GETTING THE TUBE BACK ON TRACK

The outcome of this month's London assembly elections will reverberate around the country because the critical issue of the future of the London Underground raises broad questions about funding of public services.

As the battle for London mayor warmed up last month up so did the tempers of the capital's weary tube commuters. Transport in general and the future of London Underground in particular were already among the main issues of the mayoral election race, but a spate of station closures and widespread escalator shutdowns ensured that the tube would be at the centre of the debate.

The outcome of the election and the future of the tube have important implications for those who live and work in London but also for the rest of the country as well. This is not just in respect of the economic significance of the capital - in terms of the City, tourism and other key industries - but also as part of the continuing debate about public services and how they are funded.

Control over transport policy is one of the main responsibilities being handed over to the new mayor, who will appoint the board of the new Transport for London (TfL) organisation which will run the system. However, a decisive change in how the tube is run will take place before the control is handed over to TfL and will have been planned and negotiated before the mayor takes office.

TfL is set to take over from London Transport from July this year but will only take responsibility for the tube after negotiations have been concluded over the government-proposed public-private partnership (PPP). Speaking at the end of last year about the improvements that PPP would bring, deputy prime minister John Prescott said: "There's no big mystery about the PPP. The Underground will continue to be publicly owned and publicly run - the big difference is that unlike under the previous administration it will be properly financed."

The government estimates that the tube requires £1.2 billion to cover a backlog of investment and an average £400 million a year just to ensure the infrastructure does not deteriorate further.

However, the three main rail unions - ASLEF, RMT and TSSA - have formed a campaign, "Listen to London", to oppose the PPP proposal. The elections for the Labour Party's candidate for mayor saw all three unions voting overwhelmingly in favour of Ken Livingstone, which ASLEF general secretary Mick Rix put down to a "massive vote of no confidence in the government's plan for a public-private partnership in London Underground."

Livingstone, now standing as an independent, backs the idea of bonds to raise money to finance tube investment, an idea also supported by Liberal Democrat mayoral candidate Susan Kramer. They argue that the bonds, which would be issued by TfL, would be a secure investment for individuals or institutions in the same way as government stock (or "gilts"). Bonds have been used successfully by the Metropolitan Transport Authority in New York to raise £23 billion dollars over the last 20 years to finance capital investment.

The rail unions also believe that bonds are an attractive alternative to PPP. They would allow TfL, as a public sector organisation, to borrow at an interest rate of around 4.5%. Private companies involved in the PPP, on the other hand, would face interest rates of 12% or more which would feed through into the annual charges they would make to TfL.

The Department of the Environment, Transport and the Regions (DETR) commissioned consultants PricewaterhouseCoopers to assess the overall costs of the PPP compared to the bond-financed alternative. They concluded that PPP could save the public sector up to £4.5 billion mainly through efficiencies from private sector "innovations and incentives".

But unions and transport campaigners are worried about the real cost of those efficiencies. As the Capital Transport Campaign points out, the figures include a projection of Underground operating costs falling by 21% in the first year of PPP while revenues will rise by 70%. Capital spokesperson Cynthia Hay said: "Achieving these targets will require squeezing running costs and squeezing even more passengers onto an overcrowded system. And these figures give good reason to fear that a massive fares increase will be squeezed out of Underground passengers to finance the public-private partnership."

The unions' "Listen to London" campaign commissioned an independent report on the funding and financing of the Underground. The report, Funding London Underground1, says that the debate about PPP versus bonds for capital investment has ignored how the money gets paid back. It argues that: "The main sources of funding for the tube are fares revenue and government grant. This will not be changed by the use of any financing mechanism."

The report explains that government grants have gradually been cut back and are due to be withdrawn completely by 2002-03. Substantial amounts were made available to cover the Jubilee line extension and other new developments but, during the 1990s, "grant for capital expenditure on existing lines, including maintenance, has declined from £533 million in 1990-91 to £143 million in 1998-99."

