Beyond the Barriers: The Future for TfL’s Non-Fare Income

Given the amount of money generated by the fare box, it is easy sometimes to forget that this is not the only source of revenue for TfL. One of the more interesting things lurking in the last TfL Board Papers was the suggestion that the opportunity was there to radically increase TfL’s non-fare income. Currently, the organisation draws in approximately £233m a year from various sponsorships, advertising and retail activities, but TfL have indicated that they wish to increase total non-fare revenue by £1.1bn, cumulatively, by 2022.

Some of TfL’s recent commercial experiences have not necessarily garnered a great deal of praise. The sponsorship deals with both Emirates for the Cable Car and Barclays for the cycle hire scheme came in for criticism from various quarters, including the London Assembly, largely for the lack of transparency surrounding the contracting process and their award. TfL and CBS Outdoor, responsible for much of the advertising on the Underground, also found themselves engaged in a long-running battle over the timing of upgrade works and the value of the advertising contract. TfL also came under criticism for payday loan company Wonga’s sponsorship of free travel on New Year’s Eve last year.

With all the above in mind, it is perhaps unsurprising that in recent months TfL have been looking to overhaul their approach to both sponsorship and retail. The remit for doing so largely falls to Graeme Craig, TfL’s Commercial Development Director, who yesterday appeared before before the London Assembly’s Budget and Performance Committee. The resulting session can be found here, and is well worth a watch, as it provides quite a detailed insight into just what TfL are looking to change and do. A summary of the key points raised, however, can also be found below.

What’s In A Name

One of the overriding themes of the session was the need to formalise and improve TfL’s approach to sponsorship. With a new three-person TfL sponsorship team now in place, the goal is not only to identify more opportunities for sponsorship, but to ensure that previous issues of transparency and a perceived poor choice of partners is addressed.

Craig asserted that, broadly speaking, there were ultimately three areas over which TfL would be looking to increase its corporate sponsorships and partnerships. These were assets, such as the Cycle Hire Scheme and the Cable Car, ad hoc sponsorship of particular events, and finally broader corporate sponsorship across multiple areas perhaps aligned to specific themes such as sustainable transport (something Craig described as the “Champions League” approach). In all areas going forward, he asserted, there needed to be an increased focus on more than just the bottom line, and must always be in the “public interest”:

“Sponsorship shouldn’t be that someone gives us a cheque in response to their name being on something,” Craig explained, “or their brand being on the side of something. It should be something that’s much more of a partnership where there is much more of a tangible improvement in service as a direct result of two organisations whose brands align. Whose aspirations for that service come together and they are working jointly in order to deliver a tangible improvement or a tangible saving – something that the public can see the benefits of.

“If TfL were seen to be, simply, selling off the family silver, or devaluing the brand I think we’d get fairly short shrift from the travelling public for doing so. I think we have to be in a position where we can articulate what the benefits are of the sponsorship arrangement, and it has to be more than just a simple advertising deal.”

Just what kind of assets might find themselves open to sponsorship was naturally a subject that the Budget Committee were quick to enquire about – and just how the definition of “public interest” might be applied. If a company offered to provide enough money to allow a fares freeze, Committee chair John Biggs asked, would they be able to acquire the naming rights for an Underground station?

“Personally, I think no.” Replied Craig.

“You think no?”

“Well I speak to a lot of people about these sorts of issues. There’s a very strong sense in which people feel that it’s their system. I think if we were looking to hawk round the name ‘Oxford Circus’ to, say, Oxford Landing who have approached us before, about selling the name of a tube station simply for the sake of a pun then I’m not sure that people would see that as being a TfL who is interested in the long term reputation.”

Biggs was quick to ask whether this might have been one of the failures with regards to the Emirates Cable Car deal . Craig, however, asserted that there was a clear difference between between existing infrastructure and new.

“You could sell off naming rights for the Crossrail stations then?” Asked Biggs.

