The role of private finance

Regardless of which way the results fall, after the coming General Election big changes are on the way.

And while the leading parties may have different plans for the future of rail, whoever takes the reins will face the same problem. There simply isn’t enough money in the public purse to finance much-needed infrastructure.

At the same time, the need for investment in rail is as great as it’s ever been, with renewed focus on delivering greater connectivity, more robust services in the face of climate resilience, and the decarbonisation of our rail network.

The benefits of bridging this gap are broad and wide-ranging - from connecting communities and boosting economic growth to creating jobs and housing, as well as the positive environmental impact by reducing reliance on cars and other carbon-intensive forms of transportation (thus furthering the UK’s efforts to achieve net zero).

It is therefore inevitable that there will be an appetite for private finance in some form.

There are echoes of the early days of the Blair years, when then-Health Secretary Alan Milburn claimed: “When there is a limited amount of public sector capital available, as there is, it’s PFI or bust.”

While private finance initiatives (PFIs) for UK infrastructure projects have largely fallen out of favour, this approach to investment and delivery is worth revisiting.

Private financing comes with increased costs compared with public borrowing, but was introduced with the expectation that this would be more than offset by the increased efficiency and schedule focus brought to the delivery of capital projects.

Despite those best initial intentions, in recent years we’ve seen too many publicly funded projects where any savings gained through public borrowing have been reversed through indecision, changes in scope, and through delays in planning, in consenting, and in delivery.

And the longer any process takes, the greater the expenditure and the longer it takes to pay it all back.

Infrastructure projects have also had to contend with the high inflation we’ve witnessed in the past few years, creating a new challenge. The laser focus on cost that private finance brings has been lost for a decade in UK rail.

There has been a long-held perspective in the UK that it’s hard to turn a reliable profit on rail, which has disincentivised private investment in the past.

But look to the US to see such a project in action. In Florida, Brightline has blazed a path for private investment by becoming the first fully private passenger service in the US in over a century, with its Orlando to Miami line.

It has barely been able to keep up with demand since opening in autumn 2023. And now the company is investing billions in a high-speed rail line connecting southern California with Las Vegas.

Of course, the UK has its own unique frameworks when it comes to delivering infrastructure, involving government, planning, finance and regulators, so direct comparisons to the US can only go so far.

But certainly, the US’s appetite for problem solving has clearly outpaced our own. We have been reliant on a pipeline that hasn’t always had secure funding, rather than meaningfully asking how we can unlock this with a private investment element.

Remember market-led proposals (MLPs)? The MLP process sparked great fanfare in 2018, but then stalled because every proposal required something from government to make it happen.

If projects worked entirely without government support, why would there be a need for an MLP process at all? MLPs are not free infrastructure for governments, nor can the ideas simply be taken from a private sector promoter and openly competed in a public procurement process.

Government must bridge the gap to make the market work and make private investment work.

Whether that is partially funding the costs, funding the development cost stage, sharing some of the risks, or enabling privately owned assets to be built on the UK network, unlocking the challenge would bring the investment that is desperately needed.

And guess what? Other infrastructure sectors are making this work in the UK.

Despite the lack of recent privately financed rail projects, there are private investments in nuclear energy.

And in water, the obvious example is Thames Tideway. Started in 2015, the 25km super sewer system has just finished construction, clearing up spills and sewage while providing a vital update to London’s 150-year-old network.

Key to its success is that the project possessed a strong foundation from which to attract competitive capital in terms of size and customer base, resulting in a good contract, aided by a government support package and regulatory support.

By embracing private financing, this project was able to generate the upfront financing it required, while sharing the costs over many millions of households that will benefit from its effects - all while staying off the government’s balance sheet.

There are many areas where these learnings could be applied when it comes to private investment in the UK’s rail network.

A natural starting point would be the Southern Access to Heathrow project. Beyond the connectivity benefits to Heathrow and to the South West and South East of England, providing civil aviation with a much-needed boost as it continues to recover post-pandemic, the environmental benefits would be considerable - greatly reducing congestion on the motorways and providing cleaner air throughout the area. Heathrow Airport Limited has already stated its support as a preferred option.

The challenge, then, is ensuring that upcoming projects have the right structure to appeal to capital.

Fundamentally, this will require policy-level changes - in particular, a plan will need to be put in place to ensure governments are faster and more consistent when it comes to decision-making around infrastructure, especially concerning development pre-consenting, demand risks, and asset ownership and maintenance.

Funding needs to come from somewhere. And for as long as there’s little spending money floating freely in the public purse, private financing must have a part to play in the future of UK rail.

The sooner the industry embraces that fact and takes the necessary actions to draw private investment in, the better we will be for it.

Russell Jackson is Global Transit Director for AECOM.