To ask the Secretary of State for Transport if he will set financial objectives for London Regional Transport.
I have today written to the Chairman of London Regional Transport in the following terms:
"On 20 December 1989, I wrote to you setting quality of service objectives for London Underground Limited, for bus services operated by or on behalf of London Regional Transport, and for the Docklands Light Railway. In the same letter, I formally endorsed the safety objectives which you had set for London Regional Transport and all its subsidiaries. I am now writing to you, in exercise of my powers under section 16 of the London Regional Transport Act 1984, to set financial objectives to be achieved by London Regional Transport, by London Underground Limited and by London Buses Limited.
I must reiterate that safety is your top priority. We have also agreed on the need to improve the quality of the services LRT provide and hence to meet the quality of service objective I set you on 20 December. These financial objectives are concerned with ensuring that you meet your other objectives as efficiently as possible, thereby ensuring that passengers and taxpayers receive value for money.
I am setting three main financial objectives. In each case I have specified a level of performance which I wish to see achieved in respect of the financial year ending 31 March 1993, set at 1989–90 prices. For the purpose of measuring the achievement against the objectives, the figures actually achieved will be deflated to 1989–90 prices using the Retail Price Index.
The objectives relate to the operating surplus of London Regional Transport and to the operating costs of your principal subsidiaries. Achievement of these objectives will not in any way impact on the pursuit of your ambitious capital expenditure programme. In the Chancellor's Autumn Statement, we announced our intention of contributing £1·75 billion of grant over the three years up to 1992–93, towards your investment programme of £2·2 billion. That arrangement is unaffected by these objectives.
London Regional Transport
London Regional Transport has forecast that it will make an operating loss, before making deductions in respect of depreciation and renewals, of £76 million in the financial year ending 31 March 1990. I propose that you should transform this loss into an operating surplus of £70 million in the financial year ending 31 March 1993, so that the day to day operations of LRT can at least make some contribution towards its investment programme. This objective assumes that London Underground Limited and London Buses Limited achieve the unit cost reduction objectives set out below and that London Regional Transport secures additional improvements in the financial performance of its other subsidiaries. The objective is based on London Regional Transport's own forecasts of future revenue, which include the conventional assumption that fare increases in future years will be in line with the increase introduced in February this year. If for any reason this assumption proves to be ill-founded, the objective will need to be modified accordingly.
In order to meet the objective, it will be necessary for all London Regional Transport businesses to exercise their best endeavours to optimise revenue whilst running their operations efficiently and cost-effectively. Certain activities of London Regional Transport are categorised as being essentially commercial in nature. These include certain commercial bus and coach operations undertaken by subsidiaries of London Buses Limited, and all the activities undertaken by the Victoria Coach Station Ltd., London Transport International Services Ltd., London Transport Catering and London Transport Advertising. It has previously been agreed between the Government and London Regional Transport that each of these commercial activities should, as a minimum, earn a 5 per cent. return on turnover, taking one financial year with another. I confirm that I wish these activities to continue to meet this requirement.
The Docklands Light Railway is not covered by this requirement. Nor have I sought to set a loss reduction objective for it. This reflects the fact that there are very many uncertainties about the future financial performance of the railway, whose services are still evolving: the extensions to Beckton and the City, for instance, should both open within the period covered by these financial objectives. I will wish to set a financial objective for the Docklands Light Railway, as soon as possible. Although the Docklands Light Railway is not a major contributor to the costs or revenue of London Regional Transport at this stage, it accounts for a significant part of your capital expenditure. We need to ensure that the benefits of this investment are realised in Docklands. I have asked officials to hold urgent discussions with the Docklands Light Railway to consider what form of objective it would be appropriate to set the railway at this stage. In the interim, I look to the Board of London Regional Transport to ensure that the Docklands Light Railway makes its proper contribution to achievement of the profit target.
London Underground Limited
Expenditure in the day-to-day running of the London Underground system has risen significantly over the last two years. It is now some 23 per cent. above the level of 1987–88. The reasons are well known. The actions which London Regional Transport and London Underground Limited set in hand in the wake of the fire at Kings Cross, and the further actions called for in the report by Sir Desmond Fennell QC and other reports, have involved incurring additional capital and current expenditure. The complement of the British Transport Police 'L' Division has likewise increased in response to the urgent need to tackle crime on the Underground. You have introduced a new management structure within London Underground Limited, which is designed to ensure that the individual lines and stations are brought within better day-to-day management control. Last, but not least, you are now embarked on an ambitious capital expenditure and maintenance programme, which makes additional demands on your staff resources. All these developments are very welcome, and I recognise that there are further areas of the business where you see a legitimate case for increased operating expenditure.
Nevertheless, I consider it essential that London Underground Limited should be set a financial objective, which ensures that this enormous expansion in activity with its associated costs is achieved with due regard to efficiency. This is a necessary safeguard for the fare-payers and taxpayers who must, between them, bear the cost of running the London Underground system. I propose a target to be calculated on the basis of operating costs, excluding depreciation and renewals, per operated train mile. The figure I propose is £14·02. This compares with a forecast outturn figure for 1989–90 of £14·97. We are both satisfied that this can be achieved without prejudicing the achievement by London Underground of a steady improvement in both safety and quality of service.
London Buses Limited
As noted above, certain bus and coaching operations of subsidiaries of London Buses Limited are categorised as commercial. They are subject to the requirement that each service earns not less than a 5 per cent. return on turnover. The remainder of London Buses' operations consists of network routes and routes operated under contract to London Regional Transport. I propose that these routes should be set a unit cost reduction target expressed in terms of operating costs (including depreciation and renewals, but excluding severance payments) per operated bus mile.
The Government remains firmly committed to the deregulation of the London bus market, and the subsequent privatisation of the subsidiaries of London Buses Limited, but has yet to determine a timetable. I recognise that the absence of a firm date for deregulation makes it difficult for LBL to plan unit cost reductions too far ahead. However, the prospect of deregulation and privatisation makes it vital that the subsidiaries of London Buses Limited should move as quickly as possible to a position where they can compete successfully in a deregulated bus market. Their efforts to achieve this can only be strengthened by having a firm financial objective to work to. I am therefore setting a unit cost target for the financial year ending 31 March 1993. We will review the position for future years in the light of the decisions we take on the timing of deregulation. The target figure is £2·57. This compares with a forecast outturn figure for 1989–90 of £2·77.
I would like the Board to report performance and progress in achieving all its different objectives in its annual Report and Accounts. This should include:
(a) progress in implementing the safety objectives you have set for London Regional Transport and its subsidiaries; (b) the quality of service achieved against the objectives set for London Underground Ltd, London Regional Transport bus services and the Docklands Light Railway; (c) progress towards the achievement of the financial objectives set in this letter."