Outlook: Livingstone bonds

THE DEBATE about how best to fund improvements to London's Underground is in most respects an academic one, since the new mayor of London won't have powers to affect policy one way or the other. The Government has already decided on the "Public Private Partnership" route, and whoever wins the race for mayor, it has no intention of budging.

That hasn't stopped Ken Livingstone, one of the Labour Party's prospective candidates, advancing, and gaining a quite considerable level of support for, the alternative plan of keeping the Tube entirely in the public sector and raising the money for improvement through the issue of London Transport bonds.

This approach has seemed to work well in reviving the New York subway. Furthermore, the argument goes, the public sector, with the gilt-edged backing of HMG, can always borrow money more cheaply than the private sector, so bonds are bound ultimately to prove a less expensive way of financing the necessary investment.

Up to a point he is right about this, although the difference between government borrowing rates and triple-A rated private-sector rates is not nearly as big as it used to be. However, there is a basic flaw in the argument. The reason the Government can borrow more cheaply is because any such borrowing is underwritten by the tax payer, as indeed would be the risk of cost and time overruns in improvements and extensions to the London Underground if the bond route were chosen.

Most public-sector construction projects over run horribly, witness the Jubilee Line Extension, and the tax-payer is exposed accordingly. Part of the idea of PPP (essentially the Private Finance Initiative, but dressed up in New Labour form), is to foist the risk of overspend on to the private sector. As a result, the private-sector solution will in most cases end up costing less than the public-sector one, despite the higher financing costs and the fact that the private sector is looking to make a profit.

Perhaps the best example of this potential saving is Eurotunnel, which was entirely privately financed. As a result, it was the private sector that suffered from the cost overruns, not the public purse. Indeed, if the project had been government financed, the damage would probably have been even worse, since the tunnel would not have benefited from private sector disciplines and efficiencies.

That whole experience has had a chastening effect on private finance for public-sector projects, and these days the private sector builds a much bigger cushion into its calculations. Even so, the Treasury still believes PPP can work to the public sector's advantage. The Government's advisers, PriceWaterhouseCoopers, reckon that this benefit, applied to the Tube, might be anything between pounds 2.5bn and pounds 3bn, a quite considerable difference.

Of course, the proof of the pudding will be in the eating and if private- sector bids fail, when modelled against the public-sector solution, to show any such benefit, then the PPP route will be abandoned and "Our Ken" will end up getting his way after all. Well, not exactly, since the Tube will have to fight for public finance alongside everyone else, rather than having its own, committed, "Livingstone bonds".

All the same, it can readily be seen that the issues are not quite so black and white as they seem.

Of course, for those that believe in private-sector solutions and the efficiency gains they deliver, the simplest and better approach would be to privatise the Tube entirely. But that was never going to be an option with a Labour government, and post the Paddington crash, it has become remoter still. Even so, once it is accepted that PPP can save the public- sector money and still generate a profit for the private sector, we are in most respects ideologically halfway there. Perhaps Ken Livingstone has a point after all.