UK: London Underground's latest line.

UK: London Underground's latest line. - With its public funding slashed, London's Tube is on the breadline. Could private sector ownership save it?

by Steve Bevan.
Last Updated: 31 Aug 2010

With its public funding slashed, London's Tube is on the breadline. Could private sector ownership save it?

'I suppose you're going to blame me for this,' grumbles Dennis Tunnicliffe when I eventually stumble into his office half an hour late for our meeting. London Underground's managing director has the air of a man used to criticism. He studies his pager for details of the latest system breakdowns as I give a rundown of the delays that have stretched a 20-minute journey to 50.

It's a familiar tale to regular Tube users and likely to become even more commonplace. Already delays, cancellations and station closures are daily occurrences rather than unusual events. For regular passengers, overcrowding is a fact of life. Without an urgent injection of funds, LU's managers warn, the system will tip into terminal decline. Even now its 398 kilometres of track are subject to some 20 speed restrictions.

According to one senior executive, that could double by 2000, putting an extra five-to-10 minutes on the average journey.

That's bad news for business: the Underground currently carries about half the million or so people entering central London during morning peak time, and still the largest share of trips on the Underground are work-related. For an organisation in the rapid transit business, extra travelling time is obviously of crucial concern. As Tunnicliffe says: 'People want to buy time, just as you did tonight. Your journey felt longer than it should have done at two levels - you measured it on your watch but more importantly you actually felt it because waiting feels longer than normal activity. We seek to measure all those things. At the moment we have a particular level of excess time and we're more or less trying to halve that by a series of initiatives.'

It's ambitious stuff for an organisation that is currently struggling just to maintain a decent service in the face of cuts to its budget and the mounting evidence of 35 years of neglect. The sheer size and age of the Tube network, most of which was built before the first world war making it the oldest underground system in the world if not the largest (New York has that honour), mean it requires substantial amounts of money just to keep pace with wear and tear. Around £350 million a year is the current estimate just for network maintenance, rising to £400 million by 2000 when maintenance of the Jubilee Line Extension (JLE) will be added to the remit.

Such extensive need for maintenance works is largely the result of decades of underfunding: since the '60s, government funding has consistently fallen short of what was needed, leading to a backlog of capital investment for renewal of track, signalling and station equipment, repair of tunnels and earthworks and replacement of rolling stock. The current cost of dealing with that capital investment backlog is put by LU at around £1.2 billion and is growing by £100 million a year.

There was a brief respite from the funding drought in the late '80s when the King's Cross fire pushed the state of the Underground to the top of the political agenda. And again in the early '90s when the combination of a damming MMC report and the '92 election unlocked the Treasury coffers some more. Over the next five years, some £3 billion was invested in the network.

Then, just as Tube managers were beginning to relax, in November last year, chancellor Ken Clarke dropped his bombshell. The three-year projected budget of £1.5 billion announced in 1995 was slashed by 29%, or £430 million, for reasons never fully explained. In addition the chancellor made it clear that London Transport (LU's parent company) would have to bear the cost of any overrun on the JLE, a massive engineering project that has been dogged by technical problems and is now running six months behind schedule and some £700 million over budget at £2.6 billion.

Clarke's move only served to underline the extent to which LT's funding is subject to political whim, making forward planning virtually impossible.

One project affected was the £1 billion upgrade of the Northern Line including a new fleet supplied by GEC Alsthom in a £400 million Private Finance Initiative (PFI) deal. While the trains are now ready, the rest of the work to replace the signalling system, upgrade the power supply, track and tunnels has had to be shelved for at least three years.

In the absence of the cash it needs or any firm commitment from the Government on future levels of funding, LU has instead been forced to adopt a patch and mend approach. In the case of the Northern Line, that amounts to a £120-million patch-up job just to bring it up to a minimum acceptable standard. Similarly on the Metropolitan Line, newly refurbished stock is being, in LT chairman Peter Ford's words, 'shaken to pieces'.

In total, LU has been forced to cut £700 million from its investment programme over the next three years to around £1 billion, compared with £5.5 billion it says it needs over the next 10 years to keep up with maintenance and clear the capital investment backlog. Such is the extent of the problem that even if the Government suddenly coughed up all the money being requested, LU couldn't spend it straightaway because this would cause too much disruption.

There are also doubts about whether LU would be able to find the people to carry out the work. 'It's a very real concern to us at the moment,' says director of development David Bailey. 'The supplier base we created over the last five to six years was really driven by our spending £500 million to £600 million a year. Now we're down to £340 million a year, that supplier base is going to look for work elsewhere.'

