PUBLIC SPENDING could be cut to ensure the government has enough money to bail out the £16bn privately financed London Underground upgrade, it emerged this week.
Transport secretary Stephen Byers has written to the project's lenders with assurances that it will pay off loans if the consortia they are financing runs into serious financial difficulties during the 30 year upgrade programme.
Banks are lending 95% of the private finance element being put into the project.
Final contract details are being negotiated with the Metronet and Tubelines groups.
Metronet has the Bakerloo, Central and Victoria lines plus the sub surface lines contracts, while Tubelines has the Jubilee, Northern and Piccadilly lines.
The Department of Transport Local Government & the Regions this week confirmed that Byers had written a 'comfort letter' to the banks assuring them that their loans would be repaid.
The letter stops short of a cast iron government repayment guarantee, which would mean that the government is effectively underwriting the bank finance.
But it is unclear whether the reassurances will force the Office of National Statistics to consider the loans to be technically underwritten.
If it does, the cost of the upgrade will effectively go onto the government's balance sheet and count as public spending.
Treasury would then have to reduce other public spending programmes to compensate.
'The balance sheet treatment will be determined at the end of the (contract negotiation) process, ' said a DTLR spokesman. This was confirmed by the Treasury, which added that getting the best deal for the upgrade was more important than whose balance sheet it ended up on.
Treasury and DTLR spokesmen added that under the terms of the PPP deal, the government would only be called in to pay off bank debt as a last resort.
If one of the PPP concessions ran into financial trouble, London Underground and the concession company would have a year to find another company to take over the contract.
Failing this, LUL would take over and the Transport Secretary would then have to make a final decision on whether to pay off the bank debt as well as fund improvement work.