Two important recent developments intend to start to unlock opportunities for third parties to provide much-needed funding or finance for rail infrastructure schemes.
The UK Government has published Guidance for Rail Market-led Proposals and the Rail Networks Enhancements Pipeline, and Network Rail has published Open for Business, a list of opportunities for third parties to fund rail improvements. Do they take things forward significantly? We consider both publications below.
It is not easy to get a large new third party sponsored rail infrastructure project off the ground. Last year's Hansford Review looked at the opportunities for innovation and the use of alternative project delivery models on Britain’s rail network, and explored the barriers that prevent or discourage third parties from investing in, and delivering, rail infrastructure projects. Network Rail enthusiastically responded with Network Rail: Open for Business, setting out ways they would change their processes and behaviours to make it easier for third parties to carry out projects and renewals on and around the railway.
Shortly after this, the Government published its HLOS for Control Period 6, as we reported in this article. The Government was clear that Network Rail must try to maximise third party funding contributions and that the regulatory framework should facilitate greater private investment.
November's Strategic Vision for Rail again stressed the focus on unlocking funds for developers and other potential beneficiaries.
Market-led Proposals and Enhancements Pipeline
But up to now it has not been easy for private bodies (developers and investors) to promote new rail projects with any sense of certainty. There seems to be a willingness to invest in rail infrastructure but a lack of knowledge of who to contact and how to put a project forward. All that is intended to change with the new Guidance for Rail Market-led Proposals (MLP Guidance), which is aimed at proposals from the private sector for rail projects that address a new opportunity that the DfT and Network Rail have not thought of and/or not included in the HLOS, for example a new route passing through a new housing development, a traffic management system to enhance an existing signalling system, or reinstating a closed local branch line. The idea is that these proposals should be financially sustainable without government support.
For projects that need some government funding, there is the Rail Networks Enhancements Pipeline (RNEP), which will be a rolling programme of investment rather than the five year Control Period constrained enhancements cycle of the past.
The two documents are designed to be read together. For example, a Category 2 project that requires some government and some private funding will need to follow both sets of guidelines.
There are two categories of project.
- Category 1 projects do not require public funding, have no contractual requirements that involve government action (e.g. changes to franchise agreements or usage guarantees), and no asset exclusivity. In practice it is unlikely there will be many of these, given the lack of exclusivity. An example is iPort Doncaster, where the port owner funded the gauge clearance of a line providing an additional route for freight services operating to and from the port. There is no charge for freight operators to use the route, but the port benefits from a more reliable service for its customers and an increase in rail freight capacity to and from its port.
- Category 2 projects involve one or more of: public funding; contractual requirements needing government action; asset exclusivity. These projects compete with other unfunded government projects for capital and therefore need a compelling business case. They are also subject to procurement (when they reach the Design stage). An example is a company re-opening a branch line and station to connect an isolated community to areas of commerce, recovering its capital costs by taking a portion of the track access charge.
The business case needs to address the DfT's four priorities for investment and action:
- Keeping people moving safely and smoothly;
- Delivering the benefits from programmes and projects which are already committed;
- New and better journeys and opportunities for the future; and
- Changing the way the rail sector works for the better.
The MLP Guidance helpfully sets out the criteria for each priority that the DfT will assess the business plans against.
Funding, financing and procurement of Category 2 projects
Chapter 3 of the MLP Guidance sets out what the DfT believes is necessary for promoters to present credible funding and financing solutions for their proposals. Funding is the ultimate source of revenue that pays for the investment (government grant, rail farebox, or private sector beneficiary contribution). Financing is what spreads the need for funding over time.
MLPs that include alternative sources of funding will be more attractive to government as they help in reducing the burden for taxpayers and fare payers. The MLP Guidance lists some potential sources of local authority funding that projects could access, including Section 106 Agreements, Community Infrastructure Levy, business rate supplements (a la Crossrail), property development where the profits from developing land around a transport scheme are used to pay for it (Euston station), and direct contributions from businesses (e.g. Canary Wharf's contribution to Crossrail).
