Peter Greenhalgh, Associate Director – Turner & Townsend, looks at the investors and investments in UK rail…
The national political agenda is once again dominated by discussions around the UK’s ageing rail network. With talk of reopening lines and stations closed during the Beeching Cuts in the 1960s and the creation of new nationally significant routes, there are encouraging signs of the new Government’s support for rail.
Regionally, the call for investment is becoming increasingly difficult to ignore. Pressure in particular is coming from regional leaders such as Andy Burnham, Mayor of Greater Manchester, and Andy Street, West Midlands Mayor, calling for greater support for rail outside of London as part of Downing Street’s ‘levelling up’ agenda. Echoing these calls, the work by the UK2070 Commission has highlighted the need for the creation of a ‘national network which creates renewed levels of connectivity between cities’.
The challenges facing the network are well documented. The need to modernise ageing infrastructure is often brought face-to-face with the harsh reality of minimising the cost to the taxpayer. To realise the ambition of creating a world-class rail network – with export-ready skills to match, more must be done to attract private investment alongside Government spend.
This has been an ambition of Network Rail and government for many years, with the Shaw Report (2016) raising the subject of opening railway investment up to third party funding and the Hansford Review (2017) providing detailed recommendations on how this might be achieved. With major programmes coming forward and Government backing for rail, we have a golden opportunity to do so.
The reality is challenging. Perceptions of infrastructure, and the railways in particular, as investable propositions for private capital are low. Regaining investor confidence relies on innovative thinking, but also taking stock of past lessons – bringing together a coherent route map for attracting private funding and finance and delivering new projects and upgrade works. Working in Manchester, we know the possibilities of what can be done. The creation of the Liverpool and Manchester Railway Company (L&MR) in 1824 proved to be a financial success, earning backers of the project an average return of 9.5 per cent on their investment. The line solved a real problem for communities and businesses and boosted regional business activity and growth. The promise of this kind of profit encouraged a massive increase in railway construction across Britain.
Although the financial landscape is very different today, the L&MR’s clear business case and replicable model for delivery is as relevant as ever – as the combination of programmes like Northern Powerhouse Rail and East West Rail recapture the spirit of the Victorian railway age.
Diversification of funding
Critically – and as noted by Hansford’s review in particular – private finance must draw on a variety of different models to make it stack up. We need to see innovative thinking of the type that has supported Crossrail in London, where 60 per cent of funding is being generated by local businesses – a solution that won’t work for all schemes, but which could contribute to many in some form. Bigger still, there is a real opportunity to channel institutional investment and even private household wealth into dedicated infrastructure funds which are suited to stable, long-term returns.
In other sectors, Private Public Partnerships (PPPs) had become widespread prior to the Government scrapping all new PF2 programmes last year. Despite high profile criticism of some projects – from hospitals and schools to roads – work by Turner & Townsend for the World Economic Forum shows that globally PPPs can work and work well, providing that they are well set-up and managed. The same logic can be applied to funding models of diverse types – dramatically reducing risk profiles and lending rail an investability boost.
Investors need reassurances that programmes are set up for success – navigating the pitfalls of past initiatives and demonstrating a strong business case for funding. This has been reinforced by the National Audit Office report on Modernising the Great Western Railway, which highlighted the importance of prioritising strategic objectives and accurately predicting cost and scope.
The first – and arguably most critical – area of focus should be on the creation of a whole-life business case which lays out a transparent route map on returns for decades to come. Early-engagement between private-public stakeholders helps ensure this business case is sound and doesn’t contain surprises down the line which could dent credibility in the railways as an investable proposition overall.
This partnership approach then needs to be maintained throughout the programme – ensuring that transition and management from investment case to construction to operation is smooth. Our work with the WEF highlighted the ongoing need for contractually framed, resilient partnerships to maintain collaborative rather than combative working relationships.
This includes a recognition of the risks of scope creep. The best cases – from the 1824 L&MR onwards – have a clear business case and scope which is brought to fruition. Although we should always be alive to opportunities over the course of a programme to upgrade or amend the scope, this needs to be adequately factored into the wider economic case for the project, minimising the risk of financial loss to either the public or private purse.
Understanding complex outcomes
The conundrum for rail is balancing the hard economics with the wider concerns, outputs and benefits of good connections. The success of attracting investment into schemes such as Northern Powerhouse Rail relies on identifying detailed rules and transparent processes that will guide the project to meet the needs of each partner.
While private investors will understandably be driven by financial returns as a metric of success, there is a need among all contractual parties to attach more weight to the importance of whole-life economic, social and environmental values. For instance, a new railway line could serve to connect marginalised communities that have lost transport and basic local services – encouraging the connectivity revolution called for by the UK2070 Commission.
While forms of multi-criteria analysis (MCA) are already in play in the UK, cost remains the dominant factor in long term decision-making.
Work by the Institution of Civil Engineers points to other global regions, including Australia, as adopting increasingly sophisticated MCA, while in Germany federally funded infrastructure also includes a spatial impact assessment which gives extra weight to programmes serving low-income regions.
The changing nature of infrastructure development means that these considerations need to be factored into business cases for our own network and will play a significant role in the balance of private funding plus public spending. By putting the end-user first and looking beyond profit, funders could find that they unlock further opportunities with their initial investment.
Beyond specific schemes and investment, this process of setting up programmes for success provides a generational opportunity to drive consistently higher performance – improving how it learns from experience and building capabilities in the sector.
Rather importantly, but seemingly missing from the lexicon of some within the industry, is the need to conduct ex-post analysis of rail projects once they are completed. This is difficult, but by assessing the project’s actual outcomes against those proposed at the start, lessons – good and bad – from the process can be understood to ensure that future project management considers all possible points of failure.
Post completion analysis has been recognised as a means of driving cost and performance efficiency. In the (March 2019) Railway Industry Association Electrification Cost Challenge Report, it was highlighted how learning from the lessons of past mistakes could deliver a 33-50 per cent saving on financial costs. This could be achieved by establishing a ten-year rolling pipeline of electrification works that build on the learnings of successes of past projects by transferring skills from one project to another.
This model – replicable across multiple types of capital projects – not only lowers headline costs but reduces financial risk terms that ultimately determine a yes/no investment case.
For UK plc, establishing programmes and technical expertise of this type offers a bigger prize. In the same way that the UK’s tunnelling expertise is now being exported internationally to assist with the design and delivery of projects around the world, coordinated investment in the UK network could once again put the UK at the forefront of international rail delivery as it was in 1823. To achieve this, the industry needs to sit up and listen to where projects went wrong and build on the success of those that go right.
The devil will – as with all major investment schemes – be in the implementation. But with three major rail programmes coming forward we have a real opportunity to build capacity and expertise in the sector that in turn can unlock a wider stream of smaller but critical projects across the network.
Doing so will depend on building and maintaining cohesive and stable public-private partnerships – delivering predictable returns on investment for partners, alongside clear environmental, social and economic benefits for fare payers.
Peter Greenhalgh is Associate Director at Turner & Townsend, based in Manchester