When John Aspinall’s Lancashire and Yorkshire Railway (LYR) decided to electrify its line between Liverpool and Southport in 1902, it had to build its own power station to supply the trains with current.
There were no other suitable electricity suppliers. Aspinall was wiring his railway only a little over 20 years after the first buildings in Britain were equipped with electric light bulbs.
Today, an electrification scheme would tap into the national grid and buy power from any of a number of suppliers.
Rail back then was a private enterprise. To expand or upgrade, the LYR needed to raise capital, which was not easy then… as it is not easy now.
Aspinall noted: “There is nothing so coy as capital, and if it is to be won, it must be by convincing arguments, and not by the doubtful pleadings of conflicted interests.”
He also said: “It is obviously of great importance also that where a large amount of additional capital is being spent, it should be made to earn money at the earliest possible date so as to avoid loss of interest.”
In other words, once you’ve secured the capital, spend it on your project as quickly as possible so that you can reap the benefits. For companies such as the LYR, the benefits would come from increased traffic bringing in extra money and lower costs cutting outgoings.
Aspinall was perceptive when it came to his passengers: “The public are not likely to pay more than they do at present, and it is therefore a question as to whether electrical working would induce much larger numbers to travel and to travel more frequently.”
LYR train planners found it possible to path electric stopping trains more easily than steam ones between express steam services, so that both could be accommodated on the same lines. This allowed the company to close waiting rooms and to remove staff from stations with four platforms, because passenger traffic now used only two.
The electric service was more efficient.
The power station at Formby burned 49lb of coal per train-mile, whereas steam stopping services were burning 100lb per train-mile when they were temporarily accelerated to electric timings in the transition phase when electric trains entered service.
So, after authorising the electrification in October 1902, the LYR’s board would see the first electric train running on test in December 1903, and carrying passengers in March 1904. In May 1904, the LYR withdrew steam stopping services.
Compare this with the prevarication over wiring plans for the Trans-Pennine and Midland Main Lines over the past decade.
Where’s the money?
Today’s railway has plenty of plans, but no money to deliver them.
For infrastructure projects, the railway has long relied on government coffers, but government has also had its fingers burnt with major projects (such as Great Western’s electrification) running very late and hugely over budget.
So, no one should be surprised that government is reticent when it comes to enhancing the current railway.
What, then, of private money?
Well, it’s worth revisiting Sir Michael Holden’s words in RailReview Q1-2022: “Many suppliers are very nervous about the short-term future, unsure what the effects will be on their businesses, but suspecting that they will be negative. The absence of progress on the much-trumpeted rail enhancements pipeline, the failure to translate the published rail decarbonisation policy into a programme, and the likely looming reduction on maintenance and renewals expenditure on CP7 together suggest a gloomy outlook for rail investment over the next five years or so.”
So, remind me why private investors should put their money into rail?
Then there’s the government’s decision to dump public-private partnerships.
On one level, there’s a feeling that government doesn’t like private companies making money from public services.
On another, there’s the evidence that PPP deals were costly, inefficient, and didn’t deliver what they promised.
As Chancellor of the Exchequer in 2018, Philip Hammond told Parliament: “In financing public infrastructure, I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector, but there is compelling evidence that the private finance initiative does neither… I have never signed off a PFI contract as Chancellor, and I can confirm today that I never will. I can announce that the Government will abolish the use of PFI and PF2 for future projects.”
PFI or PPP deals came particularly unstuck on London Underground.
To cut a long story short, the government back in the 2000s decided to contract out maintenance and upgrade work on London Underground. Private companies, usually as members of consortia, bid for this work. They then found that upgrade work in particular was more expensive than they thought, so they claimed extra money from Transport for London, which naturally resisted.
It fell to an independent arbiter to decide these claims. The usual result was that the arbiter decided that TfL should pay more, but not as much as the private companies claimed. When they were unable to raise the extra money from private markets, the PPP companies fell into administration.
Their shareholders lost money and taxpayers had extra bills, too.
