TfL faces difficult decision over government funding offer

Transport for London (TfL) has revealed some details of the government’s funding offer to keep London’s public transport running, and the current deal would last just 20-months, far less than the 3-year minimum that TfL had been seeking.

If TfL agrees to the offer, then it will be funded to April 2024, which marks the end of the 2023 financial year, so it’s a very short-term deal.

TfL’s Commissioner, Andy Byford has been arguing for a three-year deal to secure medium-term maintenance budgets. Like any large capital-intensive organisation, maintenance is often planned years in advance as they know when things will be wearing out and needing work done to keep them in good shape. The difficulty is that you can’t plan maintenance work to take place in 3 years time if you don’t have a reasonable expectation that the money will be available.

This uncertainty is causing a lot of concern. Not only is long term planning being hampered, but if they have to switch to short-term maintenance packages, those are a lot more expensive.

So in a situation where there’s less money, but costs are also higher, then even less maintenance can be carried out. This leads to a managed decline in London’s public transport as services are progressively cut back to ensure the services that can run do so safely and reliably. TfL’s current projection is that it may need to cut its planned capital expenditure by around 20 per cent if it doesn’t sign the funding agreement being offered. That’s about £800 million of repairs not being carried out, at a time when there’s already a backlog of repairs caused by the pandemic, so the real impact on the transport network is worse than the headline cuts would suggest.

The other concern being raised is that the government seems to be trying to micromanage how TfL will spend the money, with the 20-month funding offer described as coming “wide ranging and complex conditions”. In the years before Transport for London and the Mayor of London’s office were created, London’s transport was subjected to short-term funding settlements from the government, a lot of micromanaging, and little opportunity for medium-term planning.

The government seems to be of the opinion that TfL needs to return to being more tightly controlled than it has been over the past 20 years. This may be the case, and if so, then the KPMG report into how TfL is run, commissioned by the Department for Transport (DfT) should be published so we can all see what the problems are.

That the report isn’t being published, and there hasn’t been a big fuss from the DfT about how badly run TfL is, suggests that the KPMG report found a relatively well run organisation. Otherwise, the report would be published, and the Secretary of State, Grant Shapps who commissioned it would be quoting from it all the time.

It’s odd that the government, presumably having found an organisation that can control its spending, is still seeking to take control of how it spends its money.

If nothing else, it adds another layer of approvals and red tape to the process.

Considering that in recent years, a number of rail franchises have been given 6-year extensions, the DfT is clearly not averse to long-term agreements.

Just not for London.

On a positive note, TfL has reiterated that it’s on a path back to financial sustainability by April 2023, so there shouldn’t be a need for government funding for the day-to-day running costs. Those running costs are usually subsidised to some degree by central governments in other countries, but not in the UK, so getting to break even next year is a fairly impressive outcome regardless of other issues affecting TfL.

The difficulty is that breaking even in running costs leaves little scope for maintenance and investment, and TfL has been warning that without a commitment to support that, then public transport in London will go into “managed decline”, where they progressively reduce services as equipment wears out and cannot be repaired.

Since the pandemic shattered TfL’s revenue, they’ve received around £5 billion in funding to keep public transport running, which was entirely used to cover the collapse in fares revenue. It didn’t actually cover the full losses though, and TfL has lost around £1 billion from its own cash reserves as well.

For comparison, the DfT’s expenditure on keeping public transport running during the pandemic had exceeded £21 billion by the end of the last financial year. TfL was not unique in requiring support to keep trains and buses running when most people were told to stay at home.

The most recent funding agreement from the government expired on 3rd August, so TfL has been running on its own reserves, although it still requires revenue support for the next 9 months.

This has put TfL in a position where it can either accept the complicated and short-term deal that’s on the table or trigger the nuclear option, that is to issue a Section 114 notice, which would force TfL to shut down any loss-making service and run a break-even service. That would likely mostly fall on the bus networks, which were traditionally cross-subsidised from train fares, and run at a loss.

At the moment, they’ve avoided having to issue the notice because TfL and the DfT have been in negotiations with an expectation of an agreement being reached. If the negotiations fail, then TfL’s interim Chief Finance Officer, Patrick Doig would be legally required to issue the notice and make massive cuts to services almost overnight.

TfL’s Board of Directors will meet on Tuesday morning to make their decision.