How To Fund Passenger Transport
With the Comprehensive Spending Review coming up in 2025, now’s a good time to be thinking through how to set up the long term funding of transport.
One thing is clear: the way we’re currently doing it in the UK is not ideal. Let’s learn from others; especially those delivering good outcomes.
The situation today
The current model in the UK is roughly as follows:
Network Rail and Highways England get five-year funding settlements, subject to oversight by an independent regulator.
Transport for London is self-funding for revenue and has hand-to-mouth capital funding deals.
Train Operating Companies are being nationalised with no clarity on their long-term funding.
Combined Authorities (potentially alongside shire-based Strategic Authorities) are gradually moving towards Integrated Settlements in which funding for a whole basket of different policy areas are devolved locally.
Pros and Cons
The strengths of the current British model are the long-term capital funding available to Network Rail, Highways England and the Combined Authorities. These organisations can plan their investments knowing how much is available - at least for the next few years.
However, there’s absolutely no certainty on revenue funding. This is a huge problem. You can’t make intelligent capital investments if you don’t know what your revenue funding position will be. In Switzerland, they start with the timetable (i.e. the revenue side) and use this to work out the infrastructure needed (i.e. the capital side). We do it back-to-front.
So what do others do?
Switzerland - Rail Infrastructure Fund
I’m going to start with my favourite.
Switzerland has the densest network of railways in Europe with the best service performance. The network is brilliant in every way. They’re clearly doing something right.
It won’t come as any surprise that the Swiss have perfected long-term funding. The Swiss Rail Infrastructure Fund (RIF) is a dedicated financial mechanism established to support the operation, maintenance, renewal, modernisation, and expansion of Switzerland's rail infrastructure. It takes a whole bunch of taxes, consolidates them and then distributes them.
That will need some maintaining…
Funding Sources:
The RIF is financed through a combination of federal contributions, taxes and levies:
Heavy Goods Vehicle Charge (HGVC): Up to two-thirds of the net revenues from the HGVC are allocated to the RIF.
Value Added Tax (VAT): A portion of VAT contributes to the fund, including an additional 1 per mile from 2018 until 2030.
Mineral Oil Tax: 9% of the net revenues, under certain conditions, are directed to the RIF.
Federal Contributions: Approximately CHF 2.3 billion from the ordinary federal budget, adjusted for GDP and inflation.
Cantonal Contributions: Cantons contribute CHF 500 million to the fund.
The great thing about this model is that it’s diversified (so it reduces risk) and is highly predictable. Swiss rail companies can predict the size of the fund with reasonable degrees of certainty for years in advance.
Allocation of Funds:
The other joy of the RIF is that it has three key purposes, which are prioritised by law:
Operation and Maintenance: Ensuring the reliability and safety of existing rail services.
Renewal and Modernisation: Upgrading infrastructure to meet current standards and future demands.
Expansion Projects: Developing new lines and enhancing capacity to accommodate increasing passenger and freight traffic.
Isn’t that great? Every year the rail operators have the money they need to run this year’s service, cash to renew assets for next year’s service and funding to make things better for the future.
The daft thing is that every year the British will spend billions on all three categories. But instead of an automatic mechanism that ensures consistency and predictability, we chaotically lurch from year to year, with the amount being spent oscillating wildly. [When I sent a draft of this blog post to a Swiss colleague to review for accuracy, he highlighted this sentence as the key difference between our two countries]
In Switzerland, the money is predictable. Whereas our control periods vary both the amount and the purpose, in Switzerland the control period equivalent is simply about how to spend it. Even this is comparatively long-term, with the Federal Assembly approving a payment schedule every four years outlining the allocation of funds. Performance agreements set targets and funding for railway undertakings, while expansion projects are decided by the Federal Assembly based on federal council proposals. These are called “Strategic Extension Steps”. Currently they’re preparing Step 2035 (which will be fully operational roundabout 2040 / 2045).
Obviously, in reality, the “Federal Assembly” simply approves proposals and the proposals come from the Cantons and the various railways themselves (there are 74 railway companies in Switzerland, though the state railway SBB accounts for 60% of the network). There is then a long process of discussion and negotiation. But the point is that once it’s agreed, then the railways know their priorities.
And because the timetables are set around a decade in advance, the capital investments are designed to deliver the timetable. I know this sounds like it should be obvious, but it’s not what we do in this country.
