HC Deb 05 February 1996 vol 271 cc112-8

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Streeter.]

10 pm

Mr. Eric Illsley (Barnsley, Central)

My debate relates to the Sheffield light rapid transit railway, otherwise known as the Sheffield supertram. The purpose of the debate is to draw the Government's attention to the problems that surround the supertram project, particularly those that are experienced by my local authority and its council tax payers as a result of the somewhat complex funding formulae that apply to the supertram. The supertram is funded through the South Yorkshire passenger transport authority, which is made up of representatives from the four local authorities in South Yorkshire—hence my speaking on a subject that is perhaps more in line with Sheffield.

The light rapid transit railway is located in Sheffield but funded by the South Yorkshire passenger transport authority. I should like at the outset to make it clear that the project was entered into by all concerned in good faith and with a commitment to ensure its success. That good faith extended to the local authorities, the passenger transport authority and, of course, the Government, who gave a commitment to fund it in full. Indeed, the rationale for supertram that existed when the Government agreed to finance it was accepted by all the parties involved. The Government made a financial commitment to supertram on the evidence available at the time, as did all the other parties involved. They accepted the original business plan and assumptions in terms of construction, operation, financing and the timetable for the project.

Although the system currently has problems, it is important that we do not to lose sight of the fact that the project was completed on time and within its budget. Despite the problems, that is something of which we can be proud. The Government's commitment to funding the supertram system has not been disputed by them or by local authorities other than when certain problems have arisen. Successive Ministers have reiterated and given assurances that the revenue support grant funding—the local government funding—would cover the costs that would not eventually be reimbursed through the sale proceeds or through operational revenues.

At the moment, however, there are no operational revenues, and the sale prospects, or the sale value, looks very poor. That has caused debt to accumulate which was not envisaged throughout the construction of the project. Supertram is not currently profitable. Because there are no operational revenues, the sale prospects are looking bleak. That is where the problem lies, and it is where my local authority—and perhaps one or two other local authorities in South Yorkshire—faces difficulty. I am sure that the Minister will agree that it was never intended that the construction costs of the project would fall on the local authorities, but the fear is that that is precisely what will happen. Those costs were to be financed by operational revenues and, of course, the sale.

The Government may say that they committed themselves to funding the construction only, but, as I have said, even that cost is now falling on the local authorities. With the Minister's permission and yours, Madam Speaker, my hon. Friend the Member for Sheffield, Central (Mr. Caborn) may say a little about the construction period shortly.

The project was delivered within its budget of some £240 million, of which about £80 million took the form of trading credit approvals. It was envisaged that those would eventually be repaid from operating profits; the interest and minimum revenue provision would come from operating revenues, and the rest from the sale proceeds. During the construction period, the interest payments on the trading credit approvals were capitalised—they had to be, because no revenues were available—and that built up further heavy debts.

I understand that the total cost of the trading credit approvals and the capitalised interest is currently around £97.5 million. So far, the Government have funded the trading credit approvals, but that is now ending because, in the Government's eyes, the construction period is over. The bulk of the figure would have been met from the sale proceeds; the sale was expected to take place soon after the completion of the project, and the proceeds from a profitable operation would have been substantial. Now, however, there is some doubt about whether the profits of the operation would meet anything like a third of that £97.5 million.

Even if the sale proceeds produced £35 million—a figure that has been mentioned to me—other costs of privatisation could leave as little as £17 million, landing local authorities with unfunded liabilities amounting to more than £80 million. My authority's share of that, in terms of interest payments, would be between £2 million and £3 million per annum—assuming that no further debt is incurred by the system this year or next year.

The Government have refused to issue further trading credit approvals to fund the interest payments. Because no profits or revenues are available, the position may become even worse. I understand that the cost of operating losses is also unfunded by the Government, and that the interest on those losses has also been capitalised. It seems that local authorities must bear the cost of interest on operating losses as well as the construction costs. The sale value is not looking too clever, and there are no operating revenues to pay off what should have been paid off from the end of the construction period.

The Government's current deadline for the sale of supertram is early next year. That does not allow much time in which to turn the position round and make the system profitable. If the losses continue, the sale value is likely to be minimal, and it is feared that very little will be recouped to bite into the construction debt and the interest on the capitalised losses.

