BLAIR’S BRITAIN, 1997–2007
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the Private Finance Initiative. He was appointed chairman of London
Regional Transport (LRT) in April 1998 in place of Peter Ford who had
articulated LRT’s view that the PPP proposal was close to the bottom of a
list of fifteen alternative options.
Thus a major policy was developed not by the Prime Minister, not by
the Secretary of State for Transport, not by the civil service, not by management consultants but by an ad hoc group of businessmen selected by a
Treasury minister and against the considered policy of the board responsible for running the Underground.
Prescott announced the PPP for the Underground to the Commons
in March 1998, after refinement by management consultants
PricewaterhouseCoopers and the law firm Freshfields. Thirty-year contracts based on three roughly equal-sized groups of lines were to be
awarded to the private sector, after a competition, for the repair, maintenance and enhancement of the fixed infrastructure, signalling and trains.
Two-thirds of the employees would remain in direct public sector
employment to drive the trains and staff the stations.
One embellishment authored by Prescott was an assurance that staff
transferring to the private sector would have their terms and conditions
protected. This was an important departure from previous privatisations
and private finance deals and, arguably, it compromised one of the main
sources of cost reduction that the Treasury was so keen to replicate for the
Underground.
Gordon Brown and the Treasury have systematically held the line that
the PPP was the sole responsibility of Prescott and his successors. But few
in Whitehall or in the press saw it that way. Chair of the Transport Select
Committee, Gwyneth Dunwoody, gave the following account in the
Commons:
As a Committee, we were worried that most of the arrangements for the
bids had been Treasury led, to the point where Treasury officials appeared
to be taking precedence over the DETR in the negotiating, and providing
individuals who were themselves directly dealing with the applicants for
the bids, and yet we were not able to persuade Treasury Ministers to appear
before us to discuss the implications. We said very clearly that we thought
that that decision undermined the work of Select Committees, simply
because the House of Commons does have a responsibility not just to ask
awkward questions but to obtain answers.23
22 Evening Standard, 28 June 2003.
23 House of Commons debate, 27 June 2002.
The Treasury refused to be scrutinised, but employees of the consultants did appear before the Select Committee to assist transport officials
and ministers in explaining the policy, and on occasion they were put up
to explain and justify it at briefings for the press. For instance:
The Treasury’s argument is two-fold. First . . . it does not trust London
Underground’s public sector management to deliver. But second, it maintains the PFI offers the advantage of transferring to the private sector the
risk of maintaining the track, signalling and tunnels. ‘Under PPP,’ says
Tony Poulter of PricewaterhouseCoopers, who is advising the government
on the Underground deal, ‘it was down to the private sector to sort it out,
and they did . . . Bonds may have worked for the New York subway but the
British public sector does not have experience of being able to write contracts that successfully deliver what is wanted. Through a PPP, with its
long-term transfer of operating and financial risk, it does.’24
This illustrates not only that the government was using private consultants to expound and defend government policy, but also that in 1999 it was
accepted on all sides that this was in fact a Treasury policy. In 2005 the press
and the public remained clear that PFI and PPP policies were Treasury policies. One of many illustrations is Will Hutton’s comment: ‘Over the past
eight years, I have had my differences with Brown . . . The Private Finance
Initiative and the London Underground Public Private Partnership, in particular, are too poorly designed to advance the public interest.’25
The extent to which the Treasury had become seduced by what
the consultants promised the PPP would deliver is apparent in the
Chancellor’s 1998 Comprehensive Spending Review which mentions ‘the
new Public–Private Partnership for London Underground (which is
expected to remove the need for public subsidy from 2000/01)’.26 Thus it
was anticipated that, magically, the Underground’s underinvestment
problem would be solved and all need for subsidy for the Underground
would be removed! The government has never revealed the analysis
underlying this, even in the face of repeated demands from members of
the Standing Committee of the Commons dealing with the legislation.
On analysis of a six-page sketch issued by PricewaterhouseCoopers it
immediately looked too good to be true.27
24 Financial Times, 27 November 1999.
25 The Observer, 13 March 2005.
26 HM Treasury, Modern Public Services for Britain, Investing in Reform (Comprehensive
Spending Review), Cm. 4011 (London: TSO, 1998), para. 8.4.
