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Could rail PPP make a comeback in the UK?

With Britain gearing up for a wave of major rail projects amid Brexit uncertainty, will PPP come in from the cold?

The bar was already set high – and then Brexit lifted it higher.

Britain’s construction industry is due to deliver a series of highly ambitious rail projects in the next decade, from the completion of Thameslink and Crossrail to the Great Western upgrade and the start of High Speed 2.

Yet all this is due to happen against the backdrop of the UK’s exit from the EU.

The uncertainty triggered by the vote for Brexit has increased the risk of reduced overall infrastructure spending and forced those planning major projects to think laterally about contingency funding models.

At Turner & Townsend, we’ve observed from our projects around the world that while many of the challenges involved in delivering a high-quality rail network are universal, the means of funding and procuring them can vary substantially.

Universal challenges and multiple solutions

Wherever it is, the sheer size and complexity of a major rail programme means that seldom will a single contractor be able to design and build it alone. The division of the work into multiple packages is now a common solution for clients around the world.

TGV train_SNCF_France_rail

TGV train_SNCF_France_rail

France’s TGV network used a hybrid approach to funding

Project sponsors – whether governments or regional authorities – must also secure substantial investment upfront to develop the project to a level where bidders are comfortable it is deliverable and worthy of investing bid costs. They must also sustain public and political support during long lead times – which can extend over several electoral cycles – and manage multiple stakeholders along the proposed route.

“The division of the work on major rail programmes into multiple packages is now a common solution for clients around the world”

Despite these fundamental similarities between global rail projects, there is a wide variety of different approaches taken to funding.

In broad terms, the sources of funding typically considered include capturing development gain, private sector investment, public funding (whether at central government or regional level, either as grants or soft loans), or new legislative transport allocations. Typically a portfolio of funding contributions is developed for the most significant projects.

How the rest of the world does it

However, the funding mix will vary from country to country and project to project, and recent years have seen increasing sophistication in the models used. These include contracts such as Germany’s ICE – which remains in government ownership – and Japan’s Shinkansen HSL Network, which has been fully privatised.

“It’s striking how many overseas rail projects are using some form of PPP, which – though used on HS1 – has been less of a feature of UK rail projects in recent years”

France’s TGV network used a hybrid approach – it was funded with a mixture of state and regional funding, and complemented by public-private partnerships. Meanwhile the Netherlands’ HSL Zuid was funded on two levels – state funding for the substructure and PPP for the superstructure.

One of the latest models in this ever-evolving market is being used on Australia’s biggest public transport project, Sydney Metro Northwest, which uses a blend of PPP and traditional funding. It delivers the higher-risk elements such as tunnelling and major excavations through traditional means and uses PPP to provide the operations, trains and systems – thus providing the balance of risk that encourages market interest and delivers value for money for the public purse.

Sydney Metro Nort-west_Rouse Hill aerial

Sydney Metro Nort-west_Rouse Hill aerial

Sydney Metro Northwest uses a blend of PPP and traditional funding

It’s striking how many overseas rail projects are using some form of PPP, which – though used on HS1 – has been less of a feature of UK rail projects in recent years, with the notable exception of standalone LRT schemes where external risks can be more easily managed.

Britain’s challenge

As the UK’s leading construction contractors prepare to compete for and build a series of major rail projects, we should never lose sight of the fact that the project’s long-term operational priorities and objectives should drive the delivery strategy.

Any major rail project should be driven from the perspective of the long-term operator as a transport business, and not solely from the perspective of the contractor building the infrastructure or the manufacturer of the rolling stock.

Operations and maintenance are the long-term core business of a rail enterprise and they need to be in the hands of a competent entity. This entity must not only build massive infrastructure and high-tech rolling stock, but also create an ongoing transport company able to run the service and maintain its assets.

The recent profile of PPP in UK infrastructure projects may have been lower than it was in its 1990s heyday, but it has continued to evolve and improve in other markets. With alternative routes back on the agenda due to ongoing uncertainty, PPP is once again likely to feature as an option in the rail funding mix.

David Fox is global head of infrastructure at Turner & Townsend

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