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".
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.
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.
Details of the competition were published only in late March 2000,
with the requirement that proposals be submitted by 15 September
The contracts may finally be signed in April 2001.
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.
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.
The money will be used to provide improved services in the run-up
to the implementation of the PPP.
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.
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,
and the Government has also made the design, construction and
use of the comparator available for scrutiny by the National Audit
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.
10. In December 1999, a further PPP was initiated
for the management and development of London Underground's non-operational
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.
The money raised by the property PPP will be used for general
investment in the Underground network.
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.
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.
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.
Another would be to issue 'revenue bonds', secured, as their name
implies, against future revenue streams from the Underground.
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.
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
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
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
and Mrs Susan Kramer,
who subsequently became Mayor of London and a board member of
Transport for London
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.
Similarly Professor Lord Currie
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
By contrast, Glaister, Scanlon and Travers,
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.
14. That view was shared by Gaffney, Shaoul and Pollock.
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.
They, however, argue that the bond option, like the PPP, would
also be "simply unaffordable".
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
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.
The Conservative Party's mayoral candidate, Mr Steve Norris,
thought that complete privatisation of the Underground was a valuable
option worthy of further consideration.
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.
The Government, however, rejected privatisation at an early stage.
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.
The Labour Party's candidate for Mayor, Mr Frank Dobson MP, agreed,
and said also that his opposition to privatisation might be ideological.
3 Seventh Report of the Environment, Transport and Regional
Affairs Committee, London Underground, HC (1997-98) 715-I. Back
Transport and Regional Affairs Committee, London Underground,
Minutes of Evidence, Wednesday 15 December 1999, HC (1999-2000)
Environment, Transport and Regional Affairs Committee Press Notice
no. 17, Session 1999-2000. Back
(1997-98) 715-I, paras. 13-29. Back
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
(1997-98) 715-II, Q 259. Back
and Metronet were shortlisted for Infraco BCV, and TubeLines and
TubeRail for Infraco JNP. Back
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
HC Deb, 15 July 1999, col.300w. Back
million budget bonus for transport: public transport and pensioners
gain, DETR Press Notice 225,
23 March 2000. Back
Underground Public-Private Partnership: Methodology for Preparing
the Public Sector Comparator,
London Underground Ltd., February 2000. Back
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
Deb, 30 March 2000, col. 226w. Back
improvements to London Underground on the way,
LU Press Notice, 22 December 1999. Back
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
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
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
Getting Partnerships Going: PPPs in Transport, p. 27. Back
Partnerships Going: PPPs in Transport,
Partnerships Going: PPPs in Transport,
p. 27. Back
2, para. 1.5. Back
Evening Standard, 24 May 2000. Back
Underground: Bond Financing vs the PPP,
PricewaterhouseCoopers, December 1999. Back
Currie is a Professor of Economics at the London Business School. Back
David Currie, Funding the London Underground, London Business
School, March 2000, pp. 26 and 27. Back
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
Partnerships Going: PPPs in Transport,
pp. 18-21. Back
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
6, paras. 36 and 37. LT refutes this assumption (Q 152). Back
6, para. 63. Back
6, para. 77. Back
(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
Norris has now also joined the board of Transport for London
(London Evening Standard, 21 June 2000). Back
71 and 72. Back
(1997-98) 715-I, para. 37. Back
See QQ.81 ff. Back
See Q.88. Back