Fast Forward – Funding Report Delivery of High Speed Rail in Britain February 2010 Contents

Introduction 1 Overview of High Speed Rail 2 Scope of High Speed Rail 4 Summary of key risks 5 Structure of the project delivery organisations 7 Funding sources 10 HSR delivery and financing structure: illustrative model 14 Conclusion 23 Appendices 24 Contacts 36 Introduction

This summary report on the delivery We have described an illustrative of High Speed Rail (HSR) in delivery and financing structure for a Britain has been prepared by single corridor, -Birmingham- PricewaterhouseCoopers LLP (PwC) Manchester, the first stage of the on behalf of . proposed high speed North West Scheme. This can also be used as a The report covers: model for the financing of subsequent corridors. However, the benefits of n commercial and organisational economies of scale and increased issues; understanding of risk might reduce n contractual mechanisms including the average cost to the public sector risk allocation; and lead to modifications to the structure for these later corridors. n funding and financing sources; and

n an illustrative structure for the This report makes a fundamental delivery and operation of HSR. assumption that delivery of HSR could not be funded solely from It describes the work carried out by its own revenue and therefore PwC for Greengauge 21’s HSR substantial Government involvement development programme, as reported will be required. Despite the current in ‘Fast Forward – a high speed rail pressure on Government finances, strategy for Britain’. it is important that funds continue to be found for investment in key strategic infrastructure.

1 Overview of High Speed Rail

High Speed Rail, which is broadly The first European high speed line defined by the industry as trains of 420km was inaugurated in 1981, travelling at over 250km per hour, between and . The graph began in Japan in 1964. The first high below shows the growth of high speed line of 515km was between speed rail in Europe since 1981 Tokyo and Osaka. Japan now has a and a projection to the end of 2010. high speed network of over 2000 km and since opening the network has The UK has a single 108km high carried 6 billion passengers. speed line from the channel to St Pancras known as High Speed 1 (see case study).

Figure 1: Length of high speed infrastructure in Europe in Kms

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2 Case study: High Speed 1

The Rail Link (CTRL), In 1998 the project ran into financial LCR is the 100% owner of: now known as High Speed 1 (HS1), is difficulties. The project was n High Speed 1 Limited, the company a 108km high-speed line between the restructured and the length of the which operates St. Pancras Channel Tunnel and St Pancras, lease was reduced to 90 years, International Station and the high London. London to Paris now takes ending in 2086. speed line to the Channel Tunnel; 2 hours 15 minutes and less than 2 hours. The total cost of building A recovery programme was agreed n London & Continental Stations the infrastructure was £5.2bn. whereby LCR issued government and Property (LCSP) which is the backed debt to pay for the construction property division of LCR. The Government decided that the of section 1 (Channel tunnel to North entire project should be a Public Private ). A further restructuring occurred Since the restructuring this year, Partnership (PPP). In 1994, an open in 2001 when LCR also took over LCR is also 40% owner (with SNCF competition was undertaken to find the Section 2 (North Kent to St Pancras) and SNCB) of , which appropriate private sector partner to which had taken responsibility operates international train services. part fund and manage the project. for after the first restructuring. LCR is now the sole owner of both sections of Lessons learnt: A 999 year concession was awarded the CTRL and development property n It is not practical to transfer to London and Continental Railways around St Pancras. Detail of the revenue risk to the private (LCR) in 1996. Under the concession restructuring is set out in the NAO sector on a new-build railway agreement LCR would finance, build Report published 28th March 2001, in Western Europe; and and operate the link, drawing on “The Channel Tunnel Link”. revenues primarily from the Eurostar n Public sector involvement in service and additionally from later use In June 2009 the Department for the funding of projects of this of the link by domestic train operators. Transport novated bonds issued by size is inevitable. LCR to the Department and took The financing of the project was control of LCR ready for sale in 3 originally highly dependent on discrete parts being the infrastructure, forecast revenues of Eurostar UK the UK train operator and the (British operations owned by LCR). property assets.

3 Scope of a High Speed Rail project

To deliver a HSR project the following n Maintenance of the n Train operations: the day to day elements of the project need to infrastructure: scheduled lifecycle operation of the train service be considered and in most cases refurbishment such as periodic includes despatch, driving, on specified and procured through renewal of track, unscheduled board customer service, ticket contracts of various types: maintenance such as repairing inspection and provision of damaged power lines and routine refreshment services. Train n Planning of the network and land inspection and servicing. operators also typically carry out a acquisition: preparation of detailed range of other activities as part of plans, business cases, environmental n Operation of the infrastructure: their business including marketing impact assessments and signalling and train control plus and sales, station and car park management of the statutory safety management including operation and provision of planning process then in force to maintaining security and customer information. obtain relevant planning consents; responding to incidents. acquisition of land for the line and for n Property construction (stations n Rolling stock manufacture: construction and access, including and depots): stations, depots and designing, manufacturing, testing compulsory acquisition. All activities stabling facilities for the rolling and commissioning new high speed need to include consideration of stock. This may require existing trains to run on the network. integration with other land uses and property assets to be upgraded transport modes and a plan to ensure n Rolling stock maintenance: and new assets to be built as well the benefits of the project are realised. scheduled and unscheduled as integration with neighbouring maintenance and servicing. property such as roads, bus/tram n Design: concept design through to Servicing includes watering, tank stations, offices or retail facilities. detailed design of each work package emptying and the cleaning of both – different levels of design would be n Property maintenance: the outside and inside of the trains. carried out by different parties. unscheduled and scheduled Scheduled maintenance may maintenance for new and enhanced n Construction of the include periodic major overhauls. property assets. infrastructure: new build dedicated high speed lines plus enhancements The private sector is typically to and interfaces with the classic responsible for all the above activities network so that it can sustain high for new lines except for project speed trains. The work comprises planning and the specification and civil engineering plus signalling, procurement of the other elements, communications and power supply which Government is normally best and distribution. placed to manage.

