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Mind the funding gap: public transport’s COVID-19 bill

Underused and underfunded, most urban transport systems have remained open during lockdown. But how will they survive their debts and could the pandemic provide an opportunity for reorganisation?

Author: René Lavanchy

01 March 2021

Illustration: Bewilder

On 23 January 2020, all public transport in the Chinese city of Wuhan was shut down to prevent the spread of what was at the time still being referred to as a ‘new’ or ‘novel’ coronavirus. It would be another three weeks before the virus was officially given its now familiar name of COVID-19.

Two months later, year-on-year public transport usage had collapsed everywhere from Hong Kong’s metro (down 42%) to New York City’s Subway (down 88%) via London’s Underground (down over 90% by the end of March).

Since then, the emptying of buses, trams and trains, whether through compulsion, guidance or just fear of infection, has been one of the shared global experiences of the pandemic. But the effects of these falls in patronage on transport authorities’ finances vary widely, depending on their reliance on fares.

Few, if any, public transport systems fund their operations entirely from fare revenues, and none can use it to entirely cover their capital costs. In both developed and developing countries it is common for fares to make up less than 50% of operating costs, with public subsidies or commercial revenues making up the rest.

The cruel irony of the pandemic is that transport bodies that appeared to be in the ‘fittest’ state financially, because of their heavy reliance on fares, have been among the hardest hit. Thus Delhi’s metro, which earned around 84% of its revenues from passengers in 2018-19 and was making an operating profit, only covered about 11% of its operating costs from income in the last eight months of 2020. Transport for London (TfL) was expecting to cover 72% of its operating budget from fares when the pandemic hit; at one point last year, the authority’s officials were seriously considering triggering bankruptcy plans.

One way the funding gap has been bridged in the short term is to cut costs and transfer funding over from non-operational budgets. Both the Delhi metro and the Massachusetts Bay Transportation Authority (MBTA), which manages public transport in the greater Boston area, were able to do this. “We could see future years being very tight even if vaccines were rolled out, so the result was a big effort to look at the capital plan in the very short term and drastically reduce what we were intending to do,” explains Alistair Sawers, senior director of rail transformation at the MBTA.

Cutting costs from operations, by contrast, can be harder. TfL’s initial savings came from a mixture of furloughing staff and stopping construction projects; its current £160m savings programme, however, focuses largely on reducing capital spending. “When you have a system like the Tube (metro), you can’t save a lot of operational expenditure, so even if we closed the stations and put all of the trains in depots, we’d really only save on the traction current and the electricity for powering the stations; that’s not an awful lot of money,” Stephen Dadswell, TfL’s head of corporate finance explains.

All over the world emergency funding from governments has been critical to keep services running. The US Congress last year approved $34bn-worth of COVID-related funding for public transport, and more is expected to be granted this year. “Without it, we would have been cutting service even more than we are,” Sawers says.

Sources spoken to for this article were broadly confident that passenger numbers will return in the next few years, although not necessarily to pre-COVID levels. As such, they expressed little interest in developing radically new funding techniques. Instead, discussion centred on tapping taxpayer funding and encouraging a recovery in patronage.

In the US, public transport systems have often struggled with a vicious circle of low share of journeys, weak political support and low funding. The MBTA, together with other US transport authorities, is seeking to drive up passenger numbers by moving from a peak-focused to an all-day service, which could also help provide social distancing if passengers spread their travel times more. If successful, it hopes to increase patronage beyond pre-pandemic levels.

“Prior to COVID, it was difficult to change the schedule,” Sawers explains. “The opportunity of COVID is, with a much-reduced service, to move to hourly all-day rather than throwing all our resources at peak… to then build back the schedule to fill in the pieces where the demand is… At certain points we hit infrastructure constraints, and that helps us make the case for investment”. The collapse in use of ride-sharing services during the pandemic represents an opportunity here.

