Lies, damn lies and TfL’s finances
This poster is a flashback to the 1970s. Then nationalisation was fashionable, the rich were taxed at up to 98% and the country, like Greece today, was in hoc to the IMF. But the poster has a certain ring, 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 wrong in almost every way.
Let’s take the TfL assertion apart. In fact, there are three:
· TfL does not make a profit
· TfL reinvests all its income into running and improving services
· And the first (being unprofitable) is because of the second (reinvestment)
A quick look into TfL’s 2014 accounts shows that it made a profit of about £3 billion, so the first assertion is wrong.
It’s also impossible for TfL to re-invest all income because capital has a cost, whether it comes from equity — the people and institutions that own a business — and or from debt. The WACC (Weighted Average Cost of Capital) is the blended cost of capital, taking into account all the sources and the amount of each. TfL’s WACC may be low, but it cannot be zero.
The third assessment is just nonsense: you invest from profits; if you don’t make a profit, there is nothing to invest.
Does it really matter that the poster is wrong? What’s wrong with TfL doing a little self-serving propaganda? Who cares if it’s misleading? It does matter and we should care. Profits make companies stronger and enable them to invest.
Finance is important for all businesses, whether private or public, whether for profit or not for profit organisations. And above all, it’s too important to be used to distort the real situation.
So let’s drag this tag line from the 1970s into today’s world. How about, “TfL makes thumping profits to provide a return to our providers of capital and to reinvest to improve your services.” I can get behind that.