At the heart of these PPP problems was the transfer and treatment of risk. The Tube PPP companies shouldered the risk of finding the infrastructure that needed more work. This was tolerable up to a point, but when they found much more work and no one willing to pay for it, the deals collapsed.
If government wanted to build a new railway, where should the risk sit of dealing with adverse ground conditions caused by old mine workings?
Placing it with private contractors will lead to those contractors pricing it in - they will quote and charge more to protect themselves from the cost of finding and dealing with mine workings. If they find none, they will do very well financially and ministers will feel like they’ve overpaid.
If government takes the risk, it could see keener quotes and prices from contractors, and it will only have to pay extra if mine workings appear.
That’s reasonably simple. Now add operating the new line into the contract, and decide whether the contractor or government should be on the hook for future problems from mine workings.
Life then becomes more complicated. The contractor will want to build a railway that can withstand future problems, which might result in over-engineering and government overpaying.
That’s the flaw at the heart of ‘design, build, operate and maintain’ (DBOM) deals. Perhaps it’s better to split them into ‘design and build’ and ‘operate and maintain’ deals, with a firebreak preventing risk from one infecting the other. Which was the usual way of doing things.
It doesn’t prevent private sector investment, as High Speed 1 shows. It was built with public money, but then let to private investors as a 30-year concession. The key to making HS1 attractive was its long deal, because that provides more certainty.
But (there’s always a but) there’s sense in designing for lowest maintenance cost rather than designing for lowest build cost if this gives lower whole-life costs. Splitting DBOM into two removes this possibility, unless the contracting authority (government or Network Rail in this context) has the skills to bridge the gap. In other words, they need to be a competent client.
Contracts for difference
Complexity has bedevilled UK efforts to increase power production, which has led to governments across the years flip-flopping over the question of nuclear power. In the mix is not just the complexity and expense of building a power station, but also a question of whether future electricity prices make it worthwhile.
One answer to power generation is ‘Contracts for Difference’ (CfD), as developed by the Department of Business Energy and Industrial Strategy (BEIS). These contracts require companies to bid through auctions to provide low-carbon electricity. From these auctions comes a ‘strike price’, which becomes a fixed and pre-agreed price for that electricity.
Companies receive revenue from selling their electricity. If that price (as calculated as the market reference price) is lower than the strike price, companies receive a top-up to the level of the strike price from the Low Carbon Contracts Company (LCCC), which BEIS owns. This payment comes from a levy on GB electricity suppliers. If the market reference price is higher than the strike price, the companies pay LCCC the difference.
The idea behind CfD is to provide generators with price certainty over the lifetime of their contracts. LCCC notes that as private contracts between it and generators, these deals cannot be unilaterally changed once they are signed.
Their essential ‘pain-gain’ construction is similar to the way train operator franchise contracts once worked. They had ‘cap and collar’ arrangements that typically kicked in after four years.
These arrangements meant that train operators shared with DfT 50% of any fares revenue in excess of 102% of the operator’s original forecast.
This shared any gain.
To share any pain, DfT would contribute 50% of any revenue shortfall below 98% of original forecasts. DfT’s contribution increased to 80% if the shortfall fell below 96%.
Thus, DfT insulated train operators to some extent from wider economic risks that those operators could not control.
Later deals for commuter operators in southern England used central London employment as the measure of the wider economy.
This was shown to be flawed when season ticket sales started falling, even before COVID-19, as more commuters worked from home for a day or two every week.
They were still employed in central London, but no longer paying train operators to take them there and back every day.
The lesson from this is that it remains difficult to design risk-sharing mechanisms when they rely on predicting the future.
A second lesson of risk sharing was predicted by the House of Commons Transport Select Committee back in 2006, and demonstrated during the pandemic: “The reason for the lack of risk transfer is primarily because, at the end of the day, no government can afford to let part of the railway system collapse.” In other words, all roads (sorry, rails) lead back to ministers in London, Edinburgh or Cardiff.