Meanwhile the spending cuts are forcing LU to find ways of reducing its own headcount. According to director of engineering David Hornby, up to 800 engineering jobs may be transferred to a private contractor - where they can be 'accessed' when more money becomes available. In essence this is merely an acceleration of a process under way at LU for some time with its market testing programme called Make or Buy. In the four years since Make or Buy began, LU has outsourced some £69 million of work including the contracting out of IT technical services to ICL and the maintenance of the new Northern Line fleet to GEC Alsthom.

So far a total of 644 jobs has been transferred to the private sector.

A further £113 million in projects representing 506 jobs is currently in the balance. In addition there are plans to transfer some 700 staff to the private sector as part of new projects being developed under the PFI to upgrade power supply, ticketing, radio communications and escalators.

As a solution to the problem of how to reduce overheads on existing work, the Make or Buy approach has merit but there are also substantial drawbacks.

Not only are there worries about maintaining core skills within the organisation, but the scale of the savings is also generally modest - LU calculates it has saved £37.5 million as a result of Make or Buy since its inception.

PFI too has severe limitations. The deals are costly and time-consuming to put together and they are difficult to plan so that the work takes place in the order that LU would like.

LT's response to the budget cuts has been a vociferous campaign warning of the dire consequences if the money is not forthcoming. By all accounts the campaign has done little to endear Ford to the civil service, who moan that he has 'gone native' and complain that LT can never make up its mind what it wants. (LU produced three different figures for the amount of money being spent on the networks during the writing of this article.)

There is indeed a sense of corporate schizophrenia about LU which is embodied in the personalities of its top management. Ford - or Piranha Pete as some LU staff have dubbed him - is the private-sector hatchet man, a former chairman of P&O European Ferries.Yet he says he has always used public transport and believes in it - he travels in to work on the District Line and spends at least half a day a week travelling around the system talking to staff. A small, thin man with a rather patrician manner, Ford's passion for public transport is obvious when at the end of our interview he grabs the draft of a brochure on the JLE and proudly shows off pictures of the construction work as if they were snaps of his four children.

Tunnicliffe is his polar opposite: a lifelong civil servant, former Labour candidate and (in his own words) an 'old leftie'. To some he is a loose cannon: plain-speaking and an uncompromising defender of public ownership.

A sign of his lack of interest in gesture politics is that he travels to work by car. Yet his commitment to public service belies a tough approach which, since 1991, has cut the workforce by one quarter (to 16,000) and transformed LU into a more customer-focused organisation.

Reports that the two are at odds both in style and on policy are difficult to verify: so wary was Tunnicliffe of appearing to contradict his chairman that he refused to be interviewed when first approached for this piece.

'Yes, we have some interesting times,' says Ford, but he insists, 'vigorous discussion of the issues can be healthy'. Where the two agree is on the urgent need for more funding - and perhaps something else, call it public spirit.

That spirit is, however, beginning to look increasingly endangered as Labour has made it clear that an immediate injection of public funds is out of the question. Tunnicliffe doesn't hide his disappointment. 'We had indicated to this Government the depth of our financial problems and so far they have not been able to help us directly. Am I surprised? Yes, I am surprised - I'm disappointed.' Such is the scale of the problem that even Labour is now prepared to think the unthinkable and is considering privatisation. For Tunnicliffe, it is anathema. Like a drowning man clinging to a life raft, he sticks rigidly to the formula outlined in Labour's manifesto: 'anything short of wholesale privatisation'.

In a bid to influence a debate from which it appears in the past to have been excluded, LU has launched its own review of the various options to solve the funding crisis and to find further means of improving its own efficiency. This will take in everything from the staffing ratios on the stations to closer scrutiny of absenteeism.

In some ways, the development is a natural next step for an organisation which has been treading water since the end of Tunnicliffe's Company Plan a year ago. This was the suspiciously Soviet-sounding title given to a five-year change programme launched in 1991. The aim was to take £100 million a year off running costs at the same time as improving services.

In total a quarter of the workforce was lost either by voluntary redundancy or transfer to the private sector as part of an outsourcing programme.

Over the same period, train services increased by 10%, and customer satisfaction levels by 20% (although these have now 'plateaued').

Ford proudly boasts that LU now covers its own operating costs - last year it produced a gross margin of £210 million (before depreciation and renewals), a year-on-year increase of 9.4%, on sales revenue up by only 4.5% to £853.6 million. Gross margin at LT (of which LU accounts for 70% of revenues) was up by 30% to £169 million. The forecast for the year to 31 March 1998 is of a £256 million surplus (LU £224.7 million). Add depreciation and renewals cost back into the figures, however, and LT actually made an operating loss in the year 1996/97 of £170.3 million (LU £116 million). In a report released in June, Stephen Glaister and Tony Travers of the LSE said: 'The core Underground - as a continuing public service railway - is a liability rather than an asset,' (which they calculate as £1.6 billion).

