The emerging structural changes in the way customers travel, inflationary cost pressures and the planned withdrawal of Government grants, are creating unprecedented challenges to the finances of UK transport authorities. Many authorities are now having to consider what measures they should take to not only adapt their services, but also balance the books.
Post-pandemic financial challenges
The increase in flexible working following the COVID-19 pandemic has led to many transport authorities downgrading their forecasts for future demand compared to pre-pandemic expectations.
To date, emergency Government grants have meant that many transport authorities have been protected from the worst of the financial impacts caused by the fall in demand due to the pandemic.
However, with these grants due to end in October 2022 and farebox revenues expected to remain below pre-pandemic levels for the foreseeable future, many transport authorities now face an acute challenge to balance the books in the coming years.
This is exacerbated by rising inflationary cost pressures in areas such as energy, fuel and wages. At the same time, a squeeze on household budgets means that there is limited scope to increase fares or local transport levies to plug the gap.
Not only that, but this comes at a time when transport services are now more than ever expected to play a key strategic role in the delivery of wider policy initiatives. These include supporting the economic recovery, Levelling Up, the transition to net zero and goals for new housing.
Exploring the options
Transport authorities will continue to feel the pressure to demonstrate they have done as much as possible to minimise the impact on customers and frontline services.
For some, this will mean continuing their previous incremental efforts to do 'more with less'. However, after years of sustained downward pressure on budgets, many will find their options for 'quick win' efficiencies have been exhausted. These organisations will need to take stock and innovate. This could include developing new income streams and adopting new funding and financing approaches. Those that can may choose to invest in areas such as digital transformation to unlock further efficiencies.
However, the scale of the financial challenge means that many authorities will still face difficult choices around how to make ends meet. Many of the options that are most beneficial from a financial perspective are often also the most inequitable; negatively impacting the most vulnerable in society, and undermining policy goals such as avoiding a car-led recovery. Other options such as reducing non-essential maintenance and scaling back new investment have longer-term implications for financial sustainability and quality of services.
A key goal is therefore to find those options that deliver the most financial benefits over the long-term, while also minimising the impact on customers and broader society.
In the short-term, transport authorities can look to deploy temporary or one-off funding measures to balance the books, such as negotiating temporary settlements with local authorities and drawing down on reserves.
These measures can provide transport authorities with the time required to design and implement scaled-up efficiency plans, as well as more fundamental changes to their operations and funding arrangements to achieve lasting sustainability.
However, before these short-term measures can be arranged, stakeholders will expect transport authorities to demonstrate that they have a robust financial sustainability plan in place. But, with difficult choices likely to be necessary to achieve financial sustainability, it is vital that transport authorities engage with their key stakeholders as early as possible and act now.
A structured approach
To ensure all available options are considered on a consistent basis and prioritised effectively, transport authorities should approach their financial sustainability objectives in a structured way. Leaders should consider undertaking a thorough diagnostic of their authority's financial sustainability position, the options for resolving the challenges, and how they should articulate trade-offs between financial and non-financial goals to stakeholders.
A structured approach also provides regular opportunities to engage with key stakeholders, and to ensure financial sustainability goals are not undermined by unforeseen circumstances, such as changes in customer behaviour or the displacement of costs to elsewhere in the system.
Closing the gap
Decisions aimed at achieving financial sustainability are often difficult, particularly when they force a trade-off between future financial health and the service being offered to customers today. Changes of this nature require strong leadership, disciplined financial management and often a step-change in organisational culture.
Adopting a structured approach to arriving at the decisions lends confidence in the process and the outcomes that arise from it and should be seen as an essential part of resolving the substantial financial challenges faced by the sector.
Nick Le Neve Foster is Assistant Director, Government & Infrastructure at Deloitte LLP.