Future Network Rail Investment

[yorksrob]

I suppose the plus side is that even if the financing mechanism does disappear up its own backside, at least we'll still be left with some additional infrastructure.

 

[Elecman]

Since it will be virtually the same larger contracting groups that will do the work as do it today under NR contracts of the various forms then costs will NEVER reduce. The only form of contract that delivered to time and gist was the Stafford Alliance

 

[coppercapped]

By initiating a root and branch investigation of the causes of all recent cost overruns, and of the causes of the rise in costs in areas where expenditure is growing rapidly - and then based on the findings of that investigation start implementing mentions to contain those costs, from the bottom up.

Don't just hive the whole thing off the private sector believing they will wave a magic wand and make it all right again.

It is clear that you have not understood the report. Nowhere is it suggested that NR should be hived off the private sector. The report is all about attracting additional funding into the railways.

Persuade the Treasury that additional spending is worthwhile.
The private sector isn't interested in transport infrastructure, it is interested in making money.
And the only way to make the returns the private sector wants is by trading a little up front capital investment for massive long term liabilities that will be loaded onto the taxpayer so the Chancellor can mislead the public about the state of the public finances.
Private sector money paid for in the future by the public sector is public sector borrowing - just this way around (you, I) the public have to pay more for it.

I am upset because this is simply more PFI style nonsense being loaded onto one of the few areas in the public sector that has largely escaped it.

Again, you have not understood the reason for the Hansford Review.

You write "Persuade the Treasury that additional spending is worthwhile." At the moment, and certainly for the next ten years - THIS WILL NOT HAPPEN. Network Rail has overspent vast amounts of money and underdelivered on an audacious scale. Remind me - how late is the Great Western Electrification and EGIP, to name just two projects? By how much have the costs increased?

Any credence Network Rail might have had with the Treasury has been comprehensively blown. Until it can show that it can design, plan and deliver projects to schedule and to an economic cost there will be no additional funding above that which has already been agreed.

And your remark about the private sector and infrastructure is a nonsense. Of course the private sector in interested in profit - it is what ensures that the company is still there next year. The difficulty in getting the private sector to invest in rail infrastructure, which will be operated by a nationalised business, is due to the difficulty in aligning the interests of each of the parties in areas such as ownership, risk transfer, accounting and legal issues. These are difficult but not insurmountable - and the answer is not necessarily a PFI contract.

 

[HSTEd]

It is clear that you have not understood the report. Nowhere is it suggested that NR should be hived off the private sector. The report is all about attracting additional funding into the railways.

[cynical thinking]
And if they succeed, it will then likely be used as a reason for the Treasury to cut railway funding further. Forcing the use of more private sector funding, causing railway funding to be cut further until all public support is eliminated.

At least for the first years before the weight of comparatively usurious interest rates forces it into Railtrack esque death spiral.
The government will then step in and guarantee all the debt, loading it onto the taxpayer, and the cycle will begin again.
[/cynical thinking]

You write "Persuade the Treasury that additional spending is worthwhile." At the moment, and certainly for the next ten years - THIS WILL NOT HAPPEN. Network Rail has overspent vast amounts of money and underdelivered on an audacious scale. Remind me - how late is the Great Western Electrification and EGIP, to name just two projects? By how much have the costs increased?

Any credence Network Rail might have had with the Treasury has been comprehensively blown. Until it can show that it can design, plan and deliver projects to schedule and to an economic cost there will be no additional funding above that which has already been agreed.

And so your answer is to essentially go to the, figurative, loan sharks?
ANd how will use private funding make Network Rail better at running projects?

Maybe we should get on with actually improving Network Rail's ability to manage, rather than desperately trying to find more money to allow things to continue as they are.

And your remark about the private sector and infrastructure is a nonsense. Of course the private sector in interested in profit - it is what ensures that the company is still there next year. The difficulty in getting the private sector to invest in rail infrastructure, which will be operated by a nationalised business, is due to the difficulty in aligning the interests of each of the parties in areas such as ownership, risk transfer, accounting and legal issues. These are difficult but not insurmountable - and the answer is not necessarily a PFI contract.

I never suggested the private sector being interested in profit was a negative - that is simply a statement of fact. The market is an entirely amoral actor, that is the way it is. Companies will scruples or political agendas are inevitably outcompeted and crushed by those without them in long run.

The interest rate on 30-year Government Bonds is 1.73%.
Will the private funder be willing to invest at that interest rate?
If they are not, the public is worse off for pursuing a contract with them. [And they won't be - based on Hinkley Point calculations a more typical private sector venture capital return rate is 9%]

If you think they can contribute to improvements in project management, then sure, hire them.
But don't expect to obtain funding from them at a useful rate for a government backed institution.

