The government is to review the financial structure of Transport for London (Photo: TfL)

UK: Cost efficiencies, workforce modernisation, alternative potential operating models and ‘exploring the feasibility of extending driverless operation from the Docklands Light Railway to other lines which are already automatic’ are to be considered by a government review into the financial structure of Transport for London.

TfL is heavily dependent on farebox income, and in May the government required TfL and Mayor of London Sadiq Khan to agree to the review in return for financial support as the coronavirus pandemic caused a collapse in ridership. This released a grant of £1·095bn and a loan of £505m to ensure continuity of services.

Cleaning regime (Photo: TfL)

Khan explained on May 15 that this was ‘the only deal the government put on the table’ leaving him with no choice but to agree. He pointed out that London was ‘the only major city in western Europe that hasn’t received direct government funding to run day-to-day transport services.’

The government published the terms of reference for the review on July 20, when Secretary of State for Transport Grant Shapps also named the two people that are to be appointed to the TfL board as the government’s special representatives.

The review is to be completed by the end of August, to inform decisions as to what should happen after the current support agreement ends on October 17. It is required to provide the Secretary of State with detailed options and an assessment of their deliverability implications, as well as considering the impact on wider government objectives, including maximising housing supply.

Crossrail is outside the scope of the review, but will be considered through other commitments made in the agreement. Changes to the government’s tax or spending plans are also not within the scope, although the government says it will consider evidence from the review.

Three levels

The report will have three levels, with the number of options and complexity increasing with each level.

Level 1 is intended to provide a clear understanding of TfL’s current financial position. It will include:

  • review of TfL’s current obligations and functions, both statutory and contractual;
  • review of current income streams, with a commentary on how they have been impacted by the pandemic.

Level 2 is intended to provide options to strengthen TfL’s financial position over the remainder of the current (2020-21) and next (2021-22) financial years. It is to include:

  • development and assessment of options for short-term revenue maximisation and assessment of the potential for raising more non-fare revenue and commercial income, including TfL’s housing development pipeline;
  • identification of opportunities to deliver further short-term operating cost efficiencies;
  • review of the approach to prioritising capital spending, including maintenance and enhancement of rolling stock, infrastructure and TfL estate assets.

Level 3 would provide options for more fundamental changes to put TfL in a ‘fully sustainable’ financial position by the end of the current business plan (2024-25). This is to include:

  • development and assessment of medium-term options, and identification of potential longer-term options, for revenue maximisation and assessment of the potential for raising more fare and non-fare based income. This will include TfL’s housing development pipeline, revenue yield choices over time and changes to road user charging schemes;
  • identification of opportunities for further medium-term operation cost efficiencies, including but not limited to, workforce modernisation, and ‘exploring the feasibility of extending driverless operation from the Docklands Light Railway to other lines which are already automatic’;
  • review of the approach to prioritising capital spending for the remainder of the business plan period and to evaluate long-term sustainability, including but not limited to asset maintenance and enhancement for existing and future rolling stock, network infrastructure and TfL estate;
  • review of the current operating model and whether there are any opportunities that alternative operating models could bring over the longer term, including consideration of structures and governance;
  • review of the balance sheet and financing structure of TfL, including financing policy, debt sustainability, cash reserves, rating agency engagement and capital versus operational expenditure choices;

The review will be led by the Department for Transport, with support provided by external advisors, DfT’s Special Representatives to the TfL board and TfL itself.

Inputs will include:

  • financial modelling against multiple Covid-19 recovery scenarios, recognising the high levels of uncertainty;
  • review of TfL obligations and functions, including statutory and contractual;
  • review of the current operating model and alternative potential models, and assessment of financial sustainability of TfL’s current model pre-Covid-19;
  • summary of all current and planned capital spending;
  • review of the balance sheet and financing structure, including financing policy, of TfL;
  • review of the current fiscal support arrangements and income streams
  • review of international and cross-modal benchmarks in considering all of the above, and comparison of TfL to these, in particular for operating models. Comparison to include commentary on mitigating factors, such as levels of public funding;
  • assessment of the relative impact of different options on financial forecasts.

The review will report to the Secretary of State for Transport with oversight from the Prime Minister and the Chancellor of the Exchequer. It must produce a written report ‘suitable for publication if ministers are minded to do so’.

Shapps has appointed Andrew Gilligan and Clare Moriarty as the two government Special Representatives to attend the TfL Board and TfL’s Finance and Programme Investment committees. Noting that the positions required a specific skillset, he said this had required a direct Ministerial Appointment.

Moriarty is a former civil servant whose previous roles include Director General of the Rail Executive and Director General for Corporate Services in the Department for Transport; she was most recently Permanent Secretary at the Department for Exiting the EU until its abolition.

Andrew Gilligan advises the Prime Minister on transport and served as Cycling Commissioner for London during Boris Johnson’s tenure as Mayor.

Responses

Responding to the announcement, Simon Kilonback, Chief Finance Officer at TfL, said ‘London’s transport network is absolutely vital to the economic, social and environmental health of the capital. Prior to the coronavirus pandemic we were in a strong financial position. As recently as March 2020, we were forecasting a reduction in our like-for-like operating deficit of 86% from £1·5bn in 2016 to £0·2bn this year, and were on track to turn this into a surplus by 2022-23. This enabled us to build cash reserves of more than £2bn, which helped us continue to deliver services for nearly three months at the start of the pandemic before we received any government support.

Hand sanitiser station (Photo: TfL)

‘Whilst our own financial performance has been strong, we have suffered from a lack of any long term certainty for funding vital investment going forward. The coronavirus pandemic has made this more acute. We will be fully supporting and engaging in this review, and will set out our strong record of delivering efficiencies across our business and delivering the vital services London needs to function.’

The RMT trade union expressed concern that the government might seek to privatise the operation of London Underground services. ‘It is utterly disgraceful that the government’s response to the heroic efforts of thousands of key tube workers who are risking their lives to keep London moving during the Covid-19 epidemic is to now threaten tube privatisation and driverless trains’, said Senior Assistant General Secretary Mick Lynch. Accusing the government of using LU ‘as a political football and engaging in political point scoring in advance of the Mayoral elections’, he warned that if the government attempted to privatise services ‘there will be the mother of all battles including the option of all-out strike action.’