Image: Denys Nevozhai from Unsplash

Sam Mullins OBE, Director of London Transport Museum, reflects on the funding and finance opportunities explored in its latest thought leadership report…

As societal trends and new technologies disrupt how and why we move around, changes are afoot in how we think about funding and financing major new transport infrastructure. Our latest thought leadership report, ‘Rethinking Transport Finance and Funding’ was published at the end of February. It explores some of the opportunities and challenges ahead as city governments, and others, look to raise additional resources for new transport schemes, known for being notoriously ‘greedy’ for capital.

Produced with Arup in partnership with international law firm Gowling WLG and global technology company Thales, it brings together views shared at our recent Interchange events by leaders from across the transport sector, policy makers and academics.

It outlines how models to generate long-term financial gains exist for the taking at a city and metro level, but also highlights that generating revenue and securing borrowing is only one side of the equation. And this is all part of a picture further complicated by an uncertain political environment, changing passenger trends and disruptive new technologies.

Can we take growth for granted?

Looking back at the historical growth of transport in the UK reveals how a complex relationship between public funding and private finance has evolved to provide investment to meet increasing travel demand. But can we afford to take this growth in demand for granted? And what are the risks if we do?

It has become all too easy to assume that demand for efficient, flexible and sustainable modes of transport will continue to increase with the ongoing global trend toward urbanisation. But analysis by Arup reveals that despite population and economic growth, world cities including London, New York, Paris and Toronto have seen fluctuations – and in some cases a decline – in ridership on their respective metro systems in recent years.

New technologies, changing working practices, increased car ownership, better digital connectivity, pressure on people’s real incomes and concerns for the environment are amongst the societal shifts playing a major role in shaping how and why people travel and the modes of transport they choose.

A potential long-term decoupling of population growth and passenger demand could have a considerable effect on farebox income. But paradoxically, these trends also mean that opportunities to generate additional value from new transport-orientated development is becoming increasingly important.

With this in mind, the report explores the balance between public and private finance; why harnessing innovation is essential; and how embracing new user-charging schemes can unlock additional financial resources.

Private partnerships for public good

Sustained government funding will remain essential to the future of transport infrastructure, including the creation of new national and urban railways. But what emerged from our conversations was an overwhelming sense that now is the time to investigate ways to unlock additional income at a much more local level.

Developing public/private partnerships with a greater focus on land and property value capture provoked much debate. One hundred or so years ago, Britain’s big cities typically raised around four-fifths of their resources from local property taxes, but today that figure is more like 20 per cent. As we look to the future, tapping into the wider economic and financial gains generated by transport infrastructure offers huge opportunities.

Partnerships between public authorities and private investors that align new transport routes with real estate development can ‘lock in’ future demand for transport services, for instance. We are already seeing this alignment taking place in cities such as London to some degree, with the redevelopment of railway station carparks for high-density housing.

However, what became clear in our conversations, and is drawn out in the report, is that key to lasting value creation, and the long-term sustainability of models like this, will be giving city authorities greater fiscal powers. Powers that enable them to tap into the wider real-estate value transport infrastructure helps to create, such as premium rents, property prices and capital values.

Establishing mechanisms to successfully enable city authorities to borrow and retain at least some of the taxes generated by their transport investment needs to be explored further. But if these can be successfully established, then embracing this model has huge potential to create a virtuous circle of economic growth in which city authorities gain the ability to garner funds for future projects, and attractive financing opportunities are open to the private sector.

Harnessing disruptive technologies

One challenge the conversations at our Interchange events returned to regularly was the risk of stifling innovation within the development of public infrastructure projects supported by private capital. Where this happens, it was felt that the allocation of risk down the supply chain had potential to jeopardise collaboration between suppliers. As such, the report highlights that when private capital is attracted and secured, it remains essential for innovation to be incentivised from the outset, particularly with the view to capitalising quickly on the advent of disruptive new technologies.

As the world of transport changes at an unprecedented pace, technologies we once considered the stuff of science fiction draw closer to reality. In London, for instance, driverless trains have served the Docklands Light Railway since the late 80s, but as technology advances at an ever more rapid pace, the possibility of self-driving cars, air-taxis and solar roadways becoming part of daily life is no longer outside the realms of possibility.

How transport authorities embrace and manage the uncertainty that these technologies bring will undoubtedly influence the infrastructure projects brought forward and receive central government funding. And, as the government charts a course to a carbon-free future, competition could increase further as the environmental impacts of transport are looked at within a much broader set of complex challenges to decarbonise other public infrastructure first.

Enabling user choice

To help mitigate against increased competition, the move towards a world of ‘Mobility as a Service’ opened up an interesting debate about the introduction of dynamic pricing into what and how people pay for transport. The report highlights that such schemes could offer consumers a rich variety of options for travel, from choosing the type of vehicle, a guaranteed journey time, a reduced environmental impact level and so on.

By capitalising on increased consumer choice, models like this have the potential to benefit both the user and provider: At an individual level, increased choice offers customers the opportunity to ‘mix and match’ modes of transport to suit their needs with appropriate pricing, as well as giving greater control over their individual environmental impact. And for the transport provider or city authority, revenue raised through these dynamic pricing structures can be reinvested into infrastructure improvements and developments.

The report also outlines how an additional benefit will in turn be the ability to harness ‘big data’ from these multi-model passenger journeys. Understanding detailed real-time information about the modes of transport taken across an individual’s daily, weekly and monthly journeys could become a powerful tool to better inform the future design of urban spaces and transport services.

Embracing user charging

Alongside the opportunities offered by interconnected passenger journeys, we also explored how road user charging has the potential to enable city authorities to raise new funds.

International schemes such as Stockholm’s congestion tax and Singapore’s electronic road pricing both offer interesting models for consideration.

In Singapore, for instance, the creation of a barrier free dynamic road pricing system has resulted in a substantial and consistent income stream for Singapore’s Land Transport Authority. With 60 per cent of this revenue reinvested into transport improvement projects, replicating similar models is certainly an attractive prospect for other city authorities – although not without some challenges over, for example, persuading the public to back such schemes.

     Some road users are wary that ‘things will (actually) get better’ in return for payments. And so, a key takeaway from the report is the need for schemes to be ‘sold’ to the public in a way which demonstrates the immediate benefits to individuals, as well as long-term benefits to towns and cities.

Looking forward

Ultimately, transport projects must be as attractive as possible to secure the resources they need to get built, whether that is by securing public sector backing, attracting private financers who will share in future capital gains, or winning over the users who pay for existing services. And if transport infrastructure is to continue being a long-term strategic driver for economic growth in our towns and cities – helping to attract new businesses and residents – then it is vital to keep our sights on the creation of finance and funding models which are resilient and adaptable to future disruption and passenger trends.

But, as the report concludes, what stood out strongly in our discussions with leaders from across the transport industry is the vision for the future city. It is important to remember that how we pay for projects has a long-term impact on the shape, density and attractiveness of our cities as places to live and work. The sort of cities we are creating, therefore, is just as, if not more, important a consideration than working out how to secure the long-term financial security of our transport authorities and service providers.

Alongside our partners, we will be continuing these discussions on the future of transport in the UK and internationally over the coming months. Our next Interchange series will explore themes from the Rail Sector Deal in partnership with the Railway Industry Association.

Sam Mullins OBE is Director of London Transport Museum

To read the report and for information about upcoming Interchange events visit:

www.ltmuseum.co.uk/interchange