4 Summary of key risks

The inherent technical, environmental, Construction cost overrun and Maintenance and operational financial and political complexity delivery risk cost risk means any HSR project will inevitably involve a large number of major risks. Delivery of high speed infrastructure Maintenance and operation risks for The identification and allocation of the on time and on budget is probably the infrastructure are relatively small most significant project risks is a the biggest risk faced by Government in comparison to construction risks. critical factor in deciding upon the and so it would normally wish to Risks of operating and maintaining most appropriate financing and transfer this risk to the private sector. HSR infrastructure should be ownership structure for the project. In practice the private sector will not transferable to the private sector, The party best able to bear or manage have the financial capacity to take on though possibly this would be best a risk should have responsibility for the level of risk associated with the done for periods of 5-10 years at a that risk. scale of HSR. It will limit its liability time as is the case with in respect of cost overruns and under its regulatory structure. therefore any cost overruns above Land acquisition and that level would be a Government Ideally, maintenance risk should be planning risk retained risk. Alternative delivery born by the same party as the The risk of acquiring land and options such as a PPP might seek construction risk in order to incentivise appropriate planning consents for HSR to transfer a greater level of whole life cost optimisation and corridors would lie with Government construction risk to the private sector. performance. Separating responsibility as it is able to manage this risk most However the financial capacity of the for operation and responsibility for efficiently particularly where HSR private sector to take risk is a limiting build from maintenance therefore corridors pass through conurbations factor regardless of the delivery reduces the potential for effective risk or sensitive land. This is consistent structure taken forward. PPPs might transfer. For equipment, and in with the procurement of other major allow full risk transfer for discrete particular for rolling stock, this means rail projects in developed countries. sections of the route though this there are benefits in the design, creates additional interface risk. construction and maintenance being A specific area where risk might be the responsibility of one organisation passed to the private sector is the of consortium. acquisition of land and planning consents for depots and stations. In Great Britain this is normally undertaken by Network Rail or train suppliers.

5 Interface with Network Rail risk Revenue risk stream is proven however, lenders and investors may be willing to take greater Any high speed network that is not Private sector investors in HSR levels of revenue risk as they do for discrete from the national network will Infrastructure or Rolling Stock are example when lending corporately to have a high degree of interface risk unlikely to accept a funding model that public transport operators. Franchise with Network Rail, the asset manager includes significant demand risk (i.e. operators are more comfortable taking and operator of the national network. that the repayment of finance and/or revenue risk but typically this is in This includes a variety of different funding of operations is dependent on respect of services with a history of risks ranging from access to national the level of customer revenue or the operation which high speed rail would network infrastructure for number of trains using the network). not have at the outset. Therefore, even construction to integration of Customer demand is heavily affected for a HSR operating franchise, the signalling systems, to knock-on by factors outside the control of the revenue risk may need to be shared impacts of operational performance private contractor such as the provision between public and private sectors in between networks. These are and relative cost of competing modes the early years. complex risks to allocate. Network and the general performance of the Rail has only limited capacity to economy. The private sector bore absorb risk and the private sector revenue risk under the original CTRL will not take risks it cannot manage, funding model but over optimistic so much of the risk potentially revenue assumptions ultimately meant remains with Government. sufficient finance could not be raised for construction. Once the revenue

6 Structure of the project delivery organisations

The national strategic importance of Figure 2: Roles to be fulfilled for project delivery HSR combined with the requirement for substantial public funding means that Contractor/ Government Procuring Authority Project Delivery Co Consortium public sector leadership for such a Set policy Define specification Manage delivery Build/operate infrastructure project is essential. In addition Government will need to ensure new HSR meets safety standards and that Train Operator the specification of the project meets Operate services its strategic objectives and complies with EU interoperability requirements. Rolling Stock Contractor The private sector also has a significant Build/Maintain Stock role to play in the delivery, operation and financing of HSR and Government will need to put in place a structure that optimises the private sector role. Currently national network track The delivery structure for the project n Government: would decide to infrastructure, which is largely a needs to have the following attributes: procure each HSR project, manage historic legacy, and the delivery of the business case and retain ultimate n Focus on key strategic objectives significant enhancements, are responsibility for key strategic managed by Network Rail under a n Ability to mobilise resource decisions such as defining the statutory regulatory structure (but objectives of the project (including n Ability to secure funding and finance using some private sector contractors). the degree of integration with the Train manufacture and operations are n Minimal bureaucracy and overhead classic network and other modes), delivered by the private sector to a costs which corridor to procure and the Government specification under the precise route. Government lead is n Independence of sectional interests franchise system. The Government has likely to be the Department for a recent history of procuring large Transport (DfT) which would The key roles to be fulfilled for the non-rail infrastructure projects using manage the relationship with other delivery of HSR have been identified PFI/PPP structures that seek to Government stakeholders such in Figure 2. optimise private sector operational as HM Treasury. It may appoint a and financial participation. private sector organisation to oversee its interests in the project.

7 n Procuring Authority: would process for some aspects of the Two other organisations recently develop the detailed specification project on the procuring Authority’s established by Government could of what to procure. It would prepare behalf. The Project DeliveryCo might play a significant role in developing the detailed documentation and run own the infrastructure or transfer it to HSR. These are: the procurement process to select the Procuring Authority or another n Infrastructure UK: the Government parties to fulfil the other roles. long term owner. has recently announced the It would also have to ensure n Contractor(s) / Consortium(a): establishment of Infrastructure UK compatibility between different would undertake the construction to advise on management and projects on the HSR network. and maintenance works and might planning for the UK’s critical The Authority would most likely raise part of the finance. infrastructure. It is intended that have the powers to acquire land. Infrastructure UK will identify long Post construction, the Authority n Train Operating Company (TOC): term infrastructure needs and will would oversee operation of HSR will operate train services and act consider interdependencies as well as procuring further projects as interface with customers. between large projects; and to extend the network. The Authority n Rolling Stock Contractor: would need to liaise closely with n The Infrastructure Planning will build and maintain the Network Rail, the national Commission (“IPC”): The IPC was rolling stock. infrastructure manager, regarding set up under the 2008 Planning Act integration into the existing network. to make the application process for Some of the above roles could be For example capacity allocation and nationally significant infrastructure combined or sub-divided. For example signalling will need to be managed in projects faster, fairer and easier1. the Government could be the Procuring an integrated way across the Unless new corridors were Authority or the Procuring Authority enlarged network. authorised by a specific Act of could also carry out Project Delivery Parliament (as for ), the IPC n Project DeliveryCo: would be in-house. The line between private would be involved in examining and responsible for delivering the project and public sector roles could be determining planning applications to specification, timescale and drawn in a number of places but falls for a high speed network. budget including integrating the most naturally in between Procuring different aspects being delivered by Authority (which is naturally a public different parties and ensuring the sector role) and Project DeliveryCo overall functionality of the project. (which could be public or private but It would act as a single point of the private sector has more 1 See Report by Bircham Dyson Bell (Feb 2009) for further contact for the Procuring Authority experience in this role). information on the role the IPC would play http://www. and might also run the tender greengauge21.net/hsr-development- programme.html