“I personally think that the idea of doing, as they’ve looked at in some other cities around the world, of going along the line and selling off the name of tube stations is something about which I am instinctively uncomfortable.” Replied Craig. “I think we’ve got fantastic heritage, we’re in the 150th year, and we do need to find funds to innovate, transform and expand the network. Personally though I’m not sure that I’d feel comfortable, myself, doing that by selling off station names that have been in place for a long time.”

Given the sensitive approach that clearly needed to be taken with regards to sponsorships, the Committee was keen to know where, ultimately the buck stopped when it came to decision making. Craig admitted that the ad hoc nature of previous deals had left this unclear, but asserted that the new strategy would lead to a clearer governance process, and any large sponsorship deals would likely be signed off by mayor, in his role as head of TfL. He was also keen to stress that the number of sponsorships and partnerships that TfL would engage in was intended to be relatively limited.

“There is, apart from anything else, a market appetite. What we would look to do is get the maximum value for those assets and that, I think, will always limit us to a relatively small number of sponsorship deals.”

He was also keen to stress that there’d need to be more to them than just the attachment of a high-value brand to an existing asset. It couldn’t just be a case of selling space to the highest bidder.

“When it comes to assets if we have… I don’t know… it could even be a local institution or a museum which wants to drag some of the excitement that surrounds our stations into the station itself.” He continued, “Or wants to look at what more we could do in terms of customer information or something – if you’ve got an organisation or institution which is keen to see improvements on the transport system and is willing to invest their intellectual and financial capital in order to do so, I’m not averse – let’s be clear about that – to improving our existing assets and working with others in order to improve those assets. What I don’t see it being is an auction for naming rights for long-cherished stations.”

Did this mean, the Committee asked, that the emphasis would be on businesses that could claim some relevant link to stations already – “Knightsbridge for Harrods” being suggested by Richard Tracey in particular, or attractions like Madame Tussauds.

“I think there are some examples of… associations… that could be seen to be both commercially viable and potentially attractive to the public.” Craig accepted. “I think there are some that would be seen to be absolutely tacky. ”

Just what an association might constitute, Craig admitted, was something that still needed to be documented. Not least because, as the Committee rightly highlighted, there was a potential overlap between the quest for such associations and the need to highlight certain attractions for ease of passenger experience. The O2, for example, currently do not pay for their presence on station signage, yet directions to the venue are clearly marked. Should they pay? Should these be removed if they don’t?

“Part of the challenge we have as an organisation is that we want to help people move round London.” Admitted Craig “And, you know, as anyone who is a regular user of Piccadilly Circus or Oxford Circus will know, it’s not always easy to tell which exit is the one that you need to be going out by. Particularly if you’re new to London. So there is commercial value, for organisations, in TfL pointing people to that organisation. Sometimes I think it is entirely appropriate for TfL to retain some of that value, working with those organisations.

“In other cases, it’s absolutely the right thing to do for TfL to point out the major attractions nearby at stations.”

Ultimately, Craig asserted, it was key to remember that TfL was emphatically not declaring open season on its assets, or waiting for offers. More that it was now more open to conversations about possible partnerships and needed to get its policies in order to support that.

Picking up on Craig’s point about the existing Tube network being relatively protected, the Committee push again as to where the boundaries would lie with regards to new stations and extensions.

“Would you consider sponsoring the Northern Line extension,” asked Richard Tracey, “because that’s a new piece of kit?”

“We have no plans to.” Craig said. “I come back to the view that the primary purpose of the Underground network is to navigate round and we, at our peril, do anything that gets in the way of smooth travel around the system and that includes geographic naming.”

Picking Your Friends

Moving away from the “what”, the Committee pushed on the subject of “who” with several elephants that had been residing firmly in the room addressed.

“Under the new arrangements,” came the first question, “would TfL still do a sponsorship deal with Wonga?”

“The whole issue of payday loan companies is the Treasury’s.” Replied Craig. “They launched a consultation, 6th March, they are… we know… and working with the OFT, Advertising Standards on the industry to look, more broadly, at advertising of payday loan companies. I think this goes to the point of advertising as well as sponsorship.”

