23 Mar 2018

Rail private investment – Key points from the DfT and ORR's new call for investors

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March 2018: This Tuesday (20 March) the Secretary of State for Transport capped off a wider call for private investment in the railways with a specific call for proposals for a new southern rail link to Heathrow.

This call represents a coordinated and comprehensive push, and as such is accompanied by guidance from the DfT on how these proposals should be made as well as an "enhancements pipeline" giving some (limited) certainty as to its governance approach to future projects.

The ORR is matching these initiatives with, amongst other things, a refresh of its investor-specific webpages (to be launched soon), including updated guidance on the investment framework and how to secure access rights as investors, along with a dedicated point of contact (investment@orr.gov.uk). The ORR is also commissioning an independent review of Network Rail's Industry Risk and Network Rail Fee Funds, in response to investor concerns that these funds (covering Network Rail costs and liabilities for third party investment) are often a barrier to progressing proposals. A link to these initiatives can be found here.

So what are the key points from these DfT guidelines and governance procedures?

In this update we consider: (a) what are the key points from the DfT guidance in terms of preparing a proposal; and (b) the key features of the DfT's new governance procedure, the "Rail Network Enhancements Pipeline".

Key points for investment proposals

The DfT's "Guidance to Rail market-led proposals", now published, is essentially a new framework for reviewing investor proposals. What this amounts to is: (a) an ongoing business case competition for those proposals that require public funding or other government guarantees; and (b) a "fast-track" approval process for those which do not, which only enter the DfT's new governance procedures (once classified on this basis) after they've been implemented, provided Network Rail and the ORR have been engaged and the relevant other approvals (such as safety tests and licence authorisations) have been satisfied. A link to this guidance can be found here.

With respect to those proposals needing government assistance, the example given by the DfT is a new branch line for a TOC where the investors take a percentage of the subsequent track access charges. It remains unclear whether the DfT would classify this proposal as requiring governmental guarantees where, for example, a TOC is an Open Access Operator, rather than a franchisee whose routes are set by the Secretary of State. In short however, government assisted proposals are defined as those that require either public funding by central or local government, contractual requirements involving the government or asset exclusivity.

Unassisted proposals have the additional benefits of not being required to enter into procurement according to public procurement rules at the various stages of the enhancement's development, and that they can request that the government enter into a confidentiality agreement restricting access to the scheme's information inside and outside the DfT, subject to their statutory duties under the Freedom of Information Act.

Key points from the DfT's new approach are that:

Business cases will be prepared in accordance with DfT protocols
This means in practice that any investor proposal will need to: (a) be compliant with HM Treasury's Green Book guidance, including the "five business case model" comprising, amongst others, the Economic Case, the Commercial Case and Financial Case; (b) use the Government's transport analysis guidance and toolkit (WebTAG); and (c) address the DfT's five "priorities for investment and action". Whilst giving welcome clarity and a "level playing field" for proposals, the likely cost associated with compliance may restrict proposals to sophisticated investors with expectations of significant returns or more certain revenues.

Public procurement rules will apply from cradle to grave
For government assisted proposals, any proposal will be subject to a public procurement regime throughout the project lifecycle. This is fairly onerous, and will at various stages involve the DfT conducting market testing, public statements of interest being made and procurement of the various stages being run to DfT standards.

Continuous engagement
One of the clear benefits of the new guidance is that throughout the project lifecycle investors will have the benefit of engagement not only with the DfT but with the Network Rail System Operator (a distinct but connected part of Network Rail that coordinates strategic planning and produces the national timetable) and Network Rail Business Development Directors.

Clarified requirements for private finance
An area that has received greater clarity as a result of the new guidance is the sign-posting of potential alternative private sector financing (i.e. other than government grants and farebox revenue) being acceptable and encouraged. In particular, apart from highlighting potential sources of local authority funding, the DfT has helpfully clarified that it would favour proposals structured to be "off balance sheet" and indicated the conditions under which it considers private finance commercial structures to be such. For example, availability payments from the government would need to, amongst other things, ensure that a financier retains an on-going role in operation and maintenance of the new asset. Equally, a proposed retention of track access charge cannot be linked to any "minimum usage guarantee" unless the payment is subject to deductions for reliability, and others typical in availability payment regimes.

The Enhancements Pipeline

Following the Bowe Review, the DfT agreed to adopt a "pipeline" governance approach for enhancements. This coincides with a move away from the more rigid five-year cycles for enhancement planning (as enhancements now fall outside of the ORR's periodic review). This approach has now been formulated and published as the "Rail Network Enhancements Pipeline" or "RNEP". A link to this publication can be found here.

Broadly similar in concept to Network Rail's Guide to Rail Investment Projects (GRIP), it outlines each stage of the project lifecycle (the "pipeline") in terms of deliverables. Beginning with "Determine" (output definition), it then moves through Develop (feasibility and option selection) and Design (outline and detailed design) and ends with Deliver (implementation) and Deploy (handback and close).

RNEP also outlines an equivalent of stage gate reviews, with so-called "decision points" where the DfT must be presented with certain information and confirmations in order for them to endorse progression to the next stage.

Some key points to consider include the detailed estimates that are required at every decision point from the indicative costings at the Determine stage to regular cost reporting at the Deliver stage and the more onerous and potentially subjective nature of other deliverables, such as the requirement to provide "demonstration that rail demand has been considered in the Enhancement" at the Determine stage.

Whilst most of these deliverables will be produced as a normal part of any modern project's development, and will correspond to the developer/investor's own internal processes, the lack of specific detail and wide discretion provided to the DfT means that there will need to be considerable engagement throughout the life of the project. This would usually be facilitated by a single point of contact and responsibility for such consents on the part of the sponsor, so any developer/investor wishing to undertake an enhancement may to need to establish from the outset whether the DfT has the capacity to offer this in their case, in order to provide the requisite certainty that these decision points can be passed.

Interestingly, other than Heathrow Southern Access the "pipeline" does not include specific details of other projects that may be procured, funded and financed in the new way.

Next steps

For those interested in this area, there are two immediate dates for consideration:

May – "Rail Investment Opportunity Days" are being held, where government officials can provide further support and advice

June – July (deadline 31 July) – Initial proposals need to be submitted to the DfT by this date

To express an interest in a Rail Investment Opportunity Day, or to submit an initial proposal, the DfT have asked that those interested contact railmlp@dft.gsi.gov.uk.

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KEY CONTACT

Tammy Samuel

Tammy Samuel
Partner

T:  +44 20 7809 2227 M:  +44 7766 991 053 Email Tammy | Vcard Office:  London

Richard Shepherd

Richard Shepherd
Associate

T:  +44 20 7809 2563 M:  +44 7702 150 493 Email Richard | Vcard Office:  London

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