The tube has to rely increasingly on revenue from passengers to cover its costs. Income from passengers more than tripled between 1984-85 and 1998-99 as a result of increases in fares, an expansion in the network and greater use of the network. The number of passenger journeys rose by just over half while the average fare per passenger kilometre nearly doubled.

Funding London Underground says that "what is unique about the plans for the London Underground is that users will be required to meet all costs." In contrast, funding for public transport in Paris and New York is shared between users and regional and national taxation. In 1998 London Transport relied on passengers for 71% of its funding compared to 34% for the Paris transport system and 52% for the Metropolitan Transportation Authority in New York.

The Parisian transport system gets money from a levy on employers as well as some of the revenue from traffic and parking fines. And the New York transport authority benefits from charges on business and property owners and taxes on commercial rents.

These arrangements acknowledge that the beneficiaries of an efficient public transport system are not just those that use it. Businesses not only want to ensure that their employees get to work on time and without the anxiety and stress that are the symptoms of a rundown network, but they also want to see the roads unclogged to keep their distribution costs down.

More importantly, as Funding London Underground points out, public transport is an "economic, social, environmental and health issue that affects the lives not simply of those who use the services but of those who do not." The government's white paper on transport and its action plan on health inequalities also emphasises the important part an efficient, modern and accessible public transport system has to play in improving the quality of life.

Funding London Underground says a bond-financed alternative could deliver the necessary improvements to the tube but at the moment it is simply not an option because of the Treasury's rules over public sector borrowing. Without a change of policy the government would not authorise such borrowing. Even if it did, Funding London Underground argues that there would still be a funding gap which would have to be filled by a central government grant if fares are not to rise excessively.

The rail unions acknowledge that extra funding is needed and hope that a contribution towards this could come from the road congestion and non-residential car parking taxes that will be an option for the new mayor. Ultimately, though, they will be looking to "an agreed, consistent level of government grant" to back this up.

Last year's annual report from the DETR assumed that PPP would obviate the need for government subsidy for the tube. Recent press reports suggest that the Treasury may have to backtrack on this and allow the DETR extra money to cover any potential funding gap. However, the government is remaining tight-lipped on the issue as negotiations with the PPP bidders get under way.

Public-private partnership v bonds

The Department for Environment, Transport and the Regions (DETR) argues that the public-private partnership (PPP) "is not a privatisation. PPPs are a tried and tested way of delivering essential public sector investment."

Train and station services will be planned and operated by London Underground (LU) which will come under the remit of the new Transport for London (TfL) body.

Private companies will take responsibility for maintaining the tube's infrastructure. Tube lines have been bundled in three groups, and four consortia bid for two of the groups at the end of March. Bids for the third have an autumn deadline.

The DETR argues that the companies will have to meet strict performance criteria and "will be allowed to achieve profits in return for improved performance and improved services for customers."

The bids will be assessed against a public sector comparator - an estimate of what it would cost LU to carry out the repair and maintenance work itself. In fact the DETR is using two comparators, one based on how the tube is financed now and one based on raising money through public sector bonds. The details of the comparators will only be made public once negotiations with the bidders are complete.

The key argument in favour of the PPP is that the private sector will take on the financial risks and manage the maintenance and upgrading of the tube at a much lower cost than a publicly managed project. Supporters of the bond option claim that financing investment this way is cheaper because of the lower interest rates available to public sector bodies. Funding London Underground estimates that, on the basis of spending assumptions in the PricewaterhouseCoopers report (see text), raising finance through bonds would be £1 billion cheaper than PPP finance over the first 15 years of the project.

1 Funding London Underground - financial myths and economic realities, Declan Gaffney, Dr Jean Shaoul and Professor Allyson Pollock, February 2000, published by Listen to London, Unity House, 205 Euston Road, London NW1 2BL. Tel: 020 7387 4771, fax: 020 7387 4123.