Select Committee on Environment, Transport and Regional Affairs Fourteenth Report


The Environment, Transport and Regional Affairs Committee has agreed to the following Report:—



1. The Transport Sub-committee first looked at the Government's proposals for modernising London Underground by means of a Public-Private Partnership (PPP) in spring 1998.[3] It stated at the time that it would return to this issue as the arrangements for the PPP developed. In keeping with this intention, we took evidence from London Transport (LT) about funding, as well as other aspects of London Underground's activities, in December 1999.[4] We subsequently decided to conduct a further inquiry in Spring 2000 as the plans for the PPP had become more advanced and the first bids had been submitted by the private sector.

2. The political importance of the funding of London Underground was illustrated by the fact that it was the leading issue, and the source of considerable debate, during the campaign which preceded the elections for the Mayor of London and the Greater London Assembly on 4 May 2000. Our inquiry coincided with the campaign, and we were able to take oral evidence from the four main Mayoral candidates, as well as from the Deputy Prime Minister, and from academics with experience of the matter. We also received more than twenty memoranda. We are most grateful to those who gave evidence to us or who otherwise assisted us during our inquiry.

3. The objective of our inquiry was to consider the level of funding required by London Underground, the development of PPPs for the Underground, and what alternative proposals there were to meet the Underground's financial needs.[5] We were not concerned with the different methods for funding the Underground from an ideological viewpoint, but rather to ensure that the best option is chosen and put in place as quickly as possible.

The proposed Public-Private Partnership for the Underground

4. The Government's proposals for tackling the Underground's investment backlog and for financing the upgrading of the existing system were discussed in detail in our earlier report.[6] The Government believes that the PPP is the best option to solve London Underground's long-term funding problems, arguing that the plans combine the benefits of private sector investment and expertise with those of public ownership and accountability. It is intended that over the first 15 years of the contracts, the partnership will provide infrastructure improvements valued at approximately £8 billion as well as £4-5 billion worth of maintenance work, funded principally by a combination of fare revenue and private sector capital. In the longer term, it is claimed, the partnership will provide a strong framework for high and stable funding of the Underground.[7]

5. The PPP will lead to the creation of a public sector operating company, known as 'New London Underground', which will run trains and stations, and determine service patterns. Responsibility for maintaining and improving the infrastructure, including the track, signals and stations, as well as the rolling stock, will transfer to three privately-owned infrastructure companies (or 'infracos'),[8] on fixed term contracts. As well as eliminating the estimated £1.2 billion backlog in investment, the infracos will be required to increase efficiency, improve the capacity of the system and the reliability of services, and provide other enhancements to the fabric of the Underground.[9] In return, they will receive a fee, which will vary according to their performance, judged according to the capability or capacity, of each line, the availability of services, and the ambience or condition, of trains and stations.[10] The intention is "to create a series of incentives whereby private partners can make their own investment decisions, but which will best focus improvements on the needs of passengers".[11] London Underground has already been restructured into four companies and, since September 1999, the system has been managed in the way that it would be under the new arrangements.[12]

6. Only when the PPP contracts have been signed will responsibility for the Underground be given to the Mayor of London and Transport for London, the functional body which has assumed LT's functions together with those of other transport-related agencies in the capital. Powers for setting fares on all former London Transport services, including those of the Underground, have been in the Mayor's hands from the start of his term.[13]

Developments since our last Report

7. During our earlier inquiry, the Government said that the competition to find the successful bidder for the PPP was likely to take most of 1999, "with the aim of having the contract awarded for the Government's timetable, which is in time for April 2000".[14] In fact there has been considerable delay: tenders for the deep tube lines were only submitted by 31 March 2000, and the short-listed bidders announced on 5 July.[15] Bidding for the sub-surface lines contract has been held up by the decision to allow exclusive discussions between LT and Railtrack, in conjunction with the shadow Strategic Rail Authority (sSRA), about the scope for integrating the Underground's sub-surface lines with the national rail network. By November 1999, however, it became apparent that the desired integration between the two networks could not be achieved within the timescale planned. As a result, it was agreed not to continue with exclusive talks, and it was decided that a competition of the type used for the deep tube lines contracts should be held instead.[16] Details of the competition were published only in late March 2000, with the requirement that proposals be submitted by 15 September 2000.[17] The contracts may finally be signed in April 2001.[18]

8. Because funding from the PPP will not be in place as soon as had been hoped, the Government decided in July 1999 to allocate LT an extra £517 million over two years.[19] Following this year's Budget this sum was increased, when the Government announced that a further £65 million would be given to London Underground in 2000-01.[20] The money will be used to provide improved services in the run-up to the implementation of the PPP.[21]

9. Another development since our last inquiry is the publication of a paper which sets out how the public sector comparator, which will be used to evaluate the private sector bids against public sector alternatives, has been developed.[22] LT's auditor, KPMG, has been asked to examine the public sector comparator to ensure that it represents a robust basis for establishing whether bids under the PPP offer best value for money,[23] and the Government has also made the design, construction and use of the comparator available for scrutiny by the National Audit Office (NAO).[24] However, although the full results of using the comparator will be published, the Government intends to do this only once the PPP contracts have been awarded. It believes to do so earlier would jeopardise its negotiating position and prevent best value for money being achieved.[25]