8 Case study: Crossrail

The £16bn Crossrail project will run n Project DeliveryCo: The Programme Delivery Partner from Maidenhead and Heathrow in Transcend – a private sector joint will tender separate packages the West of London to Shenfield in venture between AECOM, CH2M for construction of the tunnel; the East and Abbey Wood in South Hill and Nichols Group – has been n Train Operating Company (TOC): East London. It will carry more than selected as the Programme an operating contract will be 1,500 passengers on each train Partner. Transcend will work with procured by TfL and will operate during peak periods. Preliminary Crossrail Limited to coordinate services through the tunnel as well works commenced during 2009. eight separate strands of work as taking over some services Construction will start in 2010 and including links with the London currently in other franchises on operations are scheduled to Underground network, utilities, the national network; and commence in 2017. and overground rail sections built by Network Rail. The value of the n Rolling Stock Contractor: The delivery of Crossrail is set up contract is approximately £100m; Still to be appointed. on the following basis: n Contractor Consortium: n Finance: The financing of n Government: DfT working with , supported by Halcrow Crossrail is managed by TfL Transport for London (TfL). The and Systra, has been appointed and is mainly from public sector DfT has appointed a joint venture to be the Programme Delivery sources (including a Supplementary between Jacobs and KPMG as its Partner and will be responsible Business Rate and bonds project representative; for delivering the central London repayable from future fare tunnel from Paddington branching revenues) with some significant n Procuring Authority: to the north and south of contributions from private CLRL (now Crossrail Limited) was Whitechapel. The value of the sector beneficiaries. Neither established as a joint venture contact is approximately £400m; the Programme Partner nor the between the Strategic Rail Authority Programme Delivery Partner is and TfL, but is now owned by TfL. n Contractors: 12 companies raising finance though they have TfL is to be the Procuring Authority have been selected to be on an element of their contract for the operating concession and the Crossrail design framework revenue at risk. The trains the supply of trains. Crossrail and they will competitively tender and depots are planned to be Limited will own the completed for pieces of design work. privately financed. infrastructure;

9 Funding sources

The principal sources of funding seek to maximise the total revenue Public sector funding for HSR are described below. generated net of variable costs, with Funding requirements for the no regard to the overall social benefit. In light of the likely revenue shortfall London-Birmingham-Manchester For example, social objectives might described, it can be assumed that route are set out in Appendix B. suggest the maximum possible some form of public funding will be number of seats to be made available needed to support the development of the HSR programme and maintain Customer revenue at regulated low prices whereas profit maximisation might require a greater the classic rail network and services. Customer revenue will be a key proportion of first class seats which Possible funding mechanisms source of direct funding for HSR. take up more space in the train. include: However, given the considerable A practical compromise might involve n providing capital grants directly investment requirements for the HSR targeted provision of cheaper fares to the Project DeliveryCo or the programme, customer revenue alone combined with maximisation of Consortium/contractor through will not provide sufficient income to revenue from other sources (e.g. the DfT, which would be funded cover the total cost of construction business travel) as happens currently by HM Treasury ultimately from and finance of infrastructure and on intercity franchises on which taxes or borrowing; rolling stock, operation of train ‘saver’ fares are regulated but others services and operation, maintenance are set by the operator. n having the Procuring Authority and renewal of infrastructure. (or the Project DeliveryCo if in the For all routes it is likely that HSR will public sector) raise its own debt The level of customer revenue will have a negative impact on the finance to invest in HSR with the be affected by decisions about the revenue of existing franchises on backing of Government guarantees. trade-off between the competing competing routes, which will lead to a Crossrail will come from bonds policy objectives of socio-economic need for additional public sector issued by TfL whose credit rating welfare optimisation and revenue support and/or service changes. benefits from various forms of maximisation. Prioritisation of implicit or explicit Government socio-economic welfare might result This report assumes customer credit support. The European in fares being set by Government revenue is primarily from passengers Investment Bank (EIB) has at a level that optimises the but the new line could also generate committed to buy £1bn of socio-economic benefits to users. access charge revenue from freight these bonds. In contrast, a private sector train operators. determined fares strategy would

10 In terms of governance, finance Government is required to recognise Other sources raising by the Procuring Authority, such guarantees as a contingent rather than funding through HM liability in its accounts, rather than A variety of other funding sources Treasury, would promote robust on the balance sheet (unless there is could be available to fund a high financial management of the project a likelihood of the guarantee being speed line. The beneficiaries of HSR as the board of the Authority would called) and so the commitment can be extend well beyond HSR users and have direct responsibility for “off-balance sheet”. The government include road users and rail balancing sources and use of funds. would need to manage its exposure passengers and freight on the existing It would also be more transparent to under these guarantees. This could be network. In addition to the sources stakeholders, and is a more flexible done, for example, by ranking ahead identified other sources might include: structure, should Government later of private sector finance such as n hypothecated charges on road or decide to sell the asset; equity, and by putting appropriate aviation users, additional levies on governance in place; and council tax or business rates and n providing financial guarantees to a environmental charges; private sector Project DeliveryCo or n contracting to pay annual subsidies the Consortium/contractor to enable to fund access charges payable by n planning levies or development gain it to raise finance, with lenders able the TOC or to pay availability charges taxes on developers or land owners to rely on the sovereign credit rating direct to the infrastructure owner so who will benefit from HSR; of the Government (rather than that of that the infrastructure owner has a the private sector borrower). secure revenue stream against which n capital grants from strategic Guarantees would be provided by the it can borrow to finance the project. beneficiaries such as airports (who DfT or HM Treasury. This is likely to This is a route used for some smaller might alternatively commit to fund enable a greater amount of finance to infrastructure enhancements on the their own interfaces with the HSR be raised at lower nominal cost than national network and for some light network); and if left to the private sector. rail schemes and non-rail PFI n local funding from cities or regions projects such as the £1.15bn M25 which will benefit from high speed This approach was employed for Widening PFI. rail. For example the East TGV CTRL when it was restructured, The overall funding package may benefited from up to 80% of and various forms of Government contain a combination of all the above local funding. support also underpin the funding mechanisms. The project needs to be of Network Rail. structured so that future revenue

flows from subsidy or customer revenue can repay any external finance raised by the borrower(s).

11 There is also likely to be some scope Private sector finance Where risk is being transferred to to realise major property value uplifts the private sector in this way, the in the vicinity of HSR stations and Most project costs are incurred in involvement of private finance plays a these could be used to defray some of advance of passenger and other key role as the investment at risk gives the capital cost. The extent to which revenues being received, and public the private sector partner an incentive property gains will materialise is largely funding such as capital grants or to ensure the project is properly dependent on the availability of subsidies may not be matched with specified and planned from the development land at station locations the timing of expenditure. Private beginning, and has the financial as well as the general economic finance in the form of debt and equity capacity to absorb downsides. performance of the property sector. may be a means to bridge this gap. Historically it has proven difficult to Efficient allocation of risk to the party capture development gains to fund a The decision to use private finance is best able to manage or bear it is an particular project due to their a complex one. It needs policy setters important component in ensuring that dispersed and varied nature, and the to establish whether the premium projects are completed on time, take difficulty of calculating how much gain paid for private finance over the cash into account whole life costs and is due to the effect of a particular cost of Government debt is less perform at the level required over the project. CTRL was part-funded by than the benefits achieved from long term. The benefit of this risk development profits but the gains transferring risk to the private sector. transfer can make the overall risk available to fund HSR are likely to be adjusted cost of a project cheaper smaller. The Borders rail link in Long term private finance is consistent and therefore potentially better value Scotland is being partly funded by a with the concept of payment for for money than a project financed levy on planning consents in the area services as they are received (e.g. purely by Government. which will benefit. Crossrail is to be paying for rolling stock availability partly funded by a Supplementary rather than a particular train technical Two extreme cases illustrate this point: Business Rate on London businesses specification). In defining a level of with Eurotunnel (a concession), a very as well as contributions from BAA, service required, and paying for it significant cost overrun was borne by Canary Wharf Group and the City of when it is delivered, the public sector private sector financiers rather than London Corporation. is able to transfer risk of delivery to the taxpayer whereas in contrast on the private sector. This entails private the Jubilee Line extension (which was financing of the construction of the a traditional directly procured asset over a number of years. construction contract), the taxpayer Non-performance of the asset leaves had to bear a significant cost overrun. financiers at risk of not being repaid.