“Here is a clear example of where the government has signalled a consultation that they’re keen to undertake. Quickly, as I understand it, working with the ASA to offer their views on payday loan companies and that will have implications, I am sure, for advertising as well as sponsorship – I just don’t know what the outcome of those things are, pending the outcome of the consultation process.”

The current draft of the documents pertaining to potential sponsors, the Committee highlighted, included a clause that indicated that sponsors should not be engaged in pornography or “immoral activities.” Perhaps unsurprisingly, this led to a brief discussion as to whose morals these would be. Would they be the morals of whichever mayor was incumbent? Boris Johnson’s morals several committee members suggested, perhaps not entirely innocently, might be potentially different to those of his eventual successor. Similarly, Barclays’ banks recent role in the financial crisis could leave it open to accusations of immoral behaviour.

Craig’s answer was simple: “It’s not about defining a small amount of organisations with which we would not work and then work with anyone else.”

Contracts, he explained, would include provisions to allow TfL to terminate a relationship should a scandal strike mid-contract, and as sponsorship will only ever contribute the equivalent of perhaps 5 – 10% of fare revenue, the pressure to maintain a contract in order to meet financial demands should be relatively low.

Moving onto the value of sponsorships, the Committee asked how the potential value of deals would be assessed, and how they would likely be tendered. Craig asserted that all sponsorships would include a value for money assessment, with that done by an independent third party in the case of large deals. In the majority of cases, they would also go to competitive tender.

“In almost all cases we would [tender competitively].” He explained. “Specific examples where we might not do would be if there was something like an event that might be valued in the low tens of thousands of pounds, let say, and we were looking for existing suppliers to help sponsor an event. In a situation like that it may not be – well, I’m sure it would not be – the case that the process of going through an open market competition would cost more than we’d get in terms of sponsorship.”

Getting Smarter in Retail

Moving beyond the topic of sponsorships, the subject turned to other areas of non-fare income. Here, Craig asserted, there was the potential for substantial growth – in part because of the extensive station assets TfL possess, and the huge potential customer base.

“The combined populations of the top six cities out of London,” Craig highlighted, “in terms of numbers of individuals, equates to a quiet weekday on the Tube in February.”

Currently TfL make approximately £23m from retail, and it was clear that Craig believed this was far too low, resulting from the lack of an effective and forward-thinking strategy. It was also clear that Craig believed that TfL’s current approach focused too heavily on the acquisition of upfront capital, rather than developing its retail assets into sources of ongoing income.

“We should be employing an approach that’s similar to the estates like Grosvenor Estate, Crown Estate, and be an organisation that invests in its assets and looks to deliver a long term return from its assets.” He claimed.

Later in the session Craig would go into more detail about what this really meant.

“In the past we’ve entered into arrangements where we’ve disposed of assets, and developers have come in and done what they thought was appropriate. I think the view was to minimise the risk to the public purse, which I understand. But also because TfL has seen developers at being better able, I’m not sure whether it’s to get commercial value or to get the best opportunity from the sites. I think there are lessons, I think I mentioned earlier, that we can gain from people like the Crown Estate, who instead have a tendency to invest in their own assets and work with others in order to get a long term return. So I think moving away from capital receipts and thinking more about a TfL that’s willing to invest, and a TfL that’s more willing to look at recurring revenues, is one that’s more likely – much more likely – to recognise the transport requirements, the broader requirements in terms of sustainable developments, and to sit that alongside commercial activity.”

As several Committee members pointed out, Craig seemed to be advocating an approach more similar, in future, to that now taken by Network Rail at its terminals. Craig confirmed that there was some inspiration there, but ultimately there needed to be more to the strategy than that. TfL had the locations, but just wasn’t putting enough thought into how it used them.

“There’s a variety of factors at play here.” He said. “We have guidelines for retailers but we don’t either sufficiently enforce those guidelines nor do we have the carrot to accompany the stick whereby we, for example, might work with retailers for them to invest in their estate in order to get the return that they could do. It is, as you know, predominantly independent sole traders and we’d be keen to retain independents as part of the estate. But I think there’s also more opportunity for TfL to work with national and international brands in order to provide more… recognisable retail offerings, and more consistency across the network.

