Investment: In with the newTom MeacockBusiness Development Director, Transportation

Transportation Investment: In with the new

Demand and supply in changing times

Today, across the UK’s railway we’re seeing unprecedented levels of change. On the demand side, passenger numbers keep growing apace – rail passenger numbers have doubled in just two decades, and the way people use the railway is changing, with statistics revealing that over a quarter of all trips by rail in 2016 were for leisure purposes. But supply is not meeting demand. In many locations our railway is almost full, there are hold-ups at junctions, complexities around ticketing, and 20% of rail passengers are still saying they’re not happy with their journeys. That’s a fifth of all rail users – surely that’s something we need to work together to improve?

The good news is, things are changing on the supply side, too. The Department of Transport is resolute in its aims to shake-up the industry, and put a sharper focus on how Network Rail – the monopoly provider – can add value for money by staying competitive and innovative, as was highlighted in last year’s Hansford Review. One key area of the review’s focus was Network Rail’s remit, and how, faced with its mandate by the government to focus on delivering core railway activities of maintenance, operations and renewals of track and systems, it will manage to fund all the work that needs doing, even with its record-breaking budget for its next control period (CP6) of £47 billion.

Time to exceed expectations

There’s widespread agreement that more investment is needed. The economy can’t afford for our railway to

lag behind, it needs to not just meet current passenger demands, but exceed them. And underpinning any success will be improvements to infrastructure – such as bringing operational technology into the digital age, working smarter to develop new capacity, more services, and more reliability. So to do this, asks the Hansford Review, should we now be looking at ways in which our national railway network could encourage third party investment to underpin the delivery of new rail infrastructure? Because, it’s a well-known fact that the overhaul, development and upgrading of our Victorian railway system will cost billions to bring it up to speed with twenty-first century rail travel, and the bill cannot be paid for by the UK Government alone.

Private investment in railway infrastructure isn’t a new concept and there are a number of international examples we can learn from. In Canada, whole new light railway services have been built using a public-private partnership (PPP) investment model – just look at three major programmes that are either near completion or in operation as a shining example: the Eglington Crosstown light railway, the Confederation Line in Ontario, and Vancouver’s rapid transit service. Each are new railway

Investment: In with the new

There is an appetite among government and investors alike to deliver major transformational change in the UK’s rail sector through private investment. This kind of investment is happening in other countries with great success. It would be good for our network infrastructure, it would help to increase network capacity and digital connectivity, so it would be good news for passengers, too. If it’s so good – why isn’t it happening in the UK? And what’s causing the delay? SNC-Lavalin Atkin’s Business Development Director for Transportation, Tom Meacock takes a closer look.

Transportation Investment: In with the new

services delivered as complete end-to-end projects, with the private sector responsible for all the aspects of the design, build, operation and maintenance over a 30-year period – after which the railway is then handed back to the public sector. And, in all three of these projects SNC-Lavalin took a central role, as the leading provider of public private partnership projects in Canada, having delivered more than 30 projects in this way.

No more delays

So, why aren’t we doing this in the UK yet, when there is no shortage of private capital looking to be invested in infrastructure? We already have the legal, regulatory and financial frameworks in place in the UK to enable private finance in infrastructure, and a track record of having done so, with more than 700 projects delivered over the past 25 to 30 years using the public-private partnership model. That’s over £56 billion of new infrastructure of new infrastructure built using private sector capital In other sectors we’re seeing signs that, for the right projects, private sector investment is being considered as a valuable solution – look at our highways, for example. Our road system is established in attracting third party investment into improvement projects using the design, build, operate, maintain and finance model, and delivering major new road systems. And there are plans in place to unlock two of the biggest UK road projects using private finance. But not in rail. Which is odd, because the UK’s railway has experienced private investment in other ways, such as with rolling stock. Hundreds of new trains are now in operation thanks to private finance, and private finance underpins our rail franchises. So, why the delay in getting private investment to underpin infrastructure, too? Why isn’t it helping us build new track? Replace our ageing signalling system? Or bring in new digital technology to transform the passenger experience? What’s holding it up?

Identifying a pathfinder project

One problem is in finding the right kind of project to fund, that is, a project that can be clearly identified as a standalone endeavour, and whose success can be easily evaluated. Not easy here in the UK, where our railways are complicated, and intrinsically interlinked. However, we

are starting to see new routes and projects emerging that would fit with being backed by a different funding model; major work programmes that would have the potential to allow new railway infrastructure to be developed and delivered in new ways. This is likely to include new combinations of parties working together, for example, train operators, freight operators, logistics companies or housing developers working alongside infrastructure contractors and financial investors, combining their knowledge and bringing together a vested interest in ensuring a prosperous railway network into the future.

One good example, which could act as a pathfinder to prove how the PPP concept can work on our railway, is the proposed new 6.5 km direct rail link from the West of England into Heathrow airport. Cited as a new development that will improve journeys to Britain’s busiest airport from the South Coast, South West, South Wales and West Midlands, it will remove the need for millions of people to go via London Paddington, and the proposal is part of the Department for Transport’s current Railway Upgrade Plan.

Drawing a clear boundary

What makes this such a strong candidate for PPP in my view is the fact that it’s a completely new railway line. You can draw a clear boundary around the project, deliver it as an asset, measure its performance, and pay someone for making the asset available for trains to use. Clearly, there isn’t an endless supply of public sector capital that can pay for new upgrade programmes, so we have to look at new investment models if we’re going to commit to have a railway that’s fit for the twenty-first century.

