Michael Harrison's Outlook: Down a Tube tunnel darkly, with the PPP

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The Independent Online

London Underground regrets to inform you that Northern and Jubilee Line services are currently suspended because of signal failure, delays are occurring on District and Circle Line services because of a defective train at Embankment, the Bakerloo and Metropolitan Lines are running a reduced schedule owing to driver shortages and the Piccadilly Line has been disrupted by a passenger action at Green Park. Taxpayers are strongly advised to seek alternative methods of financing the Tube.

Labour's version of rail privatisation - the public private partnership for London Underground - is still only two years old but already it is becoming ominously clear who are the winners and losers. Nearly £1bn worth of taxpayers' money has gone down the tube just setting up the PPP and yet there is little or nothing to show in the way of improved services. Those passengers who were trapped in the dark for more than an hour yesterday morning on a broken down Jubilee Line train will not have needed to read the Public Accounts Committee's sobering report on the Tube PPP to know what a lottery the exercise is proving. The only crumb of comfort Transport for London could offer was to note they were lucky it wasn't high summer.

The banks financing the two private consortia, Metronet and Tube Lines, are, on the other hand, basking in it. Although the risk to them of the PPP falling apart was largely removed before it even got under way, they have still succeeded in charging £450m more in interest than had the Government chosen to fund the modernisation of the Underground directly.

For their part, Metronet and Tube Lines only have to hit the levels of reliability that existed prior to the PPP to earn their 18-20 per cent rate of return while the maximum penalties they face in the first seven and a half years are capped.

In fairness to the two contractors, they are still only two and a bit years into a 30-year £16bn programme to restore the Tube so it is premature to reach judgement. Any yet, as the chairman of the PAC Edward Leigh notes, it will take until 2026 - some 23 years into the experiment - before it is possible to say with any certainty whether the vast amounts of money pumped into the system have delivered a better railway.

What can be said now, and what ministers were perfectly well aware of before the ink was dry on the contracts, is that there were other, cheaper ways of financing the network. Public transport bonds, secured against future revenues, have proved a perfectly respectable method of funding other underground systems, not least the New York subway. But they were ruled out in the case of London for the naked political reason that it would have given Ken Livingstone and his transport supremo Bob Kiley too much control - a move made all the more peculiar by the Government's subsequent decision to allow him to issue £2.9bn of bonds to support TfL's capital programme.

Meanwhile, the Tube, and its passengers, struggle to work and the contractors still lack a proper asset register to tell them which bits of the crumbling network need replacing first. There is a supposed watchdog called the PPP Arbiter (paid for ultimately by the travelling public) but it cannot get its teeth into the contractors for the first seven and a half years and, in the meantime, Ken and Kiley have little or no leverage to extract a better deal for passengers. What a way to run a railway.

Drowning not waiving

Some of the men running the hole in the ground called the Channel Tunnel do not know when to stop digging. Even now that Eurotunnel has seen the light and agreed to start talks with its banks on the inevitable debt- for-equity swap, there is is dissent on the board over the £13m in advisers' fees the company will have to shoulder on behalf of the creditors. Compared with the tunnel's £6.4bn of debt, the advisers' fees are a drop in the English Channel.

Haggling over them looked like a horrible case of spoiling the ship for the sake of a ha'p'orth of tar. But Eurotunnel has shown a flair for self-inflicted wounds and self-denial for a long time. Take this extraordinary assertion from the board yesterday after it finally announced that it intends to seek the necessary waiver of its credit agreement to allow debt restructuring talks to begin: "In the event of a favourable reply, Eurotunnel will begin negotiations with the intention of reaching a financial agreement that will ensure the future of the group whilst at the same time maintaining shareholder interests."

Since most observers expect existing shareholders to be blown clean out of the water by the resulting financial arrangement, it will be fascinating to see how Eurotunnel plans to maintain their interest in the tunnel.

Perhaps something was lost in the translation from the French who now control the Eurotunnel board in its entirety and own most of the company. The interests of these million or so French shareholders will be diluted anyway when Eurotunnel runs out of capacity at the end of this year to service its debts with bits of paper instead of hard cash. The opportunity to convert those bits of paper into shares at a sixth of their issued value is too good to miss but it will mean existing shareholders owning 15 per cent less of the company than they did before. The debt-for-equity swap will surely take care of the rest.

Lurking in the shadows is the figure of Nicholas Miguet, the share tipster and sometime fraudster who succeeded in ousting the previous Anglo-Saxon board en masse a year ago and even now looks to be pulling the strings. What precisely he is up to is anyone's guess but it would be as hazardous to follow his lead now as it was a year ago when 60,000 fools climbed aboard the doomed vessel.

Allen's rosy picture

A year ago Charles Allen looked to be living on borrowed time at ITV. Following the unceremonious dumping of its chairman Michael Green by a cabal of disgruntled shareholders, it seemed that the chief executive did not have long for this life either. The betting was that he too would be sacrificed or else ITV would disappear into the belly of some private equity firm. Well, if a week is a long time in politics then a year is an eternity in telly and today Mr Allen is the flavour of the month. So much so that the £8.7m pay package he was awarded last year is unlikely to raise so much as a flicker of concern among those self-same shareholders. The pay deal includes a large slug of free shares which will be worth more than £6m provided ITV hits its targets.

Financially, it seems well on course. Profits are roaring ahead, thanks to cost-cutting gains from the Granada-Carlton merger and falling licence fees, while the share price is up a quarter. The picture on viewing figures is not so rosy. A diet of reality TV and makeovers has failed to stop ITV's audience share sliding alarming and there is every sign that innovative programme-making will be sacrificed on the alter of commercial greed as the channel moves forward. Good for Mr Allen but a depressing thought for his audience outside the City.