How should Transport for London fund itself in the coming years?

The pandemic caused major disruption to economic and social activities with long-lasting effects. TfL has felt the impact.

Public transport use in London fell sharply with the introduction of social restrictions. It’s been recovering slowly as hybrid work has become more common and international visitors remain below pre-pandemic levels.

The latest data available from May 2022 shows ridership levels are still 20% below the same period in 2019.

As such, TfL has received over £5bn in support from the central government to guarantee services in the last couple of years.

Now, the new Long Term Funding Settlement that’s being negotiated between the government and TfL needs to take into consideration the weaknesses of the TfL’s revenue model in a lower ridership world.

Therefore, both the government and the mayor should look at lessons from other global cities’ transport networks.

The TfL funding model is highly dependent on ridership – this needs to change

All public transportation agencies across the world were hit by the pandemic, but TfL’s revenue model made this situation particularly difficult.

Before the pandemic, TfL raised more than 70%of its revenue from the farebox, which is significantly higher than other global cities like Paris (26%), Hong Kong (36%), New York (38%) or Singapore (46%).

Previously, this feature was frequently seen as a strength – as TfL was not massively dependent on government subsidies – but it’s become a major vulnerability in the last two years.

Without new funding tools, cutting services and raising fares may be the way of balancing TfL’s finances.

However, this would deeply deteriorate London’s urban mobility, air quality and ability to compete economically with other global cities.

Meanwhile, this option would still not help TfL diversify away from the farebox like the public transport systems mentioned above.

Car restricting measures have been TfL’s preferred option, but Singapore shows that there are still some tools available

Finding new sources of income isn’t entirely new for London.

Historically, the mayors have opted to collect revenue from car use — congestion charging was introduced in 2003 and the Ultra Low Emissions Zone (ULEZ) in 2019.

Those tools had positive effects in London, raising revenue, improving air quality and making bus services faster (by reducing road congestion).

Most recently, the current mayor of London has been considering other possibilities, such as a ‘boundary charge’. This would mean expanding the ULEZ to cover the whole of Greater London, or implementing a daily Clean Air Charge for most vehicles.

That said, income generated from the latest ULEZ expansion has been lower than expected, which highlights the limitations of deepening existing ‘car-restricting’ policies.

Singapore, however, has been able to effectively collect significantly more revenues (as a share of public transit total revenue) than London in car-restricting policies.

First, the city-state has moved from a congestion charge to a road pricing system, which charges different amounts depending on the time of the day, vehicle size and specific route.

Second, road pricing is complemented by a system that charges car ownership (the certificate of entitlement), which is Singapore’s big revenue raiser. This could be an alternative tool for London.

There is currently no charge in London for the space occupied by vehicles when they aren’t moving, except for resident parking permits.

Meanwhile, this option would still not help TfL diversify away from the farebox like the public transport systems mentioned above.

The ‘Parisian model’ may be the short-term answer and the ‘Hong Kong model’ the long-term one

Paris shows that there are effective ways of collecting revenues that don’t require charging for car use.

The French capital has a tool called “Versement Transport” (VT) that allows local government to fund public transport with a local payroll tax.

This contribution – which varies between 1.4% and 2.6% of gross wages – accounts for more than half of Paris’ transit authority total revenue.

A similar policy has been adopted by other cities such as New York, and it should be relatively easy to implement in London in the coming years.

Centre for Cities estimates that £1 billion could be raised with a 0.6% contribution from London’s gross wages (on average £20.40 a month per worker). This estimate is broadly TfL’s projected funding gap.

On the other side of the world, Hong Kong has a model that would improve public transport accessibility and tackle the housing crisis over the long term.

Hong Kong’s transit agency has the right to obtain development rights at pre-rail value above its stations. This allows it to develop the land and receive either a part of the property sale value or some rental income.

A development-driven funding model would help diversify TfL’s income stream and increase the number of residents living next to stations.

The relatively low levels of density around stations is one of the reasons why public transport accessibility in London isn't as high as in other global cities.

Recently, TfL announced it aims to develop three over-stations sites (Paddington, Southwark and Bank). But this model should be the rule and not the exception - especially for large-scale projects such as the Bakerloo line extension or Crossrail 2.

The ‘New York model’ shows the importance of fiscal devolution to diversify funding when necessary

The examples above should be seen as guidance for a new funding model. However, they cannot be implemented with the powers that the mayor of London currently holds.

To implement most of these measures, primary legislation is required (just like congestion charging in 2003).

Unlike London, New York’s governance structure allows the State government to create new public transport funding tools without constant negotiations with the government.

The consequence of this structure is that New York can freely diversify its income streams and swiftly adjust to change.

For instance, the ‘Parisian-style’ payroll tax was introduced in 2009 to support the Transit Authority during the financial crisis, while a congestion charge may be introduced next year.

The negotiations between the mayor and the government should go beyond balancing TfL’s books in the coming years - a new funding structure should be negotiated.

That structure should simultaneously diversify TfL’s revenue away from the farebox and allow both the current and future mayors to adjust quickly in a fast-moving world.

Diversifying TfL’s revenue may be politically hard, but it should be preferred over reducing services or raising fares significantly.

To meet these criteria, a long-term funding settlement must include a move toward fiscal devolution, just like the one New York has.

Otherwise, we may end up in similar negotiations five or six years down the line.

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