 

[daccer]

With interest rates at historical low levels any 'normal' business with a high capital requirement would look this as being a good opportunity to load up on debt and invest now. Network Rail have shot their bolt in this regard having ran up massive debts previously which have now been transferred onto the public ledger.

We are fast approaching the end of the current CP and many large projects will be reaching completion in 2018. I believe strongly that the govt will look at HS2 spending and decide the traditional network has had more than enough investment in the last two CP's. If there is a desire to cut the railways overall cost the only real opportunity lies in NR's capital expenditure programme. I cant think of one single large project that NR could say is a necessity in the next CP especially if growth does slow. If they bring private money in then this will be at a cost and in he post-brexit world private capital in the UK is going to be priced at a higher price due to the implied risk of investing into a country outside of the EU. This may change once the exit happens but until then capital will be more expensive and I cant see NR being able to attract that much unless they are prepared to commit to higher levels of return.

 

[squizzler]

I am enjoying this debate but feel willing to chip in with my 2p worth.

I have had a brief scan through the Hansford Review and initial impression it seems more readable to a layperson like myself than a lot of these reports which bodes well for its findings. It may seem trivial but if the idea is good it is usually easier (or desirable) for the authors to communicate it in a concise report. Anyhow I digress.

[cynical thinking]
And if they succeed, it will then likely be used as a reason for the Treasury to cut railway funding further. Forcing the use of more private sector funding, causing railway funding to be cut further until all public support is eliminated.

The form of government support might change over time which may not be a bad thing. There are arguments for government support to focus on the desired service not the infrastructure.

At least for the first years before the weight of comparatively usurious interest rates forces it into Railtrack esque death spiral.
The government will then step in and guarantee all the debt, loading it onto the taxpayer, and the cycle will begin again.
[/cynical thinking]

And so your answer is to essentially go to the, figurative, loan sharks?
ANd how will use private funding make Network Rail better at running projects?

These loan sharks are probably the pension funds looking after your money for retirement. These institutions are typically ones that prefer safe long term investments to park their investors cash.

Maybe we should get on with actually improving Network Rail's ability to manage, rather than desperately trying to find more money to allow things to continue as they are.

I never suggested the private sector being interested in profit was a negative - that is simply a statement of fact. The market is an entirely amoral actor, that is the way it is. Companies will scruples or political agendas are inevitably outcompeted and crushed by those without them in long run.

The interest rate on 30-year Government Bonds is 1.73%.
Will the private funder be willing to invest at that interest rate?
If they are not, the public is worse off for pursuing a contract with them. [And they won't be - based on Hinkley Point calculations a more typical private sector venture capital return rate is 9%]

Railways are very different from atomic power stations (huge risk to price in). Network rail, for all their faults, have in house engineering skills so are better positioned, IMO, to act as informed buyer than local authorities and NHS trusts when it came to PFI schools and hospitals. In fact they are beyond informed buyer, more like rival bidder too

If you think they can contribute to improvements in project management, then sure, hire them.
But don't expect to obtain funding from them at a useful rate for a government backed institution.

Government backed institutions are typically those that best able to obtain money at "useful" rates. If I might be permitted to say, I am optimistic about this as a means to throw off the yoke of central government funding control under which Network Rail has suffered since 2014 when its debt was nationalised. I am delighted the business has apparently developed a "can-do" mindset . I think this corner was turned with Mark Carne at the helm well before the electrification schemes were pulled this summer, and future partnership with private resources will give the modernisation programme a second wind.

 

[InTheEastMids]

These loan sharks are probably the pension funds looking after your money for retirement. These institutions are typically ones that prefer safe long term investments to park their investors cash.

Railways are very different from atomic power stations (huge risk to price in).

If we're going to make comparisons between electricity and rail networks, then 3.75% is a good starting point for rate of returns - it's what Ofgem reckon the GB networks are getting - that's a weighted average of debt and equity, for pure debt it was thought to be 2.55%.

In actual monetary terms, the difference between 2.55 and UK Govt costs starts to get much less significant . However, as an investor I'd see a NR project as being riskier than a power network (see electrification), and that needs pricing in. However, if they get the financing right, then the WACC can come right down as investors get happier. This has happened in offshore wind power, and is a big reason why its cost has been falling (whilst nuclear tends to go the other way).

The other analogy that's worth making with electricity networks is that in Ofgem's regulation, there is a form of competition between the different monopolies in terms of comparative performance. Secondly, independent DNOs also mean there is competition for new network assets. I think the way things are going, both of these will happen in the rail industry.

I also think Bimodes could actually help electrification in this world. Because instead of having to make one big decision about e.g. Kettering to Sheffield, you can do it in lots of small bits. This reduces risk and helps make it easier to invest - thinking of an entire scheme, it basically brings forward returns, whilst giving the opportunity to defer capital investment.

