House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Fourteenth Report

FOURTEENTH REPORT

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

FUNDING OF LONDON UNDERGROUND

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]