If the sale proceeds are insufficient, the local authorities will be left with a huge debt—anything between £40 million and £100 million—which they will have to service in future. As I have said, a debt of £2 million to £3 million will fall on Barnsley district council. Similar amounts will fall on the other local authorities in proportion to their share of the total debt. Moneys from the council's revenue support grant and its council tax, and money available to the local authority will be spent every year on interest to fund supertram, depending on how long the council is left with that debt burden.

That means that services in my local authority, which are being and have been cut for the past five years because of the shortfall in funding against budget, are likely to be cut further simply to fund the supertram system. The sum of £2 million to £3 million will be paid with no benefit to Barnsley council tax payers because the supertram system does not extend to Barnsley, although the council accepts its responsibilities in the South Yorkshire passenger transport authority. The worry is that we are facing the debt, but have nothing to show for it. We entered the system in good faith, as did all the other local authorities, and we never envisaged that that level of debt would fall on us.

I understand that revisions to Supertram's business plan are being made to determine when or whether it will make a profit. Without that profit, it will be unattractive to buyers and cannot pay its way. The local authorities involved and the SYPTA must take on board the fact that it is essential that someone now does a feasibility study to determine how soon the system can be brought into profit to ensure that it is saleable before it is offered for sale, to maximise sale revenues and to reduce the debt. It is essential to show that the system may make a profit.

If the system is to be sold next year, I fear that it will be too soon to generate any repayment of the debt, and that, because of the losses and the system's lack of profitability, the sale will be at a low value and will not recover sufficient money even to cover the operating losses, let alone the debt on the construction costs, bearing in mind the projected figures that have been supplied to me by my local authority.

It must be accepted that any new system has teething problems. I accept that this is the first tram system, running side by side with motor vehicles, to be built for the past 50 years. There is therefore the novelty of the new system. There are the traffic systems in Sheffield. There has been substantial construction in that city to accommodate supertram. Obviously, there will be a need for time to allow the system to bed in and to operate properly. Traffic priorities may need to be altered and some co-operation must take place with the other public transport systems in Sheffield to ensure that the project runs at a profit, but that will take time. I ask the Minister whether the sale timetable is realistic, given the debt level and the need for the project to show a profit and to generate a sale value.

No one disputes that the project should be sold, as was envisaged by the original business plan. The questions are when—whether we sell it now and cut the losses or wait and give it a timetable to achieve profitability and hope that it generates a sale value. At the same time, we must determine how the local authorities will fund the debts that they face. Difficult decisions need to be made as to whether to wait for profitability or to stop those losses now, to stand the losses and not to allow them to generate any further, or to find a way of getting round the debt burden that is placed on the local authority. I understand that Sheffield district council is taking steps to examine the operation of supertram, traffic management, car restraint, and pedestrianisation, and that the SYPTA and supertram are working hard to improve its marketing. I believe that steps are being taken to try and deal with the problem.

As I have said, all parties entered into the project in good faith. My local authority agreed to go along with it, but it now faces huge financial burdens not of its own making from a project that it did not construct and that does not operate in Barnsley. An annual debt of £2 million to £3 million is a substantial proportion of Barnsley council's budget, bearing in mind the financial difficulties that it has. I appeal to the Government to accept that their commitment fully to fund supertram was given to all the local authorities before they or the Government envisaged the current problems. They should look to see whether further assistance can be given to the local authorities to get matters sorted at the moment. Perhaps they could also consider funding the local authorities, as happened before, until the system can be put into a saleable condition with operating revenues to reduce some of the debt.

10.15 pm
Mr. Richard Caborn (Sheffield, Central)

I thank my hon. Friend the Member for Barnsley, Central (Mr. Illsley) for the fair way in which he presented his case. He has obviously mastered much of a complex financial deal. More importantly, he said that South Yorkshire in its totality has borne much of the brunt of the financial arrangements, although it has not had any benefit from the supertram. Supertram runs from one side of my constituency to the other, so I am able to tell the House all about the problems we have had with traffic management since supertram was installed.

As my hon. Friend said, the authority in Sheffield is trying to make sure that, in terms of traffic management, the effectiveness of supertram is maximised. I am sure that everybody welcomes this innovative system, which hopefully will have a beneficial impact upon the environment of the major city of Sheffield.

