New Capital Pathways for Modern Transport Networks – Investment Summit Write Up

This panel session features Eve Roodhouse, Director of Strategy and Policy at Local Government Association; Paul Foster, Head of Transport Strategy at Leeds City Council; Lisa Littlefair, Northern Transport Market Lead for Mott Macdonald; Jon Peters, Infrastructure Transactions at Steer Group; and Madeliene Yong, Director at Aviva Investors.  

 

What Modern Connectivity Means Today  

Eve kicks off this session with a reminder about how complex transport projects can be. She shares that the local news has reported about the Northumberland Line and that this is a perfect example of what modern connectivity means today.  

She says that while these projects appear quite straightforward, with the objective being about faster journeys and more jobs, in reality it took multiple authorities, private investors, and advisory partners to come together, along with the communities that have waited decades to benefit from infrastructure change.  

This example, she says, highlights how when partners come together the results can be revolutionary, however, it is not as simple as it looks.   

The ambition across the country is to invest in these projects and anyone who lives and works in Leeds can see that they are delivering massive benefits. With no fewer than 12 projects underway, including the revamp of the station, pedestrianisation of the city and upgrade to road networks, it is a positive example.  

However, Leeds isn’t the only place that’s got huge infrastructure projects in mind. There are projects right across the country with a trend towards bus franchising across different combined authorities, and a move towards active travel.  

What we need to discuss is how we fund all of these projects and unlock the potential.  

 

What are the main considerations necessary for the public sector when seeking to attract private capital investment into major new transport networks. 

Jon – I want to start by dispelling the myths. There is plenty of private sector capital out there. The questions I am asked by private sector clients are:  

• What’s coming next 

• Where will it be 

• What’s it going to cost    

It comes down to what price they can invest at and how can they reduce the risk. It’s about whether the project is investable or bankable and there is also a whole piece around the individual things that make up investability.  

Primarily, it’s about risk allocation. They want to see that the risks are managed effectively whether that is project risks, construction risk, financing risk, or revenue risk. They want to see that those risks are managed by those best placed to manage them.  

It’s fundamentally about the revenue stream and what it can be used to pay for. When you know the answer to that question, you can define the project structure and get private sector interest.  

Taking an example, I’ve been working with the Government of Hungary in the last year in some pre-tender work for an airport rail link to Budapest Airport. The project is really good and has lots of benefits and is almost investable on its own.  

The difference is that the government there has the benefit of being able to do fully integrated transport planning. They control the bus networks, and they’re able to reshape the future bus network so it’s truly complementary, not competing.  

This drives demand up and it reduces demand risk. So, you’ve got two things working together to make this project bankable.  

 

With devolution in West Yorkshire and Leeds, and big ambitions around transport projects, what are the kind of considerations that you’re working through now around some of those major projects in terms of accessing capital?   

Paul – We have three big funding challenges.  

One is around bus franchising that the combined authority is taking forward. So, there’s clearly a revenue risk. At the moment we subsidise a lot of the travel in the city, and that’s going to continue in the future, but to keep the same levels of service we’ve got at the moment it isn’t a profitable scenario. Private investment is needed to get the social value out of that.   

The second is to deliver a mass transit system and while there will be some government grant funding for that, there will still remain a private requirement. At the West Yorkshire level, we have the ability to reconfigure the networks, so it controls those two systems together and makes them work as one. So, there’s an opportunity to improve from the baseline.   

The third one that is important is the chronic underinvestment in our current assets. These are causing us a real concern – such as the inner ring round in Leeds that has a hospital on top of it.  

We have to identify the revenue streams that allow us to invest in innovative solutions that can address these challenges.  

 

You introduced what Aviva does, what does an institutional investor like Aviva consider when they want to invest in major infrastructure? What are the core elements and what might be different for an institutional investor as opposed to public sector?  

Madeliene – a lot of institutional money comes from people’s pension funds, which is one of the largest funds worldwide. So, people invest their own money and then there are others that invest through businesses like Aviva who invest on their behalf.  

At Aviva, we want to get value for money for pension holders. As such, we don’t want to work with too much risk, we leave the higher risk investments to venture capitalists and private equity.  

With lower-risk portfolios, it often means longer-term contracts that take into account fixed revenue streams to enable people to invest.  

I looked at the electrification of the bus network in Demark. There is a push to move from diesel busses to electric busses, which cost a lot more to build. The technology is more evolved, making it more expensive.  

