Does the UK need a new deal to fund infrastructure investment?
Writing in Passenger Transport last month, Alistair Gordon, CEO of Keolis UK, discusses how the private sector has a growing role to play in the development of regional infrastructure. With transport investment a key target for many areas but the uncertainty of which regions will receive the necessary government funding holding them back, he proposes Public Private Partnerships as a way to encourage innovation, while controlling costs.
Today, more than ever, there is a resounding appreciation of the link between investing in transport infrastructure and delivering better social and economic outcomes. As a result, UK transport policy has dominated the political agenda over the last three years, both nationally - with the debate around HS2 - and more recently at a regional level with transport becoming a vanguard of the arguments for increased regional devolution.
For me, this was perhaps best summarised by comments made by Dr Jon Lamonte, Chief Executive of Transport for Greater Manchester, at the UK Light Rail conference in Nottingham earlier this year. He explained that for his city region, devolution was about gaining control of the ‘local levers’ that would allow it to make earlier interventions in key areas like health, employment and education. Transport, he said, was the enabler for all of the above and, as such, was a critical part of Manchester’s strategy to develop an integrated network that will support its local economic objectives.
I’m sure that’s a sentiment echoed by LEPs, cities and local authorities around the country. The political will to improve infrastructure is clearly there, but in a period of austerity what may be lacking is the financial muscle to make it happen.
To ensure progress is made there needs to be a new deal for upgrading and maintaining existing infrastructure and delivering new programmes and transit schemes.
Private sector investment
As economies recover around the world there is an increasing amount of private money available for investment. Institutional investors in particular are looking for projects that will deliver steady returns and the formation of the Long-term Infrastructure Investor’s Association (LTIIA) last year is a clear sign of growing opportunity.
The challenge for the UK, and other markets, is that experts say that while the appetite, and the money, is there from the private sector, the structure, intelligence and expertise to attract those investors, reassure them about risk and timeframes and manage that process is lacking. Having somewhat fallen out of fashion in the UK, Public Private Partnerships are gaining popularity across the world as an attractive method of gaining the kind of investment in infrastructure needed to improve transport. Just this summer, China introduced new private investment rules, which legal experts say will provide a greater level of investor protection, in an effort to promote private investment via PPP.
The model has also taken off in Australia and North America particularly to fund light rail schemes, with multiple PPPs being launched in both markets over the last four years. Keolis is active in both territories, in Australia as part of the GoldlinQ consortium that delivered the Gold Coast’s G-Link network under an 18-year PPP, and as part of the GrandLinq consortium delivering Waterloo’s Light Rail Transit in Canada.
PPPs could be a way forward for UK regions seeking to bring forward new transit schemes. The UK is a mature market in terms of PPPs, yet in the case of light rail - an increasingly in-demand mode - the majority of UK projects have been delivered via traditional public funding. The Nottingham Express Transit (NET) is a notable exception. Recognising that to wait for public funding may have placed its scheme at the back of a long queue behind Manchester and Birmingham, Nottingham opted for a PPP. The lessons from Nottingham don’t stop there.
While the PPP covered the financing of the project, the public sector still needed to solve the challenge of how to fund the scheme thereafter. Here Nottingham also took a new approach, introducing a workplace parking levy – applicable to employers with more than 11 parking spaces – which has contributed 35 per cent of the scheme’s funding so far, the rest coming via central government.
PPPs are beneficial for a number of reasons but not least because they encourage innovation and cost control. Having a scheme’s operator involved from the start in the design and construction process means decisions can be taken to ensure schemes will be as appealing as possible to the travelling public and can be future proofed, to a degree, to take into account likely changes in journey habits. The PPP model also incentivises the private sector to bring innovative thinking from the outset.
Of course PPPs do require a particular mindset from all those parties involved to make sensible commercial decisions over the allocation of risk, which can have a significant impact on the price.
There are alternatives to PPPs. Infrastructure owners and operators in both the UK and overseas have leveraged the value of their commercial real estate properties to raise funding, either via divestment and sale of assets or in developing space into rent generating properties. The most successful of these strategies often involves finding a private sector partner with the experience to make the most of those assets and development opportunities.
Whichever model the UK looks to, with transport investment a key target for many regions and a question mark remaining over where central government funding can be allocated, the private sector has a growing role to play in bringing forward the infrastructure the country needs to encourage regional growth.
This article originally appeared in Passenger Transport magazine on 28th August.