12 Funding structures used for other large rail projects

Project Value Fixed Price Details contract? The table provides an overview Crossrail £16bn No Mainly publicly funded with some private funding of past and present multi-billion pound rail and high speed rail Taiwan HSR £9.3bn Yes Private ownership financed through a combination of Government grants projects. It suggests that there is and private finance, currently being a ceiling above which the funding rescued by Government following requirement and risks become shortfall in revenue too large to attract private West Coast Mainline £8.6bn No Initially to be funded by Railtrack but had to be funded mainly by investors on a fixed price basis. Government through Network Rail It is therefore highly likely that after Railtrack’s insolvency some form of construction risk CTRL (now HS1) £5.8bn Initially Combination of Government grants and sharing and possibly contract Government guaranteed private finance. packaging will be necessary in Taken over by Government following shortfall in revenue but now to be sold order to deliver HSR in the UK. to a private investor RAVE (Portugal) £5.7bn Yes PPP split into 3 high speed lines currently in procurement. Supported by capital grants from HSL-Zuid (Holland) £4.8bn Mixed Superstructure procured as PPP raising £0.8bn. Substructure of £4bn was procured directly by Government Öresund Bridge £3bn No Financed by government guaranteed (Denmark/Sweden) bonds issued by the government owned project company Nuremberg-Munich £1.6bn No Funded by , (Germany) the Government owned national railway company Perpignan Figueras £0.8bn Yes PPP (France)

13 HSR delivery and financing structure: illustrative model

An illustrative delivery and financing stage in the project. It will for example The role of each party is described structure is set out in Figure 3. be useful to consider lessons from below: This is one possible approach which the delivery of Crossrail and the sale demonstrates how the project might of HS1 as well as other current Government be delivered. Other approaches projects before such a decision is might also be considered and it is made. Further detail on other The role of Government would be as premature to determine the possible structural options is described earlier in ‘Structure of preferred structure at this early provided in Appendix A. project delivery organisations’.

Figure 3: Illustrative delivery and financing structure

Government

Procuring Authority Regulator Passengers DeliveryCo (Govt owned)

Build contract (including milestone payments) Customer revenue

Maintenance and Operating operations contract contract Transfer of assets and Debt Finance liabilities at construction completion Track access InfrabuildCo InfraCo charges HSRTOC Equity PPP type contract (including milestone payments)

Signalling and VehicleCo Construction Construction Maintenance Operation Rolling stock subcontract1 subcontract2 subcontract1 (manufacture and subcontract maintenance)

Contractual and payment arrangement Debt Finance Equity Financing cashflow Shareholding

14 Procuring Authority and DeliveryCo would set up an The transfer price and terms Delivery Company (DeliveryCo) infrastructure management SPV (including the acceptance process (InfraCo) which would manage and for approval of the completed project) DeliveryCo would have overall operate the infrastructure for a long will therefore be a key risk allocation responsibility for the HSR specification concession period, say 30-40 years. mechanism. and procurement of private sector This company could initially be owned contractors. DeliveryCo would be by Government but could be floated DeliveryCo would also be responsible a central government-owned company or sold to private or trade investors for ensuring that InfrabuildCo is with a dual role to reduce once construction is complete. incentivised to design into the administration and aid accountability infrastructure whole life cost benefits. and governance. Other stakeholders The scale and cost of the Failure to do so would create a risk such as local authorities might also be infrastructure is such that it would that ongoing costs are greater than shareholders or partners. not be possible for DeliveryCo to expected and, again, DeliveryCo fully transfer delivery and price risk would bear this risk. Pre-construction design and planning to InfrabuildCo. InfrabuildCo would works would be managed and seek to limit its liability to the amount Alternatively DeliveryCo could procured by DeliveryCo in order to of its equity investment. Therefore to tender the construction and enable it to optimise the specification the extent that the cost of the delivery management of the infrastructure and risk allocation in the main contract. of the infrastructure increases to a single consortium which would because of construction price both form InfrabuildCo and also sign DeliveryCo would tender a contract increases or late delivery, DeliveryCo a maintenance contract with InfraCo. for construction of the HSR line and would have to bear the majority of this This would incentivise whole life the winning tenderer would form a risk. In addition DeliveryCo would asset cost optimisation but would Special Purpose Vehicle (SPV)², need to provide an undertaking that also make the tender process more in this case InfrabuildCo. DeliveryCo InfraCo would accept the transfer of complex so this issue will need would make milestone construction the assets and liabilities of further analysis and consultation payments to InfrabuildCo to meet InfrabuildCo at construction with the market. the cost of construction that cannot completion on certain conditions. be met through finance raised by InfrabuildCo.

2 In this context SPV means a company set up by a private sector consortium to raise finance for and deliver the specific asset identified. The project might be split into more than one tender and any individual consortium might in practice work through more than one SPV

15 DeliveryCo would also tender one Infrastructure build Company InfrabuildCo and its financiers will or more operating franchises for (InfrabuildCo) require an undertaking from HSR train services on the corridor. Government that InfraCo will take The selected Operator (HSRTOC) InfrabuildCo would be owned by the over InfrabuildCo’s repayment formed by the winning bidder would winning consortium of contractors obligations; and be obliged to operate HSR services and financiers and would deliver its n Equity: assumed predominantly in according to the terms of the obligations through a Design-Build- the form of shareholder loan notes franchise which might specify a Finance-Transfer (DBFT) contract. It is and a notional amount of ordinary timetable or, more likely specify responsible for constructing the asset share capital, mainly subscribed by certain minimum service levels with over a period of around 5 years, after consortium members. some flexibility to enable HSRTOC which point the assets and liabilities of to respond to the market. The tender InfrabuildCo would be transferred to Given the realistic constraints on process would set a subsidy/premium InfraCo on agreed terms. availability for both of the above payable by DeliveryCo (or DfT) to sources of finance for a project of HSRTOC or vice versa based on InfrabuildCo would raise a significant this scale, InfrabuildCo would also the difference between the winning amount of the finance required to receive construction payments similar bidder’s forecast revenues and construct the HSR infrastructure. to grant funding from DeliveryCo operating costs. Finance is expected to be raised by InfrabuildCo in two forms: on achievement of scheduled construction milestones. Finally, DeliveryCo will also tender a n Debt: assumed to be in the form contract for the provision of rolling of government guaranteed listed InfrabuildCo would manage the stock to HSRTOC by VehicleCo. bonds and/or bank debt. construction and therefore would The amount of debt raised of enter into a series of sub-contracts approximately £6bn is considered to deliver the constituent elements too large to be raised without of the HSR corridor. Government support. Finance is anticipated to be raised on a long term basis and therefore

