When Railway Funding Hits The Buffers
Later this year, the UK rail industry will start to get a picture of what the next proposed regulatory period looks like, with Scotland having already published its advice to the rail industry in a bullish document that genuinely recognises the importance of rail to communities and the economy in the country.
While headline funding in the industry may still end up appearing relatively positive, a consequence of rising investment in HS2, the reality is that there is a strong likelihood that funding for Network Rail will contract, particularly with regards to enhancement schemes, these long being viewed as discretionary, even when they can both support and deliver prosperity. We are no longer in an area where value for money can carry the day - there is a shortage of available funding in absolute terms and we are moving into uncharted waters.
At a time of relative economic uncertainty in the UK following our decision to leave the European Union and spending that has failed to adjust to economic realities since 2007/8, the challenge for the railway will be to work out how best to ensure that it can continue to build upon the great steps forward it has taken in performance, reliability and safety that have been seen in the last 10 years.
During this period, it is essential that Government creates a viable and stable macroeconomic environment for ongoing 3rd party investment in the railway. While long lead schemes such as HS2 will pass through the uncertainty and political will will keep funding strong throughout, mega-projects are not what the railway is built on; there are railway companies large and small which have strong regional presence and if there is a major reduction in regional enhancement work, in Network Rail's routes, then the next control period may well damage large elements of our supply chain.
To avoid this risk, to build on the legacy of the last 10 years of (generally) upturned performance, we need to move quickly to a position where 3rd party financing, at least for smaller schemes, becomes the norm – a shift from the top down scheme development process that still dominates the industry.
While few individuals want to pay directly for improved rail services and as a consequence are reluctant to see funding increase even in the best of times, many people in the rail industry continue to have an aversion to 3rd party financing of rail schemes. This is a somewhat unfortunate position.
With a long legacy of state investment (even if it was indirectly through guarantee prior to NR reclassification), 3rd party financing is almost seen as an anathema in some quarters. Surprisingly, it is a position that I have some sympathy with, but not as a position of principle; when an economy is strong, it is an easy argument to make that nobody can borrow money more cheaply than a Government – funding has its place - and that was for a while, absolutely true, but not today...
Being punch drunk on our history is a poor way to run an industrial investment strategy - once we were kings, but today we're a little poorer. Now, I recognise that only a few private companies in the world have an AAA credit rating, When we start to look at how the world perceives us; Standard & Poor's credit rating for the United Kingdom stands at AA with negative outlook, Moody's credit rating for the United Kingdom is Aa1 with negative outlook and Fitch's rating is AA with negative outlook.
The gap is closing upon the cost of capital from the state and that which can be secured by other institutions - there are dozens of banks with a rating equivalent to where the UK sits today. The argument that funding from the state is automatically better than 3rd party finance is slowly fading. Ironically, we are turning back to the roots of the railway, something that should give comfort to those attached to the nostalgia of our industry, rather than its future.
Those same credit rating agencies that today increase the cost of our Government raising money from the markets were born of the railway. When the US started to build rail infrastructure in the 19th century, many companies failed, leaving investors completely out of pocket. When John Moody launched his company, Analyses of Railroad Investments, the ground was laid for 3rd party finance to enter the rail industry, a history that has been forgotten by many, but a principle which remains valid today.
The changing face of the cost of capital is however only one aspect of the picture we need to consider when we think of applying 3rd party financing into the UK rail industry. While Government is very good - surprisingly competent - at identifying schemes that can stimulate economic growth on a national level, Government equally has a poor track record of being able to deliver innovation, to work quickly and to monetise opportunity fast and it is here where we need to focus.
Commercial entities alone are effectively placed to make this shift. In a world of plenty, it is entirely possible to run a network based upon national planning, grand project after grand project, but that is not the world that we find ourselves in today, nor is it the world that commercial entities will be willing to finance. Mega projects, mega franchises... they all bring a portfolio of risk that is unattractive unless given that sure-fire backstop of the state. This also cannot be the right answer for our industry or for us, the taxpayers.
At the moment, the industry is swamped with workstreams looking at the potential for 3rd party financing. They are all well intentioned, consuming a lot of effort and generally focussed on trying to deliver engineering solutions - particularly around Digital Railway - rather than financing solutions. Time is running out, the light at the end of the tunnel is CP6 and we are not moving fast enough. This is a risk to everyone in the industry.
To identify schemes that can be effectively financed, there needs to be increased transparency and openness of the challenges; how will changed asset policies, increased heavy maintenance and the need to maximise efficiencies from route maintenance staff shape the demand for financing?
