Financial trouble at TfL: can it stay afloat?

14 May 2018 (Last Updated May 11th, 2018 16:35)

London’s public transport provider, TfL, is under increasing pressure. Not only has its government operating grant been slashed but a funding freeze is also expected to cost £640m across the course of the current mayoralty. Can TfL create the commercial income needed to keep it afloat or are there serious causes for concern?

Financial trouble at TfL: can it stay afloat?
A number of rail projects could be at risk if London passenger numbers don’t increase as much as TfL expects.

With London’s population surging to 8.8 million in 2017 and set to increase even further, continued investment from industry body Transport for London (TfL) will be vital to keeping things moving in the capital.

But an ongoing financial crisis could bring the city to a standstill. Recent reports have said the organisation’s operational deficit increased from £171m in fiscal 2012-2013 to £458m in 2016-2017. At the time of writing, the deficit is forecast to be £784m for 2017-2018, which is set to reach nearly £1bn by 2018-2019.

The removal of government grants, an ongoing fare freeze and a dip in passenger numbers have forced TfL to make major cuts to its projects in order to stay afloat. Though the organisation remains confident of reducing its deficit by 2021, this relies on a number of assumptions which, if not fulfilled, could spell disaster.

The factors of decline

A leading contributor to TfL’s financial woes has been the phased removal of government subsidies since 2015. Prior to this, TfL had received around £700m in grants, but this gradually ebbed away to £228m in 2017-2018, and will disappear completely in the year ahead.

“Our members who operate transport in the capital are telling us loud and clear that this funding crisis will have a severe impact on safety and services if action isn’t taken urgently,” said Rail, Maritime and Transport union general secretary Mick Cash in a statement. “This crisis in funding will also have a major impact on jobs and the economy in London which would ripple out across the South East and the rest of the country.”

London Mayor Sadiq Khan has slammed the UK Government for the grant removal, calling it “astonishing” that TfL would be the only major transport body in Europe not subsidised by a central government. Nevertheless, the mayor himself has come under fire from speculators for his decision to freeze fares across TfL services until 2020. The move, which Khan said would save the average household around £200 over the course of the four-year freeze period, has been estimated to cost TfL a total of £640m.

“TfL claims that London Underground ridership is only ‘marginally’ down compared with last year’s results.”

According to London Assembly member Keith Prince, this was a good example of Khan “spending money like a man with no arms”, despite being fully aware that government grants would be removed.

“It’s very clear that the mayor was quite aware that the government subsidy was going to be reduced even more during the period of his tenure and yet he had done nothing to offset that,” says Prince. “He was told by all the other [mayoral] candidates that having a fare freeze was suicidal, and that would have been made clear to him by TfL.”

What TfL didn’t expect was that London would experience a downturn in passenger numbers; though commuters crammed on the London Underground at rush hour are unlikely to notice, 20 million fewer tube journeys were made last year up to November. TfL predicts it will cut fare revenues by £240m for the ending fiscal year.

This downturn has a number of potential causes, with some commentators pointing at convenience technology. Uber gives Londoners a more direct, easy way of getting around, while apps such as Deliveroo and Netflix deter them from going out as much. In the draft for its business plan, TfL blamed the unexpected dip in ridership on reduced economic growth and potential uncertainties over the UK’s departure from the EU.

TfL, however, claims that London Underground ridership is only ‘marginally’ down compared with last year’s results, and show a significantly lower reduction in the context of the country-wide downturn. At a recent meeting of the London Assembly, TfL Commissioner Mike Brown said Khan’s fare freeze had in fact been helpful for keeping passengers onboard.

“If you look at the evidence now, there is no doubt that it has cushioned our demand decline compared to the real numbers of decline we have seen in the train operating companies serving London.”

Plans for the future

TfL has fought back against reports that it’s in financial crisis, saying that the company’s latest draft budget published in March shows good progress towards achieving an operating surplus by 2021-2022.

The organisation has been able to reduce the day to day running costs of London’s transport network by £153m through a range of actions, including reducing management layers, renegotiating contacts and delivering transport improvements more efficiently. It is also hoping to develop TfL’s land above ground for housing and commercial space – a prospect that could deliver more than 3,000 homes – to help fund transport improvements.

“TfL’s hopes for the future are pinned on the completion of its upcoming Elizabeth Line project.”

“While we are currently below budget for fares income, this is more than made up by savings made through being more efficient,” says a TfL spokesperson.

Nevertheless, TfL’s hopes for the future are pinned on the completion of its upcoming Elizabeth Line project, scheduled for the end of the year. The £14.8bn project, which will create a brand new line running underground across London, is expected to be a big revenue raiser. TfL predicts that ridership will increase from the current 46 million passengers on TfL Rail, to nearly 270 million by 2022-2023.

Despite 90% of the network being completed, a report in March revealed that ‘a significant amount of work remains’. Delaying this project could cripple TfL’s financial expectations; however, Prince says assuming that it will increase passenger numbers could be just as dangerous.

“I don’t think it will be the massive revenue generator that they’re claiming,” says Prince. “I think what will happen is, people who use the Central Line will switch onto the Elizabeth Line. That won’t necessarily generate more revenue.”

“Certainly a business the size of TfL should always have a Plan B if you’re projecting an unprecedented increase in fare revenues to save your business.”

“The business plan makes what looks like optimistic assumptions about future passenger numbers; if they turn out to be accurate, TfL can get by,” adds LSE London director Tony Travers. “If not,” he says, “the financial position could worsen significantly”.

A number of rail projects could be at risk if London passenger numbers don’t increase as much as TfL expects. Planned renovation works for the Jubilee and Northern Lines have already been shelved as part of cuts, and future renovations to expand capacity on other lines could be in jeopardy.

“If TfL cannot generate sufficient income, there will be delays to the replacement of Piccadilly and Bakerloo Line rolling stock and no money for any expansion,” says Travers. “There would always be a risk that maintenance also gets delayed, which would soon show up as more signal failures and breakdowns.

“We should know by 2020 how things will turn out.”