In a letter dated 2 February to the leader of Sheffield city council, Mike Bower, the Minister quoted from a letter sent by the former Minister of State, Department of Transport, now the Chancellor of the Duchy of Lancaster, to the local authority on 13 May 1991. The quote in the Minister's letter read: '"No authority to continue capitalisation is likely to extend beyond the construction period'". That is true, but the letter of 13 May continued: ie, later than a year or two after entry into operation of the Supertram system. One could ask what was the operational date, but it had been interpreted as the date on which supertram was up and running, and October last year is the effective month. Therefore, there are two interpretations of the examples that the Minister gave of the construction period in his letter of 13 May 1991. I hope that the Minister will take that on board, and say that last October was two years after the total construction of the programme.

I hope that the Minister will agree that the letter of 2 February would be a way to solve the problems. We all accept that the financial arrangement was complex. In addition, supertram was the first project of its kind in the UK and was built on a green-field site, as it were. The letter referred to a joint working group and said that that might be one way to get at least an understanding of the problems, and probably some pathways out of them. I suggest to the Minister that that joint working group should not just consist of civil servants, but could also involve politicians from the Department of the Environment and the Minister's Department, and representatives from local authorities in South Yorkshire.

I am sure that we all want to find a solution to this problem, because, as my hon. Friend the Member for Barnsley, Central said, the four local authorities in Rotherham, Doncaster, Barnsley and Sheffield are in a serious financial situation. If the Minister can respond positively to that suggestion, I am sure that it will be welcomed in South Yorkshire. If he does, we shall respond as well.

10.18 pm
The Minister for Transport in London (Mr. Steve Norris)

I congratulate the hon. Member for Barnsley, Central (Mr. Illsley) on having secured a debate on the undoubtedly important subject of the South Yorkshire supertram, and I welcome the contribution to the debate made by the hon. Member for Sheffield, Central (Mr. Caborn).

There is no doubt that the supertram is a highly attractive modern tram system. It provides a real alternative to the car, and I am quite sure that in due course it can be a great success. I have ridden on it. It is comfortable and pleasant, and the people I met when I rode on the system liked it and welcomed it.

Although the supertram can be a good thing, it is not particularly a good thing yet, as the hon. Member for Barnsley, Central so accurately defined. There is general agreement on a number of ways in which the system can much improve. It has been said that marketing might be a good place to start. It is a matter of record that the public relations department of supertram told the press: the people of Sheffield are just a load of whingers". As the hon. Member for Barnsley, Central will know, there is some apocryphal evidence of how a man who was tipped off his bicycle received a letter telling him to get off and push next time. Supertram needs to understand that it is the servant of the public, not the other way round.

To achieve its obvious potential, the operating environment in which supertram works, to which the hon. Members for Barnsley, Central and Sheffield, Central have referred, is important. For example, the park-and-ride sites that the local authorities promised for the tram should be provided. We should ensure that the traffic light priority system works, so that the one feature of a light rail system that should be taken for granted—the quickest way in which to access the city centre—is realised.

It is being found that the private car and the bus are able to make the journey to the city centre more quickly. Journey time is fundamental to the operation of such a system. If one wonders why the system has so miserably failed to meet its operating objectives, I respectfully suggest that that might be the reason. I know that both hon. Gentlemen, for whom I have the greatest respect, appreciate the common sense of that argument.

In Manchester, only trams, buses and taxis have access to whole swathes of the city centre. That will be the case to some degree in Leeds as well. It will have what it calls a public transport box, where only buses and trams will be able to travel. I want to make it clear that it is not my business to tell Sheffield how to pedestrianise its centre if it wishes to do so, but it must consider a co-ordinated transport plan if it wants supertram to be a success.

The passenger transport executive of course invested its funds in obtaining Acts of Parliament giving powers to build and operate supertram. It then submitted a bid to my Department for funding. To make it absolutely clear, the funding was sought under the general heading of the public transport facilities grant available under section 56 of the Transport Act 1968.

I should emphasise that, under the published rules for that funding, the South Yorkshire supertram had to be the most economic way in which to meet the identified transport need; it had to need no operating subsidy; the future income from it had to be sufficient to make a real contribution to its capital cost; and it had to attract enough drivers off the road to deliver wider economic and environmental benefits, thus justifying the taxpayers' investment.

It is important to this debate on the precise meaning of the various elements of correspondence that have been exchanged to understand that the South Yorkshire PTE made the case that all those requirements were met. My Department certainly probed, argued and queried the case, but in the end it was not for my Department to produce research analysis and forecasts of South Yorkshire's transport needs. The PTE was responsible for that, and made the case for it, and we in central Government in due course accepted it.

