Jason Chamberlain, Partner, Asset Finance at global law firm Bryan Cave Leighton Paisner LLP
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Extracting value from new approaches

Jason Chamberlain, Partner, Asset Finance at global law firm Bryan Cave Leighton Paisner LLP

 

The Department for Transport has recently turned to the private sector for ideas, because as Secretary of State for Transport Chris Grayling declared: “Governments do not have a monopoly on good ideas for the railways.”

Against a backdrop of largely stripping Network Rail of responsibility for upgrading the railway, the DfT launched its Rail market-led proposals - Call for Ideas.

At the same time, but ring-fenced from the call for third-party ideas, the DfT has called for specific third-party ideas on much-needed rail access from the south to Heathrow Airport - what it calls the Southern Rail Link to Heathrow (SRLtH).

Separately (yet not), it has pushed out another rail enhancements initiative - Rail Network Enhancements Pipeline: A New Approach for Rail Enhancements - to create a pipeline (the RNEP) down which it will put the rail enhancements government funds. Sounds as if they need some ideas in the acronym department!

The DfT wants to use the market-led proposals it receives in response to its Call for Ideas to help create some “contestability”.

Contestability is something you do with or against or around Network Rail in the delivery of railway infrastructure. In a circle as round as it is unbreakable, the DfT has endorsed Network Rail’s response endorsing the independent review Network Rail commissioned into how third parties compete with NR in delivering railway infrastructure, which Network Rail commissioned under pressure from the DfT to make NR subject to competitive pressure when delivering railway infrastructure.

And then, apart from all that, government-owned Network Rail declared itself open for business to third-party investment to develop the upgrades it has identified. Perhaps NR understands contestability as being contestability with the government for ideas and investment.

So, Grayling was right: the Government does not have a monopoly on good ideas, but it certainly seems to have a monopoly on not necessarily joined-up ideas that it thinks is a good idea to publish all at once.

But if the public sector is constrained in how much it spends improving the railway, the private sector is the only place left to look to fill the gap.  And there is obvious value in establishing an enhancements programme, so that the industry and its supply chain can plan. 

The right idea then, but what will be critical to whether anything tangible comes of it will be if the DfT can generate enough market confidence that there is the opportunity to realise enhancements ideas, including to monetise them.  That confidence is generated by expectation management of pipeline content, certainty of process, and likelihood of reward.

So, who is in the market to make market-led proposals?

A market-led proposal (MLP) is an “unsolicited bid” to enhance the railway (unsolicited, that is, if you ignore all the soliciting by the DfT for market-led proposals), which the DfT has not already sent down the RNEP. Anyone not publicly funded can make a market-led proposal.

Proposals have been split into two types: ‘Category 1 MLPs’ and ‘Category 2 MLPs’. 

Category 1 MLPs are those which do not require public money, government guarantee or exclusivity. You might call them ‘Magic Bean Ideas’, because the idea that there are dormant rail enhancements projects out there that do not require some form of money, underpinning or exploitation rights (or a combination of those) belongs in a fairy tale.

On the assumption that we won’t be seeing the rail equivalent of a giant beanstalk any time soon, let’s focus on Category 2 MLPs, which means the following:

N We are really talking about market-led proposals where promoters are looking for some sort of government support.

N Promoters must develop their Category 2 MLPs at their own risk and cost.

N At some point a promoter will have to run the gauntlet of the DfT’s governance process.

That process - the so-called ‘RNEP Framework’ - contains the five stages or gateways that a promoter of a railway enhancement must go through before it will be made (below).

These are what you might call instead the five Ds of Dodgeball - Dodge, Duck, Dive, Dip and Dodge - because the owner of an idea to enhance the railway must do each of these things in order to see that enhancement realised. It looks a bit like an obstacle course. To those familiar with government-led procurement, it probably conjures up images of a ‘tough mudder’ with caged crawls, electric shocks and butter-smeared monkey bars.

