Transport for London: how an international marvel came to the brink of collapse

Transport for London is a local authority in its own right. The statutory corporation, strategically guided by the Mayor of London, regulated under local government finance rules, and governed by the Greater London Authority Act, directly employs nearly 30,000 people, operates one of the world’s most complicated rapid transport systems, and is responsible for one of the largest capital portfolios in Europe. Crossrail alone is Europe’s largest construction project.

More extraordinary still is that this organisation is largely financially independent. TfL has sustained its finances via two routes: first, through its operational income from the millions of fares purchased by Londoners daily as well as commercial deals, and second, through borrowing from the markets and the Treasury, which are mainly investments in infrastructure projects. 

This has allowed TfL to continuously upgrade parts of the London Underground system, in stark contrast to the New York metro system. TfL’ has revolutionised step-free access and, more recently, introduced data connectivity within tubes. It is unlikely that any such upgrades would have been made without financial independence – few politicians in Westminster would want to be seen to invest billions in tube enhancements for the “metropolitan elites”.

To maintain the distance between central government funds and the London transport hegemon, a new financial settlement was agreed in 2015 between then-Chancellor George Osborne and Mayor Boris Johnson. TfL would no longer receive £700m a year from the Treasury to top up its operational spending, and would, (bar some devolved business rate benefits), instead have to rely entirely on borrowing, congestion charging, advertising and fares. 

The already great financial burden on TfL grew evermore. Last year, the organisation borrowed around £650m from the markets, excluding a separate line of borrowing worth £750m with the Department of Transport to meet Crossrail overrun costs. In the financial year 2019 to 2020, TfL’s total active borrowing is now £11.5bn, around double TfL’s annual income of £5.8bn. 

Still, all this borrowing remained under TfL’s debt ceiling, and the organisation could continue to borrow comfortably on the basis that it expected its operational income to increase as Crossrail came online and the decline in driving increased tube demand. TfL also maintained a funding reserve of over £1bn at all times, in addition to other strategic reserves, for potential loan-related payments. 

Then came coronavirus, a uniquely devastating financial crisis. In contrast with its actions during the Great Recession, TfL could not survive this through efficiency cuts or long-term, low-risk loan arrangements. Rather, the organisation was crippled as soon as the first national lockdown was announced. The number of passengers carried on buses immediately dropped by 85% and the number of tube passengers 95%, costing TfL over £600m a month to operate services. 

In May, the financial situation was so critical that TfL told the Department for Transport that, without a bailout within hours, the organisation would have to dramatically cut services and issue a Section 114 notice – the equivalent of bankruptcy for a local authority. “If we don’t get the deal done today,” Sadiq Khan told LBC on 14 May, “the [chief financial officer] of TfL has legal duties that he has to follow.” 

TfL secured a £1.6bn bailout on that day – £1.1bn in cash and a £505m loan – but it was significantly less than the £3.2bn the organisation needed to balance its proposed emergency budget for 2020/21. The financial package also came with stringent terms: the 15-person TfL board would have to accept two new government officials, reducing the organisation’s independence, the congestion charge would be raised by 30%, and free travel for children and peak times travel for over-60s would be temporarily stopped. 

Conservative mayoral candidate, Shaun Bailey, pinned the blame on Sadiq Khan’s failure to reduce TfL’s debt burden in the years preceding the pandemic, saying Khan failed to create sufficient headwind for unexpected events. He pointed to Khan’s Fare Freeze policy, which since 2016 has cost TfL over £600m in cumulative revenue, as an example of irresponsible financial management. 

On the other hand, Labour politicians said the terms were an act of political retribution, and noted that TfL would be in a significant financial crisis even if it had an exceedingly healthy balance sheet, given the scale of the effect of the national lockdown on the demand for public transport. 

Five months on, another bailout row is brewing over TfL’s request for another £2bn from the Department for Transport for the rest of this financial year, plus £2.9bn for the next financial year. This has led to fierce exchanges between City Hall and Whitehall, with leaked correspondence showing that the government requested even more stringent terms than last time, such as an extension of the congestion charge zone to the North and South Circular roads, a further increase on the above-inflation rise in fares planned for January, and the cancellation of free travel for teenagers. 

The correspondence also shows an extraordinary threat from Transport Secretary, Grant Shapps, who suggested that if TfL did not accept the terms of the bailout, central government would go for the nuclear option and take direct control of the organisation. 

In between this fierce political battle sits an organisation once considered an international marvel of public transportation management. Transport for London may not make it to 2021 in its current form.