All parties agree that the effective modernisation of London Underground requires:
- the assurance of stable funding over many years (and all recognise that such stability cannot be guaranteed with conventional public finance);
- effective risk management of the physical upgrading work (which, under all financing options would be carried out by a range of private sector contractors).
In both TfL's approach and the PPPs', stable funding is provided because the greater part of the money needed is raised at the outset. The direct costs of finance would differ: TfL's approach would be cheaper than in the PPPs.
The approaches to risk management are radically different. TfL would rely on strong public sector management of the private sector contractors. In the PPP, the private sector would have higher exposure to risk than in a conventional project but greater responsibility for managing those risks. Because private sector money would be at risk, there would be incentives for the private sector to manage the risks effectively.
If private sector risk management as in the PPPs is more likely to be effective than the public sector contract management proposed by TfL, then the extra cost of the PPP finance might be outweighed by the benefits of superior control of the risks. The Government took that view and ruled out public sector bond options accordingly. The TfL public sector bond option would also have been unique in the field of local government finance in the UK.
The bond financing proposals run up against two opposing philosophies. TfL proposed lower cost finance within a contract framework controlled by the public sector to counteract private sector self-interest. London Underground (when owned by London Regional Transport) considered that higher cost finance included transfer of sufficient risk and project control to the private sector so that their self-interest would incentivise them to deliver performance that would more than offset the extra financing costs.