 

[Elecman]

I also think Bimodes could actually help electrification in this world. Because instead of having to make one big decision about e.g. Kettering to Sheffield, you can do it in lots of small bits. This reduces risk and helps make it easier to invest - thinking of an entire scheme, it basically brings forward returns, whilst giving the opportunity to defer capital investment.

Until you get to the point of needing a Grid Feeder when the cost of that will kill off any further extension

 

[GRALISTAIR]

There are arguments for government support to focus on the desired service not the infrastructure.

In effect a market led solution not an engineering one. Learning the lessons of history, it can be argued this is what saved the railways.

Engineering led- APT fiasco

Market led -well we can give you in under 2 years a diesel train that will do 125mph conservatively with braking etc and give you fast sleek journeys with very little investment in raising bridges etc etc etc ............. .

IC125 HSTs

 

[edwin_m]

In effect a market led solution not an engineering one. Learning the lessons of history, it can be argued this is what saved the railways.

Engineering led- APT fiasco

Market led -well we can give you in under 2 years a diesel train that will do 125mph conservatively with braking etc and give you fast sleek journeys with very little investment in raising bridges etc etc etc ............. .

IC125 HSTs

I'd suggest that both were engineering led, but one was from a set of engineers with little railway background wanting to bring in new ideas and the other was produced by traditional railway engineers.

 

[YorkshireBear]

I'd suggest that both were engineering led, but one was from a set of engineers with little railway background wanting to bring in new ideas and the other was produced by traditional railway engineers.

This.

 

[DarloRich]

I take some the points above but maintain I can not see, on a traditional railway construction project, how an adequate return will be made for an investor in an adequate time.

I suppose the plus side is that even if the financing mechanism does disappear up its own backside, at least we'll still be left with some additional infrastructure.

expensive infrastructure that the public have paid over the odds to buy out of the pfi style contract? However that is a bill for the next government so doesn't register as an issue today.

I'd suggest that both were engineering led, but one was from a set of engineers with little railway background wanting to bring in new ideas and the other was produced by traditional railway engineers.

correct.

 

[GRALISTAIR]

In effect a market led solution not an engineering one. Learning the lessons of history, it can be argued this is what saved the railways.
Engineering led- APT fiasco

Market led -well we can give you in under 2 years a diesel train that will do 125mph conservatively with braking etc and give you fast sleek journeys with very little investment in raising bridges etc etc etc ............. .

IC125 HSTs

I'd suggest that both were engineering led, but one was from a set of engineers with little railway background wanting to bring in new ideas and the other was produced by traditional railway engineers.

This.

correct.

https://www.youtube.com/watch?v=VvsIYaRmRAM

I was getting my info from this very famous documentary in railway annals. It starts at 5.04 - talks about the market led at 5.30 , key bits at 5.55 to 6.20 and then mentions engineering led APT fiasco at 6.30.

I maintain there are parallels with Electrification vs Bi-Modes

BTW as an aside - even features Rodger Ford later on a few times.

 

[Olaf]

Where does the profit come from? Who is expected to maintain the new line going forward? How is that paid for?

.

A lot of investment funds are looking for high quality assets that have a relatively good retention value for classes of investments. They do not need a high yield, and in many cases anything that meets the requirements for retention of value and which pays a positive yield is better than a bond investment; it is all very topical at the moment with many funds pulling out bonds.

 

[Olaf]

With interest rates at historical low levels any 'normal' business with a high capital requirement would look this as being a good opportunity to load up on debt and invest now. Network Rail have shot their bolt in this regard having ran up massive debts previously which have now been transferred onto the public ledger.

We are fast approaching the end of the current CP and many large projects will be reaching completion in 2018. I believe strongly that the govt will look at HS2 spending and decide the traditional network has had more than enough investment in the last two CP's. ...

The announcements on the way forward are imminent.

There is a lot of infrastructure work that could still be done on the classic railways but until someone is able to get Network Rail and the industry into shape - i.e. establish a high degree of confidence in it's ability to deliver to time and budget - there may be a bit of an a hiatus in capital expenditure.

There are also issues with the over-spend/non-delivery of about GBP 4 Billion this CP, pressing demands from other Departments such as Defence and Health, and a need to re-balance investment towards the trunk road network.

 

[InTheEastMids]

Until you get to the point of needing a Grid Feeder when the cost of that will kill off any further extension

I don't know how much a 400/25 kV substation for rail use costs, but struggle to believe it'd be much more than the £25M - assuming this PR from Dong Energy is accurate, as this will handle a 1200 MW wind farm. In the context of the £Billions NR seem to have spaffed on Great Western, it seems like relatively small beer?

