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How can Network Rail find the private cash for CP6?

Network Rail’s plan to boost private funding is struggling to get off the ground. Binyamin Ali examines both the obstacles to success and the examples that give cause for optimism.

“We spent a lot of time with the Treasury trying to work out how we could generate funds,” says Barking Riverside project director Matthew Carpen.

“In the end, the private sector is effectively funding £172m of it alongside Transport for London, who are funding £91m, so there is a total cost of around £263m,” he adds.

We’re discussing the funding model used to secure capital for the extension of the Gospel Oak to Barking Overground line in east London, which involves 4.5 km of new track as well as a new station. Barking Riverside Ltd is developing 443 ha of brownfield land around the site where the station will sit, and will build more than 10,000 homes in the area.

“The model is: cash goes in upfront from the private sector to fund the infrastructure project, and as the [housing development] project builds out on the back of that railway investment, the money is paid off,” Mr Carpen explains.

Network Rail chief executive Mark Carne would love to hear these words applied to a project delivered by his organisation.

The Hansford Review, published last July, encouraged Network Rail to find creative ways to attract more private investment into rail infrastructure as the next funding envelope – Control Period 6 – loomed.

Since then Mr Carne has been beating the private investment drum, having seen only £328m of CP5’s £15bn funding for large enhancement projects coming from third-party sources.

“I believe in the power of competition to drive efficiency, creativity and innovation,” Mr Carne asserted in his response to the review in July. “These are not always words associated with the rail industry ­– but I want them to be. My message to the industry is that Network Rail is open for business.”

This new approach has been reflected in the way funds have been allocated for CP6. Of the £47bn to be spent between 2019 and 2024, only £10.9bn has been earmarked for enhancement projects, while the rest of the cash will be spent on maintenance and upgrade work.

CREDIT Transport for London London Overground Barking Riverside extension 2

CREDIT Transport for London London Overground Barking Riverside extension 2

Source: Transport for London

London Overground – Barking Riverside extension

What’s more, most of that £10.9bn will go towards “CP5 tail projects” that Network Rail was unable to complete within CP5, as Mr Carne outlined at a CP6 press briefing event last month.

If CP6 is going to feature any new large enhancement projects, they will have to be privately funded. Since the summer, however, there’s been very little detail about what these new third-party funding opportunities will look like.

Dead before dawn?

When Mr Carne responded to the Hansford Review last July, Network Rail also said a pipeline of projects set aside for third-party funding would be announced at the end of 2017.

“Transport unlocks homes and that’s the bottom line”

Matthew Carpen, Barking Riverside

This never materialised, with Mr Carne laying some of the blame at the door of Carillion’s dramatic collapse. “We have a list which we had planned to publish at the end of the year, but [we put] a little bit of a brake on that,” he said at the CP6 event. “It was important that we made sure the full impact of the current situation with Carillion is fully reflected on.”

Despite the delay, the private funding drive has not died before it could see the light of day, Mr Carne insisted.

The good news for the rail operator is it does not have to reinvent the wheel. As the public-private funding model described by Barking Riverside’s Mr Carpen demonstrates, the private sector can be persuaded to pay for a significant portion of an infrastructure project, given the right opportunity.

Third-party funding model

Barking Riverside Ltd was created in May 2016, a joint venture between  L&Q and the Greater London Authority to develop the 443 ha brownfield site that runs alongside a 2 km bank of the Thames.

“You can’t build more than 1,500 homes on this site unless you have planning consent for a railway. We got the planning consent in November last year,” Mr Carpen says.

The Barking Riverside project has been in development in some guise or other, under various partnerships, for almost a decade. Full realisation of the plan had been stalled since 2014 due to a lack of infrastructure funding, which the L&Q-GLA partnership has finally solved.

Work on the Overground rail extension is scheduled to begin at the end of this year, with the new Barking Riverside station expected to be operational by 2021. L&Q is contributing almost two-thirds (£172m) of the £263m budgeted for the project.

