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Private finance, public problems

PFI contractors should re-examine the risks they take on in the light of problems on the Midland Metro.

The revelation last week that Midland Metro Line One builder and operator Altram will finish the project 10 months late serves as a reminder of some of the dangers of Private Finance Initiative schemes to contractors and the benefits to their clients.

Altram, a fully integrated consortium made up of John Laing, Italian rolling stock manufacturer Ansaldo Trasporti and transport operator Travel West Midlands, is in trouble. It is having to pay client Centro £24,500 a day in liquidated damages after missing the early November trigger date for contractual remedies and, more importantly, is also missing almost a year of operating revenue (NCE last week).

As an equal member of the consortium Laing is having to pay its share of the liquidated damages, although the bulk of the delays have been down to slippage in the rolling stock delivery programme. Behind the scenes Laing's lawyers are now trying to find ways of clawing back as much money as possible from the Italian partner. Not exactly a good start to the remaining 20 years of the operating concession.

The private finance element for construction of the Midland Metro is relatively small at only £11.4M of the £145M fixed-price total. But once the line is open Altram will carry all the operating risks and will be paid directly from the fare box. It will be competing directly with the bus market to win passengers so fares will be low, making it difficult to win back the operating revenue lost by the late completion.

In contrast, the Midland Metro highlights the main benefits of PFI from the public sector's point of view. While Centro is not exactly thrilled with the situation it can at least report back to the West Midlands Passenger Transport Authority that all the additional costs are being financed by Altram and its contractors.

'There is no construction and no operating risk for us. The only impact really is that we and the people of the West Midlands don't yet have the system,' says Centro finance director Philip Severs.

Had the scheme been publicly financed Centro would by now be in disgrace and receiving the kind of bad press that London Underground has had over the Jubilee Line Extension. Instead, along with all the direct financial implications, it is Altram facing the damaging headlines.

At the end of the day Centro will get what is widely regarded as a first rate light rail system without any risk to the public purse.

But for contractors bidding for PFI projects, the Midlands Metro offers a timely lesson - choose your partners carefully and make sure they can deliver.

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