16 Infrastructure Asset InfraCo would receive access charge Alternatively, a full regulated structure Management Company revenue from HSRTOC in return for could be put in place whereby the (InfraCo) providing access to the infrastructure. entire access charge was re-set InfraCo is not assumed to take periodically (similar to Network Rail InfraCo is anticipated to be an asset demand risk (ie payments would not and utilities). However, it is expected manager similar to Network Rail, which be linked to the number of services such a structure would be less in theory could take on this role.3 that use the infrastructure) but it may attractive to investors, as their returns InfraCo would be granted a long term take some availability risk (i.e. it would would be subject to regulatory risk, concession by DeliveryCo to manage have a contractual obligation to make which could increase the cost of and operate the infrastructure. InfraCo’s the infrastructure available and borrowing and depress a sale price. duties would include maintenance of the receive a lower payment if it did not HSR track, operation of the signalling achieve this). The access charge and maintenance and operation of would be paid by HSRTOC from stations and ancillary facilities. In the customer revenue received from case of HS1, part of this activity is providing HSR services augmented sub-contracted to Network Rail. by subsidy. There may also be open Alternatively stations could be access operators. Part of the access maintained and operated by HSRTOC charge would be fixed or partially or the functions could be split. variable for demand for the life of the concession, which would give InfraCo would be financed primarily by investors an appropriate degree of debt taken over from InfrabuildCo and certainty. The remainder of the equity from new investors in the access charge relating to completed project. The finance could maintenance and operations costs be raised by flotation or private tender would be reset periodically to give which would be designed to attract InfraCo the ability to cover its costs. investors such as infrastructure funds. HS1 is proposing to put in place a similar access charge structure.

3 The Financial responsibilities and risks might be seen as disproportionate in relation to its existing core business, but it is possible that Network Rail’s financial structure will have changed by the time HSR is developed.

17 Revenue risk would be primarily with Vehicle Owning Company (HSRTOC) HSRTOC as an incentive to maximise (VehicleCo) demand, deliver good customer HSRTOC would enter into a franchise service and generally to be responsive The HSR rolling stock fleet would be agreement with the DeliveryCo under to the market. However, an optimal delivered by a SPV (VehicleCo) under which HSRTOC would operate and arrangement could allow for it to a long term Design-Build-Finance- provide train services. HSRTOC share some of the demand risk with Maintain (DBFM) contract (similar to a would plan and market services, sell DeliveryCo or DfT with subsidy/ PPP). VehicleCo would be set up by tickets generating passenger revenue premium adjusted according to a the winning consortium following a over the operating period and would revenue risk (or profit) sharing tender process run by DeliveryCo. be responsible for its operating costs. mechanism. This would reflect the Consortia are likely to be led by fact that some of the main drivers of train manufacturers supported by In practice there could be more than revenue are outside the control of the independent equity investors. one TOC operating HSR services on a train operator. The detailed structure would be able single corridor. Additionally, services to draw on lessons from the Intercity may also be operated under open It is assumed that HSRTOC would Express, and Crossrail access. Open access operators also operate the adjacent classic train procurements. VehicleCo would would pay track access charges to network, at least during the contract with HSRTOC to provide InfraCo but would not be subject to construction and initial operation the required number of trains at the the same franchise arrangements as phase, so that the transition to high start of each day and this train HSRTOC. speed rail services can be managed availability contract would set out more efficiently and shortfalls in VehicleCo’s detailed obligations revenue on one network might be and how it is paid. offset by revenue on the other. This is the approach adopted for new domestic services on HS1.

18 The rolling stock leasing companies Finance is expected to be raised by agreement but not demand risk. (ROSCOs) created at privatisation of VehicleCo in two forms: VehicleCo is likely to manage its risk do not currently have the by transferring it onto sub-contractors n Debt: assumed to be non-recourse capacity to finance a fleet of this size namely the manufacturer/maintainer. commercial bank debt or possibly though they might become members bonds. This is not anticipated to be of bidding consortia. The broader The train availability payment would backed by government guarantees leasing market would be an alternative be set to meet the on-going costs of unless such an approach was to DBFM, should capacity return. maintaining the vehicles, repaying deemed to provide better value commercial debt, meeting the for money; As the franchise arrangement entered covenants of the debt (e.g. cover into by HSRTOC may be shorter than n Equity: assumed predominantly in ratios) and providing a target return the contract with VehicleCo there the form of subordinated loan notes to equity providers. would be arrangements for successor and a notional amount of ordinary franchisees to take over the contract share capital subscribed by the As an alternative, HSRTOC could lead and an appropriate usage guarantee manufacturer and independent the procurement and financing of the from Government protecting investors. trains, but this would require the VehicleCo from not having a franchise to be tendered several years franchisee to contract with. Such a The level of franchise subsidy payable in advance of services starting. Also, guarantee is intended to enable to HSRTOC would need to be high HSRTOC could be a new enterprise VehicleCo to repay its finance over a enough (in addition to passenger or a subsidiary of a well established longer period than the initial train revenue) for it to fund the availability franchise operator. However, as it availability contract with HSRTOC. payments to VehicleCo. The DBFM would have no history of operating contract would transfer construction HSR on a new line, the business VehicleCo is assumed to raise a risk to VehicleCo. VehicleCo would might be viewed as higher risk than significant amount of the finance receive a train availability payment an established TOC and this might required to manufacture, deliver into from HSRTOC. Performance would be affect the availability and cost of service and maintain the HSR train measured through the contract and private finance for trains. fleet against the anticipated stream VehicleCo would face deductions of train availability payments payable from the payment for poor by HSRTOC. performance or unavailability. VehicleCo is assumed to take performance risk under the

