Mayor establishes new facility to ensure TfL can balance its budget and avoid making big cuts to bus and tube services.
- Recent funding deal agreed with previous Secretary of State for Transport Grant Shapps in August 2022 left a significant funding gap.
- This could have meant huge service cuts if TfL could not deliver £230m of unidentified savings on top of existing efficiency plan.
- New City Hall finance facility of up to £500m will ensure TfL can avoid having to make unnecessary widescale service cuts and allows TfL to balance its budget.
The Mayor of London, Sadiq Khan, has established a facility to ensure Transport for London's (TfL's) budget will balance throughout the period of the latest funding agreement with the government.
This facility will restrict the GLA’s future financial flexibility and the money will have to be withheld from later funding from the GLA to TfL. It gives TfL time for its revenue to recover and protects essential services for Londoners.
The recent government agreement has left TfL with a £230m funding gap across the current and next financial years, which the previous Secretary of State for Transport, Grant Shapps, assumed could be met through further efficiencies without saying how. But TfL assesses this as highly challenging and has to prepare for the eventuality that it may not be deliverable.
Since 2016, and before the pandemic, TfL has saved £1.1 billion from its annual operating costs, and it is currently working on the delivery of £730m in savings commitments. As part of the Mayor’s determination to ensure all agencies he is responsible for are as efficient as possible, TfL is committed to looking for further efficiencies. However, there is no certainty that the additional £230m savings required by the agreement can be identified and delivered, without which TfL would face choosing between slashing services to save money quickly or not being able to balance its budget – a legal requirement.
That’s why - to remove uncertainty both for TfL, Londoners using our essential public transport services and the staff who operate them - the Mayor has acted to provide a finance facility of up to £500m from City Hall that TfL can call on if necessary between now and March 2024, when the government funding deal expires.
This facility - which the GLA could not introduce before as the funding gap was too large to fill and there was insufficient confidence that the money could be recovered from funds intended for TfL in the future - is designed to ensure that TfL's budget will balance in light of the gap and the risks TfL's Chief Finance Officer has identified to the delivery of their budget, such as the level of non-passenger income generated. Without this new facility, it’s likely TfL would have faced taking a decision to plan significant service reductions in a matter of weeks in order to confirm it could balance its budget, as further efficiencies cannot be confirmed that quickly.
Proposals for additional investment would require additional funding as this facility is not for additional spending but only for balancing the budget, based on the requirements of the funding deal. This means it can’t be used to reverse the bus cuts that TfL recently consulted on and which the government effectively insisted on in return for giving TfL funding. However, it does mean that TfL will move further away from 'managed decline' - thereby allowing it to get on with serving London and supporting the city’s recovery from the pandemic.
The Mayor and the GLA’s Chief Finance Officer wrote to TfL at the beginning of this month offering this facility, enabling the TfL board to accept the government’s funding deal. Following completion of the necessary formal processes, this ‘comfort letter’ can now be published.
The Mayor of London, Sadiq Khan, said: “The recent funding agreement for TfL came after some extremely tough and protracted negotiations. Although TfL and I were able to secure a number of key concessions, the Government still left TfL with a significant funding gap.
"City Hall’s innovative yet prudent approach to ensuring TfL can balance its books, will help TfL to adapt to the negative impacts of the pandemic without the need for significant service cuts, protecting London’s transport network for the millions of Londoners and visitors who rely on it every day. As Mayor, I will continue working flat out to ensure we maintain a world-class transport network – something that’s so crucial as we continue building a greener, fairer London for everyone.”
Notes to editors
The facility will be funded through the GLA’s cash balances, which are in part working capital and in part prudent reserves in relation to long-term projects. If it is necessary to draw upon it, a suitable recovery profile will be agreed between the GLA and TfL, ensuring both parties can meet their obligations. This will be underpinned by TfL’s business plan, to be published in November, which will set out TfL’s financial position for the years ahead.
S&P Global Ratings upgraded the outlook on the GLA to stable and affirmed at "AA" on Friday 16 September. This reflects the expectation that the GLA will continue to post strong performance metrics, despite ongoing economic, political, and operational risks, having proven financial resilience over recent years, along with maintaining robust liquidity and exceptional access to capital markets.
The pandemic is the only reason TfL is facing a financial crisis and it has worked hard to progress all conditions placed on them by the government.
TfL has already been making every efficiency saving it can to try to save services, cutting annual running costs by £1bn over the last five years. Pre-pandemic, TfL was on track to deliver £1.4 billion a year of recurring savings since 2016, with £1bn of those already secured. Pre-pandemic it was on course to return an operating surplus for the first time, in 2022-23.
In 2015, the government cut national funding for TfL leaving it reliant on passenger fares for 72 per cent of its income – around twice the level of other world cities.
The GLA will use its cash balances to finance the support payments to TfL in the first instance, leading to loss of interest and financial flexibility, although likely to achieve better value for money than additional borrowing by TfL. This may necessitate GLA temporarily borrowing for capital expenditure it would otherwise have been able to finance directly, until such sums are recovered from future savings.
The government set a number of conditions before providing previous emergency funding to enable TfL to keep operating, this included reducing the extent of the bus network by four per cent by 2024-25. Proposals to achieve this reduction, by changing and withdrawing some bus routes in and around Central London were published in a public consultation which has now closed. No final decisions have been made and public and stakeholder responses are now being considered by TfL.