22 May 2015
Is TfL returning to a 1970's view of finance?
When I first saw this poster, I thought for a moment we were back in the 1970s. Then nationalisation was fashionable, the rich were taxed at up to 98% and the country, much like Greece today, was off cap in hand to the IMF. But the poster has a certain ring to it, doesn’t it? Profits are bad, trains are good. Londoners have the right to cheap tickets. Down with the fat cats. Why make profits when you can improve services? We’re on the side of the passenger. And so on. Unfortunately, the wording on the poster is just plain wrong.
You can’t reinvest without profits. And it’s impossible to
re-invest all your income because of the cost of capital - or a measurement
called Weighted Average Cost of Capital (WACC) to be precise. Capital can come
from equity, the people and institutions that own a business, and or from debt.
Capital has a cost, wherever it comes from. The WACC (Weighted Average Cost of
Capital) is a company’s blended cost of capital, taking into account all the
sources and the amount of each. WACC is the minimum level of profit a company
needs to generate, otherwise sooner or later it will go out of business.
Grants can plug the financial hole, but grants are income not
capital; you can tell because they appear in the P&L rather than in the
Balance Sheet. A quick look into TfL’s accounts shows that in 2014 it received
£5.3b of grants, not just for fixed assets but to cover operating losses. Income
(mostly from tickets) of £4.5b does not cover staff and other operating costs
of £6.5b. It’s a bit difficult to “reinvest all the income” when a £4.50
journey costs TfL £6.50. In fact with the grant, TfL made a profit of about £3 billion
last year.
(TfL is for sure not the only public transport system
requiring on-going subsidies but that is quite different from claiming a WACC
of zero.)
So let’s drag this tag line from the 1970s into today’s world.
How about, “Thanks to grants from long-suffering taxpayers, TfL makes thumping profits because we need to provide a return to
our providers of capital and to reinvest to improve your services.”
I could get
behind that.
# posted by DavidF @ 18:01 
