A major rethink of Network Rail’s structure and financing with more DBFO projects constructed by the private sector and even full scale privatisation of the organisation are options being considered by a team commissioned by Government to investigate the organisation.

Government  revealed in the Summer Budget that it has asked HS1 chief executive Nicola Shaw to advise on how it should approach the longer term future shape and financing of Network Rail.

Last week Shaw published a scoping report on the work – The future shape and financing of Network Rail – with firm recommendations to be published in Spring next year.

Structure of the organisation will drive the financing options, Shaw said, with the structure question “being considered through three distinct lenses or perspectives”:

• the customer perspective will consider who Network Rail’s direct (and potentially indirect) customers are, and how effectively the current organisational structure works to deliver for those customers;
• the devolution perspective will consider the question of the geographical organisation of Network Rail’s operations, and whether this enables effective delivery of railway infrastructure, especially given the continuing move to deeper and more widespread political devolution; and
• the growth perspective will ask whether Network Rail’s structure works to enable effective planning and delivery of enhancements to rail infrastructure, particularly with a view to meeting growth projections and increasing capacity.

 Alternative funding mechanisms are being considered to remove Network Rail’s reliance on direct public sector funding, “with different company structures likely to require different financing and funding solutions at various levels of Network Rail’s capital structure and/or for specific projects, to ensure sustainability and affordability” the report said.

It anticipates that “while government support is expected to remain an important component of the system, especially for enhancements of the network, the introduction of specific forms of private sector capital may facilitate risk transfer (albeit partial) away from government, as well as potentially reduce the upfront capital demand on the taxpayer.”

Solutions offered in the report are not meant to be mutually exclusive and several combinations may exist, the report explained

“For illustrative purposes, one scenario could be maintaining Network Rail as a public sector body, while separating out a route to be given in concession to private parties and financing specific infrastructure projects through a combination of private and public money.”

Looking at other sectors and/or countries, some examples of the alternative options include:

• full or partial privatisation at the parent company level by way of accessing the equity capital markets (e.g. National Grid, Royal Mail) or selling an equity stake to one/a consortium of investor(s);
• debt capital markets issuance at the parent company level, either in the form of unsupported debt (e.g. National Grid), or with an explicit government guarantee (as per the past Network Rail model and ÖBB in Austria), or as debt benefiting from public status of the company (e.g. Infrabel in Belgium);
• monetisation of non-core assets, e.g. property, depots, car parks, etc.;
• sale or other contractual arrangements on a specific part of the infrastructure e.g. concessions as per the High Speed 1 and Tours-Bordeaux high speed train line, where the concessionaire is given the right to operate certain assets for a given timeframe, providing a revenue stream against a capital receipt for the party granting the concession;
• part funding from other local/devolved governments, particularly for the funding of specific projects (e.g. the £3.5m Pye Corner station in Newport in which the UK government’s New Station Fund provided £2.15m towards the cost, the Welsh Government funded the rest);
• joint ventures and other types of private or private and public sector partnerships to develop and build assets and then either operate them under concession for a number of years (e.g. GSM-R in France) or transfer them on to Network Rail. These partnerships may involve developers as well as financial parties and potentially the setup of special purpose vehicles (e.g. Thames Tideway Tunnel);
• levies/other forms of arrangement, whereby businesses contribute to the cost of infrastructure they benefit from (e.g. through business rates, where reforms announced recently would give some metropolitan areas a capped power to increase business rates to fund infrastructure, with the support of the local business community; and the Community Infrastructure Levy currently used by – among others – Transport for London to part fund Crossrail); and
• other arrangements to raise finance against long term revenues (fares) to pay for capital investment.

 “I am grateful to all those who have already given me their thoughts and views and who have taken time to think through the options for the future,” Shaw said in the report introduction. “From those conversations, despite the wide range of perspectives, there appears to be genuine consensus that:

• the way we do long term planning for rail could be improved – in a variety of ways;
• he processes we have in a number of areas are frustrating and time consuming and could be considerably slicker and more effective; and
• there is a concern that, even if the rail industry is extremely efficient, the funds required for investment in rail infrastructure won’t be available in future because of the changes to Network Rail’s finances now that its debt is part of the government balance sheet.”

“However, there isn’t, yet, consensus about how these shared concerns could be dealt with. I look forward to more conversations on these points and others.”

Commenting on the Shaw Report TUC General Secretary Frances O’Grady said: “The future of Network Rail is of key importance not only for commuters and rail industry workers, but for our national infrastructure too.

“Network Rail must remain a public body that – looking ahead – sits at the heart of a safe, integrated, publicly-owned railway system.

“We are pleased that today’s report recognises the TUC’s call for unions to be more involved in the future of our railways.

“Our message to policymakers is clear – we would warn against a return to the days of privatised rail infrastructure which resulted in years of under-investment. The last thing the travelling public needs is more fragmentation of our rail network and more money being siphoned off to shareholders.

“Taxpayers and passengers deserve a more sustainable approach to delivering 21st century rail travel.”