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Harsh staff cuts could affect Transport for London's credit score

Harsh staff cuts by Transport for London (TfL) could harm its credit worthiness, a leading financial group warned this week.

Credit rating agency Moodys said TfL should weigh up the risk of having a dearth of experienced project managers to deliver its investment programme against planned cost cutting measures. The agency has maintained TfL’s Aa1 debt rating but warned that it could fall if the organisation axes too many staff.

Moodys said total cost cutting has already been “substantial”, with a reduction of more than £3.6bn in operational costs planned between now and 2018. TfL is also planning to slash 27% from management overheads.

Moodys said these cuts will need to be carefully managed from now on as monitoring requirements and risk management needs are increasing, with Metronet and Tube Lines works set to be directed by London Underground, and with Crossrail going forward under TfL control.

TfL is currently funding £15.6bn in capital works, which does not include investments in Crossrail from 2009 to 2018. The largest project is the revised Metronet works, now integrated into the London Underground, estimated at over £7bn.

TfL’s 2004 business plan projected an annual spend on works of about £700M-£800M under TfL control. The most recent plan pushes this figure to £2bn per year, before taking into account TfL’s share of Crossrail, for which spending is anticipated to peak at an additional £2.5bn per year in 2013.

Moodys has also warned that the pressure on TfL’s declining cash reserves is anticipated to increase sharply.

This stockpile has been largely earmarked for capital projects and may be used to meet other short-term expenses. Cash and equivalents reached £1.5bn as of 31 March 2010, and have provided flexibility to deal with risks from the termination of private investment contracts and re-organisation of their related works.

Long-term funding needs are now projected to drop reserves quickly to £250M - excluding funds allocated for Crossrail - by the end of 2010/11.

This level - the planned floor for the remainder of the plan to 2018 - is roughly 3% of total annual expenditure.

Moodys said this lower level reduces TfL’s ability to deal with new revenue surprises such as the £220M of reduction in revenues from fares for the year 2009/10 or any cost overruns on major schemes.

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