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£60billion investment in rail over the next 10 years has to be good news – even though a lot of it is already spoken for.
When labour were in opposition I rated John Prescott. Transport for him was a personal thing, not a passing portfolio. His ideas on bringing in private sector investment to British Rail were ahead of their time, not to mention the Treasury's thinking.
In power he became Deputy Prime Minister and kept Transport in a new super ministry created specially for the man political observers saw as New Labour's link with Old Labour. Subsequently , this column has seen him a huge disappointment, culminating in the despicable way he handled the immediate aftermath of the Ladbroke Grove accident.
But what I overlooked was the fact that a one time ship's steward doesn't rise to be Deputy Prime Minister in a cabinet full of toffs, as he might put it, without being a shrewd political operator. And the Ten year transport plan unveiled on 20 July showed that when it came to fighting transport's corner with the Treasury John Prescott had finally arm wrestled his weight.
Making the announcement he reverted to type, trumpeting ‘£60billion for a bigger, better, safer railway – the biggest investment in railways for generations'. But when you break it down (Table 1), the money the Government is bringing to the party is under half that headline figure.
This is emphasised in Chart 1, where only the ‘blue' (subsidy) and ‘red' money (public investment) is underwritten. The ‘green' money is private sector investment which the private sector may or may not stump up.
So you can see that from 2007 onwards, the taxpayer's contribution to the railways will be back to the levels of 1994, when subsidy doubled to pay track access charges and train leasing costs. It is also worth remembering that pre 1994, the year when Railtrack was separated, ‘public' investment by BR was borrowed and not a grant.
There is a further caveat before you break out the champagne. While total spend peaks at around £7billion a year for four successive years, much of the guaranteed ‘red' money will be going on projects already planned, or even, in the case of the West Coast Route Modernisation, on a serious cost overrun. Table 3 lists these projects.
Table 1 and Chart 1 do not cover transport in London which has its own budget. With the short listed PPP consortia still bidding, commercial confidentiality means that the Government's spending figures in the Ten year plan do not include the on-going grant for London Underground. But, in broad numbers, under the PPP, the private sector will be responsible for around £8million of renewals and £5billon of maintenance over the next 15 years.
Non Underground spending in London , includes similar double counting to the main line network project lists. The current Docklands Light Rail City Airport extension and the completion of Thameslink 2000 are included. Definitely new is the possibility of a new east-west link ‘such as CrossRail', costed at £3.2bn and funded by the private sector.
Prescott 's welcome volte face on light rail also benefits London , with ‘at least two tram/guided bus schemes'.
| Source | £bn |
| Public investment | 14.7 |
| Private investment | 34.3 |
| Total investment | 49.1 |
| Public resource* | 11.3 |
| Total spend | 60.4 |
*Public resource includes public sector administration costs, passenger and freight support and grants.
Source DETR
| Passenger enhancement and renewals | £38billion |
| New and replacement rolling stock | £7billion |
| Freight infrastructure and rolling stock | £4billion |
Source DETR
*Completion of Channel Tunnel Rail Link Phase 2 * Upgrading of East Coast Main Line, including London-Edinburgh journey time of 3hr 30min *Modernisation of West Coast Main Line *Upgrading of Great Western Main line including reduced journey times *Completion of Thameslink 2000 and construction of East London Line Extensions *Other capacity enhancements (London-Brighton, Chiltern, Trans-Pennine quoted) *Gauge and capacity enhancements on freight routes to major ports ‘such as Felixstowe' and to the Channel Tunnel. *opening up bottlenecks ( West Midlands and ‘ Manchester commuter area' quoted) *Installation of the Train Protection & Warning System and full automatic Train Protection on the high speed passenger network. *Up to 6,000 new passenger vehicles *Station improvements |
Source: DETR
Differentiating new money from old in Table 3 is important. The West Coast and East Coast Main Line schemes are both old, as is Thameslink 2000 to which Railtrack signed up before it could be privatised five years ago.
Installation of the Train Protection & Warning System is funded and under way. The ‘6,000 new vehicles' includes the 2,000 already ordered and the 1,000 or so for Mk 1 stock replacement.
At first sight the Channel Tunnel Rail Link Phase 2 comes under the ‘expected but we'll need more money' category. However, the Railway forum thought it spotted an anomaly and followed it up with the DETR.
It appears that the £5billion is not new money to complete Phase 2 into St Pancras. It is really the current value of the £1.8billion grant for the full route announced when the scheme was privatised.
Since the £1.8billion was at 1995 prices and discounted back to a Net Present Value, it now represents £5billion. Clever people accountants. Lord knows what the cost of Thameslink has inflated to.
Great Western Main Line upgrade is ‘new' in money terms, although it is listed in Railtrack's Network Management Statement as one of the major schemes over the next 10 years..
But this should not obscure John Prescott's two major achievements. First, he has persuaded the Treasury of the necessity of directly funding infrastructure investment, even if it is not all new.
True the Chancellor's £14.7billion will soon be swallowed up. Apart from the £5billion on CTRL, a further £4billion will be taken up by capital payments towards renewal schemes, ‘notably the WCML'. But that still leaves the Shadow Strategic Rail Authority's new £7billion Rail Modernisation Fund.
These components total £16billion not £14.7billion, but the additional £1.7billion is probably just random noise in the rounding up.
Let's run through these billion munching categories.
In last month's column we left the Regulator wrestling with the challenge of how much of the West Coast Route Modernisation (WCRM) cost over-run he would let Railtrack recoup over the next five years. Now, after you and I, dear readers, have destroyed millions of brain cells understanding the Regulator's labyrinthine reasoning, John Prescott has decided to cut out the middle men, in the form of the West Coast Train Operating Companies and their track access charges, and slip Railtrack the occasional fiver-filled brown envelope.
