PPP 'get-out' in case plan fails

Speculation increased today that ministers are preparing a face-saving fall-back position over their controversial plans to part privatise London Underground.

It comes amid a change of emphasis which the Treasury is placing on transferring risk of major transport projects to the private sector, stressing the value of private sector expertise to public projects rather than the supposed financial benefits. It is the Treasury which is the single driving force railroading through the Public Private Partnership (PPP) for the Tube.

The project has been condemned by virtually all acknowledged transport experts both on cost and safety grounds, because it breaks up the most densely used transport system in the world into separate operating companies, and is likely to prove billions of pounds more expensive than alternative methods of raising investment cash.

The private sector bidders chosen to take over large sections of the network have yet to pass the test proving that their schemes will be cheaper in the long run than publicly funded alternatives, and the controlling Health and Safety Executive has still to approve complex and detailed safety plans without which the PPP cannot proceed. Officials now admit privately that the plans are unlikely to be completed by April - the latest and repeatedly deferred date when PPP is due to start after the signing of contracts with Metronet and Tube Lines, the two private consortia.

Failing the PPP on either financial or safety grounds would provide ministers with a face-saving deal without the Government having to admit to a highly embarrassing U-turn over PPP.

The Government's official line is that PPP remains firmly on track. But speculation over its future increased dramatically following the financial collapse of Railtrack and the role of private sector investors in large transport schemes.

The move towards a possible facesaving deal was revealed by the Evening Standard last week. This followed a meeting between Mayor Ken Livingstone, who is due to take over the Tube but only when the PPP is finalised, and Stephen Byers the transport secretary.

James McLean writes: The City has become increasingly concerned about the risks involved in helping fund the £13 billion upgrade for the Underground following the Government's controversial decision to put Railtrack into administration.

Bankers working on the loans for the project say Railtrack's demise has dented confidence in the Government's support for public infrastructure projects, adding to the nervousness in the City that was stemming from volatile financial markets and the rising scale of their involvement in the Tube project.

City banks are currently expected to lend the project £4.5 billion, far higher the £2.6 billion originally estimated, and the heightened risk for lenders is likely to see the banks charging more for the cash than originally forecast. Should the terms of the loans become onerous, it is possible that the project could fail value for money tests designed to ensure the Government is spending taxpayers' money efficiently. That could jeopardise this project's financing structure, and could have wide-ranging implications for the future of private sector involvement in public infrastructure.

London Underground has awarded mandates to arrange loans for the specially created infrastructure companies, though no construction contracts have been granted.