Memorandum by The Royal Academy of Engineering
(FLU 08)
INQUIRY INTO THE FUNDING OF LONDON UNDERGROUND
GENERAL COMMENTS
1. Fellows recognise the importance of London
Underground to the capital city. For example, 90 per cent of London
commuters use the Underground for part or all of their daily journeys,
and a similar percentage of tourists also use the system as the
principal means of transit in and around the capital. With over
110 miles of route in tunnels mainly beneath the streets of inner
London, the Underground is a large complex system, with long lived
structures and equipment . However, it is also recognised that
there is still some way to go in the provision of what has been
described as a "decently modern metro" partly reflecting,
it is believed, the inadequacy and variability of funding over
many years.
THE LEVEL
OF FUNDING
REQUIRED BY
LONDON UNDERGROUND
2. The backlog of investment referred to
above, whilst substantially reduced over the last few years, still
amounts to the £1 to £2 billion calculation produced
by London Underground Estimating the scale of this backlog is
complicated however by the difficulty in accessing and evaluating
the Underground's assets, compounded by their intensive use and
the disruption caused by taking them out of service. Consequently,
and in the interest of prudence, this figure may need to be higher
although the magnitude is not known.
3. In addition to the cash requirement to
eliminate the investment "backlog", Fellows believe
that an estimate of £400 million plus annually to replace
existing assets which have come to the end of their useful life
is realistic, and would provide a "steady state" situation.
However, this does not make any significant provision for the
enhancement of the system and the more rapid introduction of new
technology, for example, new motive systems which allow the cross
sectional area of carriage saloons to be significantly increased,
and the introduction of air conditioning. Such improvements are
believed to be measured in hundreds of millions of pounds.
4. There are other measures required to
improve the system in addition to those indicated above. These
include enlargements of some busier stations, better and more
direct links to improve interchanges, the lengthening of some
station platforms, and addressing some of the severe limitations
which exist in the older parts of the system including narrow
tunnels, short and narrow platforms, cramped ticket halls etc.
The funding of such activity is likely to be very substantial,
although impossible at this stage to quantify.
5. The continued growth in the use of the
Underground—some 900 million journeys this year compared
to 500 million in 1982—raises important questions about
the extension of the system's capacity if continuing congestion
is to be avoided. Figures available to Fellows indicate that over
the next 20 years the capital expenditure requirements will be
in the region of £16 to £17 billion. This includes the
recovery of the backlog (£1 to £2 billion), ongoing
renewals (£8.0 billion), modernisation and system enhancement
(£2 billion) and system extension (£5 billion).
THE DEVELOPMENT
OF PUBLIC-PRIVATE
PARTNERSHIPS (PPP)
6. Based on the limited information available,
Fellows consider that there are some key issues which bear on
the proposal's efficacy. It is assumed that the Underground will
remain in the public sector but that private groups (Infracos)
will have responsibility, under contract to the Underground, to
finance, maintain and modernise its infrastructure. It is also
assumed that the intention is to employ private capital to "catch
up" the investment backlog unconstrained by short-term public
expenditure restrictions, and to allow the Infracos the freedom
to achieve efficiency gains in carrying out this work.
7. The merits and de-merits of such a PPP
arrangement are complicated, but may best be expressed as the
following:
(1) Private sector efficiencies through innovation
and competence in the delivery of pre-determined investment packages
may be achieved, but will the cost savings more than outweigh
the extra cost of private sector financing?
(2) whilst PPP opens up the possibility of
considered long-term planning of the improvement and maintenance
of the existing system and more efficient procurement of major
capital activities, it may also introduce substantial constraints
on the future shape of the maintenance and improvement programme
and additional costs and complexities that could otherwise be
avoided;
(3) with PPP there exists the danger that
the relationship between the Infracos and London Underground could
become adversarial, and it is not clear to whom the Infracos will
report. If Transport for London sets the output specifications,
will London Underground be responsible for the delivery through
its own operation, and through Development Agreements entered
into with each PPP? There may be a serious role here for a regulator
to ensure fair play!
8. The principles underlying PPP are generally
regarded as acceptable by Fellows, but many doubts remain over
the practical operation of the scheme. It can be regarded as a
"hybrid" solution to a complex problem, which will require
constant vigilance by all parties to ensure the maintenance of
excellent communications in the interests of the efficiency of
the train operators, and a well defined and understood command
and control structure which assumes especial importance in times
of emergencies.
ALTERNATIVE PROPOSALS
TO MEET
THE UNDERGROUND'S
FINANCIAL NEEDS
9. It has been suggested that it may be
erroneous to divorce the problems of the Underground from the
issue of transport in London as a whole, and that a holistic approach
which looks at London's transport and land use as an entirety
is needed. For example, the Crossrail scheme, in conjunction with
the national railways, could relieve congestion on the Underground
but as a consequence could result in falling revenues.
10. Some of the disadvantages of the PPP
arrangement outlined in paragraphs seven and eight above, could
be overcome by an alternative method which allowed the Underground
to borrow through conventional loans or bonds with the significant
proviso that the costs of such borrowing are not significantly
higher than that enjoyed by the Government. Bonds could be issued
against the security of road charging revenues. In New York, the
Metropolitan Transport Authority issues bonds secured at attractive
rates against future revenue streams, to fund its capital programme
for the New York Subway. Additionally, thought might be given
to raising revenues for the Underground by levying charges on
businesses which benefit from the services provided by the Underground,
as would appear to be the case in Paris.
11. CONCLUSIONS
In general, there is realisation that the current
system and level of funding of the Underground is inadequate to
meet the full financing requirements of a network which not only
has to "catch up" on a funding backlog, but needs further
additional investment to enhance the system. The proposed PPP
is regarded as a way forward which may address these issues, but
there are reservations concerning the costs of private financing,
and on the need for clear lines of responsibility with the partners
concerned. The possibility of issuing bonds coupled with a system
of Government grants, presents an attractive alternative which
warrants serious consideration.
March 2000
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