27 See Stephen Glaister, Rosemary Scanlon and Tony Travers, A Fourth Way for the Under-
ground? (London: Greater London Group, June 1998); and Stephen Glaister, Rosemary
Yet ministers and the Prime Minister took the view that PFI and PPP
arrangements enabled delivery of projects which could be delivered in no
other way – often seeming to imply that the private sector investor would
somehow ‘step in’ to replace the basic funding that the taxpayer could
not, or would not, provide. Thus, Geoffrey Robinson declared: ‘[PFI] is
enabling Government to support a significant number of additional projects beyond what can be provided through the public purse.’28 And the
Prime Minister explicitly put the view that the policy was somehow providing public services that the taxpayer could not afford: ‘The reason that
we are engaged in this public–private investment partnership is so that
the infrastructure work, which is urgently needed in the tube, can be
done.’29 and ‘there is no way Government through the general taxpayer
can do it all’.30 This view, that PFI and PPP somehow entice the private
sector to provide resources that the taxpayer will not provide, is plainly
nonsense. But it has been put forward so often by Labour ministers that
one can only assume they believe it, perhaps because they do not understand the fundamental economics behind what are, by any standards,
technically complex procurements.
As the details of the implementation of the PPP were worked up a
philosophical difference between Blair and Brown began to emerge. The
legislation to devolve powers to a directly elected London Mayor and
London Assembly were being developed in parallel. Blair’s 1997 manifesto had indicated that this was to be genuine and substantive devolution. Yet the Treasury was concerned at the prospect that the new London
Mayor and Authority would become profligate. Initially this was independent of the personality of the Mayor. The government’s plan was to
have the Underground PPP completed bef
ore April 2000, at which point
the new Mayor would assume his or her powers.
In the event the negotiations for the Underground dragged on until the
end of 2002, at which point, in accordance with the Greater London Act
2000, they and their liabilities were summarily imposed upon the Greater
London Authority. Whether by design or by accident, the effect of the PPP
was to fetter the Mayor’s powers over the Underground. Thus the Blairinspired move towards the devolution of London government conflicted
with the Brown-inspired PPP solution for the London Underground. The
Footnote 27 ( cont. )
Scanlon and Tony Travers, Getting Partnerships Going: Public Private Partnerships in
Transport (London: Institute for Public Policy Research, April 2000).
28 Speech to a PFI conference, 27 April 1998.
29 House of Commons debate, 6 February 2002.
30 Labour Party Conference, 2002.
conflict between this and the fact that the successful candidate for Mayor
had been elected on a ticket of explicit opposition to the PPP and with an
alternative solution, formed the substance of an unsuccessful judicial
review brought by the Mayor in the summer of 2002.
One thing that Blair and Brown did have in common was a difficult
relationship with Ken Livingstone who won the first mayoral election in
2000. Having failed to give assurances considered adequate, Livingstone
was denied the official Labour candidature and excluded from the party.
He promptly stood as an independent and won easily. Blair and
Livingstone repaired their relationship, but it remains to be seen how that
between Brown and Livingstone develops.
Blair did make a public intervention on the Underground PPP in 1999,
in the context of Ken Livingstone’s alternative proposals. However, both
Blair and Prescott must have been ill-advised on the facts concerning how
capital had been successfully raised for some time in US cities:
Rosemary Scanlon, a visiting research fellow at the London School of
Economics and former deputy state comptroller for New York City . . . has
written to Mr Blair to express concerns about his comments . . . His statement, in an interview with The Observer newspaper, was ‘an absolute and
utter untruth,’ she said. In the letter to the prime minister, she explains that
New York City did have a fiscal crisis in 1975. But the Metropolitan
Transportation Authority, a State of New York agency, was set up as a
public benefit corporation in 1981, and has since then issued more than
$14bn (£8.6bn) of bonds. ‘The MTA reinvestment programme, and its
bond issuance, is without question a major success story in New York.’ A
Downing Street spokesman later . . . added: ‘To saddle the city with an
enormous amount of debt is a recipe for disaster.’31
The policy was hugely unpopular both within the Commons and
outside it. Negotiations were ugly and were obviously going to continue
for much longer than had been expected. Ken Livingstone was a popular
figure and he had appointed Bob Kiley from New York, one of the world’s
best, as Transport Commissioner (chief executive of TfL). They had an
alternative, tried and tested, proposal for raising capital through the
issuance of bonds secured against future revenues and other sources of
income; and for procuring service from the private sector through a larger
number of much shorter-term contracts, which would be easier to
manage and to enforce. Several alternatives were available. The Labour
government had rescued the floundering (supposedly privately funded)
31 Financial Times, 23 November 1999.
project to build a fast rail link between London and the Channel Tunnel by
guaranteeing over £5 billion of borrowing on the markets – subsequently
the rights under this guarantee were in effect exercised and the bond issue
method of raising local authority capital became Treasury policy in 2004.