Despite A New Approach suggesting that an idea can enter the RNEP at any stage, it still needs a government-endorsed business case and to have passed the decision point for that stage. So, in truth, you probably cannot skip a D - unless you’ve Dodged, Ducked and Dived, you won’t be Dipping.

What’s certain is procurement. The Call for Ideas says “procurement is used to ensure value for money”. So, if you have a market-led proposal, it will be contested to some degree. It’s just that at this point you have no idea to what degree, because the messaging on procurement is completely open-ended.

It will be interesting to see what kind of market the DfT has managed to create by imposing a deadline for the submission of market-led proposals (July 31).

We know that HS4Air has been put forward - a proposal to join up Heathrow and Gatwick to both High Speed 1 and 2 by by-passing London (a sort of high-speed M25 railway), an ambitious scheme that seems to tick a lot of the market-led initiative’s boxes. Then there is Crossrail to Ebbsfleet (C2E), a plan to extend the existing Crossrail route out to Kent. Both are already in the public domain. Not much else is!

C2E is really a publicly backed scheme, so strictly not a market-led proposal. But its submission is symptomatic of the Hunger Games competition that all these initiatives create. C2E’s backers probably feel they have no choice but to throw their hat into the ring now because it is competing for recognition with all Category 2 MLPs, all enhancements that are already in the RNEP, and whatever Network Rail is still allowed to do.

And that’s really the point of all this: not to create new enhancement ideas, but to create a focal point for the DfT to marshal them.

In contrast, the SRLtH imposes no such deadline. However, while ring-fenced from the wider call for ideas, SRLtH is effectively the first concrete manifestation of the market-led proposal initiative. It invites interest in discussing market-led ideas for a southern rail link, and overlays A New Approach’s RNEP Framework to DfT decision-making.

The mainstream press has spoken of five proposals for southern Heathrow rail access: Heathrow Southern; the Windsor Link Railway; a light rail solution; an unspecified proposal by MTR; and another proposal where the only thing known publicly about it is that nothing is known publicly about it. It’s not HS4Air. 

The SRLtH proposals that are known about seem innovative and genuinely distinct from each other, making the DfT’s job of assessing their relative strengths and weaknesses challenging and tempting for the DfT to cherry-pick.

Does the DfT really want you to build your own railway? Too contestable perhaps?

The DfT said in the Call for Ideas that it will protect valid intellectual property (that is, intellectual property protected by legislation and common law). In that context, that means not sharing that intellectual property with others.

Heathrow Southern’s proposal links the south to Heathrow Airport by building, operating and maintaining eight miles of new railway, over which DfT-chosen train operators operate franchised services. The new route its backers have identified joins up Terminal 5 with the South West Main Line, Paddington and HS2. They claim a proprietorial interest in their ideas, and want to operate the railway they hope to build.

But at the SRLtH market-sounding day to promote SRLtH, when Heathrow Southern challenged the DfT about the protection of intellectual property in market-led proposals, the DfT’s spokesman pointedly said that “there is no intellectual property in a line on a map”.

That sounds like while the DfT may not have a monopoly of ideas, it wants one. Some allowance must be made for an off-the-cuff response at a public consultation event, and it will be interesting to see whether the DfT continues to formally hold that line. For now, it puts investors in a poker game where they must show the dealer some of their cards, but are probably reluctant to show all of them in case he then lets the other players see them.

And it begs the obvious question: just what is protectable intellectual property in the context of designing new railways? Because if that is the DfT’s position, not much is. And if you can’t protect your ideas, you may as well not have them.

If it has created a market of private-sector proposals, the DfT must now be sorting out the genuine finds from the upcycled tat.

On SRLtH, the DfT is only exploring options at this stage. It is not the start of a procurement process. In fact, part of the exercise is to determine whether to commence a procurement at all. So, for SRLtH the DfT has commenced an open-ended conversation, but for the wider market-led initiative it might not converse at all. Neither approach helps investors who crave certainty.

But even if the DfT does end a conversation to start a procurement, who knows what it will procure? It may compete the best idea for a railway; or it may simply take the best line on a map it receives if it does not believe there is any intellectual property in drawing them, then compete the best design of that, then the best delivery. Quite simply, to the pure investor, that looks like a lottery ticket at this point.