Like so much else, the actual payment mechanism is still to be decided, but will clearly rely heavily on the Rail Regulator's current consultation.
For example, you will recall from last month that the Regulator said that the £730million overspend on the WCRM in the current control period is Railtrack's problem.
Transport 2010 agrees that the ‘significant additional renewals costs' already incurred by Railtrack, ‘will not be remunerated'. However, according to the Government ‘because of the exceptional nature' of the WCRM direct payment will cover the ‘further substantial sums' to be spent over the next five years.
Naturally I quizzed the DETR civil servants on the payment process. One said, ‘How we ensure that Railtrack delivers to cost and to time is difficult'. But ‘Something along the lines of the Channel Tunnel Rail Link' is one option.
While the Government is ‘waiting for Tom', Tom is ready to tell them how much it will cost. He told the Commons Transport Sub-committee that the WCRM cost over-run was a ‘remarkable increase and we are looking at it very closely'.
Coming close to hubris he added that while Railtrack had told him of the decision to revert to conventional signalling ‘the decision as to what the cost of that change will be is mine'. Later he added that if the cost of another project became an issue ‘I will attach prices to it'.
This sounds like Commissar Winsor telling Westinghouse how much SSI modules will cost under the government's glorious five year plan. What I think he means is that he will determine how much of a cost over run he considers justifies Government funding. Well, I hope so, although he did tell that Committee ‘This lawyer knows a lot about fish plates'.
Sorry, I digress. The real gain is the £7billion Rail Modernisation fund which should be worth much more since it is intended to act an investment multiplier.
SSRA Chairman Sir Alastair Morton call it ‘patient capital' which is intended to complement private investment by Railtrack, Train Operating Companies and other funders. It will be used to ‘lever in' private sector capital through more public private partnerships.
Sir Alastair emphasises that his patient capital ‘is not a grant - it will earn returns'. He sees it supporting ‘viable but long term investment' over a longer period than market finance will cover
Which brings us to the private sector.
Since privatisation Modern Railways has become required reading in the City, creating a whole new sub-network of Informed Sources. And the bad news is that, unless you are a Rolling Stock Company railway investment is still seen as risky. Recent experience suggests that getting authorisation for even quite minor investment is as hard, if not harder, than ever.
Assets are one problem. Railtrack has the most assets, but the value of these assets (the Regulatory Asset Base or RAB) and the return they can earn in access charges is determined by the Regulator. More on that next month
But the amount Railtrack can borrow is determined by its ability to pay the interest from its track access charges. And under the covenant with it's bankers Railtrack's EBIT (a financial acronym for once, it stands for Earnings Before Interest and Tax)has to be at least 2.25 times the total interest payable less interest due.
As you can see from Chart 2, Railtrack runs out of interest cover sometime next year, if its earnings don't increase. Which makes the current periodic review of track access charges (see last month's column) pretty critical.
Railtrack has committed to £8billion investment over the 2001-06 Control Period which the Regulator seems prepared to fund, (see the news pages for the latest figures). Say the same again for the following five years and that leaves £18.3 billion out of the £34.3million for the other private sector sources to provide.
Of course, not all of this £18.3billion is down to infrastructure. On the DETR's figures, there is around £7billion to be found for new rolling stock of which £3billion is already committed.
But my chums in the ROSCOs reckon we are going to need between 8,000 (HSBC) and 10,000 (Angel) genuinely new vehicles over the next 10 years to cover replacement and growth. So let's say a conservative £7.3billion of new investment in rolling stock to simplify the maths.
This leaves £11billion outstanding, so Sir Alastair's ‘patient capable' is going to have a leverage ratio of about 1.5 to 1. Sounds feasible
Overall, the Railway's dominate private sector transport investment in the Ten year plan. Total public spending on transport over the next 10 years is estimated at £132billion. Of this, private sector investment at £56billion and of that the railways have to find 60%.
Willy Rickett, the Civil Servant who heads the Integrated Transport Task force told the Commons Transport sub-committee that 40% of the £56million ‘was committed, some under contract'. He said that the remainder was a ‘conservative estimate based on rising passenger forecasts'.
Are yes, rising ridership. The DETR reckons that 60% of the investment in capacity needed to deliver increased rail passenger ridership will be funded from fare revenue as passenger numbers rise, despite regulated fares continuing to fall by 1% a year. The remaining 40% is covered by a mix of capital support from the Rail Modernisation Fund and revenue support payments.
Which brings us to John Prescott's second achievement. First time round franchising assumed that the dynamic thrusting private sector entrepreneurs, like Prism and MTL, would strip out costs from the inefficient railway. This would allow twice the subsidy BR received to reduce year by year.
Hence the much vaunted falling subsidy profile. In fact, ATOC figures show that the fall in subsidy has been exactly offset by the increase in revenue, to the benefit of the Treasury.
The the TOCs total income – revenue plus subsidy, has remained sensibly constant. Prescott has persuaded the Treasury that subsidy should decline no more and be held at current levels.
Chart 3 compares the old and new subsidy profiles. The SSRA and DETR profiles diverge after 1997, because the DETR ‘Public resource' expenditure includes some additional items, such as public sector administration costs. But as you can see, the decline has will now be levelled off.
How this is to be implemented is another of the imponderables in the Ten year plan. Some, quite a lot in my view, will go to pay higher subsidies as the price for stiffer performance targets in the replacement franchises.
This begs the question is how franchise premium payments in the 15 year franchises will be handled. For example, if Virgin doubles its ridership on the West Coast by 2012, the premium in that year will be equivalent to a tax on ticket prices of £10 a head.
So overall, two cheers for John Prescott, and a fascinating time ahead as the pound notes are converted into hardware, projects and services. It is just a pity that we don't have a proper integrated railway to spend the money.