29 May 2020

London has a huge transport funding gap – it needs the powers to close it


Transport for London’s (TfL’s) collapsing revenues from fares and other sources led to a widely publicised bailout. This agreement is, of course, merely a sticking plaster and policymakers will now rightly be focused on shoring up TfL’s short-term financial position.

But there is also a longer-term funding challenge that will need to be tackled in due course. TfL’s plans for capital investment to improve and expand the network over the next two decades are likely to still be needed. It is reasonable to assume that London will require an expanded mass transit system, and there will likely be an increased urgency to address policy objectives around housing, economic regeneration and decarbonisation – all of which require significant investment in transport.

The question of funding these investments was a thorny issue even before the pandemic. Last year, the consultants Arup claimed that there was a £32bn funding gap (2018 prices) for London’s transport pipeline to 2041 and TfL’s business plan suggested a gap of around £50bn in nominal terms over the next 20 years. And these estimates were made before farebox revenues started collapsing.

The Treasury is unlikely to fill all of TfL’s long-term projected funding shortfall. Its response to coronavirus will lead to a large increase in the UK’s debt-to-GDP ratio, meaning that its resources for infrastructure spending will be constrained. And within this constraint, the Government will still understandably want to meet its objective of levelling up productivity between UK regions.

As our report Squaring the Circle: Funding London’s Transport Pipeline and Levelling Up highlights, London should expect a reasonable level of baseline funding for transport. But the capital may have to raise a higher proportion of cash for its transport pipeline in future and existing funding mechanisms raising money locally would not generate sufficient resources. Nor would it be equitable to simply rely on existing ways of paying for new transport projects, so we will need to consider fare increases, and widening the scope of those contributing.

Historically, local funding contributions towards London’s transport projects have mostly come from businesses and developers. However, continuing to rely on these contributions would not fairly or proportionately target the full range of financial beneficiaries of new transport projects. For example, equity map analysis presented in our report shows that nearly a third of the financial benefits for Crossrail 2 will go to owners of residential property – and the majority of land value gains for the future transport pipeline are set to go to existing residential properties. Yet existing funding mechanisms do not capture a significant portion of these uplifts.

Other reforms are needed, too. Typically, making the case for new transport projects in London is done on a scheme-by-scheme basis, but this is highly inefficient. Instead, funding for London’s transport pipeline should be agreed at a programmatic level that looks at the transport pipeline over a long period. This programme should then be part-funded by central government grant along with a mix of London-wide and more locally targeted funding mechanisms, to ensure that project beneficiaries pay appropriate costs.

City regions are well placed to develop such a programmatic approach. But even in London, there is not sufficient devolution to achieve this. In particular, TfL’s reliance on periodic agreements with central government for short-term transport funding is creating inherent uncertainty as well as projected underfunding for future transport investment.

What now needs to follow to enable London to deliver on its responsibilities is greater fiscal devolution to city regions. Fiscal devolution would give London the necessary powers to raise more local money in an equitable way for new transport projects, potentially coming in the form of devolving property taxes and reducing central government grant to ensure fiscal neutrality at the point of devolution. Control over revenues arising from property taxes would also provide greater long-term funding certainty.

Other city regions have different devolution frameworks to London. The Government will, quite rightly, want to devolve further decision-making powers to the regions of the UK in the upcoming English Devolution Bill, but this should not mean the capital’s needs are ignored – especially when it is responsible for a fifth of UK GDP.

Inevitably, there will be political challenges locally in implementing new mechanisms to fund transport projects. But these challenges should be faced up to at a London level, and the capital needs the powers to make its own decisions about how to close its transport funding gap.

And, critically, fiscal devolution and funding reform in London would also help other regions. It could help free up resources and London could even act as a test bed for new funding mechanisms, which, if successful, could be rolled out to other parts of the UK. London has been a leader in the past – for example, through the innovative funding package for Crossrail – and can be again with the right kind of overall funding regime and powers.

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Daniel Mahoney is the Programme Director for Economy and Infrastructure at London First

Columns are the author's own opinion and do not necessarily reflect the views of CapX.