Hence the latest round of deals for train operators, through which government takes all the revenue and pays the operator a fee. The wider economic risk lies with government.
This model has worked well for rail concessions. They are subsidised operations, with government or Transport for London buying a level of service from the operator. The model may work less well for traditionally profitable and more commercial operations such as inter-city routes.
CfD has become established in a mature market. Demand for electricity will endure. There’s a distribution network that can take and distribute its product widely across the country. What’s novel is the greener generation that CfD encourages.
Hydrogen is another novel and potentially greener power source. UK government ministers talk about it as a future source of power in homes and as a way of phasing out diesel from transport.
It occurs widely (it’s the ‘hydro’ of hydrocarbons, so exists in the fuels we burn), but doesn’t occur naturally in its pure state. This means it must be extracted from other materials. This can be done by several methods, but both take energy. Steam methane reforming splits it from the gas of the same name, whereas electrolysis splits it from water, leaving oxygen as the waste product.
It might be suitable for a CfD contract if government decides that hydrogen is an energy future. The ‘if’ is important. Were ministers to show the same indecision as has blighted nuclear energy for decades, it’s unlikely that hydrogen will become established.
For rail, the better hydrogen option might be to take a leaf from Aspinall’s book. Establish a self-contained network of trains powered by hydrogen and build a plant to supply the gas. That brings us back to today’s train operating contracts: they deliver to government specification, but don’t have the freedom to invest over the 30-year lifespan of a fleet of hydrogen trains.
Private investors
Private investment in rail divides into two areas: infrastructure and rolling stock.
The latter category has been one of privatisation’s success stories. Private investors have ploughed billions into new trains. They have done well. The original three rolling stock companies bought British Rail’s fleets for a good price (from their perspective) and have made handsome profits since. The market has attracted new entrants, which is a sign that there’s money to be made.
Those profits also attracted complaints - not least from government ministers who called in the Competition Commission to investigate the market. In its report in 2009, the commission aimed most of its recommendations at the government.
Meanwhile, the government was becoming a major player in the market by leading several procurements - originally, 1,300 vehicles for the Intercity Express Project (IEP), 1,200 for Thameslink, 65 trains for Crossrail, and 60 trains for High Speed 2.
When the National Audit Office examined the IEP and Thameslink deals in 2014, it reported that DfT wanted to transfer risk to private train service providers. It added that it was too soon to say whether the deals provided value for money because the trains were not in service.
IEP entered service in 2017, ten years after DfT launched the programme. Aspinall would likely have been appalled.
Since introduction, cracks in IEP trains forced a temporary withdrawal. Manufacturer Hitachi (part of the consortium which funded and owns the IEP fleets) is footing the bill, which shows that DfT has delivered some measure of risk transfer, although it must be said that Hitachi’s bill also covers similar trains procured entirely privately.
On the plus side, DfT as contracting authority could insist IEP included bi-mode trains, which brought benefits the private sector had not delivered. And it could push a deal that was long enough to attract private investors, so easing taxpayers’ burdens. Shades of client competency.
Rolling stock companies face risks from their trains lying idle. One such fleet is the 30 Class 379 electric units. Operator Greater Anglia cast them aside when it procured new stock, despite the ‘379s’ being only 12 years old. Had DfT not cancelled several electrification projects, it’s possible that the ‘379s’ would still be running. Instead, their owner has an asset earning no return.
Overall, the rolling stock market is not plain sailing, with government decisions the major factor.
On the infrastructure side, nothing happens without government’s approval, usually because it’s footing the bill. Of course, it has a statutory role in approving major projects, even when it’s not funding them, by authorising Development Consent Orders or Transport and Works Act Orders.
Leaving that role aside, there’s great reluctance in government to spend money on rail projects. And if government is unwilling to spend, it’s little surprise that the private sector is unwilling.