Link

And I understand the Braybrooke substation will still be built to power up Corby (happy to be corrected if it has actually been cancelled). This bit of kit could allow electrification to creep a significant distance North of Kettering . Not that I think this will actually happen in anything but the long-term. To drag my post back on topic, I don't think investors would understand the risks yet, especially with policy going the other way, so doesn't look like a realistic investment.

 

[D365]

I maintain there are parallels with Electrification vs Bi-Modes

In no way does the electrification vs bi-mode situation parallel the APT. What the Class 800s were designed to do is to run the bulk of their journey under OHLE. Where the train then diverges from the mainline onto a non-electrified branch, the journey can be finished on diesel.

When the government (read: Chris Grayling) recently latched on to this they thought, hey presto, we've saved the electrification cock-up!

Except they haven't. The Class 800s have not been designed to run mainline under diesel. This means more money thrown away to rework the contract with Agility Trains, which over 30 years of cancelled electrification, is going to be a lot of waste.

And the Tories are the ones who screwed it up in the first place.

Absolute pants.

 

[squizzler]

I see the Rail Engineer has produced a brief article on the Hansford Review.

Route devolution is central to the report’s recommendations, which points to a transition away from the traditional hub and spoke contracting approach used by Network Rail Infrastructure Projects (IP), although Prof Hansford believes that there would still be a need for a centralised IP even with empowered routes.

Is this similar to the relationship between BREL and British Rail's business sectors for rolling stock back in the day?

The response to Prof Hansford’s review was immediate. Network Rail has already announced a series of reforms that address many of the review’s recommendations. These include publishing regular updates on upcoming opportunities, demonstrating flexibility around standards and drawing up a service level agreement. Prof Hansford believes Network Rail has even gone beyond his recommendations in places. In particular, Network Rail plans to launch a reward scheme that would see it share the profits of innovation with private-sector partners.

We rail supporters should all be excited about this. Already there is the deal between Resonate and the Western route to improve capacity on the GWR through TMS. I genuinely think it portents a "can-do" mindset - backed up with in-house technical savvy - that we won't have seen since privatisation.

 

[Olaf]

...
When the government (read: Chris Grayling) recently latched on to this they thought, hey presto, we've saved the electrification cock-up!
...

I don't think you can attach any blame to Chris Grayling for making the decision - this was recognised long ago as the option going forward if NR failed to deliver. Grayling is the one that had to bite the bullet.

 

[Olaf]

...
Is this similar to the relationship between BREL and British Rail's business sectors for rolling stock back in the day?
...

It is a move towards something similar to what is known as "Shared Services", but with devolution of procurement (and perhaps other activities) to Route Mangers for maintenance and other specific contracts.

 

[CapitalStar378]

I don't think you can attach any blame to Chris Grayling for making the decision - this was recognised long ago as the option going forward if NR failed to deliver. Grayling is the one that had to bite the bullet.

I think it's important to remember that Grayling is a petty, politically motivated transport secretary who has avoided making decisions that could improve services for political tit for tat. T*at!

 

[Olaf]

I think it's important to remember that Grayling is a petty, politically motivated transport secretary who has avoided making decisions that could improve services for political tit for tat. T*at!

I think you do not know enough about him, his actions or the decisions he has had to make if that is the conclusion you come to.

The Minister is going to be making some tough decisions that will affect the railway in the medium to long term so you may want to keep your powder dry until the bad news is out.

 

[DarloRich]

I think you do not know enough about him, his actions or the decisions he has had to make if that is the conclusion you come to.

The Minister is going to be making some tough decisions that will affect the railway in the medium to long term so you may want to keep your powder dry until the bad news is out.

he is a Tory so it is best to get in now with your criticism. Just assume they are out to screw you. It saves time later.

 

[snowball]

When Grayling was at Justice he was the worst minister of anything in any government in recent decades.

 

[markydh]

So much so that nearly everything he did had to be undone by his replacement! He's the most inept member of the cabinet, and that's saying something...

 

[Olaf]

he is a Tory so it is best to get in now with your criticism. Just assume they are out to screw you. It saves time later.

Unlike Labour who is out to screw everyone making a living for themselves and not relying on others to do it for them.

 

[Olaf]

Well he will shortly be making a few more decisions for you to moan about and live with.

 

[159]

Clapham jct, being a major station, home to 3 tocs and a hotspot for delays, should come into nr control and receive investment

 

[Bald Rick]

Clapham jct, being a major station, home to 3 tocs and a hotspot for delays, should come into nr control and receive investment

But it is going to NR, isn't it?

 

[squizzler]

Well he will shortly be making a few more decisions for you to moan about and live with.

Oh do please tell, the suspense is killing me. You are apparently in the know so please spill the beans...

Anyhow that is rather the point of the Hansford Review isn't it - to liberate NR from the feast and famine nature of government driven capital investment?