Ira Gupta, head of advisory services in India for engineering consultancy Arup, expects to see patronage recover in the country this year and next. “I think towards the end of the year, early 2022, we should be seeing quite a lot of normalisation… assuming that the vaccines work and that another variant doesn’t appear”. Gupta, who spoke to Modus in a personal capacity, notes however, that there was an increase in sales of cars and motorised two-wheelers during India’s first lockdown, and suggests modal split may be affected for a while yet.

 

“I think towards the end of the year, early 2022, we should be seeing quite a lot of normalisation… assuming the vaccines work and another variant doesn’t appear” Ira Gupta, Arup, India

 

In London, TfL hopes to return to an operating profit in 2023-24 (according to its more optimistic scenario; more pessimistic ones envisage an operating loss until at least 2030). But the agency expects to need subsidy for its operations until then, and is seeking government grant to help fund capital spending in both the near and longer-term, for example in recent years, TfL has funded capital projects by receiving a share in business taxes.

Still, some funding strategies may benefit from different methods, for example in the US. “Because of the federal funding requirements to isolate capital from operating funding, it’s hard to combine the two to do whole-life and cost analysis; it’s all very separate,” Sawers notes, adding that some of MBTA’s capital projects were intended to reduce operating costs. Simply raiding capital budgets, on this analysis, cannot be a long-term solution. At TfL, Stephen Dadswell is hoping that a “public discourse” can be started about the level of devolution in London, which might support the city retaining more of the tax revenue raised locally. TfL’s financial sustainability plan published in January calls for the city to keep £500m-worth of vehicle excise duty, a tax on motor vehicles, and to have multi-year funding deals with government to give it greater certainty over budgets.

And there is surprising optimism that so-called transit-oriented development (TOD) – building new property next to transport hubs and using the proceeds to help fund infrastructure costs – can continue, despite COVID-19’s impact on rental values and working patterns. “I don’t think the fundamentals for investing – which are about investing for the long term in property – have changed,” Dadswell argues when asked about the case for TOD. “The pandemic has not had a downward impact on house prices anywhere, so there’s clearly a still a huge demand.”

“Culturally in India, showing your face to the team and the boss is quite an important thing,” Ira Gupta notes, adding that, while offices and higher-end stores have been quieter, lower-end retail has held up well in India throughout the pandemic. “There’ll be somebody who’s willing to bet that in 4-5 years everyone will be willing to come back to offices,” she adds.

The impact on professional transport jobs currently looks set to vary widely across the globe. Work on new infrastructure projects was scaled back in Europe and the Americas last year, but output continued to rise in the Asia-Pacific region, as reflected in figures from RICS’ Global Construction Monitor. In London, TfL has shelved for now work on the proposed Crossrail 2 railway and on rail extension projects.

“There may be a short term impact, especially on the design business, as a number of projects have been paused before tender for design or construction,” Alistair Sawers (himself an infrastructure projects adviser for many years) notes of the outlook for advisory jobs in America. “However a lot of existing contracts are still running, so the hope is that the gap will be deferred long enough that stimulus funds are available or that new stimulus projects are started.”

In contrast, markets like Singapore, Hong Kong and India (which is moving forward with several metro projects) look set to keep planners and consultants in business with little or no disruption. “Everyone is betting on this moving very fast in the south Asia region,” Gupta comments. “It’s not stopped people from planning and pitching for metro projects… If you look at it from a government policy point of view, a lot of emphasis is still going on to fund these projects.” In fact, she notes, procurement activity actually increased in India due to lockdown, because “many public sector officials were not travelling and actually got to review and move project files”.

“There has to be a sustained effort from governments and transit agencies to keep encouraging people to use public transport,” Gupta argues, “and whether they can keep it safe now and later, that’s also a question.” It is a question transport authorities are probably asking themselves all over the world.

“We made a big effort to look at the capital plan in the very short term and drastically reduced what we were intending to do” Alistair Sawers, MBTA, US

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