19 The Regulator But clearly, an open access system n in support of this, periodic reviews would create an additional risk to of access charges; The Third Railway Package (the achievement of forecasts and n providing assurance for users of the European rail directive which therefore to certainty of realising the network and Government about the regulates international high speed planned benefits of the investment. quality and capability of the operations in Europe) requires In particular, it would be difficult for an infrastructure; and infrastructure to be open to open access operator to raise finance international passenger operators. for trains. The pros and cons of open n securing efficient management of This is not currently a requirement access will therefore need to be the interface between the high for domestic high speed operators, considered alongside the funding of the speed and classic networks. but clearly might become so. UK law project. There may be a case for limiting for the classic network makes access access in the early years of operation. These issues, and the appropriate to the network subject to the The relationship between the access regulatory mechanisms for dealing supervision of the independent Office regime on the high speed network and with them, will need to be considered of Rail Regulation (ORR) which has that on the classic network will also as part of the further development of established policies concerning need to be considered. the programme. access to the network by open access operators. The nature of the We have had helpful discussions with access regime will be important to ORR on the challenges of regulating a the economics of HSR. Open access new high-speed railway. As well as the may have the beneficial effect of rules governing access, these include: encouraging competition, thereby leading to improved and cheaper n setting access charges so as to services. The access charge regime incentivise efficiency, together with for open access needs to be a focus on the needs of customers, designed to capture the surpluses while enabling the infrastructure back from all operators over the manager and train operators to HSR network and optimise overall plan their businesses with a cost recovery. reasonable degree of certainty and secure appropriate remuneration of investment;

20 Delivering the national This provides scope for corporate n a new high speed regulatory HSR network mergers and acquisitions which structure and regime should remain may increase the attractiveness of consistent across different The illustrative structure described in this type of investment; corridors. Therefore the cost and this report is a contractual structure timing of setting up the new regime n once high speed services have for a single corridor. It is expected would be incurred only once and commenced, franchises can be that this structure could also be used could be improved by experience. combined or split across different for subsequent high speed corridors. In addition should the Government corridors and the national network wish or the regulator require operations. The short-to-medium This structure has a number of key services to be run purely by open term nature of franchise contracts benefits for rolling out the wider access operators then the franchise gives Government flexibility to network being: system could operate alongside optimise how services are open access operations. n Government retains oversight of delivered. In addition, the possibility construction and the option to of multiple franchises across Special consideration will need to be sell the asset manager. This gives different corridors creates a given to how high speed infrastructure it flexibility in the long term. potential market for train operators and services are extended onto For example it could manage the which could improve competition existing high speed corridors, for timing of the sale of the asset for franchises as more participants example from Manchester to Glasgow. manager to maximise the sale enter the market; Ideally there would be a common price and to take account of the infrastructure manager across different n the structure can realise cash at the building of subsequent corridors; parts of the same corridor although end of a construction period (similar this is not absolutely necessary. n once the construction of the to HS1) and so the sale proceeds of This would reduce infrastructure infrastructure is complete and one corridor could be used to fund interface risk, increase maintenance the asset manager has begun later corridors thereby reducing the and operational efficiency and allow steady state maintenance and ongoing impact on the public purse; operations there is an opportunity for a common set of access charges for different railway networks to on a single corridor. combine their activities.

21 An extension to a corridor is likely to require a new franchise to be tendered which would have to be for the whole corridor (the benefit of this structure is that it allows for this possibility). In practice Government will seek to maximise competition in any sale/ concession/franchise process. Therefore, Government will have to think carefully about how to attract infrastructure and operator bidders. Owners of adjacent infrastructure, and operators of adjacent services, will be able to price in economies of scale. As incumbents, they will have an understanding of operations that may give them a material advantage during the bidding process.

22 Conclusion

This report seeks to provide an lifted out of recession which will illustrative delivery structure for a change some of our assumptions HSR network in the UK. At this stage and may change the appetite of of development there is no right various parties to take different risks. answer to how HSR should be However, it is likely that the delivered. There are a wide range of fundamental conclusion of this report stakeholders in Government, local will remain the same; being that HSR and regional councils and the private is too large and complex for the sector. The views of all these private sector to deliver without stakeholders will need to be taken considerable Government support. into account when defining the final For it to be a success, Government structure. In addition, by the time will have to play a significant role in Government takes forward HSR we the planning, specifying, funding and assume the UK economy will have procurement of HSR. Appendices Appendix A: Delivery options

This Appendix describes the options European Union, although this leaves Table 2 below summarises the which are likely to be considered for the risk at the interface to be managed options for HSR. Infrastructure Option delivery of the reference HSR project. by the public sector. Even this split is a A and Rolling stock and services All options listed here are potentially simplification as the final structure is Option 2 are described in more detail feasible but as an illustration, the likely to be a combination of a variety in the summary report. The remainder summary report describes one of approaches; for example stations of this Appendix describes each approach in detail. The options could be delivered on a different basis option at a high level. considered have been analysed in from the remainder of the network. detail in the Funding Workstream 2 Report prepared by PwC as part of our work for Greengauge 21. Table 2: Options for HSR Delivery options have been analysed separately for the following components: Infrastructure provision Rolling stock and service provision Option Description Option Description n infrastructure provision, namely infrastructure build, maintenance and A Short term construction 1 Operating franchise; operation and property construction contracts with asset train lease and maintenance; and transferred to asset manager (InfraCo) on completion n rolling stock and service provision, namely train manufacture and B PPP structure, i.e. long-term 2 Operating franchise; train PPP maintenance and train service DBFM contract operation C Regulated structure – Network 3 Integrated train operations Rail or a Government-owned PPP A further option for a single contract infrastructure manager builds for integrated services, being a 4 Open access regime and operates infrastructure combination of the above two and property components into a single vertically integrated contract was also analysed. Integrated infrastructure, rolling stock and service provision Some form of split between infrastructure and rolling stock/ Option Description services is consistent with the structure 5 Integrated railway PPP of the industry more generally in the

25 Infrastructure provision Option A – Short term construction contracts with asset transferred to asset manager (InfraCo) on completion

Infrastructure and property assets Payments during the construction Key benefits are delivered through short term phase are likely to be based on Transparency and incentives – construction contracts with an contracted milestones whereas after DeliveryCo performance easily assumption of sale on completion to the take out by the asset manager there scrutinised an infrastructure manager who could potentially be a choice between a performs ongoing maintenance and regulated payment structure or a Competition – market appetite for operation of the infrastructure (which contractual payment structure. This appropriately sized InfrabuildCo could be Network Rail or an structure is typically known as a contract should be maximised alternative manager). There would be Design, Build, Finance, Transfer (DBFT). Precedented – HS1 as restructured a guaranteed transfer arrangement for demonstrates that a variant of this the infrastructure manager to take Financing is assumed to be a mixture option can be successful over the operations and maintenance of private equity and government Flexible – allows Government option of the assets and repay or take over guaranteed debt and construction to develop different post construction any construction finance. Property milestone payments. structure construction (stations and depots) Governance – degree of public sector could be undertaken by same entity. The structure has been described in involvement reflects unavoidable level more detail as part of the illustrative of risk retention structure in main report.