10. In December 1999, a further PPP was initiated for the management and development of London Underground's non-operational property.[26] It comprises the following elements: the outright sale of a package of about 30 surplus properties; a contract for the management of London Underground's remaining non-operational property ; and an exclusive 20 year agreement for the future development of the non-operational property portfolio.[27] The money raised by the property PPP will be used for general investment in the Underground network.[28]

Alternative proposals to the PPP

11. The Deputy Prime Minister told us that the real issue is not how the money needed for investment in the Underground is raised, but how wisely it is spent.[29] However, as he conceded, much of the argument about funding London Underground has centred on whether money should be borrowed through a PPP, through an alternative structure which allows the Underground to remain wholly within the public sector or through other means following full privatisation. The use of bonds has attracted most attention: indeed, the Government expects the infrastructure companies to issue their own bonds to raise finance for investment.[30] There are a number of ways in which bonds might be used. One option would be to issue Government-guaranteed bonds, as was done successfully in the case of the Channel Tunnel Rail Link.[31] Another would be to issue 'revenue bonds', secured, as their name implies, against future revenue streams from the Underground.[32]

12. The Government believes that Government-backed bonds would not be appropriate for London Underground, because they would not realise the benefits of transferring risk to the private sector as effectively as the PPP. Consequently, they would not represent best value and would also count against public spending.[33] Revenue bonds would be issued at rates slightly higher than those for public interest debt, but since they would be supported by dedicated revenues they would be excluded from the Governments's borrowing requirement.[34] Such bonds have been used to finance major infrastructure projects in the United States. New York's Metropolitan Transportation Authority, for instance, has issued more than $14 billion in revenue bonds over the last twenty years which are backed by tolls, fares or dedicated taxes.[35] The use of revenue bonds by a public sector London Underground was supported during the Mayoral campaign by two of the principal candidates, Mr Ken Livingstone MP[36] and Mrs Susan Kramer,[37] who subsequently became Mayor of London and a board member of Transport for London[38] respectively.

13. Our witnesses reflected the debate that there has been between the supporters of the PPP proposals, those who favour the issue of a revenue bond by London Underground within altering significantly its management structure, and those who argue for little or no change. The Government, citing illustrative figures from PricewaterhouseCoopers, argued that in total, the PPP would save £4.5 billion over 15 years compared to a bond.[39] Similarly Professor Lord Currie[40] estimated that the PPP would save £3.3 billion compared to investment being undertaken by London Underground under existing financial arrangements, and £2.3 billion compared to bond financing.[41] By contrast, Glaister, Scanlon and Travers,[42] who favour the use of a bond, told us that over the thirty-year life of the PPP, the Underground would require an annual grant of between £95 and £262 million, depending on the level of the efficiencies achieved, to break even, whereas funding via a bond would require a top-up of between £16 and £182 million per annum.[43]

14. That view was shared by Gaffney, Shaoul and Pollock.[44] They have said that within two years of the establishment of a PPP "an affordability gap" will develop of almost £175 million between available revenues and the level of the payment that will have to be set to the infrastructure companies to enable them to service their debt and pay a return to shareholders. They see no reason for that gap to diminish.[45] They, however, argue that the bond option, like the PPP, would also be "simply unaffordable".[46] They believe that retaining London Underground's integrated structure and providing the necessary funds is the most economically and socially efficient way of operating the Underground. In their opinion, neither the PPP nor bonds will be able to achieve this. Instead, it will be necessary to pay the full cost of the Underground's infrastructure through local or national taxation, or a combination of both.[47]

15. A further option for funding investment in the Underground would be to privatise the organisation as a single entity. An analysis produced by LT in September1997 found that the 'private sector integral option' for funding the Underground was the second best of the twelve or so options considered.[48] The Conservative Party's mayoral candidate, Mr Steve Norris,[49] thought that complete privatisation of the Underground was a valuable option worthy of further consideration.[50] London First told us that it would prefer the private sector to be involved in the operation of the system as well as the management of the infrastructure. This could be achieved through outright privatisation or by letting vertically integrated concessions for the operation and maintenance of entire lines.[51] The Government, however, rejected privatisation at an early stage.[52] The Deputy Prime Minister told us that the PPP was better than privatisation because, amongst other reasons, it gives "the proper level of public accountability". He did not think that the privatisation of the national rail network was an example that should be followed.[53] The Labour Party's candidate for Mayor, Mr Frank Dobson MP, agreed,[54] and said also that his opposition to privatisation might be ideological.[55]

3  Seventh Report of the Environment, Transport and Regional Affairs Committee, London Underground, HC (1997-98) 715-I. Back

4  Environment, Transport and Regional Affairs Committee, London Underground, Minutes of Evidence, Wednesday 15 December 1999, HC (1999-2000) 121-i. Back

