What can the London Underground tell us about PPPs?

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If you’ve ever been to London, then you’ve almost certainly seen the emblematic red circle and blue stripe with the word UNDERGROUND emblazoned on it. The Underground is a huge operation, made up of some 270 stations and 400km of track. So how does London keep this operation running?

Earlier this decade, the government experimented with a public-private partnership (PPP) under the name of Metronet. The hope was to generate efficiencies by bringing in the private sector. So did it work? A recent report by the UK National Audit Office (published 5 June 2009) makes it pretty clear the answer is "no." The report pinned responsibility for this failure on poor corporate governance:

The main cause of Metronet’s failure was its poor corporate governance and leadership. Many decisions had to be agreed unanimously by five shareholders, which all acted as Metronet’s suppliers and had different motivations depending on their roles. The executive management changed frequently and was unable to manage the work of its shareholder-dominated supply chain effectively. These suppliers had power over some of the scope of work, expected to be paid for extra work undertaken and had better access to cost information than the management. The poor quality of information available to management, particularly on the unit costs of the station and track programmes, meant that Metronet was unable to monitor costs and could not obtain adequate evidence to support claims to have performed work economically and efficiently.

There is a lot of evidence that the governance of PPP projects is essential for the public sector to succeed, but not very much attention has been given to corporate governance. And indeed the philosophy of PPP is that the private sector knows what it is doing and gets things right or at least better than the public sector. And this is correct—as long as the public sector does its job of supervising and managing the overall project and the behavior of the private partner in particular.

As I see it, corporate governance is a somewhat forsaken subject when establishing PPPs. If a government wants to get involved, it not only needs to become familiar with the corporate structure of a Special Purpose Vehicle (SPV), but should also be fully familiar with all the contractual relationships within the PPP structure and perhaps should be represented on the Board of the SPV (certainly not being responsible for its decisions) or in its controlling governance structure.

Of course, we can't pin all failures of PPPs on corporate governance. Even in the case of Metronet there were other issues at play. Check out the Economist's take on the debacle in 2007 and 2008.

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