I share Rob’s excitement about the opportunity that is East West Rail. There is a sense of liberation that comes from being able to design a delivery model unencumbered by the corporate systems of Network Rail, and with political backing for any answer provided it is radical, effective, and draws in private finance. No surprise that Rob won’t be drawn on the details of the answer now - why would he box himself in? Besides, he genuinely won’t know yet the detail of what emerges as the best approach, although as part of an experienced and smart team, they will have a few hunches.
There are three prizes to be grasped.
First, a cost and time efficiency benchmark to Network Rail. That is a laudable aim, but I will wager now that it will be hard in the end to trace a like-for-like comparison. Leaving aside that every scheme is different, the intention to procure East West Rail on a vertically integrated basis means that what will be bought is a whole-life cost.
You only have to look at the political furore over PFI to see how hard it is for politicians, the public, the media or indeed businesses to properly differentiate a cost commitment just to build something from the cost commitment to build, maintain and operate. But buying on the basis of whole-life cost is absolutely the right thing to do (a point shortly to be reiterated by the Infrastructure Client Group, whose members include Network Rail, in its Project 13 manifesto). As well as driving out the long-term efficient cost, there is also scope to lock in (through a DBFO or similar contractual mechanism) the funding to ensure that the line is properly maintained throughout its life.
Second, a contribution from land value capture. This is an area of interest not just in the UK, where KPMG recently completed a comprehensive study of potential mechanisms for Transport for London, but also globally.
To my mind it is right, as a matter of public fairness, that if Government (taxpayers - you and me) pays for a piece of new infrastructure, some (or dare I suggest all) of the windfall gain that accrues to proximate landowners as a result of that infrastructure should be captured. But let’s not get carried away with how significant this might be in the context of a £1 billion scheme. Rob says that to a large extent the project is about making sure that the beneficiaries of rail projects are also the funders. Dream on! With the sole exception, I suspect, of the Heathrow Express, there is not a railway in history that has made money without public subsidy.
Third, the involvement of private finance. There are two good reasons for that, the first of which is because the risk of losing a lot of money concentrates the minds of private backers in a way that tends to drive innovation in execution and effective management in operations.
Not always, of course, before you start shouting Metronet at me. But take Thames Tideway as an example. It is the desire of the private investors to mitigate their risk on the project that has led Andy Mitchell and his team to renegotiate the construction contracts in order to shorten the project programme, taking a commercial view to pay more upfront to reduce risk exposures in due course.
The second reason is because private finance is the way of spreading the upfront build cost of the scheme over time. That matters because infrastructure is inherently inter-generationally unfair, or at least any one scheme is when taken in isolation. We as taxpayers will pay the cost of HS2 now, but the benefit will accrue to our children and our grandchildren, in the same way that we benefit today from the legacy of investment by the Victorians, in our railways, roads, sewers and public buildings. Ideally we would altruistically accept that as we have benefited, so we will invest. But when public funding is tight, any solution which defers some of the cost to the future is welcome.
So how might East West Rail ultimately be delivered? Since Rob is not at liberty to speculate as to the likely solution, perhaps I may offer some observations.
Firstly, there is no shortage of private capital, both debt and equity, for infrastructure projects. But generally that capital prefers low risk for low reward. A scheme needing £1bn-plus will struggle to access that money on terms that the public and politicians will regard as acceptable, unless the risk to investors is minimised.
Secondly, rail is seen by investors as high risk. It is operationally complex. It has interfaces with other parts of the railway that introduce risks you cannot control. Modern trains and signalling systems are a technology risk. So something will have to be done to mitigate that risk. Either particular risks are separated out, which undermines some of the vertical integration logic, or some form of regulatory and/or Governmental risk mitigation is put in place.
That was the thought process we went through when KPMG and Linklaters were advising Thames Water on the structural solution for Thames Tideway. We analysed every model from pure privatisation to public funding and procurement, and you can see for yourself where we ended up. There was initial resistance in the Treasury, but the inescapable logic of the answer carried the day. If we as public citizens want complex infrastructure funded and built by the private sector, we either have to accept there is a high price tag for that risk, or use the country’s balance sheet to mitigate some of that risk.
Thirdly, vertical integration is a siren. Given some of the challenges post-BR privatisation, it has a sort of alluring charm. But building and maintaining a railway, building trains and operating a railway are not obviously similar skillsets, and in the private sector they are distinct capabilities and distinct corporate entities with very different balance sheets and risk appetites. Force them together and you may get the appearance of an integrated business, but inside the Kinder Egg there will still be three separate toys.