Or, if all this is the start of an obstacle course, it looks like the kind of obstacle course that requires more luck than anything else - less tough mudder, perhaps more the kind you used to find on It’s a Knockout. 

You know the kind: promoters are shoved into oversized comedic outfits, each carrying buckets of water with holes in the bottom, jumping over and diving under obstacles, edging along rolling greasy poles over pools of foam, while the DfT’s procurement team throw wet sponges at them to try and knock them off, before they trip over each other’s enormous feet in a sprint to the finish line to pour a few dribbles from their buckets into a plastic tube, which the DfT’s lawyers then evaluate to see who has deposited the most and so won the race.

Poker game, lottery ticket or comedy obstacle course? If that is how it’s going to be, you have to wonder whether promoters who want to profit directly from their ideas might just leave playing railways to the DfT.  If they do, where does that leave real contestability?

If the messaging around market-led proposals continues to be unclear, or the market interprets these initiatives as just a means of appropriation or the processes as death by procurement, then the DfT’s drive to promote third-party interest in rail enhancements is dead on arrival.

So, here’s an idea. Don’t sacrifice investor confidence on the altar of competitive tendering. If you genuinely want to encourage the investment of new ideas and money in the railways, perhaps the best way to do that is to let people run with those ideas… not run off with them.

There are parallels in this method of procurement with the approach taken on Thames Tideway Tunnel, the 151/2-mile sewage/rain water tunnel that is currently under construction under the Thames. Helpfully, the DfT seems to recognise this fact in the Call for Ideas, so there is hope yet.

Because if the private sector understands that there is a fighting chance of getting a return on its time and money investment, the DfT is surely going to receive more and better ideas than if the perception is less so.

No one is suggesting the DfT loses oversight - and so value for money - in avoiding slavishly competing everything itself. It could use the RNEP Framework decision points to act as oversight opportunities to compel procurement best practice. If a usage undertaking or other guarantee features, the DfT could attach conditions to it which could be withdrawn if not met at any point. The threat of withdrawal would keep finance-backed investors honest.

The DfT could even establish a procurement board, steering committee or project company - much like East West Rail, Crossrail or PF2 - if it wished to retain a more hands-on role to ensure value for money. The DfT and the chosen private sector promoter could work in partnership that way (a word the DfT uses a lot of these days in other contexts).

Reading the Call for Ideas, it seems this initiative might work for those players who want the railway enhanced, but who aren’t interested in playing railways. Those promoters who don’t claim a proprietorial interest in their ideas or who aren’t concerned with how it is delivered or by whom - for example, ports or housing developers, and even C2E perhaps.

From a pure investor’s perspective, it may not seem worth the candle if you contest the best market-led proposal for a given rail scheme, then contest the best design of that best proposal, then contest the best delivery of that best-designed best proposal, then contest the best operation of that best-delivered, best-designed best proposal. It will certainly get on promoters’ wicks if they perceive that the DfT will not protect their ideas, but instead compete the hell out of them.

If they do, there’s a danger that what the DfT might be left with is a market where the only proposals are owned by real believers… those who aren’t deterred by process, odds or reality - like those who might propose a tunnel-less Atlantic seabed railway, or magnetically levitating trains in low-vacuum tubes. No, wait, I’ve actually heard that last idea somewhere!

In the end, it’s commendable to try and plan future enhancements and to get third-party money into the railway to enhance that plan. But if you invite that money in, you have to accept that it is not free. It has to see a way to a return, otherwise it goes elsewhere.

At the moment, the opportunity to enhance tomorrow’s railway seems like… what’s the word? A contestable one at best.

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  • Ian Watkins - 30/10/2018 22:26

    If you work on the assumption that the DfT couldn't organise one of those events in Burton on Trent, then the likelihood of this idea actually working becomes clear. The level of incompetence displayed in our Civil Service nowadays is truly frightening.

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