Future Network Rail Investment

[LNW-GW Joint]

NR has published its plan to attract private finance for enhancement projects.
This is a summary in Railway Gazette: http://www.railwaygazette.com/news/...-to-attract-private-sector-participation.html

Infrastructure manager Network Rail announced ‘sweeping new reforms’ on July 31 which are intended to enable third parties to become ‘heavily involved’ in delivering railway investment projects. At the same time it published the Unlocking rail investment – building confidence, reducing costs report commissioned from Professor Peter Hansford in December 2016. This makes 12 recommendations for increasing contestability with the aim of encouraging third party investment and infrastructure delivery.

Network Rail’s reforms include:
- By the end of 2017 Network Rail's routes will publish 'pipelines' of projects they want to put out to market, and will work with government on producing a list of opportunities for third parties.
This would start with smaller projects such as new stations, depots and car parks, which will be used to develop best practice criteria for larger projects such as improved rail links to support power plants or projects funded by local transport authorities.
- 'Third-party project champions' will work with delivery bodies, investors and funders to ensure projects are successful;
- Service level agreements will provide third parties with clarity and reassurance regarding Network Rail's legal obligations;
- Flexibility will be introduced to railway standards where Network Rail can 'encourage innovation and reduce costs' without compromising safety;
- Money saved from introducing a new idea or innovation would be shared between Network Rail and the company or individual;
- Potential investors will have choices over who delivers projects for them.

‘By welcoming open competition into the core of our business we will increase the pace of innovation, creativity and efficiency and could deliver even more improvements to our railway and for the people that use and rely on it’, said Network Rail CEO Mark Carne.
‘I am determined to create an environment where innovative third party companies can compete for and directly deliver railway projects.
These reforms mark the next stage of Network Rail's transformation, having already decentralised into nine devolved individual businesses

The first use of this approach will apparently be trialled on Anglia Route.
The full details are at https://www.networkrail.co.uk/indus...d-party-investors/network-rail-open-business/
but I haven't trawled through it yet.
It seems to be a radical approach to get private finance into the enhacement work on NR.
Maybe it is the golden goose which will break the current funding impasse on electrification and other projects...

 

[eastdyke]

NR has published its plan to attract private finance for enhancement projects.
This is a summary in Railway Gazette: http://www.railwaygazette.com/news/...-to-attract-private-sector-participation.html


The first use of this approach will apparently be trialled on Anglia Route.
The full details are at https://www.networkrail.co.uk/indus...d-party-investors/network-rail-open-business/
but I haven't trawled through it yet.
It seems to be a radical approach to get private finance into the enhacement work on NR.
Maybe it is the golden goose which will break the current funding impasse on electrification and other projects...

It would certainly 'weed out' projects that have no chance of making a return on the investment!

But perhaps we could return to the climate of the mid-late 19th century where projects could get built on a wave of investor euphoria? No, thought not.

 

[daikilo]

Quote from top of page 5 of the Hansford report

'The forthcoming South Wales Metro upgrade project
will provide an interesting new example, as the
successful third party bidder will take over, upgrade
and extend transport infrastructure around Cardiff."

Did I miss something until now or is this an indication that the decision is taken that a third-party will build and pay for a Valleys tram network? I hope they get the funding in place before closing the network (cf new Cardiff bus station).

Alternatively, is it a formula to allow say Arriva to upgrade the network?

 

[DarloRich]

privistisation by the back door sadly

 

[eastdyke]

privistisation by the back door sadly

More like investment through the front door!

Risk/opportunities for all.

 

[pdeaves]

NR has published its plan to attract private finance for enhancement projects.

Like Hull Trains wanted to pay for some electrification? The trouble with the 'private finance' idea is that Network Rail (and others) still needs involvement, with attendant cost.

 

[mr_jrt]

Sooo...PFI then? What a wonderful success that's turned out to be for the NHS.

 

[DynamicSpirit]

Sooo...PFI then? What a wonderful success that's turned out to be for the NHS.

That was my first thought too. It's not at all clear to me from the announcement how these arrangements are going to work. There's a mention of innovation, and I can see that if it brings in innovative ideas from private enterprise that Network Rail wouldn't have thought of, then that could be good. But the obvious worry is: Is this just going to end up as a form of PFI, whereby NR saves upfront investment costs, but then loses out long term by having less revenue (or more ongoing expenses), and we have to have lots of expensive and inflexible legal agreements to boot?

