It may be out of sight but for its two and a half million daily travellers, the London Underground tube network is rarely out of mind. For many years the world’s oldest and largest underground network has been humiliatingly starved of funds for infrastructure investment and repair. Its present state is untenable; the decrepit network has become the capital’s shame. The debate between candidates for election for the mayor of London polarised the number of ways in which the tube system could be financially restructured. At the heart of the problem lies funding. Everyone wants an efficient tube service – but nobody wants to pay. Both the government and candidates for London mayor recognise funding levels for the tube have reached a crisis point. In the last financial year, London Underground invested only £415m in upgrading and renewing basic infrastructure. This sum is trivial considering the enormous investment needed. The government’s preferred method of funding tube regeneration is to involve greater levels of private-sector funding and management. Injection of private sector funding is regarded as vital and non-negotiable. In principle, the government believes the public sector should operate tube services but the private sector should maintain and improve the infrastructure. John Prescott, deputy prime minister with responsibility for transport, is in favour of the much-touted public/private partnership scheme. He points to the success of PPP involvement in the Docklands Light Railway extension to Lewisham and he believes a similar funding partnership could transform the tube’s financial fortunes. Although CGL Rail, the private consortium that constructed the Docklands extension, used bond finance of over £160m, the government is particularly impressed by the competence of the private-sector management. Even with the use of PPP the government accepts the cost of reforming the tube will be breathtakingly high. The extent of the tube’s neglect is so extensive it is difficult to quantify the exact amount needed to repair and improve the network. Under the government’s plans, the private sector would inject at least £7bn in new investment over the next 15 years. A further sum of at least £5bn is needed to fund maintenance and backlog repairs. Over this 15-year period the private sector would be responsible for restoring, maintaining and improving the infrastructure. In return, tube operators would pay a return to private sector investors for their investment. At the end of a predetermined period, (perhaps up to 30 years), the infrastructure would revert to the state. The government has been particularly impressed by the success of the Private Finance Initiative already adopted by London Transport. PFI has injected over £429m into revamping tube trains and the infrastructure on the Northern line. The Department of Transport believes the cost savings of transferring the financial risks of maintaining the track and tunnels to the private sector could be considerable. However, it is becoming increasingly evident that, in practice, some of the government’s fragmented restructuring proposals resemble some of the worst failings of the former British Rail privatisation. Organisational similarities can already be detected. Under the British Rail privatisation the railway infrastructure was split from train operations. The stations, track and signals were allocated to Railtrack and train services were franchised to the highest bidding train operators. The result was a confused, costly and wasteful use of resources. In the first year of privatisation the state subsidy to the train operators was nearly double the government’s previous support to the former British Rail. In a similar fashion, the government’s PPP plans also envisage separating the infrastructure from tube operations. There has certainly been controversy over Railtrack’s involvement. Initially, it was a ‘preferred bidder’ to take over the infrastructure of the ‘sub-surface lines’: the Circle, District and Metropolitan lines. Railtrack also wanted to improve tracks and platforms to allow mainline trains to operate over the northern portion of the Circle line to provide easier access to central London. But Railtrack’s poor public image, especially in the wake of the Paddington train disaster, did little to help its case. The government removed the preferred bidder status and Railtrack has announced it has scrapped plans to bid for PPP. Any method of future funding must recognise that London Underground is no small business. With over 16,000 employees, its net assets of over £7bn generate annual revenues in excess of £1bn. In its latest accounts, London Underground reports a gross operating margin before depreciation and renewals of £288m. The tube does not receive revenue subsidy from central government-only capital grants. Currently, capital grants are vital for the tube’s investment. The company receives limited non-repayable governmental grants in respect of capital expenditure and renewals of infrastructure. In an attempt to control public expenditure the Treasury has indicated that around only £215m of aid will be provided to the tube service this year. This is far below what is required to maintain the existing unsatisfactory level of service. But it is not all bad news. London Underground does have some prestigious projects. The recently completed Jubilee line extension linking the prosperous Canary Wharf business complex with central London has consumed over £3.5bn of investment. Many critics claim this massive investment in a flagship line has disguised widespread neglect of other parts of the network. There are alternative methods to the PPP scheme that can provide tube funding. Ken Livingstone, still in the running as a mayoral candidate, believes bond funding to be the solution. Bond