Here is something worth reading (carefully) from The Independent
[I had always assumed this was how the Treasury and Gordon Brown had thought it through,,,]

Jeremy Warner's Outlook: Disaster of Metronet may be a vindication of the public-private partnership for the Tube

Published: 17 November 2006

No wonder Ken Livingstone, the Mayor of London, was feeling so pleased with himself yesterday. His much-trumpeted opposition to the public-private partnership on the London Underground seems to have been wholly vindicated by a damning report on the disaster of Metronet, one of two private-sector consortia with responsibility for modernising and maintaining the London Tube network. This, in any case, is the knee-jerk conclusion to be drawn from the arbitrator's findings. The real meaning, however, is a rather more complicated one.

Chris Bolt, who holds the grandly named title of Public Private Partnership Arbiter for the London Underground, wouldn't sink to such language, but Metronet's performance is essentially depicted as a disgrace. Not that it needs his judgement to confirm this analysis. Anyone subjected to the misery of travelling on the Tube would already know this to be true. In any case, neither of the two Metronet companies - collectively responsible for the Bakerloo, Central, Victoria, Metropolitan and Circle lines, among others - are considered to have performed in line with expected standards.

What's more, says Mr Bolt, Metronet is already heading for a cost overrun of £750m for the initial seven-and-a-half-year contract period. Under the terms of the contract, Metronet must meet the first £100m of any such over-run, leaving the regulator to determine who should be liable for the rest.

Mr Bolt promises some initial guidance on this by the end of January, but readers of the report are left in little doubt where he thinks the bulk of the blame lies. Great tracts of expenditure are judged to have been inefficient, uneconomic or not up to best industry practice. WS Atkins, one of five private-sector partners in Metronet, recently delayed release of its interim figures in anticipation of Mr Bolt's report. We now know why. Big write-offs look inevitable for all consortium members.

Not that this necessarily means that the partners will lose money overall on the enterprise, for Metronet is essentially a workshare arrangement. Each of the five participants will be deriving big revenues from the work they get from Metronet. Whether the profits they make from this work will now be cancelled out by the losses incurred by the consortium is anyone's guess. London's Mayor would still say the private sector is profiteering at the taxpayers' and the commuting public's expense.

Yet the point to be drawn from what is undoubtedly a shambles could easily be read the other way. However bad a mess of it Metronet has made, had this work been fully funded and managed by the public sector we would almost certainly be looking at even bigger cost overruns and even greater disruptions to the travelling public. There is no evidence to suggest the public sector would have been any better at achieving the desired result. To the contrary, past experience is that it is likely to have been a lot worse. The vast cost overruns incurred on the Jubilee Line extension, all of which had to be funded by the taxpayer, eloquently illustrate the point. In this case, much of the overspend will have to be financed by the City.

Nor does Mr Bolt's report in any way undermine the basic justification for the PPP on the Tube, which is that this is money which otherwise would not have been spent at all. Mr Livingstone wanted to pay for the modernisation by issuing a London transport bond. This unfortunately would have counted as government borrowing, and with other public spending programmes taking priority, was therefore always a non-starter. Despite the present disruptions, the PPP will eventually ensure that London gets a public transport infrastructure fit for such a prosperous city.

As for whether the public are getting value for money out of the PPP, we'll never truly know the answer to that, for it is also impossible to know whether the alternatives would have delivered any better. Personally, I doubt it.

I don't want to excuse Metronet. Its partners - Balfour Beatty, EDF, Thames Water, Bombardier and WS Atkins - should hang their heads in shame. Yet they now face the prospect of real financial penalties for their failings. As a public-sector project, the whole thing would have been swept under the carpet and nobody other than the taxpayer would have paid.

NPSS: an equity risk worth taking

John Ralfe is a brilliant analyst of all matters to do with pensions funding who in the present climate of burgeoning deficits has written a number of penetrating exposés of particularly difficult pension problem areas. Yet when it comes to assessing the relative merits of bonds over equities as matching assets for pension liabilities, he really does talk a lot of twaddle.

The latest object of his pen is the proposed National Pensions Savings Scheme (NPSS), which the Government essentially committed itself to in this week's Queen's Speech. The new pensions Bill will create the delivery authority for the individual pension accounts envisaged under the NPSS. Much work on the scheme, designed to deliver a funded pension to the low-paid, remains to be done, but the broad outline as proposed by Adair Turner's Pensions Commission is already well established.

Workers without other pension arrangements will automatically be enrolled into the scheme unless they deliberately opt out. For every 4 per cent of income they pay in, there will be a matching contribution from employers and the taxpayer. Using historic data, Lord Turner has calculated that such money if invested in equities over a working lifetime ought to make a sufficiently high return to deliver a reasonably sized pension in retirement, even for the low-paid contributing relatively small amounts.

Mr Ralfe's point is that equities can go down as well as up and that to invest in such risky assets may not be entirely appropriate for those hoping for a decent pension. The rates of return extrapolated by Lord Turner are by no means guaranteed. If you are unlucky on your timing, you can end up with much lower rates, or possibly in negative territory, even over very long timescales.

Of course he is right about this. Equities are risky, even if the risk falls markedly over time. He is also no doubt right in pointing out that an investment bank would charge you possibly as much as 20 per cent of the underlying value of the equity to insure against this risk. For anything more than 10 years, the charge would be commensurately higher. To insure against this risk would therefore remove the returns Lord Turner assumes in delivering a meaningful funded pension in retirement.

One solution postulated by Mr Ralfe is that the Government could provide this guarantee, though as he points out, if properly priced, the cost to the taxpayer would be humungous and almost certainly unacceptable. Yet although these are all perfectly valid intellectual points, it is not clear what Mr Ralfe is suggesting as an alternative. Is he saying that people shouldn't save at all, because of the risks of doing so? Surely not.

The bottom line is that the risk of equities not delivering in the way assumed are certainly real, but quite low over a 45-year working lifetime. The fluctuations in between will be extreme, but the mean is highly likely to be the 3.5 per cent real, or thereabouts, envisaged by Lord Turner. No other asset class delivers with such consistency over very long timeframes.

Yet even accepting there is some risk, this is surely compensated for by the fact that under the NPSS all contributions are matched by the employer. Most people would regard it as worth saving, even in riskier assets, if half the money is coming from someone else.

There are few certainties in this world, but ironically one of them is in pensions - the basic state payout, which will be significantly enhanced and indexed to earnings under the proposals outlined in the Queen's Speech, is guaranteed. Saving, on the other hand, which is the bit of the pension the NPSS is meant to cater for, can never be risk-free. Mr Ralfe is being wrongheaded in thinking it ought to be.