I have already said that future incomes from supertram have to be made available to contribute to the capital cost. Again, the House will be aware that, in Manchester, for example, the operating concession for the metro link was sold up front, so a capital contribution was attracted immediately, and the revenue risk was with the private sector. That is also the case in the west midlands. Frankly, the same approach is planned in every other light rail scheme in the country.

As is occasionally the case, South Yorkshire did it differently. Ironically, so confident was the PTE of its forecast profit that it decided to build the scheme first, operate it itself and sell it later at what it no doubt believed would be a good profit, which meant that the only way that future supertram incomes could be made to contribute to the capital cost of the system was for the PTE to borrow against those future profits.

Now, the hon. Member for Barnsley, Central tells me that the profits are not sufficient to repay the borrowing. He asserts that the people of Barnsley have to repay it. I quite understand his concern on behalf of his constituents, but I hope that he will recognise that, while that may be an issue for the people of Barnsley, it is arguable as to whether it should be an issue for the wider taxpaying public. The PTE made this proposition, advanced it, and argued the case that was ultimately accepted.

I must make it clear that I do not run day-to-day transport in metropolitan areas, and there would be a great deal of criticism if I tried to do so. On that basis, it is not for me to interfere in how the project is managed. Ultimately, it is for those constituent authorities—here is the point that I must underline and which the hon. Member for Barnsley, Central made—to sort the matter out. There is the germ of a solution to the problem. A considerable rethink about the management and operation of the system is required, and that cannot start too soon.

On the impact of having to underwrite the costs on the financial arrangements of the local authority, and on the capping arrangements, the hon. Member for Barnsley, Central knows that the Department has consistently made the case to our colleagues in the Department of the Environment that it is an issue that ought to be considered sympathetically. Obviously, I regret the fact that there has been an impact, and equally, that the constituent authorities spend so close to the cap that they are under that risk. None the less, without making a cheap party political point on a serious occasion such as this, we have been sympathetic on the matter.

On the promises made by my predecessors that supertram would be fully funded, I know the letter to which the hon. Member for Sheffield, Central referred—indeed, I have a copy here in my hand—and I understand the quotation. The hon. Gentleman was kind enough to show me the wider context of the original quotation from my right hon. Friend the Member for Kettering (Mr. Freeman).

I must make it clear that, as far as the Government are concerned, we have delivered every commitment made by my predecessors about supertram. We have said that the capital cost, net of the future revenues forecast by the passenger transport authority, would be provided for by 50 per cent. section 56 grant and 50 per cent. credit approval. It ought not to have been necessary to underline that fact, because it is the standard advice on the issuing of section 56 grant. But it has been spelt out, and the way in which the funding system works is that future revenues from major transport schemes such as this are put towards the capital cost, in this case by the PTE undertaking borrowing, to which the hon. Member for Barnsley, Central referred, with the remaining capital cost paid for partly by grant—paid by the Department—and partly by credit approval, supported by the Department of the Environment through the revenue grant system.

Judging from the analysis, it is clear that the system was and is fully funded. Now that there is no revenue to support that element of the scheme that should have been self-generating, the problem—one that I understand perfectly well—is that the authorities are saying that it is a burden that they did not contemplate. In all honesty, I hope that they will appreciate that it was not us, but the PTE, that made the case. The authorities are jointly responsible for the PTE, and it is to them that we must all turn in the first instance.

I hope that the hon. Member for Barnsley, Central will understand that we have felt it necessary to be fairly firm on the timetable, not least because I do not believe that allowing any laxity in it would necessarily have the desired result. I believe in keeping to the firm timetable— it has been on the table for some time. Frankly, I am concerned that, even at this stage, there may not be sufficient urgency behind the process. In the present climate, I do not envisage the position getting any better if we start to indicate any laxity in the system.

Secondly, I understand that there is interest in the joint working group being reconstituted. My officials are certainly happy to be part of it. As to the suggestion that it should include elected members, I can tell the hon. Member for Sheffield, Central that I am determined to work with elected members as well as all the other interested bodies in South Yorkshire to try to do the best we can to rescue the project and let it fulfil the potential we believe it has.

The motion having been made at Ten o'clock and the debate having continued for half an hour, MADAM DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at half-past Ten o'clock.