The starting point for investment in Switzerland is what the service offered to customers needs to be in future at a whole-network level. We do project-by-project. It’s not the same thing.
France - Versement Mobilités
If Switzerland provides the model for how to do transport investment at a national level, France provides the model at a city level. Again, though, the principle is the same: dedicated taxes that automatically flow into transport, providing transport authorities with stability and predictability.
The Versement Mobilités (VM) is a tax levied on employers with more than 11 employees. It is calculated as a percentage of the gross payroll and varies depending on the location and the transport authority that benefits from the funds.
The rates range from 0% to a maximum of 2.95% of the payroll, depending on the region's size, population density, and transport needs. So Île-de-France (Greater Paris, with a lot of public transport going on) is higher than in rural areas where (in contrast to most Brits’ impressions) public transport is often woeful.
If you had visited Lyon in the 1970s, you’d have found it a traffic-choked hellscape, notorious for noise and pollution. The reason why Lyon tended to have more Michelin-starred restaurants than anywhere else on earth is that the Michelin guide started out as a guide for drivers (it was created, and is still owned, by the tyre company. Its purpose was to give drivers destinations to drive to so they wear their tyres out faster). Lyon, with its dense network of highways, was a great motoring destination.
All that changed in the 1970s when the people of Lyon realised that they didn’t actually like the city they’d created. Since then, they’ve built four Metro lines and seven tram lines (like most British cities, they’d ripped out their original tram network in the 1950s). They’ve also maintained 120km of overhead wiring for trolleybuses.
Lyon is a city with an urban area population around half that of Greater Manchester. It’s hard to believe they would have been able to achieve this transformation without the Versement Mobilités.
Lyon: an urban area half the size of Manchester, with four metro lines and seven tram lines.
Germany - where we’re heading?
Federal funding in Germany is provided by multi-year Performance and Financing Agreements (LuFV), which are not dissimilar to Network Rail control periods. The most recent LuFV IV (2020–2029) allocates €86 billion for rail infrastructure. As you’ll probably notice, this is quite a small number for the EU’s largest country, working out at an average of €8.6 billion per year - less than Network Rail’s Control Period 7 settlement.
Deutsche Bahn (DB) also has other sources of funding. In 2023, the German government allocated €12.5 billion for rail from a one-off Climate and Transformation Fund (KTF) for the upcoming years, but this was quashed by the Constitutional Court, leaving the relevant projects in limbo. (It was this quashing that was one of the main triggers of the political crisis that resulted in this year’s early elections).
DB also has certain one-off projects that are funded separately. The biggest is the never-ending mega-project Stuttgart 21: the replacement of the existing terminus station with a high-speed underground through station (basically, exactly what Andy Burnham would love in Manchester - though he’d probably prefer it without the endless delays and cost overruns).
Germany has a federal structure, so DB is also directly funded by the states (known as Lander) for various local projects as well.
It’s not a perfect parallel, but if you asked me to guess where the UK will end up, it’s something not far from Germany: multi-year control periods providing inadequate funding, various one-off projects and funding pots on top (but riven by political uncertainty) and GBR shaking its collecting tin around the Combined Authorities for specific project funding.
37% likely to be late
If I’m right, I’m not sure we should be celebrating. The German model hasn’t proved an absolute triumph. Much of the reason is down to specifics of the ways DB is led and organised, but low investment and uncertain funding has led to some pretty terrible outcomes.
In the first half of 2024, punctuality for long-distance services fell to just 62.7%. DB Fernverkehr (the operator of the long-distance ‘white trains’) saw a 6% decline in passenger numbers.
It may be that we’re heading towards being Germany, but we shouldn’t look forward to the prospect.
What should we do?
We don’t need to passively accept our fate.
In the run up the spending review, now’s the time to be arguing for a funding model built on best practice.
For long-distance and rural services, Switzerland is world-beating. Punctuality is high, density of service is high, the Swiss, on average, make roughly twice as many rail journeys per year as the Brits.
For urban services, France is hard to beat. Even small cities have integrated networks. 28 towns and cities across France have trams (compared with six in the UK) and six cities have metros (compared with three in the UK).
So if we want to emulate the best, we should do what the best do. And the thing that Swiss national and French local funding have in common is that funding is based on dedicated, hypothecated taxes.