“It’s quite conceivable for rail infrastructure to be invested in and owned by people other than Network Rail”

Graham Cross, Heathrow Southern Railway

“Transport unlocks homes and that’s the bottom line,” Mr Carpen says. “In development viability models, there’s no reason why the private sector can’t say, ‘If we don’t build the station we could probably build 500 homes on this site, but if we do build the station, we could probably build 3,000’. Therefore, your margin is different and your costs are different and you can contribute something. Maybe not everything and maybe not even half, but something.”

Under the funding model, L&Q does not gain any ownership of rail assets – its long-term reward for heavy early investment is purely financial. “What L&Q have got is they’re able to build homes on this site and they’ve got an option to build out half of the homes – that’s where their investment is crystallised,” Mr Carpen continues. “They [provide funds for] a railway, they then get the money back when they sell the land and the homes are constructed.”

Third-party ownership model

Heathrow Southern Railway is a private sector venture with plans to build 13 km of new railway into Heathrow Terminal 5. The scheme offers a completely different funding and ownership model to Barking Riverside.

The new line will run adjacent to the M25 and link to Network Rail services via Chertsey. “We’re responding to the secretary of state’s transport policy, which says not every rail investment has to be organised by Network Rail and funded on the public books,” says Heathrow Southern Railway executive director Graham Cross. “It’s quite conceivable for rail infrastructure to be invested in and owned by people other than Network Rail.”

Barking Riverside indicative masterplan_London and Quadrant

Barking Riverside indicative masterplan_London and Quadrant

Barking Riverside masterplan

If the venture is successful, Heathrow Southern Railway would finance, build and own the new stretch of railway, which is expected to cost £1.3bn-£1.6bn and is scheduled to be operational in 2025.

“We would charge train operators who operate over it access charges, and that covers the financing costs and operating costs of the scheme,” Mr Cross says. “The scheme’s debt would not ever appear on the public sector balance sheet because it would be privately raised.”

Network Rail launched an “asset divestment programme” in 2015 after being made a public sector body the previous year, which came with borrowing restrictions and saw its £42bn debt moved onto the government’s balance sheet.

“It’s amazing how much money there is actually available to invest in the railway”

Mark Carne, Network Rail

Under these circumstances, new infrastructure that places no strain on its balance sheet would no doubt be very attractive. But fragmented rail lines, all operated by different operators, present a different kind of headache.

“[Heathrow Southern Railway] is a really good example of why you need a system operator, because each of these schemes assumes certain amounts of use of the network as a whole, and that’s the key part,” Mr Carne says.

“If you were to assume your Southern access train would come up and run into Paddington using the unused capacity that is going to be freed up by the Heathrow Express trains, then you might have a really exciting scheme.

“However, Great Western might say, ‘I could also use that same capacity to run a whole load more trains from Bristol, and if you ran more trains from Bristol that might have a higher economic value to the country as a whole than a few extra trains to Heathrow’. That’s why this is a notoriously difficult area and why the system operator role is so important,” Mr Carne adds.

Which route for Network Rail?

At this stage it’s unclear to what degree similar considerations elsewhere have stopped Network Rail announcing its pipeline of third-party financed schemes. Right now, the client is still locked at the consulting stage of this pipeline.

“With devolution we’ve got a business development director in every region and these business development directors are going out and talking to local authorities, communities and transport authorities and saying, ‘What do you want from the railway?’” Mr Carne says.

“It’s amazing how much money there is actually available to invest in the railway. I really believe there is a huge change in pace today as a result of the conversations we’re now having.”

What is clear however, is there are various models already in the market using private money to build new rail infrastructure. If this agenda is to be successful, it will depend on the suitability of the funding model selected for each individual project.

“It’s worked here under a certain set of conditions: two willing partners prepared to make long-term investment,” Barking Riverside’s Mr Carpen says. “I don’t think there is any one size that fits all. They tend to be bespoke depending on the conditions, the land ownership and the access to finance.

“If you haven’t got willing partners who are going to develop, then it’s not going to happen.”

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