If privatisation is to go ahead, the markets will have to be persuaded to cough up and that means persuading them that others can reduce costs and increase revenue more rapidly than LU's managers. But is there really scope for huge improvements? On the face of it, LU has done an impressive job - sales revenue has increased by 33% since 1992. Yet the total number of passenger journeys is up by just 6% and much of the improvement in sales revenue can be put down to fare increases - Underground fares have risen by 30% in real terms since 1990 - a ruse whose end is nigh. With fares increases in the rest of the privatised railways capped at RPI minus 1% from next year, such fare hikes are simply out of the question now.

That leaves two sources for the extra margin: more passengers and improved efficiency.

So could the private sector do better than LU? 'If you look at the private train operating companies, they've all got the same game plan,' says Ford.

'It's all about getting more people on the system and reducing their costs.

We in the public sector should be doing exactly the same thing and indeed we are doing exactly the same thing.' The current target, Ford says, is a 2% annual increase in passenger numbers. At the same time, costs are to be reduced by around £50 million by 2000. He insists that does not necessarily mean job cuts.

Yet many believe LU is going to have to do more if it is to survive intact.

Despite the 25% reduction in headcount under the Company Plan, this has yet to show through in costs, perhaps because many of those workers have simply moved into the private sector where they are still employed by LU's suppliers. Ford admits that there are areas where there 'may be some way to go'.

That process was well under way - in the form of the successor to Company Plan called Everest - when Labour came to power and a mislaid document revealed that deputy prime minister John Prescott was already considering privatisation. Tunnicliffe admits that process has now been accelerated but, as he says: 'If you've done something like the Company Plan, you've done all the big dramatic things in terms of improvements, from then on you're trying to do the clever things, and clever things are more difficult.' On the level of savings or job cuts, he is non-committal: 'I don't see very dramatic changes in staff numbers, I do see some ...'

For an organisation still hurting from the last efficiency drive and currently in the middle of pay negotiations, with strikes looking likely, this is a sensitive subject. Industrial relations is one area where commentators see room for improvement despite what are generally admitted to be generous rates of pay and a three-year, no-compulsory-redundancy deal with the train drivers.

It may be that it will take the competitive pressures of the private sector to complete the job started by the Company Plan. 'All I can say is that we have consistently made our assets sweat harder year by year and what we've done with that is to give more service to our customers,' says Tunnicliffe. He sounds like a man who knows the wind is against him.


Downsized, decentralised and outsourced - the modern LU

Since the launch of the Company Plan in 1991, LU has been downsized, decentralised and outsourced, with its military-style staff grades gradually collapsed into fewer broad bands. The old structure based on four geographical areas was replaced by eight units corresponding to the main lines and a new core business unit - the passenger services directorate. 'Now the way the customer sees the railway is the way it is internally structured,' says HR director Ann Burfutt. Along with the old hierarchies went demarcation lines, and 5,600 jobs. Many of these were jobs transferred to the external market as part of LU's programme of market testing - Make or Buy.

This has been a gentle revolution - all of the redundancies were voluntary.

For those whose displacement was not through choice, there was - and still is - the redeployment pool in which staff can stay for up to three years on full pay while they try to find another job. They can take a voluntary redundancy package at any time. Not surprisingly, given an average severance package of £30,000, the problem has often been not with those going but the jealous colleagues they leave behind.

FUNDING CRISIS - Options to get the Tube up and running after 35 years of neglect

So what are the options?

- The Government caves in and provides extra funds - cost around £2 billion over five years. Generally believed to be highly unlikely.

- LU stays in public sector but Treasury alters rules to allow it to raise capital. This remains unlikely. Alternatively LU could be turned into a trust, or public interest company, with the ability to raise capital without any guarantees from the Treasury.

- PFI or another form of public/private partnership: project-related and therefore difficult to put within a logical planning framework. Essentially an expensive form of long-term borrowing.

- Hypothecated taxes: special taxes on car use in London, the money from which would be ring-fenced for investment in public transport. Politically sensitive and difficult to collect. Similar charge on car-parking technically more feasible but would also take too long to put into place to solve immediate cash crisis.

- Local taxes: a special levy on council tax revenue. Abandoned in 1987.

- Sale of a majority stake in LU to a private bidder. Would still require public subsidy, at least in the short term. Government would be sensitive to charge of selling it off cheap. The sheer scale of the capital investment required to bring the network up to scratch could put off many bidders while their ability to increase revenues through fare rises or cut services would necessarily be limited.

- Line-by-line franchising - the solution favoured by London First. Each of the lines would be let individually by LT, which would specify services, set fares and control the ticketing system.

- The BR model. Splitting the infrastructure from the service operation and selling arms off separately has worked for the national railway, but the Underground is a much more integrated operation. The density of traffic and the fact that that the rolling stock is not transferable from one line to another also means that the scope for different operators to run over the same lines is limited.

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