“I think fundamentally this is a network with huge footfall, in which the retail on the stations bears little relationship to the people who are using the stations, or very often to retail that’s immediately available outside the stations – and that relates to both convenience but also to places where people can stop and have a coffee as well. There’s a load of places where, you know, very many places where people meet at the station. Too infrequently do those people who meet at the station choose to stay on the station in order to have a coffee. They’re then taking their patronage elsewhere, and I think there’s a fantastic opportunity for us to invest in the stations in order to get a long term return.”

The Committee asked whether a TfL behaving more aggressively in the retail space would represent a threat to the high street, something Craig dismissed. The vast majority of TfL’s retail spaces, totalling approximately a thousand, were relatively small. Their focus, he also explained, should be on something he referred to as “hyper-convenience.”

“London’s transport system should be a place of innovation in retail.” He explained “It should be somewhere where we’re using technology and networks in order to provide the very best retail that we can for, again, the time-poor people that use our services in huge numbers every day.”

Technology, it soon became clear, is key to Craig’s vision of where the future lies for TfL in the retail space – with click-and-collect something foremost in his mind.

“Someone could order something on their way to work, for example,” he said, “and then pick it up at their home station on the way home. Those are the sort of services that we, uniquely almost, can offer Londoners and those are the sorts of things that we should be doing.”

Naturally, the conversation soon turned to the topic of telephony and WiFi on the Underground. Just what role, the Committee asked, does WiFi – and free access to it – play in this? What of voice and data services beyond that?

“This is an increasingly interconnected world.” Craig answered. “The vast majority of people on our services at the moment have a smart phone or some form of tablet device. Giving people a mechanism in order to do what they want whilst on the network feels at the heart of what an innovative transport network should be doing – and it’s a means for us to make money.”

For regular travellers and commuters, he explained, it was important that the current and future WiFi deals were structured so that the cost was picked up by the mobile operators rather than TfL . Visitors, however, were a different issue and could perhaps buy pay-as-you-go. Ultimately it was about seeking a balance between commerciality and keeping things free in support of the broader aspirations for using technology to boost retail.

“From a commercial perspective,” he explained, “the amount of money that we can make from giving people access to services whilst they’re travelling on our network will outweigh any money that we might make from trying to ‘fleece’ people for access.”

On the subject of more general voice and data services on the Underground, however, Craig was less enthusiastic.

“That would be an expensive thing for TfL to undertake.” He said. “I see no likelihood, given the other pressures that I recognise across the transport system, that TfL would choose to invest the very large sums of money in order to put out infrastructure for voice and data on the Underground and then simply to give that away for free. There’d have to be some mechanism in order to ensure that, for example, those mobile network operators who would have access to voice and data underground, I would argue – but then I would wouldn’t I – that those mobile network operators should make a contribution.

“And I think that if we get to a point where voice and data could be put into the Underground at nil net cost to TfL, and wrapped up into packages that the customers on the Underground would pay as part of their deal, then that may or may not be achievable but that would be my aspiration.”

With the example of Network Rail raised, and the suggestion of a more sophisticated and active retail policy on the table, the Committee were also keen to draw out whether this meant the Underground was destined to become a network populated by generic brands at the cost of character and independent shops. If TfL was looking to get more market value for its spaces, for example, would it also commit to establishing a percentage of spaces that should have affordable rents?

Craig seemed keen to make clear that TfL were not looking to take a “one size fits all” approach to station retail, which would mean taking into consideration local needs and local affordability.