 

[plcd1]

I have read the Railway Gazette summary but none of the detail. I'm afraid my alarms went off when I saw a tweet from those proposing the tunnel link under Windsor that this new "way forward" somehow meant their idea was likely to prosper.

How on earth Network Rail and the DfT are going to find the skilled resource, money and time to fend off the "loony schemes" has to be a key concern. Proponents of ill considered, unjustified but on the surface attractive schemes rarely take no for an answer. This risks being an utterly unnecessary distraction from the "day job" of actually planning and implementing much needed work.

Having worked on PFI and PPP contracts the private sector doesn't do anything unless there's a profit in it for them. Yes in some cases they may be more efficient / ruthless in delivering a project but that gain does not come for free and neither is it risk free. Even if you second people in from the likes of Bechtel or Parsons Brinkerhoff you are still forking out a fortune for whatever skills they bring. How NR can effectively weigh up the benefit of private sector involvement without being left shouldering all the project and operating risk is a major issue here.

As someone else has said this is purely a step towards privatisation of NR or least part of its overall portfolio of ops, maintenance and renewals. It feels like a "sop" that tries to meet the hawks at the DfT and HMT part way but is ultimately doomed to fail as the hawks will never be satisfied even if every project suddenly came in on time, to scope and within budget.

 

[yorksrob]

I share a lot of the scepticism about private investment being a panacea, particularly pfi.

Yet I'm sufficiently disillusioned with the current log jam on small-medium sized projects to give anything a try. If it gets sensible projects such as Wisbech, Middlewich and Uckfield - Lewes going, then it's worth trying.

For my preference, I would also like to see NR take on some similar projects so that a fair examination and comparison can be made. After all, despite the naysayers, NR has delivered some projects, such as Dawlish and the Settle Carlisle reopening very well.

In terms of private investment, I would prefer the situation where it eventually gets paid off, and the asset returns to the taxpayer, rather than the Humber Bridge situation where the public are lumbered with paying over the odds in perpetuity.

 

[LNW-GW Joint]

In terms of private investment, I would prefer the situation where it eventually gets paid off, and the asset returns to the taxpayer, rather than the Humber Bridge situation where the public are lumbered with paying over the odds in perpetuity.

I suppose it's not that different to the M6 Toll setup. Or the Channel Tunnel.
The Severn Bridge tolls are being removed next year, but the DfT was very reluctant to do so.

The way the two new LGV lines in France have been built is also interesting.
The Bordeaux line is essentially in contractor hands with SNCF paying a toll, but the shorter Rennes line has SNCF in charge but with a large contractor element.
Regional governments also contributed, particularly to connections into the classic network.

 

[DarloRich]

More like investment through the front door!

Risk/opportunities for all.

but it wont be. There is little direct return on railway investment and I fail to see how, unless coupled to a property development scheme, money can be made. What is the return on the private investment? How do they make money? What is their margin? What is the repayment time frame?

Risk will also not be transferred to the private sector. Privatization of profit, nationalization of risk and loss will be the order of the day.

I share a lot of the scepticism about private investment being a panacea, particularly pfi.

Yet I'm sufficiently disillusioned with the current log jam on small-medium sized projects to give anything a try. If it gets sensible projects such as Wisbech, Middlewich and Uckfield - Lewes going, then it's worth trying.

See above - how will the investors make a suitable return on the asset? How will the tax player avoid being ripped off for years as per pfi? I simply don't see how they will, especially with marginal lines as suggested in the quoted post. The private investors will only want to be associated with cast iron returns in a short time - hence my view on property schemes.

 

[Moonshot]

but it wont be. There is little direct return on railway investment and I fail to see how, unless coupled to a property development scheme, money can be made. What is the return on the private investment? How do they make money? What is their margin? What is the repayment time frame?

Risk will also not be transferred to the private sector. Privatization of profit, nationalization of risk and loss will be the order of the day.



See above - how will the investors make a suitable return on the asset? How will the tax player avoid being ripped off for years as per pfi? I simply don't see how they will, especially with marginal lines as suggested in the quoted post. The private investors will only want to be associated with cast iron returns in a short time - hence my view on property schemes.

I pretty much agree with this....there has to be some sort of additional venture to tag on to rail investment which overall will generate a return. Its not immediately obvious either, but one thing I do notice on my travels around the Northern network is the number of new property developments near stations.

This proposal will be one to watch over the next few years.