One project that’s stuck between the two is the plan to build a rail link into Heathrow Airport from the west. This would enable direct trains to run into the airport from a wide range of destinations in western England, Wales, the Midlands, and even northern England, given that CrossCountry usually runs into Reading from north of Birmingham. Add local trains from the Thames Valley to the mix and you open up more public transport options for airport workers to reach Heathrow. It could encourage people to switch from road to rail, helping to lower carbon emissions.
Government asked Network Rail in 2012 to start planning. It expected funding to come from Heathrow Airport itself, but when the pandemic struck in 2020, it became clear that the airport couldn’t or wouldn’t pay, so if the scheme is to go forward it needs government to pay for it.
It needs a Development Consent Order (DCO) before building can start, and Network Rail notes that funding (from government) must be in place before it can apply for a DCO (from government) via the Planning Inspectorate.
The inspectorate’s latest update is from October 2020. It anticipated a DCO application in November 2021, with major building starting in 2025 and an opening in 2029 or 2030.
In January 2021, NR’s board agreed to halt work on the project and deploy staff to other work. So, it’s taken almost a decade to fail to progress a 6.5km railway, mostly in a tunnel, to Britain’s busiest airport. This hardly inspires private sector investment.
Even when there is funding, project delivery takes a long time.
North Yorkshire County Council applied in 2013 for money to progress its ambition for half-hourly trains on the Harrogate-York line. Initially, it thought the answer was longer sections of double track. Analysis by NR showed that it was better to improve signalling by replacing Electric Token Block working with token-less block working and alter track around Cattal to permit higher speeds. NR finished the upgrade in December 2020.
Whatever benefits the council was looking for, they are not likely to be commercial in the way a private company would seek.
The improved service makes it easier for people along the line to reach York or Harrogate, whether for business or pleasure. They may switch from road to rail, which might bring carbon benefits. The council’s spending might be helping local residents, or it might be ‘buying’ cleaner air. Whatever it is, it’s hard to see where a private sector investor would generate a cash return from projects such as this.
There’s no income stream to be had from cleaner air. There may be financial benefits for the NHS in 20 years’ time, from having a healthier population. If there are, they would fall to government as the NHS’s funder. That pushes the funding onus towards government because it’s the custodian of national benefits.
Open for Business
Network Rail’s website says: “We’re making it easier for other organisations to invest in the railway. We’ve published a list of opportunities for third parties to fund, finance or deliver improvements and have committed to keeping it regularly updated.”
A link to the list displays another page that says: “This is a list of potential opportunities for third parties and inclusion does not necessarily represent a commitment to deliver a project. It is a growing list and we have ambitions to update it regularly. It is not an exhaustive list and we are always open to new and innovative ideas.”
But there’s no list on the page. So, RailReview asked NR for the list.
No list came back, but NR said: “We’re still seeking third-party investment, particularly from the private sector. We are working with our partners in the Department for Transport on an updated list of opportunities to invest in the railway and expect to be able to share that soon.”
NR’s page did include a list of schemes on which it had collaborated with third parties.
Four were stations, and the other was private funding of a scheme to add 1.4km of double track to the branch to Felixstowe and its port.
Within this section of its website, NR lists Stoke Maintenance Delivery Unit as an example of it being open for business. However, Stoke is not an example of private sector investment. It’s an example of NR being open to other ways of delivering projects. In this case, it explained what it wanted (the outcome), and gave the private sector more flexibility in delivering this.
For Stoke, the new building for maintenance staff was sufficiently far from the live railway to allow builders to work on it as they would on the High Street. This saved money, as did the contractor’s use of pre-formed panels that were quicker to install and greener than traditional building methods.
Stoke provides a decent example of NR working differently and more efficiently, but it’s not an example of NR being open to private sector investment.
What might provide an example is Project Reach. Here, NR is looking for £1 billion of private sector investment in lineside fibre optic cables.
NR launched the project in spring 2021, with Chief Executive Andrew Haines saying: “This proposal makes good business sense for all parties. We get a cutting-edge, future-proof telecoms infrastructure; the investor gets a great business opportunity; train passengers in Britain get an improved service for years to come; and the taxpayer saves a significant amount of money.”
