Three Arup economists discuss the future of rail project financing and funding, looking at the involvement of the private sector and the key role of collaboration.
Joanna Jedrasiak, Senior Economics Consultant, Arup
Victor Frebault, Economics Consultant, Arup
Patrick Andison, Economics Consultant, Arup
How can rail attract investors?
JJ: The key thing to change in the perception of rail and other major transport infrastructure projects is that they are not about transport for the sake of transport. Transport investment is not just about generating time savings for its users. Modern rail projects need to be considered as tools to achieve much wider, strategic goals on a whole city level. Rail is a means of delivering economic growth, jobs, homes and a better quality of life to the areas in which we live. If that is not our focus, and part of the focus of a funding strategy, then we are falling at the first hurdle.
PA: Precisely. Rail decision-making needs to be integrated with strategic city planning and support cities in achieving their goals and overcoming challenges. The starting point is not that we want to have a new metro line. The starting point is identifying the long-term outcomes a city wants to achieve. These include a variety of goals: increasing the number of jobs, number of homes, regeneration plans, increasing general connectivity, decreasing pollution and congestion. Transport solutions need to be designed to maximise those wider economic benefits, which can then be tied back to the funding package of a major rail project.
VF: When developing a rail line from the outset, practical engineering must be combined with strategic transport advice, economics, demographics and city planning. This approach also needs to incorporate data analytics and insights using tools to test wider outcomes along different corridors. Evidence-based planning should support the route selection and the type of services a new rail line offers. And a benefit realisation strategy should be put in place, at the design phase of a rail project, to check that the delivery of growth outcomes is synchronised with construction of the scheme.
You speak about bringing disciplines such as economics, engineering and transport planning closer together from the outset. What does this collaboration enable?
VF: By ensuring integration between these disciplines, you ensure that people will want to use the new service, that it will have a positive social impact, and that it can be funded and operate sustainably. A cross-discipline multi-criteria analysis builds the holistic understanding required to properly choose between the route corridor, station location and type of services that are being evaluated. Economics and planning should directly contribute to engineering workstreams, which means that the development of the scheme must directly complement the business case, and vice versa.
JJ: Approving and implementing major rail investments is ultimately a political process. Early and wide-reaching engagement with stakeholders, including the business community, is essential. Building a successful political case for rail investments boils down to: building a coalition; encouraging strong city and regional leadership; making the widest possible case to align planning with financial incentives for local authorities; having a narrative on infrastructure investment; and remembering that this is a political process.
PA: Individual and institutional political leadership are necessary to drive the success of transportation projects. Of vital importance is the presence of a focused and dedicated team, tasked solely with progressing the rail project and capable of building strong connections with a diverse network of stakeholders. Pioneering approaches to developing business cases for rail infrastructure that integrate private sector funding will help to mitigate the public sector risk of an unviable business case.
So, what is the role for the private sector in the funding of future rail infrastructure? How can we enable the public and private sector to work together to deliver new rail projects?
VF: The private sector plays a critical role in the future of rail infrastructure across the world. Whether as a direct contributor to rail projects or providing investment support through long-term financing arrangements, the private sector can help to push projects forward and enable their delivery. We expect that viable funding packages for ambitious rail projects will include a series of funding mechanisms from various types of beneficiaries as well as contributions from the public sector.
PA: Absolutely, but this all depends on developing a clear and effective case for ‘why’. Experience shows that developing a case that the public understands and buys into is extremely important. When we look recent cases like Crossrail, an effective case meant that private sector leaders were actively looking to find ways to help fund and deliver the project.
JJ: Crossrail was all about delivering transport infrastructure that would enable the future economic success of London and the UK. The scheme was understood to be beneficial to the city and critical for the future economic growth of the UK.
Private sector leaders like Canary Wharf and the City of London became some of the greatest advocates for the project and were advocating for additional taxation on their businesses to help ensure the project would be delivered.
How do we ensure we are generating funding for ambitious rail infrastructure projects that are delivering the best outcomes?
VF: In 2016 voters in California were asked whether they would accept an additional levy ‘to improve freeway traffic flow/ safety; and expand rail/subway/ bus systems’ among other initiatives. The transit tax passed, with 72% of voters approving ‘Measure M’ (a sales tax ballot measure). Despite available funding, history has shown that transit tax promises may remain unmet. Voters might love transit, but that does not mean that they plan to ride it.
JJ: Pressures on public budgets often mean that ambitious transport projects are de-scoped to reduce costs. For a rail line, this could mean decreasing the number of stations, the speed and frequency of services, or changing route alignments. This is often done to the detriment of the strategic and economic case for these projects, as the wider economic benefits and the potential to unlock value are not considered appropriately throughout the development of a project.
VF: Tying the economic outcomes of rail infrastructures to their funding mechanisms ensures that projects are thought about more ambitiously, focusing on the potential for growth and associated capturable benefits of investments. The alternative is de-scoping projects that would achieve sub-optimal outcomes, reducing incentives for the private sector to contribute.
If there is an effective transport case, how do we expand the menu of available funding options to enable a more innovative funding package?
VF: During a recent feasibility study, we discussed with our client developing a list of 100 ways of raising £1 million. While many of these initial ideas seemed unfeasible, impractical or downright silly, the exercise was incredibly worthwhile. As has been shown through recent success stories, creative approaches to developing a comprehensive funding solution, made up of various innovative and traditional components, is key. Putting creativity and innovation at the heart of the way we approach and work, to find solutions to challenges of funding infrastructure, is essential to our future success.
PA: The good news is, this era of creativity and innovation in funding and finance is part of a very exciting period for transport infrastructure. It will reshape the way we think about the goals, delivery and funding of our transport infrastructure needs.
Transformative rail – the issues shaping the future of the industry
Rail’s popularity is increasing, but the industry faces pressures like never before. How do we ensure our systems are fit for today’s demand and tomorrow’s opportunities? Over 100 global rail specialists from around the world discuss and debate the many themes shaping today’s rail and mobility agenda.
From a single commuter journey to a country’s wider economy, rail can transform lives, businesses and communities. Arup has over 60 years’ experience delivering rail projects for clients in the public and private sectors, across the world.
Finance and economics
We help clients by developing business cases, underpinned by economic and financial modelling. On larger programmes, our economics teams can research and evaluate the wider economic value of a proposition and assess its viability within existing and future regulatory and policy frameworks.