Funding Transport Projects in London Tony Travers London School of Economics December 2005 This paper is intended to provide a brief summary of the key issues raised by Transport for London’s (TfL’s) capital programme and funding arrangements. As the largest of the Mayor of London’s functional bodies, TfL has embarked upon a major programme of investment in new infrastructure and assets. It has done this within the so-called ‘Prudential Borrowing’ rules introduced to local government in England & Wales in 2004. TfL’s method of raising resources to fund this programme is innovative. The questions posed by the scale and importance of TfL’s investment programme have implications for the rest of devolved government within the United Kingdom. 1. Background The Greater London Authority consists of four ’functional bodies’ and a core administration at City Hall. Transport for London (TfL) is the largest of these functional bodies, with a turnover of £6 billion in 2006-07. The Mayor of London sets its budget and chairs the TfL board, which he also appoints. TfL is one of the most powerful local transport organisations in the world, with responsibility for London’s Underground, buses, major roads, river services and taxi & minicab regulation. TfL, in common with the other GLA functional bodies, is a local authority and thus subject to much of the general legislation affecting such institutions. Its turnover is funded from fares (user charges) and government grants, with broadly half of its income coming from each source. A £21 million council tax precept is planned for 2006-07, equivalent to just one-third of one per cent of all TfL income. By contrast, local government in England receives, on average, 24 per cent of its net income from local taxation. TfL’s predecessor organisations (such as London Regional Transport, the Highways Agency and the Public Carriage Office) did not borrow for capital purposes. Their capital expenditure was funded by government grant. As a result, TfL started its life debt-free. In advance of TfL taking control of London Underground, the government signed a controversial 30-year public-private partnership (PPP) deal to refurbish and renew the Tube. The service charge on the PPP contracts costs about £1.1 billion per year, funded by Treasury grant. It is against the above financial background that the organisation has approached the creation and funding of a capital programme. 2. TfL’s Investment Programme During its early years, TfL has negotiated a long-term funding settlement with central government. This settlement enables £10 billion to be invested through a five-Year Investment Programme. Under legislation effective from April 2004, TfL used this funding agreement to establish a £3.3 billion borrowing programme for the period 2004/05 to 2009/10. A Medium Term Note programme was established in November 2004 giving access to capital market funding. Both Standard & Poor’s and Fitch rating agencies re-stated their ‘AA’ credit rating of TfL, demonstrating the creditworthiness of TfL’s business plans within the international financial community. In December 2004, TfL launched the first ever UK municipal Eurobond issue for £200 million through joint lead arrangers HSBC and Morgan Stanley. One of the issue’s key aims was to establish a transparent and visible benchmark for TfL debt, enabling effective comparison with other forms of financing such as Private Finance Initiative (PFI) projects. This bond was seven times oversubscribed. The Investment Programme was designed to fund a number of projects, including the East London Line (ELL) extension. TfL has formally taken responsibility for the £900 million project to extend the line between Dalston and West Croydon/Crystal Palace. The funding agreement reached with the Government will also allow projects such as the Thames Gateway Bridge project and the East London Transit scheme to go ahead. The Bridge will, subject to a public inquiry, link Thamesmead in Greenwich to Beckton in Newham. TfL has also worked with the government and the business sector in an attempt to keep up the momentum behind Crossrail, the major east-west heavy rail project that has been part of the plans for London’s future since – at least – 1989. In July 2004 the Government accepted the Crossrail business case. A Hybrid Bill, seeking the powers to construct Crossrail, was submitted to Parliament in February 2005. The bill was later ‘carried over’ to the next session following the dissolution of Parliament because of the 2005 General Election. It achieved its Second Reading in July. However, funding arrangements are still not in place. Crossrail is not part of TfL’s Investment Programme. 3. Implications for other authorities One of the key features of TfL’s Prudential Borrowing was the fact that (unlike other British local authorities) the Mayor could use buoyant fare income (and, indeed, the net yield from congestion charge) to underpin longer-term repayments on borrowing. The investment opportunities that such sources offered TfL are suggestive of the difficulties facing other British local authorities. Such authorities do not have significant income sources apart from council tax. Moreover, if an authority chose to use prudential borrowing backed by council tax, there is a serious risk it would face capping and/or serious pressure to cut other services. A number of Passenger Transport Authorities in the metropolitan authorities outside London have in recent years sought to improve their transport systems. In particular, there have been a number of proposals to build tramways and metros. Because all such schemes are subject to Treasury approval and – to a significant extent – funding, few have gone ahead. The TfL example suggests that other authorities (and not just transport providers) could benefit from a new approach to capital programming and borrowing. However, for this to occur there would need to be significant changes to the local government funding system. 4. The Lyons Inquiry The government has set up a major inquiry, chaired by Sir Michael Lyons, into the future of local government funding, structures and expenditure pressures. The inquiry published its interim findings on 15 December 20051. Its final report is due at the end of 2006. The interim report did not rule out substantial changes to the funding of local government, including the possibility of new approaches to the business rate, to smaller taxes and to ‘equalisation’ between authorities. TfL’s investment and funding programme could only have gone ahead if there was an income source to repay interest on borrowing. The Lyons inquiry now has an opportunity to consider the possibility of new local revenues such as a levy on the National Non-Domestic Rate, tourist taxes, environmental taxes, vehicle licence taxation and planning levies. Indeed, the government recently published a response2 to Kate Barker’s review of housing supply which included proposals for a PlanningGain Supplement. The issue of how new infrastructure should be funded is of continuing importance to the government’s ‘Sustainable Communities’ agenda. Lyons Inquiry into Local Government – Consultation Paper and Interim Report, London:Lyons Inquiry, December 2005 1 The Government’s Response to Kate Barker’s Review of Housing Supply, London:TSO, December 2005 2