Investment in new rail infrastructure is essential to provide extra capacity to deal with increasing passenger numbers and promote economic growth. However Network Rail has maxed out its capacity and budget for rail enhancements because the lack of skilled and experienced rail engineers has driven up NR costs, so the government is looking for innovative ways to finance, resource and share risk on more new rail infrastructure projects than Network Rail can handle. The government has given East West Rail the green light, whilst two other potential privately-financed projects, Heathrow Southern Railway and London and Southern Counties Railway, are also vying for government attention.
Since nationalisation of the railways in 1947, development of new or enhanced rail infrastructure has been almost exclusively the responsibility of British Railways, followed by Railtrack and now Network Rail, to meet needs approved by government and with funding provided by the government.
Private financing of new railway infrastructure is not new: in the VIctorian era, new railways were promoted, built and operated by limited companies with funding from shareholders. These companies chose where to build but had to fund and seek approval from Parliament for their plans, so took:
- the political risk (would Parliament approve their plans),
- the specification risk (could the detailed design be achieved within the approved plan and would it mitigate the likely construction difficulties)
- the delivery risk (could the line be built within time and budget), and
- the revenue risk (would the line attract enough traffic to make a profit and pay a dividend to shareholders on the capital invested).
Some shareholders did well; others lost their shirts.
Chiltern Railways - Project Evergreen
There are more recent examples. At privatisation in 1996, Chiltern Railways was awarded a 20 year franchise which enabled it to invest in enhancing its line between London Marylebone and Birmingham Snow Hill to increase capacity and accelerate services by redoubling, resignalling and increasing the line speed. These Evergreen 1 and 2 projects were financed as a truly commercial venture. Chiltern Railways proposed the schemes in its franchise bid and so took the political risk. It then funded the design and development of the schemes, taking the specification risk. Chiltern Railways paid the construction contractor against project deliverables, taking the delivery risk, and then claimed pre-agreed milestone payments from Network Rail so that the completed enhancements became part of NR’s regulatory asset base. In return, Chiltern agreed to pay Network Rail a facility charge over a 30 year period at a defined rate irrespective of how many trains were run or how many passengers used them, so Chiltern also took the revenue risk. Like the Victorian railway promoters, Chiltern Railways took all the risk; however for the more recent proposals below, the risk may be shared with government.
Heathrow Southern Railway
The previous Airtrack and Airtrack Lite schemes to provide rail access to Heathrow from the south failed, and the Windsor Link Railway scheme seems to have been overtaken by progress on developing the Western rail access to Heathrow. However the need for southern rail access to Heathrow remains, and a new privately-financed scheme has been proposed – Heathrow Southern Railway. This avoids the level crossings which scuppered the previous schemes by proposing a new section of line adjacent to the M25 between Chertsey and Heathrow Terminal 5.
The scheme would provide fast services between Basingstoke/Guildford and Paddington via Heathrow and Old Oak Common using the Heathrow Express paths, and between Heathrow and Waterloo via Richmond. This would ensure the continued viability of Heathrow Express services when Crossrail is opened, provide capacity relief to the South Western Main Line and quicker access to West London destinations, and provide access to Heathrow from Surrey and southwest London.
The promoters (HSR Ltd) will not invest significant resources without a government go-ahead, so the political risk is small. They propose that HSR Ltd will be responsible for the costs of planning and constructing the railway, so they will take the specification and delivery risk. However they propose to recover their costs by contracting to provide to DfT and TfL a defined number of train paths at a pre-determined price – so DfT and TfL will take the revenue risk. For DfT and TfL, this will be like buying a new railway on hire purchase – whether it is a good deal or not will depend on the effective interest rate, compared with the rate for gilts, and whether the price is less than a Network Rail project would cost. Fortunately the need for public transport on these routes is strong, as shown by the exceptionally good benefit-cost ratio of 6.82 to 1, so the revenue risk is low.
East West Rail
In the 2016 Autumn Statement the Chancellor committed £100m to accelerate construction of the East West Rail Western Section between Bicester/Aylesbury and Bletchley, and £10m to start development work on the Central Section between Bedford and Cambridge. However the big news was left until 6th December 2016 when the Transport Secretary, Chris Grayling, announced that a special purpose vehicle would be set up to accelerate the permissions needed to reopen the entire route between Oxford and Cambridge, and to secure private sector involvement to design, build and operate the route as an integrated organisation. This will introduce the principle of ‘contestability’; currently DfT doesn’t know what new infrastructure ought to cost, only what Network Rail claims it costs. Taking the management of this programme out of the Network Rail bureaucracy will certainly reduce the capital cost, but it will still be subject to the constraints of the limited pool of skilled and experienced rail engineers. By committing to a new strategic rail link between the university cities and technology centres of Oxford and Cambridge and providing seed funding, the government has now taken the political risk. However it is too soon to see how the specification, delivery and revenue risk will be shared.
Midland Main Line electrification
Potential bidders for the East Midlands franchise have been told that plans for Midland Main Line electrification between Kettering and Sheffield are ready and it will be up to bidders to decide if they progress them. One way of reading what the DfT intend is that it will be up to bidders to include electrification in their bids if they think it is an economical prospect.
London and Southern Counties Railway
There was a hint in the National Infrastructure Commission report on Transport Investment in London that there is a case for a Crossrail 3 scheme linking the Lea Valley line southwards from Stratford via the Isle of Dogs to connect with, and provide congestion relief to, the Brighton Main Line. We understand that an investment consortium, London and Southern Counties Railway, will shortly propose a scheme like this, with a key objective of providing connectivity between Gatwick and Canary Wharf. The scheme will be similar to our Thameslink 2 proposal, with a line in tunnel between East Croydon, Lewisham, Canary Wharf and Stratford. In addition the consortium propose to reinstate Uckfield – Lewes and improve the Uckfield line as a diversionary route between Brighton and London, to enable Network Rail to undertake a major capacity upgrade of the Brighton Main Line between East Croydon, Gatwick and Brighton without significant adverse effects on passengers, and to provide resilience against unplanned disruption on the Brighton Main Line.
The first step will be a feasibility study funded by the consortium, so they will take the political risk, but this will be limited as the consortium will not proceed without a nod from the DfT. The outcome of the London and South Coast Rail Corridor Study by WSP is also awaited. To resolve the political risk, the feasibility study must identify potential solutions which deliver benefits that are desired by both the promoters and the stakeholders, ie DfT and TfL, at a price which is acceptable to both.
It is too soon to see how the specification, delivery and revenue risk will be shared.
Fixing Network Rail
Investing for growth
Keeping London moving
London South Coast study
Windsor link consultation
Rail development reset
Oxford – Cambridge
Uckfield – Lewes
East West Rail
Heathrow Southern Railway
National Infrastructure Commission report: Review of the case for Large scale Transport Investment in London para 3.5 refers (page 41 of the pdf)