Key disadvantages Risk transfer – Government retains delivery and whole life cost risk and therefore appears to transfer less risk to private sector than other options

26 Infrastructure provision Option B – PPP structure

Whole life contracts are awarded to The PPP finance market currently Key benefits service providers to build finance and could not finance an entire HSR Risk transfer – transfers delivery and maintain the infrastructure and the line on this basis but the approach whole life cost risk to private sector, property assets. Infrastructure and might be suitable for elements of thus incentivising value for money property construction may be the project. undertaken by same entity or not. Precedented – PPP contracting This structure is typically known as a This is the procurement model used mechanism is understood by the Design, Build, Finance, Maintain on some recent high speed market (DBFM). procurements such as Dutch HSL- Capability – requires less in-house Zuid (although the PPP did not skill in public sector This option differs from Option A in include civil engineering) and that it is a long term contract with Taiwanese HSR and is the model Key disadvantages much greater incentive for the currently being used to procure high Deliverability – limited financial contractor to optimise whole life cost speed networks for Portuguese HSR, capacity in private sector means as the contract remains in its control and the Bretagne-Pays de la Loire risk transfer may be illusory given for a much longer period than in High speed line in France. size of project Option A. Debt capacity – limited market capacity Payment to the service provider is to fund large infrastructure without normally direct from Government, explicit government guarantees through availability payments for Affordability – finance costs may be service delivery. The Procuring higher, although the aim is that this is Authority would need to manage outweighed by benefits of risk transfer operator access arrangements. Procurement timescales – can be protracted

27 Infrastructure provision Option C – Network Rail build and operate infrastructure and property assets

An infrastructure manager, in this This option assumes a regulated Key benefits case Network Rail, would build, structure and the new line might Simplification – Network Rail would operate and maintain infrastructure become and be financed as an build and manage the infrastructure and property assets over the life of integral part of ’s existing avoiding interface risks between build the assets (i.e. it would act as both operations. National Rail would be and maintenance phases and InfrabuildCo and InfraCo). In practice paid through a combination of access between HSR and classic network the infrastructure manager may charges (payable by the high speed subcontract the work required to operator for use of the infrastructure) Balance sheet – Network Rail is a private sector contractors, as and Government grants. This simplifies private company and so assets and Network Rail does with its own the structure, in particular avoiding liabilities are not recognised in national network projects, but retain the need for a formal handover from Government accounts though the overall control of the work and the InfrabuildCo to InfraCo though project accounting treatment for a new line interface risk. Alternatively, a separate acceptance into service would remain might be different infrastructure manager, which might a key source of risk. be Government owned, could be Key disadvantages created to fulfil this role. In the UK such a regulated structure Financial capacity – Network Rail is has not normally been used for major not currently set up to finance such a This model was used on the first high new-build projects and there would major large project, however it is speed rail procurements in France, be a risk that the roles of client possible that its financial structure will Japan and Spain. However more (Government) and regulator (ORR) change by the time HSR is developed recently, France is using PPP contracts would overlap and come into conflict. Risk transfer – Network Rail does to procure major railway lines. This would be avoided if a new not have the financial capacity to take Government owned body was created all the risk on the development of a to build HSR as happened in Spain. HSR line Furthermore, Network Rail has said publicly that it would not want to be Capability – Network Rail does not responsible for building high speed rail. currently have the experience of building new high speed lines

28 Rolling stock and service provision Option 1 – Operating franchise structure, train lease

A train operator would be awarded a The train operator would fund itself Key benefits franchise to deliver the high speed through farebox revenue and possibly Simple – the franchise structure is a services over a defined period which a subsidy from Government mature contracting process in the UK is normally 7-10 years for current determined in the tender process franchises although for a high speed should operation of the services not Interaction with classic network – service it might be longer, possibly up be profitable, which is likely in the the franchisee could run services in to 20 years. A longer franchise would early years. If profitable it may pay a both high speed and classic networks require some sort of periodic review premium to Government. thereby enabling it to manage mechanism. The operator under the transition risk franchise agreement would be The rolling stock would be financed responsible for procuring and by a rolling stock leasing company or Key disadvantages providing appropriate rolling stock bank (“ROSCO”) who would buy the Revenue risk – high speed services from a manufacturer. The operator rolling stock from the manufacturer would not initially have a financial would maintain the stock though it and lease it to the train operator. history which could depress bids to might subcontract some aspects to A ROSCO would be unlikely to take run the services the manufacturer. This is the current credit risk on a new operation, so Market capacity – today there is not industry arrangement in Great Britain. some form of Government support for capacity in the leasing market to fund the borrowing would be needed. high speed rail rolling stock, although A ROSCO may also provide some the market might evolve by the time heavy maintenance. the finance is needed Timing – the franchise would need to be tendered at least three years in advance of the start of services to allow time for the manufacture of rolling stock. This would make the franchise process more complex

29 Rolling stock and service provision Option 2 – Operating franchise, train PPP

A train operator would be awarded a The rolling stock would be financed Key benefits franchise to deliver the high speed by equity and long term debt which Simple – franchise structure is a services as above. DeliveryCo would would be repaid by the consortium mature contracting process in the UK procure rolling stock by means of a based on the availability payments it contract with a consortium of expects to receive over the life of Interaction with classic network – the manufacturer and financier. The the contract. franchisee could run services in both manufacturer would maintain the high speed and classic networks rolling stock. Variants of this are This structure has been described in thereby enabling it to manage being procured for the Thameslink more detail as part of the illustrative transition risk and rolling stock structure in the main report. Market capacity – currently transactions. infrastructure investors have greater capacity to invest in rolling stock The manufacturer sells the rolling than lessors stock to the financier who provides the rolling stock to the train operator Key disadvantages in return for lease or availability Revenue risk – high speed services payments subject to performance would not initially have a financial incentive arrangements. history which could depress bids to run the services

30 Rolling stock and service provision Option 3 – Integrated train operations PPP

The train services are operated and Key benefits the rolling stock is supplied and Risk transfer – long term risk transfer maintained by the same entity under a of maintenance and operating cost risk long term PPP contact. Typically this is delivered using an SPV structure which Procurement – only one contract is subcontracts the manufacturing, required rather than several under maintenance and train service Options 1 and 2. obligations to different parties in the joint venture which owns the SPV. Key disadvantages Structures similar to this have been Inflexible – PPP contracts cannot be used for some light rail projects. varied or flexed easily. Operations have to be tendered for the same The SPV would receive availability period as train maintenance payments from DeliveryCo for making Risk transfer – PPP investors unlikely the train services available and might to take significant revenue risk so this or might not also receive all or a share may remain with Government of passenger revenue. Market appetite – the complexity and higher level of risk transfer sought may erode competition