 

[LNW-GW Joint]

There are historical precedents for this:
Lines like the Shrewsbury & Hereford were funded and built by contractors (Thomas Brassey in this case), and then worked for a percentage of receipts.
Eventually he sold out to LNWR/GWR who ran the line jointly, but he did take the early risk of development.

 

[yorksrob]

I suppose it's not that different to the M6 Toll setup. Or the Channel Tunnel.
The Severn Bridge tolls are being removed next year, but the DfT was very reluctant to do so.

The way the two new LGV lines in France have been built is also interesting.
The Bordeaux line is essentially in contractor hands with SNCF paying a toll, but the shorter Rennes line has SNCF in charge but with a large contractor element.
Regional governments also contributed, particularly to connections into the classic network.

Yes, indeed. The Severn Bridge was in my mind. I suppose a few pence on the fare over a long enough timeframe could add up to an investment. GMT has used similar logic in having higher fares on South Eastern to pay for domestic high speed.

 

[yorksrob]

but it wont be. There is little direct return on railway investment and I fail to see how, unless coupled to a property development scheme, money can be made. What is the return on the private investment? How do they make money? What is their margin? What is the repayment time frame?

Risk will also not be transferred to the private sector. Privatization of profit, nationalization of risk and loss will be the order of the day.



See above - how will the investors make a suitable return on the asset? How will the tax player avoid being ripped off for years as per pfi? I simply don't see how they will, especially with marginal lines as suggested in the quoted post. The private investors will only want to be associated with cast iron returns in a short time - hence my view on property schemes.

In the same way that there is no return on a new road unless you have some sort of a toll. I suppose with a rail scheme, the company may require a base line income guarantee, which would translate to Government risk, but for a scheme with a better business case this won't be unduly onerous, particularly where the alternative would be for gmt to shoulder all the risk anyway.

 

[LNW-GW Joint]

Route developments like the Severn Tunnel and the Runcorn-Widnes bridge (Weaver Jn-Ditton) were also funded by fixing fares at higher than the normal pence-per-mile level.
In the case of Runcorn, the LNWR was allowed to maintain the higher via-Earlestown fare on the new shorter route, to fund the bridge.

Today, Eurostar fares are similarly maintained at a high level to pay the Eurotunnel per-train toll.

 

[edwin_m]

This is quite similar to some of the financing models used, with varying degrees of success, for tram and DLR schemes and as proposed by Grayling for East West Rail. I think the key is for the client/promoter to have a good understanding of what the risks are and to accept that not al of them can be transferred to the private sector at an economic cost.

 

[DarloRich]

In the same way that there is no return on a new road unless you have some sort of a toll. I suppose with a rail scheme, the company may require a base line income guarantee, which would translate to Government risk, but for a scheme with a better business case this won't be unduly onerous, particularly where the alternative would be for gmt to shoulder all the risk anyway.

Where does the profit come from? Who is expected to maintain the new line going forward? How is that paid for?

I simply don't see how there is a return on the private investment within a suitable timescale within the proposed framework. This is not a short term investment and that might not be acceptable for a private concern.

There are historical precedents for this:
Lines like the Shrewsbury & Hereford were funded and built by contractors (Thomas Brassey in this case), and then worked for a percentage of receipts.
Eventually he sold out to LNWR/GWR who ran the line jointly, but he did take the early risk of development.

Indeed - but will a revenue share work when considered within the current payment/reward structure? Who pays to keep the line in good nick?

I see station re development, I see station funding and i see things like car parks and retail units ( all as part of property deals) but I can't see private companies stumping up front lots of money for an investment in a new line that will be repaid by a trickle of revenue over a multi decade period. That simply wont help the dividend.

 

[edwin_m]

I see station re development, I see station funding and i see things like car parks and retail units ( all as part of property deals) but I can't see private companies stumping up front lots of money for an investment in a new line that will be repaid by a trickle of revenue over a multi decade period. That simply wont help the dividend.

It could in principle be done by some sort of availability payment, where instead of stumping up the capital the government pays the private company back over time according to whether the line is available and possibly with penalties for causing delays etc. This is intended to incentivise the company to design and build something that will perform well over its whole life rather than just the cheapest to build, but there is a fine line between this and the sort of huge returns that some PFI contracts are said to have made. Another problem is keeping flexibility for future extensions etc - several of the light rail contracts had to be bought out when they wanted to extend before the end of the original term.

