Livingstone tries to sort out TfL’s financial difficulties

The sharp rises on some fares announced recently for London Transport come as no surprise. The finances of Transport for London have looked distinctly parlous for some time, and even a relatively generous settlement in the Chancellor’s July spending review was not enough to prevent above inflation fares rises.

TfL has been waging a long and clever campaign for more money. A ‘business plan’ – it was really a wish list rather than a coherent plan – was published in the run up to the spending review with the aim of intending to persuade the Chancellor to dig deep in his pocket. The ‘plan’ argued there would be a £1bn gap in TfL’s budget from 2005/6 but even a cursory glance at the document suggested there was considerable padding and therefore room for manoeuvre.

Although Ken Livingstone was wont to suggest that much of the problem was the result of a cut in government grant, that represented only about a fifth of the gap. The rest consisted largely of ‘aspirational’ schemes which TfL wanted to carry out, partly to continue its programme of improvements, but also to cater for the 700,000 extra residents which it expects to be living in the capital by 2016.

This, of course, is standard local government practice. Cries of cuts and disaster are commonplace in the run up to expenditure reviews but TfL’s case, however, was strengthened by the fact that, unlike anywhere else in the country, it had delivered on a key government policy of trying to attract more people onto buses. That made it harder for Gordon Brown, and indeed No 10, to reject out of hand Livingstone’s special pleadings. Whereas bus use has declined steadily outside London pretty much continuously since the war and at a faster rate since the deregulation and privatisation of the mid 1980s, the trend in London had been reversed.

But at a price. The measures to increase but use contributed in no small measure to TfL’s financial difficulties. Livingstone, realising when he was elected in 2000 that there was not enough time in the four year electoral cycle to do much with the Underground, especially as it was the subject of the disputed Public Private Partnership, therefore concentrated on a deliberate and systematic policy of improving bus services.

New routes have been introduced, the bus fleet has been modernised, notably through the introduction of 300 bendy-buses that are easier to board and leave than the old double deckers, and frequencies have been increased. This has reaped major benefits in terms of passenger numbers but has not improved TfL’s finances.

There are now 6m passengers every weekday, compared with 4.2 million five years ago but in terms of income, the increase is much less because most people using buses have some kind of Travelcard or bus pass and therefore the average revenue per passenger is far lower than the £1 headline price – just over 40p. Moreover, some of these passengers have transferred from more expensive journeys on the Tube where numbers have broadly stagnated over the past five years. The finances of bus operation have been exacerbated by the fact that bus drivers have had above inflation wage rises because of recruitment difficulties in the booming London economy.

Therefore, the bus policy has been successful in transport but not economic terms. This highlights a fundamental failing of successive governments which have failed to recognise that public transport cannot be run as a money making exercise and, concomitantly, attracting more people to use it requires extra subsidy.

TfL’s problems were further exacerbated by a reduction in grant from central government. Although the Chancellor has softened the blow now that mayor Ken Livingstone and Gordon Brown are back on speaking terms following a very public and lengthy spat when the former was a backbench MP, TfL will still receive around £2.2bn next year compared with £2.4bn this year. Crucially, though this will rise broadly in line with inflation over the ensuing four years, a concession gained in the spending review which has improved TfL’s long term financial position.

The other problem for TfL’s finances is that the Mayor’s sole source of independent revenue, the congestion charge, has not been as lucrative as expected. Instead of the £120m hoped for, the net income has been around half that level. That is because the charge has been more successful in deterring more motorists from entering central London than expected. While Livingstone has always argued that the charge’s primary purpose was to create a better environment in central London, the lack of revenue has hampered his ability to fund many major schemes.

Instead, Brown has allowed Livingstone to raise money to pay for big projects such as the East London Line. Under the terms of the spending review, TfL is allowed to raise £2.9bn in borrowing over the next five years, in addition to £400m which had already been permitted. However, the trouble with borrowing is that you have to pay interest on the money and that has exacerbated TfL’s budgetary situation. Once all £3.3bn has been borrowed, interest payments will be in the order of £250m, placing a severe strain on TfL’s finances.

Broadly, the extra fares income will bring in half that, and TfL has been keen to emphasise that the money raised in this way is being reinvested to make improvements. Clearly, though it represents a shift in Livingstone’s strategy. He realises that he cannot get big increases in the precept for TfL given that the make-up of the Assembly, which scrutinises the budget, has shifted to the right and there are now more Conservative than Labour members.

Therefore his low fares policy has had to be sacrificed to some extent although there remains some good deals, particularly on the buses. The fares package is very complicated and that reflects the various motives behind the changes. The main one, of course, is redressing, at least partly, the parlous financial state of TfL, but the new fares are designed to encourage widespread use of the Oyster card with the aim of ensuring cashless buses by 2006. Currently, only 15 per cent of passengers pay cash but obviously their transactions take far longer and these delays will be exacerbated by the fact that the basic fare has risen to £1 20, a more fiddly price than the previous straight quid.

In fact, the new package is not as dramatic as some of the headlines suggested. Overall, the rise is only 1 per cent above inflation, as the sharp increase on the buses is matched by the odd reduction and allowing under 16s to travel free, a blessing for hard pressed parents and a way of trying to ensure that young people get the public transport habit. TfL points out, too, that even on the buses the fares are only back to 2000 levels in real terms and that the off peak fare will be 80p as long as Oyster card are used but nevertheless the average bus fare will still go up by 10 per cent above inflation.

Livingstone’s ability to manoeuvre has also been hamstrung by the cost of the Public Private Partnership for the Underground which, of course, he opposed throughout its development. The PPP, broadly, costs £1bn per year which the Treasury is, mostly, funding. The contracts, which are for 30 years, with 7.5 year break points, offer generous terms to the infrastructure companies carrying out the work but since they were negotiated and signed by the government, there is little Livingstone can do about them, except complain from the sidelines.

Indeed, remarkably, despite the massive costs of the PPP contractors which are supposed to result in the complete refurbishment of the Underground system, major station refurbishments are not included and these are among the projects which Livingstone is having to fund through the tube fare rises.

Overall, half of TfL’s much touted £1bn gap is being covered by extra borrowing and half by cutting back on projects. The East London Line extension is a firm commitment and so is the new bridge linking Newham with Greenwich that is being funded with PFI credits and toll revenue. However, many smaller public transport and road schemes remain in the balance and some larger ones, such as the proposed tram between Shepherd’s Bush and Uxbridge is doubtful. TfL is currently reviewing what is feasible with the idea of publishing a realistic business plan by the end of the year.

One issue that over which TfL failed to persuade Gordon Brown is that, like all local authorities, TfL is not allowed to raise money through securitisation of future income, the process by which capital is raised on the basis on an income stream. Given that TfL’s income on the buses and Tube is relatively stable, a vast amount of capital could be raised in that way and Livingstone is hopeful that one day that freedom may be granted. Until then TfL will have to muddle through, making do with a system that gives it very little flexibility.

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