31 Rolling stock and service provision Option 4 – Open access regime

The Government puts in place Key benefits arrangements which allow any Regulation – likely to be consistent operator to come and operate services with emerging European regulations on the network, subject to satisfying which may require open access on certain criteria and being granted national networks access rights by the regulator. Risk transfer – maximum risk transfer Under this option a HSR operator to the private sector would operate its own trains which it Market focused – Government not would have to procure and finance. involved in specifying train services

Key disadvantages Appetite – no guarantee that open access operators will want to use the network Usage risk – Government would need to underpin access charge revenue without assurance that operators would use the line Affordability – open access competition would be unlikely to maximise the contribution that passenger revenue could make to repaying construction costs Bankability – it is unlikely that an open access approach could provide the financial security needed for the private sector to supply significant finance for the infrastructure or trains

32 Integrated infrastructure, rolling stock and service provision Option 5 – “Integrated railway PPP”

The Government would tender a The PPP SPV would need to receive Key benefits single PPP contract for the provision payments from Government for Procurement – a single contract, albeit of infrastructure build, maintenance making the services available though a very complex one operations and train operations it could take some revenue risk and including the manufacture and pass this through to an operating Key disadvantages maintenance of rolling stock. This is subcontractor. These payments similar to the model used to procure would need to be sufficient to pay Appetite – such a large PPP would CTRL (now High Speed 1). LCR was projected operating costs and any erode competition as companies contracted to build the line and operate financing costs. would have to form bidding consortia it under a 999 year concession. thereby reducing the potential number Financing is assumed to be similar of bidders for the project The market is unlikely to support a to Option 2 where there is equity, Risk transfer – lack of competition structure for a new high speed government guaranteed debt and may lead to erosion of risk transfer network in the UK that replicates the construction milestone payments. through contract bidding and original structure of CTRL whereby negotiation process the private sector was expected to Precedent – the CTRL PPP had to be take significant revenue risk. However restructured several times indicating that does not mean that a single the structure did not work well vertically integrated contracting Inflexible – operations need to be structure would not be feasible, just tendered for same period as that the risk taken by it would need to infrastructure and train maintenance be reconsidered to make it viable. Market capacity – this deal would be larger than current market capacity

33 Appendix B: Financial modelling results and public funding requirement

We have assumed that high-speed Table 1 shows the net cashflows Costs to the public purse are stated rail services will earn in passenger required from Government to fund a on a ‘post tax’ basis. Tax payments revenues substantially more than they new high speed rail line (London- from HSR operations are not added cost to operate. However, there is Birmingham-Manchester) over a back in the figures quoted. insufficient surplus to make a great 38 year concession, assuming high contribution to the infrastructure speed services commence from 2021. The funding analysis excludes costs particularly once account is Optimism Bias which is a feature of taken of the worsening in the financial High speed rail services are the business case appraisal; its performance of the classic lines. anticipated to generate more revenue inclusion here would add 65% or Therefore significant public sector than the costs of operating those £17.3bn to the costs and have the expenditure will be required to deliver services and therefore from 2023 the effect of increasing the costs to the capital elements of the project. cashflows from high speed rail are the public purse to £43.7bn. positive. When high speed services The design development/consent commence in 2021, the fall in revenue stage of work for the first corridor and on classic rail services is offset only the preliminary development of future partially by a fall in operating costs. stages are assumed to run from 2011 The net financial impact of high speed to 2015 and entail projected services less the abstractive impact expenditure of roundly £80m – on the classic network results in a £120m per annum. Assuming a total real cost (2008 prices) to the staged programme commences in public purse of £27.5bn. 2015, this is when the major capital expenditure would start.

34 Table 1: Cost to public purse4

£bn 2008 prices Total 2011 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 -15 -53 Government receipts/(payments) 8.1 (0.5) (1.4) (1.4) (1.4) (1.7) (1.7) (1.3) (0.1) 0.0 0.1 0.2 17.2 in respect of HSR Net impact on classic network (35.6) ------(0.3) (0.4) (0.5) (0.6) (33.7) Total projects costs to Government ( 2 7. 5 ) (0.5) (1.4) (1.4) (1.4) (1.7) (1.7) (1.3) (0.4) (0.4) (0.4) (0.4) (16.5)

Notes to the table above:

Breakdown of total costs to Government (£bn) Design and consent work (0.5) Infrastructure build and maintenance (13.8) Rolling Stock build and maintenance (6.0) Financing costs (incl. tax) (7.5) Net income from HSR operations 35.9 Classic Rail Abstraction (35.6) Total project costs to Government (27.5 )

4 The total cost to the public purse is £1bn greater than published in the “Fast Forward a high-speed rail strategy for Britain” in September 2009. Revenue and tax assumptions in 2012 and 2013 have been updated to reflect revised forecasts.

35 Contacts

Julian Smith Charlie Johnson-Ferguson +44 20 7804 5940 +44 20 7212 3716 [email protected] [email protected]

About Greenguage 21 About the authors About PricewaterhouseCoopers Transport

Greengauge 21 is a not-for-profit Julian Smith is the PwC global head of The transport industry practice provides a organisation which aims to research and Rail and Transport Infrastructure. He has wide range of advice and support to develop the concept of a high speed rail over 15 years’ experience advising private clients, ranging from audit and tax to network, and to promote its implementation and public sector clients on transport issues corporate finance advice on deals and as a national economic priority. and projects including strategy, business support for capital projects. planning, project finance (PPP), rail Founded by Jim Steer, one of the country’s franchising and mergers and acquisitions. In 2009 PwC advised the UK Highways leading transport sector specialists, In the UK public sector he has worked for Agency on the £1.15bn M25 PFI financing, Greengauge 21 has been established to DfT, LUL and TfL. In the private sector he the largest infrastructure financing in the progress the debate on High Speed Rail has worked for train operators and UK in 2009. We advised the Slovak and to promote it in the public interest. Network Rail. Government on the €1.8bn R1 road The organisation has been conceived as an financing and the Polish Government on umbrella under which all those with an Charlie Johnson-Ferguson focuses on the €1.6bn PFI. PwC is currently interest in supporting and promoting a High corporate finance advisory in the rail and advising on the two largest orders of Speed Rail network can come together and infrastructure sector. He has 9 years’ rolling stock in the UK since privatisation. openly and publicly debate the merits of experience working on privately financed PwC was voted 2009 European Adviser of alternative routes, priorities and infrastructure projects across the UK and the Year by Project Finance International. technologies, alternative implementation Australia. He has worked on completed strategies and the economic and and pending deals totalling in excess of environmental benefits for Britain. £6 billion of private finance. He advises both public sector and private sector. www.greengauge21.net Recent clients include DfT, TfL and NSW State Government.

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