RIA Manifesto Deep Dive 5 - Leverage private investment

5

Leverage private investment

Private investment has always had an important role to play in developing the UK railway, with private finance having been deployed successfully in the UK rolling stock market for many years, with more than £20bn estimated invested since 1995.1 It has both enhanced and supplemented public investment. There is an opportunity for both national Governments and devolved authorities to secure additional investment to support economic growth and jobs as well as deliver transport projects which are integrated with housing and other local economic development.

In 2022-23 (the latest available data), 8% of new rail investment was private, but two-thirds of this was in rolling stock which means only 2.5% of other new rail investment came from the private sector.2 The National Infrastructure Commission has highlighted the need for a sustained increase in private investment to close the UK’s ‘infrastructure gap’.3 Unlocking further private investment – both finance and funding – has potential to bring investment forward earlier, provide greater certainty through longer contracts, introduce market discipline around budgetary controls, and encourage innovation.

Many aspects of rail infrastructure could benefit from increased private investment. It could help accelerate necessary schemes in areas such as stations, electrification, digital signalling, new rail links, freight depots, renewable energy, and other innovative technologies.

Our aspiration is that the rail industry should be able to partner with the private sector to progress such schemes sooner.

Project Reach is a good example of this working in practice. Elsewhere there have been a number of successes in releasing land around the railway to build new homes. There is potential to attract developer funding or use land-value-capture to help pay for rail upgrades.

Station development projects may be suitable, given the scope for developing land for new homes and the wider station estate, in the interests of improving accessibility and rolling out digital ticketing.

Rail should be an attractive sector in which to invest, with every £1 invested in rail generating £2.50 in wider economic benefits,4 in addition to a range of social and environmental benefits across the country.

Our aspiration is that the rail industry should be able to partner with the private sector to progress transport schemes sooner.

There is an opportunity to boost private investment, which has been declining in recent years £million (2022-23 prices) 1,533

1,233

1,115

739

757

Total private investment

169 77

Other Station

564

512

Rolling stock

2021-22

2022-23

839

1,600 233 1,200

86 171 146

132

106 800

113 105 1214

400

162

163 931 862 470

0 2017-18

2018-19

2019-20

2020-21

Source: Office of Rail and Road, 2023. Rail industry finance (UK): April 2022 to March 2023. https://dataportal.orr.gov.uk/media/algdbizg/rail-industry-finance-uk-statistical-release-202223.pdf.

Case study: Upgrading the railway and boosting housing supply The integration of rail projects and housing has significant potential particularly if unused rail land can be harnessed. The value of such land could be used as a catalyst for leveraging private capital, generating new income streams to upgrade railways and their operation, support economic growth, and deliver the affordable housing that is in such high demand across the country.

The Twickenham Station redevelopment is a good example of how these goals can be accomplished simultaneously.5 A partnership between Network Rail and Kier Property resulted in the construction of 121 new homes built on surplus railway land, whilst Twickenham Station received £8.5m of infrastructure improvements, including: • • • • •

Case study: Project Reach Project Reach is a future programme to deliver a comprehensive upgrade to trackside fibre cable and wireless infrastructure, supporting a safer and modernised digital railway.6 Utilising private sector funding up to £344m, it is an example of how private investment can be leveraged, reducing reliance on subsidies, or forcing a decision between capital investment and operational spend reductions.

Benefits include: • More investment in infrastructure, through savings generated from private contributions.

• Facilitation of the live monitoring of the network to check for faults in real time, reducing the need for manual inspections.

• Better connected trains, signalling and level crossings all help to reduce delays and disruption.

• Supports UK-wide commitments to roll out gigabit capable connections.

Project Reach will be important in demonstrating that partnerships between the rail sector and private investment are viable and attractive.

A new station building A larger ticket office Improved platform access A public plaza for the local community A new pedestrian link to Moormead park and additional cycle parking facilities

This shows that partnerships between the public and private sector can address challenges around investment in both transport and housing.

Image credit: Rolfe Judd

Challenges

The need for a ‘playbook’

At present, there is no clearly articulated Government policy or strategy to bring private investment into the railway.

One of the largest impediments to investing in rail is the lack of a clear route map which sets out how projects can be delivered in partnership. To make future private investment in rail a reality rather than a concept, RIA believes a ‘playbook’ should be published outlining how, where, and when private investment can be used in rail.

Current Government rules and decisions around private investment across the public sector including rail are opaque, inconsistent, and lack the transparency and certainty required for the private sector to invest. Recent experience has shown it is frequently difficult to secure approval, with an excessively onerous administrative and decision-making process. Such measures have made it costly and difficult to attract investment.