So – let’s say we’ve found our pathfinder project at Heathrow – what could a potential investment model look like? Having raised over $12 billion Canadian dollars’-worth of project finance over the last 10 years to support the delivery of new infrastructure in global projects, I’d assert it’s certainly not a question of one-size-fits all. Part of my work involves looking at how we can shape opportunities and get involved in rail infrastructure projects that follow the design, build, operate, maintain and finance model – projects where the remit is understood clearly form the outset and then performance

Transportation Investment: In with the new

and potential benefits gained are measured from the introduction of that separate bit of infrastructure. The good news is, within that model, financing investment in rail infrastructure is certainly becoming more attractive to investors who want to invest for 25 to 30 years.

What does a viable rail infrastructure investment project look like? › It needs to stack-up and make logistical and

commercial sense

› Its asset needs to be delineated so there are clear outcomes

› Its eventual performance of service must be measurable

› It must be structured so its long-term ownership can be transferred

› It must have an inherently good level of certainty that it will go ahead

› It needs to set a good example to pave the way for similar projects

Unlocking unprecedented levels of infrastructure finance

Privately-financed infrastructure projects are designed to combine a small amount equity, say, 10 - 15%, often provided by infrastructure companies such as SNC-Lavalin’s Atkins business, who get involved so they can work on the project delivery, with a larger proportion of debt from banks or institutional investors. Globally, we’ve seen the continued rise of equity infrastructure funds that are raising funds at an unprecedented level – in billions now, and these fund managers are looking to invest in projects around the world. On the debt side, pension funds are increasingly active in their hunt for infrastructure projects too, because these projects can offer pension funds a long-term stable income stream that’s secured against an asset.

So how do we attract this ‘wall of money’ to invest in the UK rail market? Well, we need to overcome two key hurdles. First, how do we deal with the early upfront cost of exploring the feasibility of potential schemes? Second, how can we make sure feasible projects are suitable for investment? Early development work on potential rail schemes has traditionally been funded by Network Rail, and so ultimately by the Government. However, these costs are not insignificant – and, due to the level of uncertainty that exists in the very early stages of a project – the amount of private capital available for early stage development is extremely limited. This point was also addressed by the Hansford Review, which suggests the setting-up of an early development fund to cover these initial project development costs. However, one year on, no such fund has been established. Perhaps a

potential future UK Infrastructure Bank could step into this role?

Finding a suitable structure

Once we have a feasible project, it will then be important to ensure it is suitably structured to facilitate private investment. This could, in fact, be achieved in a very simple way, with one preferred model being based on what’s known as an availability payment. This works in a similar way to a homeowner’s mortgage. Let’s say you’re the bank. Network Rail is procuring an infrastructure contractor, such as SNC-Lavalin’s Atkins business, to design, build, finance and maintain a new railway line.

They design and build the asset which as the bank you hand over the money to pay for. Once the asset is built and is available, and paying passengers are using it to travel on, funds start flowing, and as the bank, you’re reimbursed. Over the life of the project, as the investor, you continue to be responsible for delivering the service and safeguarding its maintenance of course, but when the 25 or 30 years are up, and you’ve been paid back in full, the keys are handed over to the public sector who then have use of the asset for many years to come.

This type of model is well known and understood by the financial markets making it an attractive structure for our pathfinder project to use. The key is to then map this availability payment model into the railway context which can be done using established payment terms and models such as the Investment Recovery Charge approach used on a number of existing railway projects.

Combined knowledge of rail and PPP

This model complements the work SNC-Lavalin Atkins already does in the UK, where we’re involved in the design, and the design and build, of some of the most complex railway projects on the slate at the moment. These include the recently completed £450 million Cardiff Re-signalling project, and the Western section of the East West Railway that aims to establish a strategic link from Cambridge to Oxford. Building on our experience from projects such as these, we’re now looking at how we can combine our knowledge and expertise of the UK rail market with our global PPP expertise to support a move to end-to-end delivery and financing of UK rail infrastructure projects.

Political will is also, of course, key. Another significant barrier to date in getting private investment into our railway network is a lack of government leadership – but here too there are signs of positive change and it’s encouraging to see the Department for Transport respond. In March this year, the Secretary of State for Transport, Rt Hon Chris Grayling MP announced that investors are now being invited to propose schemes that

Transportation Investment: In with the new

could “enhance and expand the rail network” specifically mentioning the Heathrow link but also expanding the concept to other potential schemes.

I want to unlock new private sector funding to invest in railway infrastructure across the country. This will be in addition to the government’s significant commitment to invest £48 billion in railway infrastructure in the next funding period. Governments do not have a monopoly on good ideas for the railways. I have been clear that I want the knowledge and expertise of investors and local partners to contribute to delivering new connections, more services and better journeys for passengers. This approach has already proved effective on a number of roads schemes in the UK. By encouraging innovative ideas and new investment on our railways, we can relieve the burden on taxpayers and fare payers with schemes that match our transport needs, support our economic and housing aspirations and ensure everyone benefits from an enhanced rail network.

Rt Hon Chris Grayling MP UK Secretary of State for Transport, March 2018

Towards a lucrative UK export

Looking ahead, by 2030 I can see no reason why UK rail infrastructure isn’t being delivered under a diverse range of models – depending on their type, size and scale – be they traditionally-procured schemes, privately-promoted schemes, or schemes delivered using the design, build, operate, maintain and finance PPP model.

Everything is lined-up and ready: government, investors, potential new projects, and passenger expectations. We’re facing unprecedented opportunity for the UK to become the world-leader in attracting private investment into its railway network – and with that will come the additional advantage of being able to export our expertise of how to get it right, further adding profit to UK plc’s balance sheet.

Tom Meacock is SNC-Lavalin’s Atkins Business Development Director for Transportation. Working across Europe and globally, Tom is part of our 5,000-strong rail business, which combines traditional railway engineering expertise with the latest techniques to support our clients in transforming their