So here’s my suggestion:
1) The Treasury accept that we are always going to spend a lot of money on public transport. It’s a critical national investment. Every year we spend just under £40 billion and always will, excluding HS2. We shouldn’t treat HS2 as separate, so that’s another £6-8 billion or so.
2) Identify a basket of taxes whose total adds up to around £45 billion. Call these the Public Transport Fund. (I’m deliberately not including Highways England because, from a passenger point of view, the Public Transport network should be one integrated network: the highways network serves a different purpose).
3) Create a mechanism whereby every five years, funds are allocated between transport authorities and operators. In an ideal world, we can gradually get to the point that - as in Switzerland - the funding is allocated to deliver a timetable, but that will take time. Switzerland is already doing early planning work for the 2050 timetable. We’re not.
4) The various local authorities can then ‘buy’ the services they want, as per my separate piece on accountability (coming soon).
How to square the Treasury
The Treasury will instinctively recoil as it ties the hands of future governments. But the certainty it provides will give the supply chain confidence to invest, cutting unit costs. The certainty it will provide to managers will allow proper planning, reducing costs. The guarantee of a long-term pipeline will allow skills to be trained and retained, cutting costs.
Do you see where I’m going here? Our current funding model is unnecessarily expensive. There’s no guarantee that the creation of GBR will make it better. It might make it worse. The reason our model is expensive is because we have a constant yo-yo of project delivery, in which we start a project (which needs to be finished yesterday), rush through the planning stage, hire an inexperienced workforce, watch costs balloon, scrap plans for similar future investments, let the workforce go (just as they’ve acquired the skills) and then wait a few years. Before repeating.
Here are just a handful of examples:
TfL deliberately timed Crossrail 2 to leverage the skills, workforce and economies of scale of Crossrail 1. But Crossrail 2 wasn’t approved, so the TfL tunnelling academy closed and the tunnellers moved overseas. If we do Crossrail 2, we’ll have to start again
Electrification has been on a constant feast-famine cycle in which Network Rail has to scrabble for resources in the global market to deliver multiple simultaneous projects in some years - with zero in others. In the last decade, the amount of track electrified per year has varied from none (i.e. no skilled workers employed on the job in this country) to nearly 900 km - with a norm of around 200 km.
Siemens are building new trains for the Piccadilly line in a purpose-built facility in Goole but there’s no order to exercise the priced option for the same trains for the Bakerloo line, despite the obvious fact that the existing Bakerloo line trains are the oldest trains in the UK and desperately need replacing
Tram schemes in the UK are all planned in isolation with no attempt to create a pipeline. As a result, according to the UTG Urban Transport Review, the cheapest UK tram project cost more per mile than the most expensive continental European tram project.
HS2 was rushed at the beginning with building work starting before a proper design was in place (there’s still no design for Euston, 15 years into the project!), with the result that everything north of Birmingham was scrapped. The teams have been laid off but, of course, we still need the new capacity - so we’re going to have to build a new railway at some point. Then we’ll hire new, inexperienced workers again, like we always do.
The TfL Tunnelling Academy: built to train tunellers to tunnel train tunnels never set in train
Let’s be clear. The data tells us that it costs around three times as much to electrify track in Britain as in continental Europe, about three times as much to build tram track in Britain as in continental Europe and about twice as much to build metro lines. That’s not because British people are lazy or steel costs more in Britain than on global markets: it’s because of our feast-famine, muddling through approach to finance.
The Treasury need to understand that there are real, big, huge cost savings available through long-term, consistent, predictable funding.
But, let’s be honest, the investors and contractors that need to invest in the UK supply chain don’t trust the British to deliver that. I know: I’ve spoken to them.
So the British Government needs to be seen to do what needs to be done. That means creating equivalents to the French Versement Mobilités or the Swiss Rail Infrastructure Fund so that the funding is predictable and guaranteed. It needs to be written into law.
My message to HM Treasury: we’re gonna spend £45 billion on transport every year. We always do. We’ve built a network and now it needs investment. No Government is going to close the Bakerloo line, so we’ll eventually buy new trains. We’ll just do it too late.
If we’re going to spend £45 billion a year regardless, the choice is between spending it chaotically and not getting much for it, or spending it wisely and getting more for it.
If you were the Treasury, which would you choose?
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