The combined approach of a model designed to deliver long-term, lower, less volatile returns, combined with governance that enshrines and builds trust offers radical alternatives to current approaches. It could be adopted in a wide number of sectors such as roads, rail franchising and construction, nuclear, electricity storage and distribution, and could be rolled out more widely at the local authority level, and in health and accommodation sectors.
In many infrastructure sectors, the current approach does not seem sustainable; short-termism from the private sector does not sit well with long term infrastructure investment in public assets, the public sentiment is against private ownership, the level of risk transfer under PPPs is too great, and the cost of capital is too high relative to public sector alternatives. But a switch to public sector delivery is also undesirable; the capabilities do not exist, the approach would not foster a strong contracting industry, the focus on costs and clarity of objectives would be lost.
The lower cost model and revised governance described in this paper offers an alternative approach.
For existing infrastructure companies and utilities that already have lower costs of capital, their focus should now be on governance; what should they do to demonstrate their long-term commitment to infrastructure and customers, to align incentives and build public trust in private delivery?
For new infrastructure, the new model could be applied in a number of sectors. For instance:
• New nuclear - rather than the high risk transfer/high cost of capital required to deliver Hinkley, a RAB-based approach could reduce the cost risk transfer to the new entity and importantly its underlying contractors, and reduce its cost of capital substantially, materially reducing the electricity price required to make it economic. Governance should ensure refinancings are kept within the company to lower prices and retain flexibility. The RAB approach with charges going to end users, could still deliver an off-balance sheet treatment for government.
• Regional roads - there is a disparity between the maintenance regimes of Highways England and regional roads, with budget constraints materially impacting the latter. Could the two be brought together in regional trusts and funded to ensure consistent quality? Governance could be more regional and focus on the links and access necessary to help regional growth and address issues at the local level.
• Road maintenance - Could existing road maintenance contracts be on a longer term, more trusted basis, with joint ownership, allowing certainty of revenues, investment and training, with a commitment to shared working practices to deliver cost efficiencies?
• Rail franchises - the current system of short term franchises with high levels of revenue risk transfer does not seem sustainable. Could long term franchise companies be established with a governance committed to growth in passengers and service quality? What would be the impact on employees who wouldn't be changing employer every few years; what would it mean for training, allegiance and career progression? Governance could focus on obtaining the lowest possible price consistent with low levels of return but evaluate other key measures of customer satisfaction, with management paid on a long-term basis aligned to those objectives. The sector could be self or soft-regulated rather than using contractual risk transfers that currently are not effective.
• Rail restructuring - there have been several recent reviews of Network Rail calling for regional vertical franchises; but on what basis? High risk transfer and short-to-medium term concessions may not be consistent with the risk appetite and strength of the contracting industry. Would it be better to have lower risk companies with a governance aligned to developing the interests of the railway? Companies that will invest long term and not profit maximise short term? Where they can and will accommodate change and work with other parts of the industry for a better collective output, not look to maximise or protect its position according to a complex web of interacting contracts?
• HS2 - if this is to be sold post construction of phase 1, could it be owned by a utility with long-term governance in place, that will keep a prudent capital structure in preparation for investment in the next phase, and governance focused on working with franchises and Network Rail?
• Regional PPPs - could this new model be used regionally for accommodation, health and local authority projects, rather than using PF2 or public procurement? An approach that aligns with the aims and make-up of Local Enterprise Partnerships?