“I wouldn’t characterise it as saying that a proportion of the units will have affordable rents,” replied Craig. “I’d say it’s more about looking at the tenancy agreements in order to make sure that we’re working with our existing tenants and others in order to give them more opportunity to invest in their estate. It’s taking more of a view on turnover, so that we’re not looking to maximise return but working with retailers where they’re successful. But fundamentally it comes down to a view on the tenant mix and the merchandising mix for each station so that you have an appropriate combination of brands and independents – an appropriate mix of different types of unit. Those are the sorts of things that any retail landlord would expect to do across their asset base and what we need to be doing.

“So it’s not just focus on affordable rents. It might be that at particular locations there’s not a commercial return, but actually thinking about it from a CSR [Corporate Social Responsibility] opportunity that there is a mechanism to enable, you know, either a start up business or some other means of employing space. Either way if we have space we should be looking to make the best use of it, and that’s not generally going to be simply looking at the best way of maximising the upfront commercial return.

“One needs to have an answer station by station effectively, to gauge the right use of that space. Is it a crèche? Is it a doctor’s surgery? Is it retail? Is it residential? Part of what we need to do is to be willing to take a long term view and understand how around our stations we can build more a sense of community that over time might help retailers and others.”

He also admitted that TfL needed to be more aware of how its retail related to the community than it had perhaps been before.

“In too many cases it can feel, historically at least, that people feel like they’re defending their network from TfL. TfL should be as interested in every station as local residents.”

Given Craigs clear desire to make better use of TfL’s existing assets, it was perhaps no surprise that during the session Murad Qureshi asked Craig how the current situation surrounding Shepherd’s Bush Market fitted in with this vision. The market is a subject which we will cover in more detail in a later post. It is located alongside and beneath the arches of the Hammersmith & City Line and is currently TfL property, but plans appear to be afoot to sell it, possibly for redevelopment.

It was a topic that appeared to catch Craig by surprise.

“I’m aware that we have had discussions,” he admitted, “I don’t know where we are with those discussions, and wasn’t aware that this would be raised.”

“Is it in TfL’s interest to dispose of this lively market which brings in regular revenues?” Qureshi asked. “When I’ve asked before it actually makes money for TfL.”

Craig proceeded to explain, in general terms, the approach that TfL now looked to take with regards to assets such as the market, and what would be considered when looking at their future.

“One – what the ongoing revenues are from existing use.” He said. “Two – what the potential income would be if the site were to be developed. And what capital receipt could be gained from an outright sale. Overlying that would be a decision as to whether strategically this would be an asset that we would look to retain an interest in, or indeed whether it sits outside the portfolio of assets that we would expect to retain. There may be other considerations in discussions with local authorities and others, but essentially it comes down to the strategic fit of the asset and its fit in the portfolio, and an economic view of the existing income and how that would relate to the disposal.

“In general, and across the estate, I am keen to move away from disposal and to understand how we can get long term return from our assets, but part of what we have to do across the estate is understand how, looking across the broader portfolio, one can look to, for example, divest TfL of some assets in order to generate money that goes to be spent on assets that are more strategic. I don’t, as it happens, know exactly where we are on Shepherds Bush Market but I can find out.”

The market is a subject to which London Reconnections will also return at a later date.

With regards to specific assets, the Committee also asked Craig to explain where Lillie Bridge Depot, and its potential sale, fitted into the current Business Plan.

“Lillie Bridge depot – there are assumed revenues in the business plan. Not £200m, as it happens, from development at Earls Court.” Craig explained. “But the business plan doesn’t assume any disposal of Lillie Bridge depot. That’s in part because we haven’t yet carried out the work on – or the work hasn’t been completed – on the feasibility of removing the operational infrastructure and the stabling at Lillie Bridge Depot. So there’s work underway on Lillie Bridge Depot and we should know by the end of this year as to whether it will be developable as part of the wider Earls Court Masterplan.”

Beyond retail space in particular, Craig was also keen to assert that TfL would look to make more use of the airspace over stations. He also indicated that, especially with the arrival of 4G services and small cells, there were potential uses to which existing street infrastructure could be put.

Making the Most of Advertising

As well as sponsorships and retail, the Committee sought to delve into the details of TfL’s advertising deals, past and future. Discussion naturally turned to TfL’s relationship with CBS Outdoor.