finance has many clear attractions. The bonds could be secured on the tube’s future revenue stream. Future income from fares is relatively predictable and non-volatile. Bonds could also be made more attractive by being underwritten by government guarantee. These secure bonds could carry a low 6% to 7% coupon rate and still find attractive levels of take-up. In effect, a government-backed bond would provide a relatively cheap and safe means of raising finance. Supporters of bond funding point to the success of the government’s previous actions. Over £2.5bn of bonds have been successfully underwritten by the government for the London and Continental railway, which is constructing the Channel Tunnel rail link. The risk of the government being required to pay out on these bond indemnities is regarded as remote. Accordingly, the government’s guarantee is not included in the politically sensitive Public Sector Borrowing Requirement. In addition to the Channel Tunnel link, supporters of bond finance also point to the New York City subway. By issuing $6bn of bonds, largely backed by fares revenue, the network was radically improved. Instead of relying on impoverished support from state and local authorities, the New York Transportation Authority was given access to capital markets. Although further investment is still required, the bond finance is credited with saving significant parts of the New York network from total collapse. But support for bond finance is not forthcoming from government circles. Tony Blair and John Prescott do not believe bonds alone will improve tube management. Their opposition to bonds goes to the heart of both the tube’s ownership and leadership. Massive cost over-runs of over £1.5bn on the Jubilee Line extension and poor control of other projects has reflected adversely on the tube’s management. The government does not want the current management to have unfettered autonomy in future fundraising. Greater involvement is being sought from the private sector in the form of a public/private partnership between up to three key players to invest in the infrastructure. To some extent the choice between PPP and bond finance is misleading. The government’s PPP scheme will almost certainly involve the use of some bond finance. The difference between Livingstone’s and the government’s PPP schemes involves the organisational structure of the tube, namely who bears the risks and the extent of public accountability. Apart from separating infrastructure from operations, there are other, quite unattractive, options for the tube. It is possible to privatise the network as a complete entity – selling both track and trains. Alternatively, the system could be split up into major sections or lines with each operator owning track and trains. This ‘multi-split’ method could encourage competition and benchmarking between services. Others believe the network could be leased to the highest bidding private operators over a 25 to 30 year time span. An extensive time period would allow the private sector to obtain a reasonable return rate. It is even feasible for the network to be floated to key interest groups, such as the public, commuters, London residents and businesses. Additional funding could be raised from a partnership of levies on City businesses and from central and local Government funding. Taxes on London businesses; road tolls and car parking charging provision could generate funds. Bonds could then be secured on these additional sources of revenue. Overall, there is little evidence that PPP schemes will confer real financial advantages over bond funding. After all, both schemes will almost certainly involve the use of bonds. The choice is really one of tube management. Should the public or private-sector management control the rebuilding of the tube network? However the tube is restructured it is vital the lessons of the disastrous British Rail privatisation are borne in mind. London cannot afford another transport pantomime. – John Stittle is senior lecturer in accountancy and finance at Anglia Polytechnic University THE TUBE’S PROPERTY PORTFOLIO Trains and tracks are not the only issue when it comes to revamping London Underground. In addition to the bids for tube trains and track management, London Underground’s property portfolio makes it an attractive proposition for private partnerships and third-party management arrangements. In December, London Underground announced it would invite tenders for the tube’s stations and ticket halls – referred to as the non-operational property portfolio. Funds raised would be ploughed into developing better station facilities. The Underground will invite bids from the private property market for a potential 20-year partnership. A spokesman said: ‘It makes good business sense to deal with only one long-term partner. The successful bidder will be able to invest money and bear greater risks for greater returns than can be done by London Underground.’ The deal will be consistent with the plans for the tube train private partnerships. Some 30 central London sites not needed for operational use and currently earning around £6m in rents per annum will be offered in the package. ?:
The second largest improvement in ‘significant’ levels of financial distress since the EU Referendum was in professional services, found research from Begbies Traynor
Just one half of UK practices have implemented a pricing structure around auto enrolment implementation and advice - with many suffering increased costs
Deloitte's north-west Europe foray; BDO, Smith & Williamson investment paths; Shelley Stock Hutter; and Wilkins Kennedy discussed by editor Kevin Reed on our Friday Afternoon Live broadcast
Accountants should alter their perspective on auto-enrolment to maximise business opportunities, according to Eric Clapton.