PFI firms in a dark tunnel as Tube deal gets the green light

Last week, the European Commission waved through the largest public-private partnership (PPP) deal in history. The £14bn part-privatisation of London's Tube has now cleared all regulatory hurdles and is almost at the finishing line. Soon the private sector will look after the trains, track, stations and signalling, while the state will remain in charge of overall strategy, staff, timetables and fares.

Meanwhile, at the Labour Party conference, trade unions stepped up their campaign to thwart the involvement of the private sector in public services. Delegates voted by around two to one for an independent review of the private finance initiative (PFI), the sister of PPP.

Tony Blair didn't take a blind bit of notice. But he will have to listen to the complaints of the companies involved because PFI is not the goldmine it once was. "Most companies say that financial returns have fallen compared to the early schemes, although they are still very reasonable," says Michael Parkinson, an analyst at Brewin Dolphin Securities.

Some companies involved in PFI are talking of pulling out, and their City valuations have dropped significantly.

Although it is one of the players in the Tube deal, Amey is the most public of the detractors. It still wants to manage contracts like the maintenance of Edinburgh's schools and two mental health hospitals in Birmingham, but it has put a "for sale" sign over the PFI deals that it owns. Its problem is that it has to put too much money upfront into some of the projects, such as building or refurbishing schools and hospitals, and the rewards are only paid over time.

The long-term financial benefits can be significant – when Amey said it could get a return of 20 per cent on its London Underground investment, the revelation prompted an outcry – but the company can't afford to wait that long. In May it had to restate its financial results due to a change in accounting rules. The costs of bidding for PFI deals can be onerous, and a new standard meant they had to be accounted for immediately. The change meant the difference between an £18m loss and a profit of £53m. Amey's finance director, David Miller, departed a few months afterwards.

Amey, alongside other PFI companies like Mowlem, publicly complained about the length and costs of bidding, and said the Government had to change the process to keep companies interested. Deputy Prime Minister John Prescott has ordered an inquiry into the issue.

Jarvis, a fellow member of the Tubelines consortium, has also run into trouble. Its chief executive, Paris Moayedi, came under fire for the size of his pay cheque when his salary rose by 66 per cent to a total package of £595,000. The increase was announced not long after the rail crash at Potters Bar – a section of track maintained by Jarvis through a contract with Railtrack. The company is still being investigated for its role.

The other member of Tubelines, Bechtel, has not had the PFI involvement in the UK of its partners. In fact it has a good reputation as a troubleshooter. But it has a thorn in its side in the "Big Dig" road-building project in Boston, America. This is a year behind schedule and its £10bn cost is well over the original 1985 estimate of £1.5bn, although that was for a smaller specification.

For the larger Metronet consortium, which oversees the rest of the Tube network, there have also been fires to fight. One of its members, Balfour Beatty, looked after the maintenance of rail at the site of the Hatfield rail crash, and its role is still being investigated. Trade unions have been particularly angry over its involvement in hospital PFI projects. The University Hospital of North Durham, where it had a PFI deal for building and maintenance, has been criticised, and Balfour Beatty's work is said to have meant fewer beds. It has also been reported that staff have had to endure over-heated kitchens and even floods of sewage in the pathology department. The company says the number of beds is a decision for the NHS Trust, while the other problems are being rectified.

WS Atkins, another Metronet member, has also had a rough ride recently. Last week its shares dived when it admitted that internal errors in a new billing system meant it wasn't getting paid on time, and that its debt had climbed to unsustainable levels. If it doesn't sort out the problem by March, it could have to renegotiate its banking facilities. Its chief executive, Robin Southwell, had to make a rapid exit.

Bombardier Transportation, a Canadian company that makes trains, is a consortium member with less experience of PFI in the UK. But it has had its own issues, particularly with its new high-speed trains on a line run by US transport company Amtrak. Passengers on the Boston-New-York-Washington route have endured delays and cancellations at a level the British could empathise with. Bombardier says the problems are due to the specifications that Amtrak insisted on, against its better judgement.

However, this is an issue in the realm of PFI. The Government has to be very careful what it writes in the fine print so that companies cannot gain by providing a poorer service.

"It's a myth that companies can just cut back service to give a level of profit; it is that service that they are being paid to do," says Jonathan Scott, a director at KP Corporate Finance. "It is possible that in the early days, the private sector thought this was all very easy, 30 years of profits. The fact is that it isn't, and they have to work hard to make money."