Labour's plans to finance Tube are dismissed by think-tank

LONDON'S CRUMBLING underground railway system must be allowed to issue bonds to fund the investment it needs, a leading British economic think-tank said yesterday.

The contents of the report by the National Institute of Economic and Social Research will come as a blow to the Government, which has rejected the idea of allowing London Underground to issue bonds.

The National Institute said the experience of New York City - which now funds one-third of all public transport investment through bonds - provided a good model.

"These features of the New York transport system could be helpful in designing a renovation plan for the London transport system," the think- tank said in its report. "Bond finance on New York lines would be at least as effective as expanding private finance initiatives in London."

New York renovated its transport network by introducing five-year capital plans and issuing special bonds.

The report said that recent changes to Treasury rules to make possible a three-year budget horizon did not go far enough.

Professor Ray Barrell, a co-author of the report, said: "Government- backed five-year Local Transport Plans, with local control, have been introduced everywhere else in England. London also needs plans of at least five years, backed by a political will and imagination."

The National Institute said that bonds would allow the risk to be transferred from the public sector to the private sector. "The market will then be able to assess the risks properly and decide whether the projects are viable," said another co-author of the report, Florence Hubert.

The report also said that London's mayor should be free to decide how to develop the capital's transport network. Ken Livingstone was almost excluded from the Labour shortlist for mayor after insisting that he would not accept plans for a public-private partnership.

Both the Prime Minister and John Prescott, the Secretary of State for Transport, have criticised the idea of issuing bonds, saying that New York City's decision to issue large amounts of debt almost led to the city's bankruptcy.

But the report says that the move to issue bonds saved the transport network from collapse after an earlier financial crisis led to investment almost totally drying up.

The authors stressed that their conclusions were based on a two-year study of public transport in Paris and New York City, although Ms Hubert admitted that their publication was "timely".

The Government is insisting that the experience of the Jubilee Line Tube extension - which was opened this year, two years later than planned and almost pounds 2bn over budget - shows the need to allow the private sector to invest in major projects.