5  See Environment, Transport and Regional Affairs Committee Press Notice no. 17, Session 1999-2000. Back

6  HC (1997-98) 715-I, paras. 13-29. Back

7  FLU 12. Back

8  The London Underground Public-Private Partnership, presentation given to the Institute for Public Policy Research on 13 January 2000, para. 6. Each infraco will have responsibility for a group of lines: Bakerloo, Central, Victoria and Waterloo & City lines (Infraco BCV); Jubilee, Northern and Piccadilly lines (Infraco JNP); and District, Circle, Metropolitan, East London and Hammersmith & City lines (Infraco SSL). Back

9  FLU 12. Back

10  FLU 12.  Back

11  FLU 12. Back

12  FLU 12. Back

13  FLU 12. Back

14  HC (1997-98) 715-II, Q 259. Back

15  Linc and Metronet were shortlisted for Infraco BCV, and TubeLines and TubeRail for Infraco JNP. Back

16  FLU 12. Back

17  Linc, Metronet and a third consortium (consisting of Amey, Bechtel/Halcrow and Jarvis) will be invited to tender for the sub-surface Infraco (London Underground Press Notice, 28 March 2000).  Back

18  Q 157. Back

19  See HC Deb, 15 July 1999, col.300wBack

20  £280 million budget bonus for transport: public transport and pensioners gain, DETR Press Notice 225, 23 March 2000. Back

21  FLU 12. Back

22  London Underground Public-Private Partnership: Methodology for Preparing the Public Sector Comparator, London Underground Ltd., February 2000. Back

23  FLU 12. KPMG concluded that the comparator's methodology is in accordance with the relevant Treasury guidance and is appropriate for the circumstances (Letter from KPMG to London Underground Ltd, dated 31 March 2000).  Back

24  HC Deb, 30 March 2000, col. 226wBack

25  FLU 12. Back

26  More improvements to London Underground on the way, LU Press Notice, 22 December 1999. Back

27  FLU 12. Five consortia and one single bidder pre-qualified for the London Underground Property Partnership. Tenders are due to be returned by July 2000 (London Underground Press Notice, 7 April 2000). Back

28  Q 203. LT says that the financial benefits that may be generated by this arrangement can only be assessed accurately once bids have been received (FLU 16). Back

29  Q 238. Back

30  FLU 12A. Back

31  The revised arrangements for funding the CTRL announced by the Government in June 1998 included the raising of £3.75 billion of private financing through Government-backed bonds. The risk of a call on the Government's guarantee was considered to be so low that it could be excluded from the budget deficit (Stephen Glaister, Rosemary Scanlon and Tony Travers, Getting Partnerships Going: PPPs in Transport, Institute for Public Policy Research, 2000, pp. 12-15). Back

32  See Getting Partnerships Going: PPPs in Transport, p. 27.  Back

33  FLU 12A. Back

34  Getting Partnerships Going: PPPs in Transport, p.25. Back

35  Getting Partnerships Going: PPPs in Transport, p. 27. Back

36  FLU 14. Back

37  FLU 2, para. 1.5. Back

38  London Evening Standard, 24 May 2000. Back

39  London Underground: Bond Financing vs the PPP, PricewaterhouseCoopers, December 1999. Back

40  Lord Currie is a Professor of Economics at the London Business School. Back

41  Professor David Currie, Funding the London Underground, London Business School, March 2000, pp. 26 and 27. Back

42  Stephen Glaister is Professor of Transport and Infrastructure at Imperial College London, Rosemary Scanlon was a Visiting Research Fellow at the London School of Economics between 1997 and 1999, and Tony Travers is Director of the Greater London Group at the London School of Economics. Professor Glaister has recently been appointed to the board of Transport for London (Greater London Authority News Release, 22 June 2000). Back

43  Getting Partnerships Going: PPPs in Transport, pp. 18-21. Back

44  Declan Gaffney is a Research Fellow in the Health Policy and Health Services Research Unit at the School of Public Policy, University College London, Dr Jean Shaoul is based at the School of Accounting and Finance, University of Manchester, and Professor Allyson Pollock is Head of the Health Services and Health Policy Research Unit at the School of Public Policy, University College London. Back

45  FLU 6, paras. 36 and 37. LT refutes this assumption (Q 152). Back

46  FLU 6, para. 63. Back

47  FLU 6, para. 77. Back

48  HC (1997-98) 715-I, para. 41. This option was more expensive, however, than LT's first choice, which was to retain the integrated structure of the Underground, but to provide it with higher and consistent funding provided by long-term committed Government grant, direct borrowing or revenue hypothecated from other transport sources. Back

49  Mr Norris has now also joined the board of Transport for London (London Evening Standard, 21 June 2000). Back

50  QQ 71 and 72. Back

51  FLU 7. Back

52  HC (1997-98) 715-I, para. 37. Back

53  Q 293. Back

54   See QQ.81 ff. Back

55   See Q.88. Back

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