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Funding Crossrail 2 Will Annoy A Lot Of People In A Lot of Different Ways

Crossrail 2 received a significant boost earlier this month when, after a long period of silence, the U.K. government indicated support for the project.

But it did not address one of the key challenges: London has to pay for half of the £31B project itself, and it must do so during the period of construction, rather than relying on things like revenue increases that allow the costs to be repaid after the scheme is operational.

Crossrail 1 tunnel

There are some ways of doing this. “Where there’s a will there’s a way, and projects like the Northern Line extension and the Thames Tideway Tunnel have shown that London can create bespoke solutions for set projects,” London First infrastructure director David Leam said.

But all of the methods of paying for the project during construction are politically difficult and will cause the project to be unpopular with different groups of people.

Increased fares

London Mayor Sadiq Khan and the Department for Transport have committed to capping the fare increases charged by Transport for London to inflation plus 1% until 2021. After that, fares could be increased even more to fund Crossrail 2 — the current timeline has construction starting in 2021/2022.

In a report written for TfL in 2014, PwC said a 1% fare increase on top of the current increase levels could raise £1.2B, or 8% of the scheme’s cost. But with the understatement typical of such reports it said: “Implementation could be difficult given the likely opposition from passengers to additional fare increases and the political sensitivity surrounding this issue.”

Business rate supplement increases

London businesses will benefit from the increased capacity for getting people into the city that big projects like Crossrail 1 and 2 create. The theory is that those businesses should pay some of the cost, so this method puts a supplement on business rates.

The problem is that businesses will not stop paying the supplement for Crossrail 1 until around 2030, even though Crossrail 1 opens in 2019. Any new business rate contribution would have to be put on top of the sum already being paid. PwC estimated a supplement equivalent to that being paid to fund Crossrail 1 could provide £2.3B of funding for Crossrail 2. But it envisaged it being levied after the scheme was finished in 2033, not before. For some businesses the extra cost could be the difference between profitability or taking a loss.

Land value capture

As well as improving profitability for businesses, big transport schemes like the two Crossrail lines boost the value of commercial and residential property along the route. In February, TfL, in conjunction with KPMG and Savills, produced a report looking into mechanisms of land value capture, i.e. how to recoup some of the value created for property or land owners from the creation of these infrastructure projects.

The report outlines methods to capture value from existing property owners, such as increased Stamp Duty on transactions in zones near new stations or a straight-up charge for owners of commercial and residential property near new stations when they sell or lease properties.

The report reckons the 10 measures it outlines would raise between £13B and £28B if applied to eight projects TfL is working on. The timing of these charges could mean that some of it was applied during Crossrail 2’s construction.

But as Leam points out, such schemes would be politically challenging in that it would take a brave politician to tell the companies subject to these charges the hypocrisy of them wanting to receive all of the benefits without paying for them.

Building on London's green belt is highly controversial.

Greenfield developments

Unlike Crossrail 1, there are fewer opportunities with Crossrail 2 to undertake large-scale developments over new stations and capture increases in value.

There is, however, the potential to undertake significant new large-scale greenfield residential developments at the terminus points of the extension in places like Broxbourne at the northern end or Shepperton or Epsom in the south.

The problem here is the word greenfield, if it involves the ever-controversial matter of building on London’s protected green belt. There would also be the NIMBYism that attends all new large developments.
TfL debt

When talking about paying for schemes like Crossrail 2 it is important to remember the distinction between funding and financing. Financing is actually having the capital in place to pay for the scheme, and could include debt or outside equity. Funding is how you cover these costs over time.

Crossrail 2 can more than pay for itself in the long term, when you take into account new revenue it would generate and longer-term funding streams like increases in Community Infrastructure Levy on new developments. It is just getting the money up front that is the problem. TfL could just borrow the money and pay it back later. As Leam pointed out, there are plenty of people who would be willing to lend to it at competitive interest rates.

But taking on £15B or anywhere near that amount of debt would be a significant rise in leverage for TfL. It currently has £9.8B of debt and as Leam said: “It is an organisation that is trying to demonstrate that it is managing its business prudently.”

Ultimately, however, to make the numbers work TfL is likely to have to undertake some extra borrowing.

The government just pays for it

The ultimate solution is for the government to change track and provide the money for Crossrail 2 to be built, borrowing at ultra low global interest rates. It could justify this on the basis that it would be certain to get the money back.

There are two problems with this. First, the government is committed to lowering government borrowing.

Second, the fact the government has expressed support for Crossrail 2 while icing transport projects in other parts of the U.K. has enraged people across the rest of the country, who already feel London gets more than its fair share of spending.

In order to stick to the original project timeline the team running Crossrail 2 has said that a funding package needs to be given this year so full approval can be received by 2020. The clock is ticking for a creative solution to be found.