What the Danish government did to make sure that private investors would come, was to extend the contract period from eight to 12-years. This made the economics work.  

It was as a result of dialogue between the three main bus operators, that allowed them to make the tenders attractive to institutional investors.  

 

There is a confidence factor in all of this. How does that play in when you are trying to secure private sector capital? 

Lisa – we are good at talking ourselves down and that is never going to deliver results and get people to invest. We have to get better at talking about the success of the delivery in this country and locally.  

We get stuff done on time and to budget. We need to deliver this in a comms fashion, to have these conversations whenever possible. We are very good at making the case to government, and to securing funding from government, but from an investment point of view, we need to make these propositions investable for the private sector.  

It might be hard for us to do that, but the results from these schemes need to be clear and obvious to those outside of government.  

Using Canada as an example, there was a rail link between a city and the airport. There were great investment forecasts, that were understated in the end, meaning the investor was delighted.  

We need to think about how we communicate in a sensible, realistic and confident fashion to get these projects delivered.  

The message coming from government is that we need to access private sector funding, so we need to be much stronger at how we bring together the public and private sectors.  

 

Thinking about longevity, how do you think about this from the outset when you’re looking at projects that may span 15-20 years or maybe even longer. What do you need to think about?  

Jon – you need to consider the contrast between the public and private sector views on these projects. The public sector when they are developing these schemes focus on outcomes and private sector are looking at risk.  

The process as it stands is to look at a strategic outlook case, which focuses entirely on outputs. That is such a different perspective to thinking about the financial case. Bringing those two perspectives together early in projects is key.  

There are examples of best practice, such as competitive dialogue with negotiation room for procurement. It relies on partnership working to shape a project to bring those two perspectives together.  

Paul – I think there is something about raising quality levels that you can get from this. So, moving away from baseline and business as usual that you would do for traditional funding streams and bringing private sector in to give them greater value.  

For example, we make the entire transport system better so that it benefits more people. In turn, more people will use it. Sometimes, rather than pushing boundaries, we do just the minimum viable product. However, there are big changes needed and especially when you work with public sector.  

We need to look at what the benefits of an improved scheme will bring and how that can be financed.  

 

Are there things that we can learn from Europe on this in terms of thinking about that kind of risk model from a longevity point of view? 

Madeliene – I spend time looking at urban bus models in Europe, which are largely concession based. You need certain routes to run and there are times when those routes don’t stack up with the private sector requirement to make money.  

Many routes in the UK are set by private companies to deliver a return, but that isn’t always the best way of working. Take Madrid as an example, it costs a lot less to get the bus and so people use the system. It is frequent and it works.  

There is a lot of talk about this in the UK, whereby we would centralise transport and develop systems that meet with local needs, which could reduce costs. Some of the challenges in the UK is where the depots are based and who they are owned by.  

Paul – Through the franchising in West Yorkshire we will be looking at owning depots and fleets to allow for greater competition of operators and consistency at the end of contracts.  

 

What skills do we need to pull these partnerships together both in public and private sector? 

Lisa – it’s having the skills on both sides, private and public sector, to be able to have the conversations that are necessary to deliver both an outcome and profit driven model.  

We need to pull in best practice.  

Profits not a scary word. In order to get the growth that we want, businesses need to be successful. Pension funds need to be successful. So, we need the skills on both sides to be able to come together and have those conversations.  

We need to engage as grown-ups and bring creativity to the ideas that are coming through. Also, when it comes to writing a contract, and getting the legals done, we need to allow organisations that are working within that environment to be flexible and creative.  

 

Closing reflections 

As the session comes to a close, the panel is asked to share any closing reflections.  

Paul – we have a cultural shift to overcome. It’s a really huge challenge for us to think differently, to make this happen.   

Jon – its translation about the different perspectives on public and private side and perhaps people working on both sides.  

Lisa – confidence and believing that all this stuff is doable and we are in a good space in the UK to get things done. Keep the faith, we can do it and do it better.  

Madeliene – it’s a really exciting time. A lot of this is part of the technology shift. Because technology changes and technology is moving forward quite quickly, there are a lot of other creative solutions we can think about when funding public transport. 

A great session and one that, again, raised a lot of questions as the audience headed off to lunch. There’s no doubt the conversations won’t stop here. Just like our transport infrastructure, there is a long way to go and a journey to travel but within this room there was a belief that it can be done.

 

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