The MLP Guidance accepts that private finance could improve the attractiveness of an MLP by increasing either its potential value for money or its immediate affordability to government, or both. The government would prefer proposals that are "off balance sheet", but where this is not possible, it will still consider "on balance sheet" private finance where there is a compelling case that the MLP will deliver better value for money.
The MLP Guidance gives examples of how a scheme could be structured to take it off-balance sheet, such as a fixed availability payment from government; a usage fee that is not linked to any minimum usage guarantee; or a Regulated Asset Base model, but only if used simply to price the offer to private sector customers and not used in conjunction with any government-backed payments.
Developing and procuring a MLP
An MLP will at some point enter the Rail Network Enhancements Pipeline (RNIP). There are five stages to the process: Determine (the opportunity), Develop (the outcomes), Design (the outputs), Deliver (the solution), and Deploy (derive the benefits), with the DfT making a formal investment decision to proceed to each next stage, guided by the HM Treasury Green Book appraisal criteria. Enhancements can enter the pipeline at any stage. There is also a Pre-Determine stage where the promoter identifies an opportunity and can satisfy certain criteria. The DfT can then place the MLP in the Determine stage if it decides that an opportunity exists that it is interested in exploring.
A true Category 1 MLP will enter at Deploy stage. It will not need to go through procurement, as it is not requiring any government funding. The promoter will develop, design and deliver the project in line with Network Rail and the ORR's existing rules and processes, and the project must pass all relevant safety tests and obtain the relevant licences. Network Rail's Investing in the Network guidance should be followed. The ORR have launched a new railway investment web section so that their guidance for investors is easy to find and up to date and have also updated their Investment Framework.
A promoter can develop a Category 2 MLP to any extent at its own risk and apply to enter at the appropriate stage of development, (i.e. the stage where it needs government support to continue). The DfT thinks that most Category 2 MLPs are likely to enter the RNIP at the Pre-determine stage or the Develop stage.
A Category 2 MLP will have to go through procurement, both before the Design stage and the Deliver stage. The time taken between the decision to develop and the start of a procurement can be anything from 6 months (for a small project like a £1m station upgrade) to 3 years for a large project like a £1bn new railway line.
It is important to note that, in order to satisfy overriding principles of openness and transparency, elements of Category 2 MLP schemes will need to be made public. Promoters may identify IP that they believe should be kept confidential, but this will be considered by the DfT on a case by case basis.
Comment and next steps
Chris Grayling states in his Foreword to the MLP Guidance, "In a complex system like the GB rail sector, where there is a significant amount of public funding and the infrastructure assets are held in the public sector, structuring deals that work for government, taxpayers and investors is not easy." Hopefully this new guidance should provide more clarity for promoters and investors, particularly of Category 2 projects.
There have been some mixed views in relation to the proposals. In particular, the fact that schemes put forward for the RNIP are proposed subject to the condition that elements of them may be disclosed but may not ultimately be taken forward by government may be a disincentive to putting ideas into the mix. In addition, the key question of how development costs can be recovered has not been addressed, which begs the question whether parties will be willing to invest the funding required or risk in circumstances where the likelihood of a scheme being "bought" is necessarily uncertain. Perhaps further work is required in these areas to shore up confidence in the process, but it otherwise feels like a good step in the right direction in an area where the benefits for the railway and passengers are clear.
To learn more, there are two Rail Network Opportunity Days coming up, which should help explain the process in more detail. We will be attending both of them to find out more. They are in:
- London at the Park Plaza Victoria, 239 Vauxhall Bridge Road on Monday 14 May 2018, from 9:00am to 4:30pm
- Birmingham at the MacDonald Burlington Hotel, 126 New Street on Tuesday 5 June 2018, from 9:00am to 4:30pm
Please email RailMLP@dft.gsi.gov.uk to register your interest.