To leverage more investment, Government’s role must now change from acting solely as a gatekeeper of projects, to being a facilitator of private investment. This means: • An overarching strategy, with clear, consistent messages on the government’s approach to private investment with a framework identifying the circumstances in which it will be favoured (including updating the Treasury Green Book as required); • Provide investors and suppliers with a clear ‘playbook’ for how and where private investment can be used in rail; • Help potential investors in rail schemes understand what needs to happen to obtain approval, and give practical assistance in navigating the various stages; • Providing a framework to bring the different stakeholders together as necessary to take decisions on projects; and • Take into account best practice from overseas.

In future, Government should look to partner with the private sector whenever it is practical, rather than waiting for the perfect opportunity.

A fair partnership with the private sector Private investment schemes need to be equitable partnerships that work for all parties. A framework is needed in which the Government provides rigorous and robust contract oversight and management.

This will deliver value for money for taxpayers while simultaneously giving the private sector the flexibility to fully harness its commercial and entrepreneurial expertise.

The National Infrastructure Commission notes there is currently intense global competition for private capital, and that projects have to be investable, with appropriate returns. The strength of the UK’s policy and regulatory environment is key to attracting investors.

In addition, procurement and investment models should contain provisions for the promotion of research and development which will allow the private sector to retain and build on intellectual property including data and digital assets. This will support rail technological development and reduce barriers to bringing in innovation from other sectors.

A playbook could help both Government and the private sector to fully understand each other’s roles, and provide the certainty needed to invest. It should outline specific areas that Government would welcome proposals in, such as stations, renewable energy, or freight depots.

Lessons learned from previous partnerships between the rail and property sectors should also support such a playbook.

What is RIA doing?

In recent years, RIA has called for more transparency and a better understanding of how to leverage private investment in the rail sector. In consultation with members, we continue to work with industry, Government and Parliamentarians to explore fresh approaches to financing and funding, and facilitate cross-industry engagement to develop this agenda.

In 2023, RIA published a paper exploring the investment case, challenges, and opportunities available through private investment in UK rail.7 In particular, the paper outlines the untapped potential that private investment has, to unlock innovation and expand its use in future rail schemes.

It also provides more detail on the challenges that Government may face, as well as solutions to meet these challenges, and specific areas where private investment would be most beneficial, including growing rail freight, investing in communities and stations, and increasing capacity.

There is considerable experience across RIA members with different funding and finance models, both in the UK and overseas.

What needs to happen next - Practical steps for success 1.

A consistent Government policy on private investment in rail. A clear strategy outlining the Government’s approach to private investment in rail should be published, which sets out the role of private investment going forward, as well as a set of criteria for how it will be evaluated and considered. The strategy should take into account best practice from overseas and must be backed by the Treasury.

2.

Switch the Government’s role from ‘gatekeeper’ to ‘facilitator’, providing investors and suppliers with a ‘playbook’ and ongoing practical support showing how and where private investment can and will be used in rail.

3.

Bring forward more pathfinder and pilot projects. Accelerating such projects, testing proof of concept will help provide frameworks and standardised approaches for future investments. The private sector has substantial experience in delivering such schemes across infrastructure, and Government should be utilising this expertise.

4.

Intelligent market engagement and a targeted review of procurement practices. To ensure cost efficiency and effectiveness, good practice must be followed in public procurement, taking into account lessons from the past.

5.

Rigorous evaluation of the costs and benefits of private finance compared to public borrowing, explicitly assessing the potential benefits. With well-designed contracts, using private finance can help minimise risk and reduce the chances of overspending, scope creep and programme delay.

Footnotes 1.

https://committees.parliament.uk/writtenevidence/124299/pdf/

2.

Office of Rail and Road. 2023. Rail industry finance (UK), April 2022 to March 2023. https://dataportal.orr.gov.uk/media/algdbizg/railindustry-finance-uk-statistical-release-202223.pdf See figure 5 and charts 3.2

3.

National Infrastructure Commission, Infrastructure Progress Review 2024

4.

Oxford Economics. 2021. The Economic Contribution of Rail. https://www.riagb.org.uk/TheRailEconomy

5.

https://www.networkrail.co.uk/wp-content/uploads/2019/04/Network-Rail-Property-unlocking-homes-for-London-brochure.pdf

6.

https://www.networkrail.co.uk/wp-content/uploads/2023/05/Overview-of-CP7-efficiency-initiatives.pdf

7.

https://www.riagb.org.uk/RIA/RIA/Newsroom/Publications%20Folder/Private_Investment.aspx