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Railtrack haunts Cameron's plan for road privatisation

Fear of recreating mistakes of the past is the biggest threat to prime minister David Cameron’s bold vision to drag England’s roads into the 21st century, aided by vast slugs of private money.

Cameron’s momentous speech to industry leaders at the ICE has been widely welcomed (News last week); however much cynicism and doubt surrounds the actual delivery.

He cited the water industry as an example of a public utility that has been much improved using private cash from fi ercely regulated private owners; documents published alongside chancellor George Osborne’s Budget two days later reiterated this.

They commit government to carrying out a feasibility study into new ownership and financing models for the national road network, “learning lessons from the water industry”, and to report on progress by the Autumn Statement, likely to be delivered at the end of the year.

It’s a careful choice of industry to learn the lessons from. An industry far closer to home, and with a far more chequered postprivatisation past, is rail. The now deceased Railtrack is a hard skeleton to hide.

“It’s a great idea, and is truly exciting. But it will never happen because Railtrack looms large as a massive scar on government,” says one senior transportation boss. “Are the railways cheaper now as a result of privatisation? McNulty would say not.

Privatisation of the London Underground was disastrous also; and even the much-vaunted privatisation of the water industry, despite seeing the condition of the existing asset base improve, has still led to the east and south east of England being plunged into drought this year as early as Easter, 23 years after privatisation.

It is clearly a sensitive issue, and certainly not one that transport minister Norman Baker was prepared to tackle last week during what turned out to be a flying visit to the Future of
Highways Delivery conference in London. A 30 minute speech was condensed into 10 and rattled off so fast few in the room could keep up with it; no questions were invited and the MP was out the door so fast he forgot his newspaper.

Word also reaches NCE that the Highways Agency is leaning on some of its suppliers to keep their mouths shut on the implications for what is a seriously politicised issue.

So all credit to Cameron for standing up and confronting the truth: underinvestment in our roads is chronic and under the status quo it can only get worse. After all, the amount of
money taken from motorists is decreasing, so why would any government spend any more on them? It’s simple maths. Since 2004 the amount of new road construction has stagnated at around 160 lane/km per year or less (in the 1990s it was frequently 600km or more). But actual income from motorists is also falling; increased fuel efficiency means revenue from tax on fuel as a percentage of GDP is expected to halve over the next 30 years and income from Vehicle Excise Duty (VED) - the tax disc - has fallen in real terms since 1997.

The Treasury is acutely aware that as the cost of oil soars the move to high effi ciency cars is going to accelerate, further hitting the coffers. “The Treasury knows that income is falling off a cliff and that it needs to change the game,” says another industry source. “It knows it needs to replace VED.”

The answer, most are agreed, is a sell-off of the Highways Agency on a region-by-region basis, turning it into a set of regulated private utilities with the operators initially funded by
some form of shadow toll or lane availability payment; but with the long-term view that some form of road user charging could be introduced, with the government now one step removed from the firing line.

It is a move with many pluses; not least the up-front injection in capital to the Treasury. The Agency has valued its asset base at £99bn, and it would expect to generate that sort of money from any sell-off . It is also a move that is already happening - the Agency already has 11 privately financed contracts operating across the network; a fact missed by most motorists. And, of course, one of the Agency’s areas - Area 5 around London - deal the Agency signed with the Connect Plus consortium of Balfour Beatty, Skanska, Egis and Atkins in 2009.

Atkins highways director Phil Hoare says that that project - albeit heavily criticised by the Public Accounts Committee as costing the taxpayer up to £1bn too much because of over-specification and procurement delays - stands as a decent example of what could be done if the price is got right.

“I know we’re involved, but I do think it’s a brilliant example. We are delivering a pretty significant upgrade on time and on budget. Yes, there was criticism of the timing of the deal, and
there is learning there. But this approach has worked previously and it is here too.”