Probalby the closest to this model is the reasonably successful design-finance-build-maintain contracts for the Lewisham, City Airport and Woolwich DLR extensions. These were built and maintained by private consortia with obviously the main DLR company operating the trains, and were reasonably successful. However even there TfL bought out the concessions (according to Wikipedia only two out of the three) because, presumably, they decided they would get better value for money.

 

[plcd1]

Probalby the closest to this model is the reasonably successful design-finance-build-maintain contracts for the Lewisham, City Airport and Woolwich DLR extensions. These were built and maintained by private consortia with obviously the main DLR company operating the trains, and were reasonably successful. However even there TfL bought out the concessions (according to Wikipedia only two out of the three) because, presumably, they decided they would get better value for money.

I believe there were elements in each of these contracts that made it viable (or not in the case of CGL (Lewisham)) for TfL to buy out the contracts. I believe in each case it was around the financing of the deal and how the debt was structured. In two cases TfL could and did get a far more affordable deal so it made sense to pay now rather than a lot more over the remaining term. The Lewisham infrastructure deal is close to being paid off and we are headed to the asset reversion date. It was not cost effective for TfL to buy out the contract - again I believe the financing structure meant any such buy out would trigger a whole pile of additional charges (there was a TfL Board Paper that touched on this). Furthermore it would let the contractor off the hook for asset condition / residual life at the end of the contract. This is also why a Night DLR will not run while the CGL deal is extant - why create more cost and risk that may then lead to a dispute later, over the ability to ensure assets were in "good state"?

And just to drag things back to topic all these sorts of issues and complications have to be assessed, evaluated and dealt with in every deal where the private sector may be creating assets or where they are funding things. Why anyone says it is "easier" is beyond me. It's vastly more complex and without some clever negotiators on the public sector (NR) side there's always a likelihood of a stitch up or risk coming back to the public purse.

 

[DarloRich]

Why anyone says it is "easier" is beyond me. It's vastly more complex and without some clever negotiators on the public sector (NR) side there's always a likelihood of a stitch up or risk coming back to the public purse.

ay, there's the rub

 

[HSTEd]

In other words, driving up the cost of borrowing and strangling Network Rail further.

Great plan to speed up the reprivatisation of the infrastructure.

 

[lineclear]

Quote from top of page 5 of the Hansford report
'The forthcoming South Wales Metro upgrade project
will provide an interesting new example, as the
successful third party bidder will take over, upgrade
and extend transport infrastructure around Cardiff."

It sounds like the contractor will have responsibility for operations and maintenance (and possibly renewals). That would be a disaster.

 

[MarkRedon]

The report which informs this agenda is entitled "Unlocking rail investment – building confidence, reducing costs". It's written by Professor Peter Hansford FREng, Professor of Construction and Infrastructure Policy at University College London. The report can be consulted at https://16cbgt3sbwr8204sf92da3xxc5m...ntent/uploads/2017/07/The-Hansford-Review.pdf

The keyword in the report appears to be "contestability". The report starts:

This report is about building on transformations already underway in Network Rail; enabling better value infrastructure projects; and creating confidence for wider investment in the national railway.
Unlocking investment in rail infrastructure by third parties will have dual benefits. It will attract much needed additional funding, whilst also bringing a competitive pressure to reduce costs. These changes will benefit Network Rail, government and the wider investment market.
There are barriers to overcome that are discouraging or hindering the involvement of third party investment. Some of these barriers relate to process; some concern the role and perceived behaviours of Network Rail towards third parties.
To address these issues, I was invited by Mark Carne, CEO of Network Rail to chair an independent review of contestability in the UK rail market, with the aim of encouraging third party investment and infrastructure delivery on the national railway. This report sets out the findings and recommendations of my review.

The Recommendations of the report are these:

Recommendation 1: Network Rail to develop and embed processes and specialist commercial capability consistently within the routes to establish and execute a range of alternative design and delivery options for infrastructure projects.
Recommendation 2: Network Rail to demonstrate its commitment to creating a more contestable market and evaluate resulting gains.
Recommendation 3: Network Rail in conjunction with government to develop clear, transparent principles and processes for considering contestability at each investment decision stage.
Recommendation 4: Government to ensure that it gives due consideration to contestability in its business case methodology, and to publish appraisal guidelines to assist third parties to realise financial benefits associated with rail infrastructure projects.
Recommendation 5: Government to establish an early development fund with clear criteria to assist in the creation of high quality investment proposals.
Recommendation 6: Network Rail in conjunction with government to create and maintain a forward view of the scale of third party investment opportunities, giving visibility and confidence to the market.
Recommendation 7: Network Rail in conjunction with government to identify a range of pathfinder projects to demonstrate the removal of barriers and the benefits from alternative funding and delivery models.
Recommendation 8: Network Rail to define roles and accountabilities, build capability and provide support to the routes for engaging with third party investors (funders and deliverers); and to define the respective accountabilities of the routes and Network Rail Infrastructure Projects directorate.
Recommendation 9: Embed within Network Rail’s transformation programme the behavioural changes required to create a welcoming, predictable and trusting environment, providing more cost and risk certainty.
Recommendation 10: Network Rail to convert its Code of Practice into a Service Level Agreement, refreshing its template agreements, asset protection agreements and guidelines reflecting a more balanced risk transfer, in consultation with industry.
Recommendation 11: Create a transparent process to enable and facilitate third party challenge of scope and standards application during project development, fixing them before funding commitments are made.
Recommendation 12: Establish effective oversight arrangements to provide strategic direction for a more contestable rail infrastructure market, building on existing Network Rail governance structures and involving government as appropriate.

I would suggest that PFI is not the only means by which to get private / public investment in new rail infrastructure.

 

[HSTEd]

So the answer to the bureucratic inefficiency of network rail and its socialist approach is....

To create a whole new bureaucracy!

Long live thatcherism!

 

[coppercapped]

So the answer to the bureucratic inefficiency of network rail and its socialist approach is....

To create a whole new bureaucracy!

Long live thatcherism!

What a facile response to a complex set of issues.

 

[HSTEd]

What a facile response to a complex set of issues.

Yes, but the idea of 'contestible' work has done more to damage transparency in pricing of grid services in the electricity industry than any other single part of the modern system.

All costs and transparency will be shrouded with "commercial confidentiality" - good luck ever getting anything but the broadest estimates for any project ever again.

And under that cover huge amounts will be transfered through chains of private contractors by accountants who will earn their keep distorting cost estimates to win contracts in competition with Network Rail.

Or simply lowball costs to get the work and then blow the budget.

 

[coppercapped]

Yes, but the idea of 'contestible' work has done more to damage transparency in pricing of grid services in the electricity industry than any other single part of the modern system.

All costs and transparency will be shrouded with "commercial confidentiality" - good luck ever getting anything but the broadest estimates for any project ever again.

And under that cover huge amounts will be transfered through chains of private contractors by accountants who will earn their keep distorting cost estimates to win contracts in competition with Network Rail.

Or simply lowball costs to get the work and then blow the budget.

As demands on the State's money, i.e., your taxes and mine, are essentially unlimited, the State limits the amount it spends in every area - and this includes the railway business.

So you have the answers to the two main questions concerned with investment in the railway infrastructure? The two questions are:

1. how does one get better value for the money that is being spent? (This refers to the significant cost increases for recent projects) and
2. how does one attract additional funding into the infrastructure to be able to do all those things that would improve the lot of the traveller?

Slagging off suggestions that people have made to solve these issue helps nobody and shows the 'slagger off' to be completely unaware of the importance of finding workable solutions.

May you enjoy your underfunded railway.

 

[HSTEd]

[*]how does one get better value for the money that is being spent? (This refers to the significant cost increases for recent projects) and

By initiating a root and branch investigation of the causes of all recent cost overruns, and of the causes of the rise in costs in areas where expenditure is growing rapidly - and then based on the findings of that investigation start implementing mentions to contain those costs, from the bottom up.

Don't just hive the whole thing off the private sector believing they will wave a magic wand and make it all right again.

[*]how does one attract additional funding into the infrastructure to be able to do all those things that would improve the lot of the traveller?

Slagging off suggestions that people have made to solve these issue helps nobody and shows the 'slagger off' to be completely unaware of the importance of finding workable solutions.

May you enjoy your underfunded railway.

Persuade the Treasury that additional spending is worthwhile.
The private sector isn't interested in transport infrastructure, it is interested in making money.
And the only way to make the returns the private sector wants is by trading a little up front capital investment for massive long term liabilities that will be loaded onto the taxpayer so the Chancellor can mislead the public about the state of the public finances.
Private sector money paid for in the future by the public sector is public sector borrowing - just this way around (you, I) the public have to pay more for it.

I am upset because this is simply more PFI style nonsense being loaded onto one of the few areas in the public sector that has largely escaped it.