The business opportunity is the chance to use spare capacity for other commercial activities. That provides an ongoing income stream that justifies private investment in the way that constructing a building or buying an intangible such as clean air does not.
With Project Reach now a year old, Network Rail told RailReview: “The commercial process continues and we hope to issue an update soon.” Which doesn’t sound very encouraging!
Coupled with the lack of any obvious list of potential private funding opportunities, NR appears fairly closed to private investment - that is, funding which requires a monetary return to the investor.
The answer to private sector investment in rail might better lie in its skills rather than its money. This means using public money to build projects, but private sector skills to extract every last penny of value.
Network Rail’s Southern Region is about to test this with a ten-year renewals programme. It will not be easy, as Programme Director Tim Coucher readily recognises. He admits that NR will need to become a much more competent client and much more open. The openness will come from NR placing its entire Control Period 7 renewals work bank upfront into the hands of its contracting partners.
In close collaboration, NR and these partners will form an integrated team that will ‘slice and dice’ how they deliver these renewals for best overall effect. The partners can’t lose money under Coucher’s arrangements, but their profits depend on how well they deliver the work bank. In some PPP cases, it was this delivery in which the private sector failed.
If work costs more than thought, the extra money comes from taking other work out of the programme. That’s because NR will be working to a fixed limit set by the Office of Rail and Road. If work costs less than thought, the programme can expand and that gives the chance for the private partners to earn more profit.
Coucher is thinking in terms of factory production for renewals, with a steady drumbeat of work. That doesn’t readily apply to enhancements or major projects, but the thinking of openness does and so does too the willingness to encourage private innovation.
Translate that into enhancement programmes (perhaps Stoke does provide an example?) and there’s a chance that rail can have the best of both worlds.
Trust me
London’s Thames Tideway Tunnel has hybrid funding. Thames Water was the client for the project and it had a good technical understanding of what it wanted.
By putting £1 billion into the project itself, it made other investors more comfortable putting in the other £3bn.
For the money side, Thames Water reflects DfT in having money to invest.
For the technical side, it’s closer to Network Rail.
The other twist to the Tideway Tunnel comparison is that Thames Water’s regulators allowed it to increase consumers’ bills to ultimately pay for the project.
Ministers are considering similar mechanisms to increase bills for electricity users to fund nuclear power station construction.
For rail, the equivalent options would be for ORR to permit NR to bill higher track access charges for upgraded lines.
That would make sense if NR were allowed to borrow money to fund enhancements, as Thames Water does.
However, when government auditors reclassified NR’s debts as public sector debts in 2014, government closed off this borrowing option.
So, any higher access charges would fall on government to pay, and that’s the same government that would have to fund the project in the first place.
The other option would be to pass on the increase in charges to passengers in the form of higher fares.
DfT has spent years increasing regulated fares by more than inflation so that passengers pay more of rail’s cost. So, there’s a clear argument that passengers are already paying for upgrades, although this is in a general sense rather than specifically for any one upgrade.
Tieing increases into particular upgrades, such as the hoped-for TransPennine route upgrade, would test John Aspinall’s view. It would need to counter the claim that rail fares are already too high, but could use the upgrade in question as evidence of improved services.
Set against this is the optional nature of much rail travel.
Unlike water or electricity, no one has to use rail.
So, history has put Network Rail into the position of being owned by the state and primarily funded by the state. Bit by bit, the state has increased its hold on rail funding. It has closed down other options so that it’s the only funder left in the game.
And it’s not keen on giving more money. Much of the problem with private funding for rail infrastructure comes down to trust. UK government doesn’t really trust rail’s private sector - it has the scars of Great Western electrification and other public-private partnerships in which the private partly failed to deliver.
Nor is there much trust the other way.
Ministers change their minds and their priorities.
They preside over stop-start programmes.
They make rail too difficult.
Rebuild this trust by releasing some of those shackles, and there’s a chance to make rail infrastructure attractive to private money.
