AN EXTRAORDINARY conflict of evidence emerged when a committee of MPs questioned Managing Director of London Underground Denis Tunnicliffe and ex-Chairman of London Transport Peter Ford - sacked by Deputy Prime Minister John Prescott on April 17 (p376).
Tunnicliffe was asked on April 29 for LU’s reaction to the ’public-private partnership’ announced by Prescott on March 20 (RG 5.98 p289). This sees control of most assets handed over to one, two or three concessionaires, possibly for 25 years. In return for investing £400m a year on asset renewal and clearing a £1·2bn backlog, the concessionaire(s) receive performance related payments from LU which continues to operate trains and stations.
Tunnicliffe assured the MPs ’we are pleased with that’ and ’pleased that we were involved in the practicalities of the scheme.’ But a week later, Ford was highly critical of the government’s plan. ’It’s going to be very difficult to make it work, and I think there is a very big element of uncertainty about the whole thing.’
Ford explained that LT had been asked to submit a paper on ways in which LU investment could be privately financed. He said the whole LT board (on which Tunnicliffe sits) had endorsed The Future of London Underground submitted in September 1997. This ranked a dozen options according to the financial outcome over 25 years.
The best option left LU as an integrated public sector company allowed to issue bonds backed by its revenue stream - and implicitly by government. Second best was privatising LU; as it would then be more expensive to borrow money, the outcome was £350m worse. But Ford said the option actually selected was at the bottom of the list and would cost £1bn more than the best option.
Moreover, the model used to rank the options assumed that the private sector would borrow money at 10%, whereas 15% is probably more realistic. ’It won’t be until one actually gets to tendering that you discover what the price is’, Ford warned. As to risk, ’we have seen with the Channel Tunnel Rail Link you can do a deal and think you’ve got the risk transferred to the private sector, but it actually comes back.’
If Tunnicliffe shared these concerns, he was not admitting it. ’The difference between any two options was less than any option done well or badly’, he insisted. Big efficiency savings would come from the continuity of investment assured by private finance.
Whereas Tunnicliffe claimed that ’all the options the government considered were put to us’, Ford told the committee that ’we didn’t have any discussions at any time’. In spite of writing ’a very strong letter’ to the Deputy Prime Minister on January 6, ’I never had a single discussion, and neither did any of my board colleagues.’ When he suggested reviewing the options again after bids had been received ’I was told that wasn’t going to happen.’ o
LU to be self-sustaining
The year to March 31 1998 was the busiest ever on London Underground with 825 million passenger journeys. Gross margin, cash generated internally out of revenue to fund renewal investment, reached £260m; five years ago it was negative.
Steady state renewal investment is put at £400m a year, but there is a backlog of £1·2bn. The Future of London Underground proposed that the backlog be cleared by the concessionaire(s) investing £550m a year for seven years, stabilising at £400m (at 1998 prices) thereafter.
LU becomes self-sustaining - requiring no subsidy except for new lines - when the gross margin reaches £400m. Although the margin will be eroded by payments to the asset concessionaires, LU says ’we expect to see a significant increase in the efficiency of capital spending because the new structure will enable stable, long-term investment plans to be established. Provided these efficiencies are delivered, we do not believe real fare increases will be needed to fund the new arrangements.’
