Policy paper

Terms of reference for the government led financial review of Transport for London

Published 20 July 2020

Purpose

The COVID-19 pandemic has had an unprecedented impact on Transport for London’s revenue and financial position. To keep vital public transport services running in London and support the government’s economic restart strategy, on 14 May 2020 the government agreed an extraordinary funding and financing package of support for Transport for London (TfL) (the Agreement).

As agreed with the Mayor and TfL, the Secretary of State for Transport is taking forward a broad ranging review of TfL’s future financial position and future financial structure with the aim of identifying clear options for strengthening TfL’s future financial sustainability.

Scope

There will be 3 levels to the review, recognising that the number of options and complexity of implementation increases with the scope and ambition of each level. Each level will build upon the results of the preceding stages. The review will report with detailed options to the Secretary of State of the choices that could be made to achieve the aims of the review, and deliverability implications of these choices.

The review will consider impacts of the options presented on wider government objectives, including maximising housing supply. While Crossrail is out of scope of the review it will be considered through other commitments made in the Agreement. Changes to the government’s tax or spending plans are not part of the scope of this review, although the government will consider evidence from the review as appropriate.

The review will be completed by end of August 2020 to inform the position after the support period of the Agreement (which ends in October).

Level 1

Evidence and clear understanding of TfL’s current financial position.

To include:

• review of TfL’s current obligations and functions, including statutory and contractual
• review of the current income streams and commentary of how these have been impacted by the COVID-19 pandemic

Level 2

Evidence and options to strengthen TfL’s financial position over the remainder of the current (2020/21) and next financial year (2021/22).

To include:

• development and assessment of options for short term revenue maximisation and assessment of the potential for raising more non-fare based revenue and commercial income, including TfL’s housing development pipeline
• identification of opportunities to deliver further efficiencies in the short term in relation to operating costs
• review of the approach to prioritising capital spending, including but not limited to asset maintenance and enhancement for rolling stock, network infrastructure and TfL estate.

Level 3

Evidence and options for more fundamental changes that could put TfL in a fully sustainable financial position by the end of the current business plan period (2024/25).

To include:

• development and assessment of medium-term options, and identification of potential longer-term options, for revenue maximisation and assessment of the potential for raising more fare and non-fare based income, including TfL’s housing development pipeline, revenue yield choices over time, and changes to road user charging schemes as foreshadowed in the Mayor’s Transport Strategy and further measures
• the identification of opportunities to deliver further efficiencies in the medium term in relation to operating costs, including but not limited to, workforce modernisation, and exploring the feasibility of extending driverless operation from the DLR to other lines which are already automatic
• review of the approach to prioritising capital spending for the remainder of the business plan period and to evaluate long-term sustainability, including but not limited to asset maintenance and enhancement for existing and future rolling stock, network infrastructure and TfL estate
• review of the current operating model and whether there are any opportunities that alternative operating models could bring over the longer term, including consideration of structures and governance
• review of the balance sheet and financing structure of TfL, including financing policy, debt sustainability, cash reserves, rating agency engagement, and CapEx vs OpEx choices

Inputs and methodology

The review will be led by the Department for Transport, with support provided by external advisors, DfT’s Special Representatives to the TfL board and TfL.

Inputs to the review will include:

• financial modelling of multiple COVID-19 recovery scenarios against TfL budget for remainder of Business Plan period. DfT, TfL and external advisors will work together to agree the parameters of these scenarios, recognising the high levels of uncertainty
• review of TfL obligations and functions, including statutory and contractual
• review of current operating model and alternative potential models, and assessment of financial sustainability of TfL’s current model pre-COVID-19
• summary of all current and planned capital spending
• review of the balance sheet and financing structure, including financing policy, of TfL
• review of the current fiscal support arrangements and income streams
• review of international and cross modal benchmarks in considering all of the above, and comparison of TfL to these, in particular for operating models. Comparison to include commentary on mitigating factors, such as levels of public funding
• financial assessment of the relative impact of different options on financial forecasts

The Mayor and TfL have been consulted on the terms of reference and will provide views and options into the review. TfL will provide information as reasonably requested by DfT and external advisors as per the scope and methodology.

Reporting and publication

The review will report to the Secretary of State for Transport with oversight from the Prime Minister and the Chancellor of the Exchequer. Regular updates will be provided to DfT’s Secretary of State and the Chancellor of the Exchequer as the review progresses. It should produce a written report suitable for publication if ministers are minded to do so.