Keeping private investment in the rail sector on track

The Hansford Review’s recommendations for driving private sector investment in the rail network are welcome news for UK infrastructure, writes Patricia Moore.  

Patricia Moore
27 September 2017

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Successfully taking forward the recommendations of the Hansford Review will rely on strong partnerships founded on customer focused outcomes, agile financing options and well-defined contracts that perform for both the network operator and the construction sector.

The challenges facing the UK rail network are well documented. From Beeching’s cuts through to the creation of new routes with HS2, successive governments and network operators have grappled with the need to maintain capacity and investment in an ageing network, while minimising the cost to the taxpayer.

With its central ambition to boost private sector investment in the rail network, the completion of Peter Hansford’s review and publication of his report last month has been widely welcomed. Comprehensive and considered, it sets out a route map for building a best in class network based on bringing in private funding and finance to deliver both upgrade works and new projects. 

Private public partnerships (PPPs) provide strong potential for addressing large infrastructure funding gaps - put simply; governments cannot afford it on the public purse alone.  In the UK, political controversy around the much critiqued private finance initiatives (PFI) in the 1990s and 2000s often overlooks the fact that the PPP model has actually been successful on the majority of the projects. The construction and infrastructure sectors have admittedly had their fingers burned by PPP in the past, but the sheer scale of this kind of procurement has proved that it does work and that it has a future too.

So how do we garner private finance into the rail industry with all of this in mind? 

Guaranteeing long-term performance

A clear message coming from Hansford’s review is that the rail sector needs to provide strong reassurances to private capital that it can avoid the problems that have plagued some past PPP initiatives. 

This means highlighting the success stories of PPP in the UK or globally to shake the negative perceptions that PPP/PFI have gained. Through our work with organisations like the Global Infrastructure Hub, we are seeking to shift some of these perceptions through development of leading practices related to PPP concession management.

For private funders to potentially invest in partnership-based rail projects in the future, they will be looking at returns for decades to come and therefore a whole life view is necessary to not only attract investment but to maintain confidence. It is important to ensure that all stakeholders in a programme are engaged with a whole life view at the earliest stage and have long-term performance in mind. This provides the certainty and predictable returns which are private investors’ overriding objectives - and these themes act as golden threads running through Hansford’s 12 recommendations. 

A critical period during the lifetime of successful major infrastructure assets is during the programme set up. During this stage there is a strong focus on predictability which is fundamental to the original contract and programme, as it will ensure the relationship between the private and public sector partners is collaborative rather than combative.  

Building upon this, research has demonstrated that one of the greatest challenges to delivering a successful programme is a lack of focus on the transition from contract set up to the construction and, ultimately, operational phase. Essentially - not being clear about the project direction from start to finish. The best route to building a successful programme model from the outset is to shape it to meet the needs of both private and public sector parties, establishing ground rules and processes that will guide the project in a way that accommodates the objectives of each partner.

Embedding commerciality 

Of all Hansford’s recommendations, a consistent understanding within the network operator of the value, opportunities and risks brought by different types of private sector funding models is the most critical. 

When it comes to funding, a one-size-fits-all solution will not work and to realise the full potential of private sector involvement, there needs to be a much broader consideration of the funding mechanisms that can be used to bring investment to the network - from design and build through to the transfer or operational management of an asset.

Each scheme offers a unique set of opportunities to third party investors and benefits to end-users and regional communities; the challenge for the network operator is how to optimise the risk transfer.

This requires a particular set of skills and expertise.  Embedding them is essential to enabling greater commerciality and innovative thinking, and will accelerate several of Hansford’s other findings.

Building capacity, underpinned by certainty

This is especially true of those recommendations designed to create new capability and capacity within the sector, including to the call to establish a forward view of opportunities that the private sector can target and plan for. 

Mark Farmer’s review of the construction sector, released at the end of 2016, identifies the need for a strong, predictable pipeline of work to enable businesses to invest in the innovative techniques, digital skills and methods that will boost productivity. 

This pipeline must be robust and attractive to private investors to leverage private finance in infrastructure projects and programmes. The pipeline should also include a range of differing sized projects; not just mega schemes designed to boost national economy. Small and medium sized projects are important for regional and local growth and attract a different type of investor that would typically target multi-billion pound investments. For private investment to be achieved, clarity and confidence in scope from the outset is also essential, as without it predictability of return diminishes overnight for the investor. Building a pipeline is therefore half the battle!

On a network-wide level, this is an opportunity to build new capability and capacity to an even greater degree, ensuring that investment in one area can be redeployed to another. Hansford’s recommendations around creating an early development fund to sponsor innovative ideas as well as initiating a series of pilot projects which can be used to test market interest in a variety of project types will act as a catalyst to kick start this programme, encouraging private sector partners to start making the investment the sector needs.

Transparency and trust

Creating a consistent pipeline of work needs to be run hand in hand with making sure that work delivers a reliable outcome for all parties, underpinned by complete transparency and standardisation of project scope.

The history of private sector investment in public assets is littered with cases of scope creep and rail is no different. As Hansford notes, several projects continue to be caught out by requirements to bring old infrastructure up to modern standards, which may have been omitted from initial assessments. 

Again, avoiding these situations relies on greater focus up front on programme planning. Programmes must be set up with the recognition that some flexibility may be required as they progress, but establishing a collaborative and cooperative approach to what falls within or beyond the scope of a contract from the outset will help build the trust that is needed to underpin a long term partnership.

Towards high performance partnerships

Network Rail has committed to adopting the recommendations from the Hansford Review and to place them at the core of its next control period. The speed at which the operator is looking to bring about reform, for example around streamlining responsibility for asset protection, is encouraging, and done well provides a huge opportunity to build capability and capacity for the infrastructure sector as a whole.

The devil will, however, be in the implementation. Ensuring that programmes are set up for success will rely on establishing strong partnerships that deliver predictable returns for private sector partners, consistent outcomes for the network operator and a reliable service for the fare paying public.

Patricia Moore is managing director of UK infrastructure at Turner & Townsend.