UK - tube upgrade shortfall is on track to pass £3bn

[John Ashworth]

Mind the gap - tube upgrade shortfall is on track to pass £3bn

After the Metronet failure, the Underground runs into trouble on its other lines

* Dan Milmo, transport correspondent
* The Guardian,
* Wednesday September 10 2008

The London Underground network faces a new funding gap of up to £1.4bn as the cost of repairing the system spirals out of control. The lack of funds for vital upgrade work has led to calls for further government cash for the tube amid warnings that the creaking network will not be able to cope with rising passenger numbers.

An assessment of the tube's financial needs published yesterday outlined a shortfall on a third of the capital's underground lines: the Jubilee, Northern and Piccadilly lines. The latest figures create a severe headache for the government when they are added to the estimated £2bn funding gap on the rest of the network. Transport for London, the London mayor's transport authority, blamed the government and said ministers would have to step in.

London Underground's boss, Tim O'Toole, said the government must bridge the funding gap after it imposed the public-private partnership (PPP) programme that parcelled out the tube upgrade operation to private companies. The three lines facing the £1.4bn shortfall are maintained by Tube Lines, a business whose investors include BAA's largest shareholder, Spain's Ferrovial.

Funding crisis

O'Toole has consistently warned that any attempt to cut back on the £30bn upgrade programme would cause chaos because the network was struggling to cope with current levels of demand.

"Any funding required above TfL's budget should be met by continuing support by government, who imposed this PPP structure on the tube and Londoners," said O'Toole. He said the recent £39bn TfL settlement, which covers 2010 to 2017, could be renegotiated if a funding crisis emerged.

"The funding agreement provided for the government to revisit the settlement if there are exceptional pressures. No one could have known what the result would be for Tube Lines. It was impossible to have provided for it."

Under the PPP model, a franchise to upgrade and maintain the network is awarded to a contractor, which is paid monthly by TfL to carry out the work.

Ruth Kelly, transport secretary, and Gordon Brown, who imposed the PPP when he was chancellor, must decide whether to bail out the Conservative mayor of London, Boris Johnson. The mayor's transport adviser, Kulveer Ranger, ruled out imposing big fare increases last week and said the mayor would go directly to the Department for Transport for the cash.

O'Toole said scaling back vital work such as new signalling systems, track replacements and station refurbishments in order to conserve funds would create cost increases elsewhere, because maintenance work would have to be stepped up to deal with the ensuing delays and cancellations on an ageing network. "It's like pushing on a balloon," he said. The Underground would ultimately carry fewer people than the 3 million a day it manages currently, added O'Toole, because the system would not be able to cope. "The infrastructure is so old and unreliable that we are going to see a contraction in capacity," he said.

The scale of the funding gap emerged yesterday in an initial report by the PPP contract referee, Chris Bolt. He said carrying out vital upgrade work on the Jubilee, Northern and Piccadilly lines up to 2017 would cost between £5.1bn and £5.5bn. TfL projected it would cost £4.1bn and therefore faces a deficit of up to £1.4bn. Tube Lines said its cost estimate was £7.2bn - implying a funding shortfall of £2.1bn.

Bolt said Tube Lines was running out of time to get debt-funding in place and start the next phase of upgrades. "Unless we are broadly in the same place by the end of December, the chances of agreeing the numbers and getting all the financing in place are pretty small."

Terry Morgan, chief executive of Tube Lines, said nothing in Bolt's report "challenged or surprised" the firm and that he expected the financial shortfall to narrow. However, Morgan indicated that further government funding was needed: "It's not a debate about the PPP. It's a debate about continuing the investment in the Underground."

Signature policy

Metronet, the contractor charged with maintaining two-thirds of the tube, collapsed last year after building up a projected overspend of at least £2bn. In an embarrassing reversal of one of Brown's signature policies as chancellor, Metronet is back in public ownership after it was taken over by TfL. TfL has yet to reveal the funding needs for Metronet up to 2017 amid speculation that it also faces a budget deficit on top of the existing £2bn funding hole.

O'Toole said TfL had made good progress in tackling the £2bn funding gap, but did not deny that the deficit for the entire network could reach more than £3bn. "That figure embraces 10 years out," he said.

One of the staunchest critics of PPP warned that cutting back investment in new trains, signalling systems and tracks would be disastrous for the network. Stephen Glaister, a former TfL board member and professor of transport at Imperial College, said: "If the programme is not carried out, then we have got a serious problem with capacity on the tube in London."

Sources close to the funding issue said they did not expect the DfT or Treasury to "write a cheque for over £1bn". Instead, there is hope that the government will underwrite any related debt increase that is taken on by Tube Lines. However, Glaister warned that TfL would still need an injection of state cash because it would ultimately be responsible for paying back any extra Tube Lines debt. "It would essentially be rubber money," he said.

Fares are not enough

Tim O'Toole, the head of London Underground, ruled out hiking fares to cover a potential £1.4bn funding gap. "There is no way you can raise fares to cover this. It is impossible," said LU's managing director. The tube takes about £1.5bn a year in fares. Plugging a £1.4bn hole would therefore require a near doubling of prices. Last week the London mayor, Boris Johnson, imposed above-inflation fare increases, blaming the move on an £84m shortfall left by his predecessor, Ken Livingstone. Total fare revenues on Transport for London services, including buses and the DLR, were just under £3bn last year.