Transport for London (TfL) has secured another short-term funding agreement worth £1.08 billion from the government to keep the Capital’s public transport services running, but will have to pay a high cost for it.
Wages frozen, pensions reformed, fares rising and costs cutting.
Although revenues from fares have risen in recent weeks thanks to the relaxing of the lockdown, they are still far below where they were before the pandemic, and with TfL heavily reliant on ticket sales for its income, the pandemic has taken a bigger toll on London’s public transport than it has on any other Capital city.
The current deal comes on top of the £1.6 billion received in May 2020 and £1.8 billion in November 2020, and the £500 million support package in March 2021.
The latest deal also allows for the uncertainty of the easing of the lockdown, so the Government will “top up” TfL’s revenues with additional grant payments if they are lower than a pre-determined passenger revenue forecast. Conversely, if TfL’s revenues are higher than the pre-determined passenger revenue forecast, TfL will be required to repay that excess.
The latest deal will see TfL required to find a further £300 million in cost savings this financial year, but as the funding deal and projected revenues still leave a gap of around £600 million, so TfL needs to find more cuts or revenues from somewhere. This is expected to be met through a combination of measures, including utilising cash reserves, additional non-passenger income and reduced or deferred costs. These additional savings are incremental to TfL’s existing efficiency plans.
TfL is also required to put in place plans to raise future revenues by £500m-£1billion a year from 2023.
The Transport Secretary, Grant Shapps said in a statement that the deal “that these support packages must be fair to taxpayers across the UK and on the condition that action is taken to put TfL on the path to long-term financial sustainability”
TfL is already one of the lowest operating cost public transport operators in the world, and the demand being put on London is one that isn’t being imposed on other cities in the UK.
The latest funding deal is also just another sticking plaster, as it only lasts six months, although that is due to the double issue of a likely recovery in TfL finances as lockdown eases, and a government post-covid recovery spending review at the end of this year.
TfL has so far received £4.9 billion in funding since the start of the pandemic, which is similar to the amount given to national rail and bus services outside London. To put that into perspective, TfL alone carries a similar number of rail and bus passengers as the rest of the UK combined, so the funding deal for London is comparable in terms of cost per passenger as the rest of the UK. Which makes the extra demands being put on TfL seem particularly capricious compared to what’s being demanded from other transport operators outside London.
The previous bailouts were also a mix of grant funding from the government, and a repayable loan. However, TfL’s debt is already nearly maxed out making future borrowing difficult, and the rail/bus operators outside London are not required to pay back loans in the way TfL is being expected to.
Before the pandemic, TfL had been on track to run an operating surplus by 2022-23, which would make it the only Capital city public transport operator in the world to be able to achieve that.
The DfT was understood to have been seeking an ongoing £300 million a year in cost cuts, but has accepted a one-off cut, which is likely to be found by deferring what maintenance and upgrades can be deferred without affecting safety.
In exchange though, TfL is to review its medium-term capital investment programme, and the government will have the power of veto over it. There’s also a review being planned for the longer-term reform of TfL’s finances, but that includes changes to governance and oversight, so the government may be seeking to take more control over the Capital’s transport network.
TfL is also being asked to review its pension scheme, which is more generous than most, but that’s mainly a legacy of how the GLA was created by the government, which locked in the scheme, and it’s also pretty difficult to reform without angering the unions.
One difficulty with the pension is that it’s classified as a private sector scheme, where TfL is responsible for both past and future liabilities. A government guarantee on these liabilities would reduce TfL’s contributions to the scheme and save an estimated £100 million a year. That would require a change in the law, so the decision lies with the government, not the Mayor.
Another cost cut that could lead to trouble is that TfL is required to freeze staff wages this year.
Although there’s much talk in the announcement of cost-cutting, they are still pushing ahead with a hugely expensive and politically difficult demand for driverless trains. TfL is expected to produce a business case for the conversion of the Waterloo & City line and Piccadilly line to a DLR style operation.
A requirement to raise revenues by between £500 million and £1 billion a year from April 2023 represents between 5 to 10 per cent increase in revenues, although being deferred until April 2023 reduces the impact slightly due to an existing agreement to raise TfL fares by inflation plus 1 per cent.
Depending on how the small print is written, the requirement to raise revenues may also not look as onerous as it sounds though, as by then the Elizabeth line will be operational, bringing in a pre-pandemic estimate of up to £1 billion a year in revenues from 2024/5.
Of course, the delay and cost overruns on the Crossrail project have themselves strained TfL’s finances, and that was before the pandemic and before TfL took over direct control of the project.
Although much has been said about the current Mayor’s freezing of fares over the past four years, it had a modest impact on fares income, of around £160 million a year — compared to the loss of £700 million a year in central government grant that TfL used to receive.
TfL is the only major public transport operator not to receive a central government grant, and it also operates the only part of the UK’s strategic road network that receives no routine funding from the Government. That particular issue lead to a heated public fight with a threat to create a new charge for people living outside London to drive into the city to help cover the costs of road maintenance.
TfL still has the legal ability to impose new road charges – and is in fact legally required to seek ways of reducing road traffic – but will need to balance the need to raise revenue for public transport, without further angering motorists already facing congestion charges, low emission zone charges, and low traffic networks.
The Mayor could also increase the mayoral precept that is added to every council tax bill, in order to fund London-specific TfL deals, such as concession fares.
While it’s too early to know how TfL will increase its revenues in the future, as that requirement of the bailout doesn’t kick in until April 2024, just a month before the next Mayoral election, one thing is certain. Any decision is going to be very political.