Select Committee on Transport, Local Government and the Regions Second Report


IV. FUNDING

Current Funding

47. The three principal sources of funding for an Underground network are public subsidy, income from the fare box and private sector finance.[110] London Underground has been funded by fare box revenue to a much higher degree than comparable Underground systems in cities such as New York and Paris.[111] In 1998, London Underground's fare box revenue was 129 per cent of its operating costs while that figure was 77 per cent in New York and 63 per cent in Paris.[112] London Underground Limited told us that "In other countries there appears to be a different sort of commitment to funding public infrastructure."[113]

Future funding

48. When the PPP was initially proposed, it was the objective of the Government to "avoid paying further grants if possible",[114] although that was never a pre-requisite to the PPP proceeding.[115] At the time of our predecessor Committee's inquiry, the chief executive of London Underground estimated that the requirement for continued Government subsidy would be "modest".[116] In its response to the Report of that inquiry, the Government stated that it had "never ruled out the possibility of continuing subsidy to London Underground".[117] As the details of the bids have become clearer the subsidy required has increased and is now substantial. In October 2001, the Government estimated that in the first seven and a half years of the PPP, the cost of the PPP would be paid for with:

  • 45 per cent from Government subsidy;
  • 30 per cent from income from fares; and
  • 25 per cent from private finance.[118]

Government Subsidy

49. While the Government's initial preference was to remove the need for continued subsidy to the Underground, it has now acknowledged that it has "an important role to play in committing long-term funding to Transport for London through the Greater London Authority Transport Grant to support London Underground's financial requirements resulting from the modernisation plans."[119] The exact level of subsidy cannot be confirmed until the final PPP bids were submitted and approved.[120] Transport for London estimated that it would require a fixed annual Government grant of £623 million per year for the next eight years if it was to implement its proposed scheme to upgrade the Underground using bond financing. It believed that the PPP might require more funding, with an annual subsidy of between £600 million and £1 billion.[121]

Fare box surplus

50. The difference between London Underground Limited revenue (primarily from fares, property and advertising) and operating costs (for running and managing the trains) is known as the 'fare box surplus'. Table 2 shows the Government's expectation for revenues, operating costs and fare box surplus for the first 15 years of the PPP as estimated in December 1999. The fare box surplus was projected to provide £10 billion for investment over the first fifteen years of the PPP rising from £490 million in the first year to £800 million in year 15.[122]

Table 2

LONDON UNDERGROUND LIMITED ESTIMATED OPERATING CASHFLOWS

(1 APRIL 1999 PRICES, £MILLION)[123]

Year

1

2

3

4

5

6

7

8

LUL Revenues

1170

1200

1230

1250

1280

1290

1310

1330

LUL Operating Cost

680

660

650

630

630

640

650

650

Fare Box Surplus

490

540

580

620

650

650

660

680


Year

9

10

11

12

13

14

15

Total

LUL Revenues

1340

1360

1380

1400

1420

1440

1460

19860

LUL Operating Cost

650

650

650

650

650

660

660

660

Fare Box Surplus

690

690

710

730

750

760

780

800

51. The Government also estimated that a further £2.5 billion would need to be invested in the Underground over the 15 year period under the PPP and that it would cost around £4.5 billion to provide that through the private sector under the PPP.[124] Fare box surplus was therefore forecast to provide almost 70 per cent of funding over the first 15 years of the PPP, more than double the 30 per cent subsequently estimated by the Government in October 2001.[125]

52. Table 3 shows that London Underground Limited revenues have increased to £1,188 million for the year 2000-01, broadly in line with expectations.[126] However, operating costs have risen from £681 million in 1997-98 to £1,115 million in 2000-01.





Table 3

LONDON UNDERGROUND LIMITED OPERATING CASHFLOWS (£MILLION)[127]

Year

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

Income

670

754

804

839

946

1027

1116

1188

Operating expenditure

602

626

612

629

681

869

962

1115

Fare box surplus

68

128

192

210

265

159

154

73

53. The fare box surplus for 2000-01 was £73 million, down from a peak of £265 million in 1997-98. That is forecast to fall again to a loss of £122 million for the year 2001-02.[128] The Secretary of State told us that the increase in operating costs was due to a number of factors including a change to the way in which investment is defined in the accounts, which was responsible for a £150 million drop in surplus. The other main factors are "an increase in payments under the existing PFI contracts; increased spending on maintenance and renewal in an effort to make the assets more reliable; the cost of extra drivers and station staff, recruited to run extra services and improve reliability".[129] The fare box surplus for 2001-02 will be over £600 million less than that forecast in December 1999.

54. London Underground Limited's advisor, Pricewaterhouse Coopers, informed the Sub-Committee that under the PPP, "if there is a difference between what London Underground Limited contracts to pay for the performance that is delivered and the amount of operating cash flow it has then that would have to come from Government support".[130] The Secretary of State told us that the finance that the Government is committing should cover both the subsidy described in the section above and the shortfall between the current operating surplus and the 30 per cent it expects the fare box to deliver without needing to increase fares by a rate above inflation.[131] Such a commitment would require the Government to cover around 75 per cent of the costs of the PPP in the first year. The Secretary of State did not make it clear over what period the Government was prepared to cover the shortfall between the actual fare box surplus and the 30 per cent it has estimated the fare box will provide over the first seven and a half years.

55. The Mayor of London will ultimately be responsible for meeting the cost of the PPP and will rely heavily on both the fixed Government subsidy and the extra funds outlined above to meet the fare box shortfall. Should the Government not provide that funding, the Mayor would have to meet that through other budgets. Transport for London believed that that could have a significant detrimental impact on other areas of its transport provision.[132]


110   London Underground currently has PFI deals for Northern line trains, ticketing, power and communications. Back

111   International fares comparisons: London-Paris-New York, Transport for London, 2000. Back

112   Ibid Back

113   Q29. Back

114   HC (SC A) 23 February 1999, col 755. Back

115   Funding of London Underground, Q411. Back

116   Funding of London UndergroundBack

117   IbidBack

118   Your Tube: Publicly Run, Privately Built Investing for Improvement DTLR (2001). Back

119   LU12. Back

120   Q572. Back

121   Q237. Back

122   Funding of London Underground. The figures are based on an assumption of no above inflation increases in fares, increased passenger journeys and near constant operating costs. Back

123   Funding of London Underground. Table 3, p95. Back

124   Ibid.  Back

125   Your Tube: Publicly Run, Privately Built Investing for Improvement DTLR (2001). Back

126   Transport Statistics Great Britain 2000-01, DTLR (2001). Back

127   Ibid, Table 5.17. Back

128   HC Deb, 15 November 2001, col 831W. Back

129   Q569. Back

130   Q144. Back

131   Q570. Back

132   Report to Ken Livingstone on the London Underground PPP, Transport for London, April 2001. Back


 
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