TfL left to pick up costs after government rejects inflation linked funding support

Another hole has appeared in TfL’s finances, as the government has decided not to provide the expected financial support to cope with the effect of high inflation on TfL’s costs.

Back in August 2022, when a funding deal was agreed to keep Transport for London (TfL) operating as it recovers from the pandemic, it was also accepted that high inflation could be a problem if it persists. Therefore, the agreement included a mechanism for further funding if the level of inflation forecast by the Office of Budget Responsibility (OBR) increased.

Which it did.

TfL had previously budgeted for a £132 million increase in costs due to inflation on 2023/25, but based on the November inflation report from the OBR, it’s expected that TfL’s costs could rise by £400 million. Although recent cost-cutting measures and negotiations on energy costs have managed to extract savings, there’s still a £279 million hole to fill.

A below inflation fares rise of 5.9 percent, effectively imposed by the government’s decision to cap national railway regulated fares rises, is expected to lift TfL’s income by around £98 million.

This has left an inflation induced gap of £181 million.

However, the Department for Transport (DfT) has refused to agree to fund the gap. This could be because government departments are allocated funding by the Treasury in fixed cash amounts rather than inflation linked funds, so the DfT itself has limited flexibility to support transport services affected by rising costs.

Although TfL has since found more savings, the lack of inflation related support means it still faces a £137 million hole in its finances.

According to a financial report for TfL’s board meeting later this week, TfL expects to cover the gap with a mix of increased borrowing and delaying some maintenance and upgrade works on the transport network.

There is some flexibility in borrowing, as TfL’s debt fell slightly over the past year by £161 million to £12.8 billion — and at a time of rising interest rates, TfL was able to ensure that most of its borrowing is done on a fixed rate of around 3.5%. That may rise in the future though, as around 10% of TfL’s debt is due to mature by 2028, and if not repaid, will be rolled over onto whatever interest rates are applicable at the time.

Despite that, TfL is still on track to achieve operating financial sustainability in terms of its day-to-day running costs, excluding the cost of large-scale capital investment. Last month, TfL submitted its application for investment funding and expects a decision within a few months. There is a tight deadline though, as too long a delay could cause TfL to push back planned maintenance projects, which could start to affect the reliability of the services.

Delayed maintenance also tends to cost a lot more in the long term due to the stop-start nature of the funding for the maintenance affecting planning, and because repairs are being undertaken on machines that are more worn out than had been planned for.

In more positive news, passenger numbers across the TfL estate are now back to 89% of pre-pandemic levels, with the now well established work from home on Monday and Friday’s still holding down passenger numbers.

Although passenger numbers are down, fares income is actually exceeding pre-pandemic levels, but that’s because of several years of fares increases, although they are not offsetting the effect of inflation, which has seen costs rise faster than fares even after the effect of cost cutting at TfL.

Despite the relatively good news in how TfL is recovering from the pandemic, inconsistent decision making in government about funding agreements is storing up long term trouble, leading to more delays and problems on the public transport network.