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Transport for London: Funding

Volume 698: debated on Wednesday 6 February 2008

My right honourable friend the Secretary of State for Transport (Ruth Kelly) has made the following Ministerial Statement.

As part of the 2007 Comprehensive Spending Review, I was able to agree a funding settlement with the Mayor of London for Transport for London (TfL) through to 2017-18. This settlement included details of funding for Crossrail and provision for costs relating to Metronet in the light of its move into administration.

This 10-year funding settlement underlines the Government’s commitment to deliver the transport investment central to our continued growth and prosperity. It carries forward our commitment to modernising and extending the capital's public transport system, including the upgrade of the London Underground. It sustains our support for transport projects central to our preparation for the Olympics in 2012. And it supports the delivery of Crossrail. I am taking this opportunity to place copies of letters setting out details of the TfL settlement in full in the Library of the House and on my department’s website.

I can set out these details now because those elements of the settlement that relate to Metronet are no longer commercially sensitive. As the House will know, in 2003, the Metronet companies (Metronet Rail BCV Ltd and Metronet Rail SSL Ltd) entered into public-private partnership (PPP) contracts with London Underground Ltd (LUL), which is now a subsidiary of TfL. Under the PPP agreements, the Metronet companies were responsible for the maintenance, renewal and upgrade of discrete parts of LUL’s infrastructure. LUL remains responsible, in the public sector, for delivering services to customers.

The PPP contractual arrangements were accompanied by put option agreements, whereby LUL could be required to purchase Metronet’s debt six months after any defined “insolvency event”. This borrowing was undertaken to finance the maintenance and renewal of the Tube network under the PPP contracts, and was already reflected in planned public spending.

In advance of the entry into the PPP contracts, the Transport Secretary at the time wrote on 7 March 2003 to the providers of finance of Metronet stating:

“The Secretary of State will take into account, amongst other factors, all the obligations of LUL under any PPP contracts (including obligations under the Put Option Agreement or the Stand Still Agreement) in considering and setting transport grant for the GLA under section 101 of the GLA Act, or in making grants to LRT under Section 12 of the LRT Act.”

This letter of comfort was notified to Parliament as a contingent liability, and the existence of that letter of comfort has been recorded in successive resource accounts for the Department for Transport, without quantification of the amount in question.

On 18 July 2007, the Metronet companies entered into PPP administration, following a lengthy period of poor performance which led to their insolvency. This constituted an “insolvency event” for the purposes of the put option agreements.

The put options were exercised yesterday (5 February), and I have today been advised by TfL that all the conditions for their exercise have been met.  Having regard to the commitments in my predecessor’s letter of March 2003 and to the 2007 Comprehensive Spending Review, I will make available to the GLA a grant under Section 31 of the Local Government Act 2003 of £1.7 billion specifically for the use of LUL for the payment of the put option price.

The timetable for payments under the put option agreements means that a cash advance of £1.7 billion is needed from the Contingencies Fund to make the grant payment. Parliamentary approval for this new expenditure, repaying the Contingencies Fund advance, will be sought at the earliest opportunity in a supplementary estimate for the Department for Transport.

The net effect of this grant payment and other changes to my department’s resource accounts made as part of the settlement with Transport for London will be £2 billion, which will go through the operating cost statement as capital grants. In addition to the sums associated with the put option, this funding provides:

additional grant payments to replace planned Metronet borrowing up to 2010—these borrowings were already provided for in planned public expenditure aggregates and so the additional grant does not involve any net increase in public expenditure; and

additional grant payments to give TfL short-term flexibility while the costs associated with Metronet's administration remain uncertain.

The settlement gives London Underground the resources needed to manage Metronet’s administration, and support moving toward a more stable long-term footing and continue the work to maintain, renew and upgrade the Underground.