It also stands as an example of an investment opportunity to the pension funds Osborne is courting; of the £1.3bn of project funding injected, £925M is being put in by 16 banks. Other highways PFIs, notably in Portstmouth and Birmingham, are seeing work done at good value to the taxpayer. More are out there and they too are solid investment opportunities.

The Highways Agency’s newlook maintenance deals for its 10 areas are also a significant step towards independence. Replacing prescriptive outputs with outcome-based targets and
upping the value of individual projects taken on to £50M means the new Asset Support Contracts offer more scope to do things the way the owner of a privatised utility would want to be able to operate.

The Agency needs to go further and become more hands-off, say most, but it’s a start. “Even with the ASCs, the Agency is a bit too hands on in handling how the work is paid for. It needs to let that go,” says Colas highways director David Craik. “While it is still taking ultimate responsibility for network life you won’t get the best out of contractors in terms of innovation.”

But these ambitions are realistic. “It’s not radical and it’s something we’ve been extremely keen on,” says Craik. “With private investment you get contractors taking the lead. With all the know-how that contractors have I would argue they are far better at maintaining and managing the day-to-day operation of the asset than a thin client,” he says.

Not only is it not radical, it’s not new; the RAC Foundation mooted this exact approach in its report Governing and Paying for England’s Roads in 2010. It’s a thorough study that perhaps got overlooked in the post-election, frenzied build-up to the Comprehensive Spending Review.

Report author and Foundation director Professor Stephen Glaister says that he received “no reaction one way or another” from the Department for Transport to the report at the time. But
he is encouraged that Cameron is now stepping up to the plate.

“It is very encouraging to hear the prime minister himself is taking an interest in the chronic levels of traffic and congestion drivers face in the years ahead. The roads are a vital asset and
need adequate investment. Almost everything we do requires travel and if there is not the money to adequately maintain the network the country will grind to a halt.

“We should cautiously welcome the prospect of private sector involvement. There are just not enough public resources to provide the capacity we need and this offers the chance to make long-term plans for a utility every bit as important as things like water, power, electricity and the railways,” he says.

It’s a view echoed by industry, where injecting pace and momentum into Cameron’s study is the top priority: “We need to make sure there is some pace behind it,” says Hoare. “As an industry we need to play our part, engage with the Department for Transport and Treasury and feed in our expertise in a proactive way. I would call for pace and urgency; we could do some things quite quickly and if we make this happen the impact on the economy will be significant and we’ll all be employing more people.”

URS transportation director Paul Bracegirdle agrees. “We welcome the feasibility study and industry must now work with government to provide the detail that will ens re this scheme happens and works in practice. Rather than a departmental or civil service restructure, Cameron’s initiative is a concrete attempt to make real improvements to the UK’s strategic network, which everyone agrees has previously lacked investment.

“Although the political will to invest in the network is there, private sector funding is the real issue,” he says.

“The government and industry therefore need to collaborate in the national interest and develop investment plans that all parties buy into.”

Chancellor George Osborne is behind it. “We want investment from British pension funds in British infrastructure - and we’re now working with a dozen of the largest pension schemes
specifically on that,” he said in last week’s Budget, adding that the new Pension Infrastructure Platform, owned and run by UK pension funds, will make the first wave of its initial £2bn
investment in UK infrastructure by early 2013. A separate group of pension fund investors has also presented proposals to the Treasury for increasing pension plan investment iin infrastructure in the construction phase. The cash is there, the plan is there, but can we ignore those scars?
is already eff ectively privatised
through the 30-year, £6.2bn M25

Readers' comments (1)

  • John Mather

    Good article Mark but something has to change as we can't sensibly muddle on as we are. The DfT's own road traffic forecasts indicate that serious problems lie ahead if and when we can drag ourselves out of the recession. Space on our strategic road network is limited and needs to be managed. But I don't think the general public, or our politicians, are ready for road pricing. So it looks like the DBFO model (with shadow tolls) may provide a compromise. But the costs of private finance and the balance of risk and reward will need to be addressed.

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