An efficient, reliable Tube is not that far down the track

Stephen Glaister and Tony Travers of the LSE on the best ways to mind the funding gap

London Underground is an awkward inheritance for the new Government: rather like a nice, young family suddenly discovering that an elderly uncle with expensive tastes is moving in permanently. It will be central to the activities of an elected mayor and an elected London Assembly. Government spending plans show cuts in investment: money previously earmarked for the core Tube system is to be raided to pay for the over-run on the jubilee extension to Docklands. Yet, according to London Transport's figures, a relatively small amount of additional money over the next five years could transform the Tube into an efficient, reliable and, eventually, a self-funding enterprise.

If Mr Prescott's promises on the Underground of last week are to be realised a formula has to be found which accommodates the self-denials on increased public spending, which recognises the manifest failure of the Private Finance Initiative to solve LT's funding deficit, and which is consistent with the pledges to rectify a democratic deficit in London. Simply enabling London Underground to borrow will not be enough to solve the problem, though it would certainly help. Some new source of cash flow must be found to form a foundation for the necessary borrowing. Here are four suggestions, all of them placing some reliance on the local economy to contribute towards its transport infrastructure.

First, between 1984 and 1987, there was the LRT levy, a precept on the local taxes of London boroughs (lost with the introduction of the poll tax). A similar precept survives for the Metropolitan Police and the London Fire and Civil Defence Authority. It would be possible to introduce something similar.

Second, an alternative is to make a local add-on to the uniform business rate, similar in principle to the business improvement districts in many US cities, or the payroll charge on Paris enterprises. Because rateable values directly reflect land values the amount of this charge would be scaled to the size of the benefit. To achieve the characteristics of "partnership" and "charge for a service" it would be essential to re-create a mechanism through which the businesses affected could vote for, or reject, proposals. This could be incorporated in any more general reform of the uniform business rate.

Third, charging private cars for their use of road space and for the pollution damage they cause would help with several of the Government's urban policy objectives. Fourth, a charge for off-street parking spaces could be levied.

These measures would service enough borrowing to renew and expand London's transport and other infrastructure. They would require a concession to allow hypothecation (ring fencing) of the revenues to the specific purposes. They would also require the creation of a body or bodies to determine and administer income, expenditures and to undertake the borrowing and lending; all in a way that could be tolerated under Treasury rules.

A trust or public-interest company given explicit public service objectives could create a new status for LT which would leave it with its public sector objectives and ethos but which would put it in the private or semi- private sector for public spending and borrowing control purposes, without resorting, in the words of the Labour Manifesto, to "wholesale" privatisation. An alternative would be a new company with specific objectives and where the government retained a "golden share". The board members could then be independent of government and might even, in part at least, be nominated by the London-wide assembly, or the London boroughs or the government itself.

A trust or public-interest company would issue capital bonds, funded by a share of operating profits, locally raised finance. The government would undertake to provide either a stable base level of funding or matching funds. There would be a genuine transfer of risk. Such an institution would be significantly less dependent on public-sector funding than, for example, many housing associations or grant-maintained schools.

These arrangements would take time to set up, but their firm prospect would make it more palatable for the Treasury to agree to the short-term "fix" which is the only possibility over the next year or so.

The LT board membership could be appointed by a new elected mayor, subject to the approval of a Greater London Assembly (GLA). Or the mayor/GLA could become accountable for the London transport trust or public-interest company with objects drawn up to match the general objectives of the mayor/GLA. Membership of the trust or board would be appointed by the mayor and possibly by other interests such as central government, London boroughs, operators and employees. The transport trust would make policy and be responsible for raising, managing and disbursing funds.

The transport trust would procure bus services, just as LT does now. In order to promote efficiency and create "yardstick" competition it could procure Underground services from 10 separate, integrated, line-based businesses, under franchise contracts lasting, say, 15 years. The transport trust would continue to own the freeholds but use of the infrastructure would be leased as part of the integrated train operating contracts. There would be no wholesale privatisation.

The trust could take over the rail franchising director's functions for London commuter services. If necessary there could be an independent transport regulator. This might be a part of the Rail Regulator's office or a part of the transport authority.

These reforms would give real effect to the ideas of partnership, stakeholding and democratic accountability, whilst offering the prospect of turning the Underground into a genuinely self-financing public utility with efficient and independent management. Within a few years it could once again be the world's best metropolitan railway.

Stephen Glaister is Cassel Reader and Tony Travers is Director of the Greater London Group, London School of Economics