05 pm

  6. Delcan, you say:
    “A common mistake is to assume that this guarantee comes with no cost attached” : may you elaborate on this?

    It sounds you qualify the 407ETR as a failure: why?


    August 21, 2010 at 9:33 pm

  7. “It sounds you qualify the 407ETR as a failure: why?”

    Well, it’s a terrible contract. The biggest flaw is the length – 99 years is far, far too long. With discounting, the bidders probably only added about $50 million (if that) to their bid in order to have the highway in their possession for the extra 50 years vs. what they would have bid for a 50 year contract. Contracts of 25 years are more typical for p3 type deals.

    Imagine every commuter on the 407 will shipping the wealth of Ontario off to the overseas owners of the 407 in the year 2085, just because the Tories had some temporary budget problems back before anybody in the Ontario of 2085 was even alive…

    Ask someone from Newfoundland about the wisdom of signing very long term deals on unfavourable terms for key elements of public infrastructure. But at least Newfoundland had no choice but to deal with Quebec – the Ontario Tories rushed into screwing the province over for a century without anyone forcing their hand.

    Agreeing not to build any other freeways nearby (for 100 years!) was another absurd concession.

    Also, the government severely underestimated the future traffic levels in their negotiations (who knew that people would want to drive across the top of Toronto).

    Finally, selling an asset (balance sheet) to cover a deficit (income statement) problem is almost always a bad idea. A sale should be motivated by getting a good deal, not by desperation to make the books look better in the short term. The unnecesary haste with which the government pursued the sale also resulted in poor contract bargaining by the government. Whereas B.C. deliberately built up its P3 expertise by establishing an entire agency to do them right, Ontario just rushed in blind with no expertise on their side.


    August 24, 2010 at 7:41 pm

  8. […] P3s are just convenient way to balance the books, and as Stephen Rees has pointed out many times there are many negative consequences. LD_AddCustomAttr("AdOpt", "1"); LD_AddCustomAttr("Origin", "other"); […]

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