TfL and CBSO have not always enjoyed an entirely amicable contractual relationship. At the end of 2011, CBSO threatened to withdraw from their advertising deal if contract terms were not renegotiated. At the time they were unhappy with the overrunning upgrade works and other promised infrastructure changes. Whilst these were the official reasons, however, it was generally accepted that CBSO, who had signed the long term contract before the economic downturn, had likely found themselves sitting on a contract that was far less profitable than they’d hoped. Ultimately the two organisations reached an undisclosed settlement in January 2012, and relations have seemed to be far more cordial since then.

“TfL, having signed a deal at the height of the market with CBSO, had a guaranteed income.” Explained Craig, shedding some light on what had happened. “It’s been a fantastic deal for TfL. CBSO, to be fair to them, are a great bunch of people who invested in the estate. They’ve transformed the estate from what it was not so many years ago with wet-posted sites. We’ve got digital sites now making a significant contribution to the network. They had a very good 2012 leveraging the games, but also working better with TfL than they ever have done in the past in order to maximise the opportunities that came from the games.

“We have a positive working relationship with CBSO and they do a very good job of maximising the opportunities from across our estate – not just on London Underground but on the other contracts they have with us.”

Given that the previous deal was signed in more affluent times, the Committee asked, was there a risk that when the contract came up again in 2015 that advertising revenue would fall?

“I think it’s a racing certainty that we wouldn’t get the same contract again,” confirmed Craig, “and there are assumptions at the moment that the amount of money that we’ll get from advertising will fall. Part of the £1.1bn additional revenues is the mitigations that we could put in place in order to the impact that might otherwise accrue from the expiry of the existing contract in 2015.”

“It was a difficult contract for them to live with.” Admitted Craig, when pressed on what the disagreement (and settlement) with CBSO had ultimately been.

“The settlement was effectively one that gave both of us something that we were most interested in, which was that TfL maintained its [fixed revenue] guarantee and CBSO saw more of a return on digital technology. So, you know, as ever on a contract renegotiation both parties sort to get, and in this case got, what they were most interested in. We’re certainly satisfied with the outcome. CBSO were satisfied with the outcome.”

As the end of the session approached, the committee sought answers on two final key questions. Firstly, and perhaps most importantly, should TfL achieve its goal of substantially increasing its non-fare revenue, would the Government seize on this as simply an opportunity to reduce TfL’s grant?

It was something to which Craig had to admit he was unable to provide an answer.

“I think I can only say that within the Business Plan, looking at 2022, there is a not insubstantial increase required in terms of commercial development in order for us to balance the books. I know that there is a huge amount of investment that is required in order to get us to where we want to get in terms of transport for London. Let’s not pretend that I’m party to any discussion about what may happen in terms of long term government grant.”

Finally, discussion returned briefly to the issue with which the session had started: transparency. In all of the above, the Committee asserted, TfL clearly needed to overcome something that had previously proved to be its major failing: a lack of transparency both with regards to strategy and contracts.

Craig’s response was emphatic – as far as he was concerned transparency was absolutely critical to moving forward, especially with regards to sponsorships. That’s why they were coming up with a public policy, and indeed talking to the Committee.

“These things are much more straightforward when everyone understands from the outset that things are going to be transparent,” he asserted, “and I think I said in my letter to you [the Committee] that we will have a presumption of full transparency in anything with us and our commercial partners and an understanding, up front, that we are going to be transparent about this activity. This will mean that we will be open, in the future, with all the activity that we’re doing. I’m nothing if not conscious of the interest that people have in the commercial arena, and I think that there is a large amount that we can do, and that we have started to do.”

Craig’s intentions thus seemed clear. The committee’s final question, however, highlighted how big a change for TfL this may prove to be.

“What success have you had” Asked Biggs as Chair, “in getting Barclays to make more details of the cycle hire contract publically available?”

“Discussions continue.” Craig admitted. “I’m sure that they will be. I’m just not in a position yet to say when that’s going to happen.”