Recommendation 10

HM Government Acknowledged

The Government agrees that credible visibility is essential for both the supply chain and private investors, and that rail should remain a sector which welcomes private capital and innovation alongside public investment. The Government also recognises the increasingly important role played by Devolved Administrations, Mayoral Combined Authorities and local partners in shaping and co-funding rail investment, especially considering the significant local funding provided to city regions for transport at the recent Spending Review. Many rail enhancements are inherently local or regional in nature, and their successful delivery depends on effective alignment between national strategic objectives and local priorities. It is important to be clear that private capital has long played, and will continue to play, a role in rail. This is consistent with what the Government’s10-year Infrastructure Strategy envisages: using government certainty to crowd in private investment where it delivers better value, transfers real risk and accelerates regeneration around stations. We will do that through the new delivery institutions, including the National Infrastructure and Service Transformation Authority (NISTA) and the National Wealth Fund, which are there to blend public and private finance and give investors clearer pipelines. In considering the role of the private sector, it is important to distinguish clearly between the different ways in which it can contribute to rail investment. In particular, there is a key distinction between private finance, where the private sector covers the initial cost of an asset and is repaid over time with a return (for example through rolling stock leasing arrangements), and private funding, where third parties make direct contributions to the ultimate funding of transport infrastructure. Private finance has seen more limited application in rail infrastructure, reflecting the conditions under which it represents value for money for the taxpayer. For Government, the use of private finance should aim to achieve sufficient transfer of control and risk, deliver risk-transfer benefits that outweigh higher financing costs, and be capable of being managed alongside the operational and safety requirements of a live railway. In practice, a key condition for the use of private finance in rail infrastructure is that sufficient risk and control are transferred to the private sector to support off-balance-sheet treatment for the public sector. Where these tests are not met, private finance is unlikely to be attractive for Government or provide value for taxpayers. The key aspect on value for money is whether the added value of the private sector can be quantified and offsets the additional cost of private finance, while the balance sheet treatment plays an important role in affordability considerations. While there is often strong market interest in financing rail infrastructure, experience shows that for long-life, single purpose assets with limited alternative use, the scope for genuine long-term transfer of risk and control is more constrained. In such cases, financing structures that appear to transfer risk at contract signature can, over time, revert risk and cost to the public sector, particularly where assets directly impact the public balance sheet. This reinforces the importance of applying a rigorous value for money and affordability assessment, as well as considering issues over long term control, at an early stage when considering any use of private finance. Experience suggests that private finance works best where assets are large enough to justify the costs of structuring, are new rather than subject to latent defect risk, are relatively stable in scope, and are sufficiently separable to allow risks to be clearly allocated and private sector performance to be held to account. One example of this is the new Euston HS2 Station, where Government is currently considering the use of a public-private partnership, looking for the private sector to design, build, finance and maintain the new station asset, subject to risk transfer and value for money. By contrast, private funding, or Alternative Sources of Funding (ASF), involves contributions towards transport infrastructure from sources other than traditional public funding routes, including central government budgets agreed through Spending Reviews and farebox revenues. In many cases there may be multiple third parties who benefit from a particular project, and attracting private funding requires early identification of the relevant beneficiaries and the mechanisms through which they can contribute. Against this background, historically, the largest concentration of private finance in the rail sector has been in the rolling stock market. The established rolling stock leasing model has supported substantial private investment in new fleets and in associated infrastructure such as depots and stabling facilities. This investment has supported larg