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ORR explain importance of third party investment in the railway industry
ORR explain importance of third party investment in the railway industry

ORR explain importance of third party investment in the railway industry

The railway industry is one that is thriving with infrastructure projects worth billions of pounds either in the construction pipeline, or already underway.

Spending plans have been outlined for the next five-year Control Period on the railway, with levels of investment at a record level.

This though, puts a strain on the public purse; any government-funded project invariably is paid for primarily by taxpayers.

It is why the industry – and the Office of Rail and Road (ORR) in particular – are committed to improving guidance for potential investors in railway projects.

James Dunshea, Enhancement Projects Manager, and Feras Alshaker, Head of Planning and Enhancements, both spoke to Transport Britain about the success of third party investment in the rail network, any barriers that exist, and the work the regulator is undertaking to ensure funds are available to facilitate projects, while also protecting those third party investors.

This is an excerpt of the full interview that appears in December’s Transport Britain. 

 

Can you give us an overview of third party investment in rail? How is this used and how is the finance secured?

FA: With third party investment, there’s a split between public and private. Local authorities have traditionally invested in improvements at stations, but also put forward money for railway schemes in local areas. That could be anything from bike sheds through to funding of re-signalling in areas. It is a fairly mature process for public funders.

Network Rail and the government’s ambition is to get a bit more private investment in more traditional infrastructure-type projects such as signalling, track, paying for new lines.

It’s fair to say that the bigger areas are maturing; where Network Rail has had success is around stations. They’ve got a joint venture with Kier which has been cited as an example – they’ve worked on a few stations, where they paid for the refurbishment of facilities but then built on top of it, where traditionally, this has come from local authorities through what’s called Network Rail’s investment framework.

Statistics show that private investment in rail sector is at its highest level for a decade. Why is this?

FA: It’s very difficult to say because there will be a lot of causal factors; rail numbers have increased over the last 20 years. It’s a successful industry in that sense. Mobility, more generally, is key to the way we live our economic lives in Britain, so rail plays a massive part of that and we have seen a lot of investment at iconic stations such as St Pancras and King’s Cross.

I think also infrastructure investment is a good long-term return for investments like pension funds for example.

If you look at HS1, it used to be owned by a Canadian pension fund because you’ve got the guaranteed income over the life of the asset, pretty much. This will support all the annuities you’ve got to pay. As part of a diverse portfolio, it’s quite a safe bet.

There’s also a lot of investment in rolling stock.

JD: I agree that it’s been one of the successful markets in the industry. For decades now, it’s proven to be a good investment.

Obviously the increase in passenger numbers means there is a larger audience, but it also means you have an increasingly congested network, and that creates competitors for train operators to invest in their own areas.

So if they identify bottlenecks such as crossings, they will put their own investment in to improving that. This is more targeted than generic government investment because the government might not be aware of the issues, so that has been quite a big benefit.

Another area has been an appreciation of the benefits to local authorities and property developers of enhancing and building new stations. It’s proven to be a major draw, particularly if you’re putting in new housing developments, because you can help sell it by having a new station nearby.

One thing our consultants have identified is there’s a lot of liquidity about; there are limited options for investment and I think railways are seen as a safer bet for long term investment.

Finally there has been historic access to the Regulatory Asset Base (RAB). Obviously this is no longer possible, but it did facilitate cheap finance for investors which made things much easier. That funding was a big plus.

How has the removal of RAB affected investment and how do you think it will do?

JD: It may do. We’re not sure yet; as I said, it was a good source of government-backed, cheap finance, and there was a simple payback mechanism in place between Network Rail and the third party.

Now that it has gone, that avenue has been removed and not been replaced, which effectively means third parties will have to secure their own finance as required.

That could make borrowing more expensive, and it could prove to be a dis-incentive but we’re just not sure yet. We haven’t seen an impact in the level of investment so far.

Agreements had already been reached by the time that access to RAB was removed and in the current control period, so we’ll have to wait and see in the next couple of years if that deters investment in future.

FA: That is part of the challenges associated with policy decisions, because it’s such a long-run process through development, design and delivery of these schemes, you don’t necessarily see the ripple effects of the policy for some time.

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