With the 2001 general election approaching, Blair intervened. On 2
February 2001 John Prescott and Bob Kiley reached an agreement under
which Kiley would take a lead in achieving the modifications necessary to
give TfL and London Underground Limited ‘unified management of the
Underground’ – thus meeting one of Kiley’s and Livingstone’s core objections to the government’s original proposal. Negotiations proceeded
throughout February and most of March. The DETR were helpful, and
with substantive input from ‘Adrian Montague, head of the government’s
private finance initiative department’,32 and ‘Lord Macdonald, a Scots
media mogul bizarrely put in charge of London’s surface and underground railways’,33 the government made concessions which looked as
though they would make a resolution possible.
But Kiley found that the understanding he had reached with Prescott
was not respected in subsequent negotiations with government representatives. Agreement was not reached by the end of February 2001 deadline,
but the government made a new proposal with a deadline for agreement
at the end of March. Again negotiations foundered, essentially because in
Kiley’s view the government was still not prepared to allow the public
sector to retain direct control over maintenance activities or to hold
private contractors accountable for the identifiable capital improvements.
After this breakdown London Underground resumed its negotiations
on the original PPP proposal, and TfL began to prepare its case for the
judicial review, due to be held on 12 June 2001 (but later delayed until
23 July). With a general election due on 7 June 2001, the Prime Minister
must have been keen to find a resolution to this unpleasant dispute
involving several of his senior ministers. It came on 4 May 2001 with
handshakes outside No. 10 and the announcement of a new agreement
whereby Kiley would be appointed to the additional position of chair of
London Regional Transport, with the purpose of enabling him to ‘finalise
the PPP contracts for the Underground, making whatever changes within
the framework of the PPP are necessary to address concerns previously
raised by TfL.’34 In a DETR press notice John Prescott said ‘I am delighted
that we have found a way towards unified management control within the
32 Sunday Times, 25 March 2001.
33 Simon Jenkins, Evening Standard, 28 March 2003.
34 Transport for London, press release, 4 May 2001.
framework of the PPP.’ The Prime Minister also commented, ‘I warmly
welcome and endorse this agreement. I’ve met with Bob Kiley, heard his
concerns and have confidence in his ability to deliver a PPP which meets
those concerns and ours and will be good for London. He will have the
full support of the Government in his efforts.’ Thus, apparently, both
Blair and Prescott had publicly conceded the crucial ‘unified management control’ point.
This move was certainly successful in removing the acrimony from the
issue for the duration of the general election campaign. But by early Ju
ly
Kiley had informed Blair and the new ‘Blairite’ Transport Secretary,
Stephen Byers, that he had been unable to conclude an agreement with
the preferred bidders and recommended that the procurement be abandoned and restarted on a new basis. With the election out of the way,
Byers immediately rejected this suggestion and directed that the government’s original plans proceed. By 15 July Blair was again defending the
original PPP plan ‘as the only way to get a “massive investment” into the
ailing network’.35 On the 17th the government summarily replaced Kiley
as chairman of the LRT Board, reinstating his predecessor, Sir Malcolm
Bates. The Prime Minister’s official spokesman made clear that the dismissal of Kiley was a government decision, approved by Tony Blair and
not a personal initiative of Stephen Byers’.
Press and parliamentary reaction was hostile, sensing that the
Chancellor had never had any real intention of giving way and that Kiley’s
appointment had been a cynical device. An Evening Standard leader said
that realities should not prevent ‘Londoners from venting their fury on
the prime minister and Mr Gordon Brown, the silent killer in the background of this debacle.’36
Polly Toynbee laid the blame firmly at Gordon Brown’s door:
Those who are friends of this government are appalled at this feckless
squandering of good will. Most London Labour MPs and ministers privately roll their eyes in despair at what is going on in their name – the chancellor’s runaway train no one else can stop . . . As I write, calls rain in from
Brown’s people claiming incredibly that the PPP has nothing to do with the
chancellor, nothing at all. It was all John Prescott’s baby – as if. Last week
they told me it was all Stephen Byers’s responsibility, forsooth. The chancellor’s fistprint on this one is indelible: his people have done the negotiating, he is the one key player who still refuses to meet Kiley.37
35 Evening Standard, 16 July 2001.
36 Evening Standard, 18 July 2001.
37 The Guardian, 20 July 2001.
Kiley and Livingstone repeatedly attempted to persuade the government that in negotiation the deal was becoming even worse value for
public money. There were constructive meetings with Blair but none with
the Chancellor. Kiley had requested a meeting with Gordon Brown as far