The time has come not for Network Rail and DfT to try and identify schemes for the market to price, for them to procure, but to see what the commercial world has to offer the industry. To do this, Network Rail needs to start by releasing the granular information that exists on passenger growth, demand and asset condition that it holds to the market, so that 3rd parties can start building schemes to bring to Government – a bottom up, rather than a top down approach.
We have reached the point where we need to step away from our comfort blanket of committees and workstreams and actually deliver a scheme, because the innovation we need to deliver today is not engineering, but financial. This is about the British railways writing a new chapter in their history – the only question in my mind is whether or not we are all yet on the same page.
This is a personal opinion piece only. Feedback, thoughts & comments welcome.
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Strategic Commercial Director at Network Rail
8 年Chris a well considered précis on the inevitable shift (or is it drift) with regards the funding of rail infrastructure investment. I agree with the sentiment and if the industry is to be coherent in its approach to non regulated sources of funding, we need to improve our ability to demonstrate what rail investment works, 'should, will & did cost and why'.
Head of Financial Control - Wales & Borders Renewals
8 年Interesting and thought provoking as ever - surety of return has to be key and different stakeholders will want different things. The challenge is to provide accurate and reliable information to 3rd parties - I don't think we are there yet!
Semi retired railwayman
8 年A few points come to mind: HS2 was going to be additional funding for the railway - yes - we all saw this one coming. It was always going to be the case that there would be a huge reduction in funding for smaller local schemes which are so desparately needed to bring these railways up to standard. Alright if you are on the route, hard luck if you are not. Do we know where the UK is going post-Brexit? Of course not, but that hardly makes it a good time to embark on a massive new project that will hoover up all the money and expertise. London employment is likely to be under pressure for a few years as banks relocate European work to Europe - so will London be the dominant growth market it has been - perhaps not?. So how about putting London schemes on hold for two or three years until the position becoms clearer. That should include HS2 which might well not be needed after all, if the economy crashes. But we are still going to trade with the world so the Felixstowe to the Midlands upgrade is critical as are the other deepsea port links. If we are to be outward looking access to Heathrow looks pretty important as well. Why the delay with East-west rail - linking the fastest growing cities in the country? It could include Peterborough (another massively growing city) with a little lateral thought - possible a chord at Manton? But why is a new railway linking at least four maybe five (Oxford) electrified routes not going to be electrified from the start - it is so much cheaper than doing it when it is in operation. But more importantly railway unit costs and development times have ballooned. For example new stations which costs ￡1.5m 15 years ago are costing ￡10m now and are totally out of reach of most third party providers. Further electrification is dead with the combination of factors but including the huge self-imposed cost impacts of GL/RT1210, for little obvious benefit and which seems to have little justification in term of safety value for money (far better to put the money in eliminating level crossings, and if electrical safety at stations is that critical - a campaign change to put insulated horns on all pantographs). Perhaps the loss of electrification leaves some money for capacity increase and bottleneck relief schemes across the network. And a bit left over for locally transformational schemes such as Bristol local services, Colne - Skipton, Stratford - Honeybourne, March - Wisbech, Thornton - Levenmouth and Exeter - Oakhampton - Plymouth. Post Brexit, these schemes, which bring benefits to lots of often ignored parts of the country, will need to come forward to keep faith with the people who voted so strongly against the established view. But experience with external funding on the Borders Railway was not good and it is not clear that anything has changed to make it easier - perhaps some of these re-opening could test the water. But if more borrowing is the answer, and I am not sure it is, except for the provision of new journey opportunities (see above), and the only sources are 3rd parties, the industry will need to do much better in term of development times and costs and delivering at the agreed cost. Otherwise 3rd parties will just not be interested This is a fundemental time in the privatised railway's development - the cheap money gravy train has stopped and there will need to be a complete rethink of how things are done, with rather a lot of sacred cows to be slaughtered (OK two metaphors but you get the point). This is, in effect, back to the 1980s, and a need for the Business to take back control from all the vested interests who have been driving up the costs and to bring the focus back to where it is needed: delivering safe, reliable, but critically cost-effective train services to current and future users to support the new post-Brexit UK economy. Otherwise like electrification and the Cambridge and Dunstable busways, we may find the whole railway priced out of the market and travel will be collectively less safe and less reliable as people are forced onto ever more crowded roads.
Manager for Renewable Energy - IUK Business Connect, Innovation from all sectors into the optimisation of energy
8 年Very good article, do we also need a long term policy from central government to stabilise the industry to have 3rd party investment. I noted last week that because southern rail was causing inconvenience, an MP demands we split the franchise, each successive MP responsable for rail wants his view of the world, labour under the union banner may try a re-nationalisation card for votes and include network rail in that. How to stabilise policy for long term investment might be key?