Opinion insurmountable obstacle.
The CBI has urged the government to do more to get pension funds investing in infrastructure by enhancing the projects’ credit ratings.
In a report in May it suggested that the Treasury ‘underpins’ infrastructure projects by underwriting or guaranteeing around 10 per cent of the total cost of the scheme. Alternatively, HS2 could approach banks, investment funds or even sovereign wealth funds for the money needed to develop the scheme. This may be a tougher sell for HS2, as banks tend to value high returns over the plodding certainty associated with infrastructure projects. There’s also the small matter of the impact of the Basel III rules, which from next year will reduce banks’ ability to invest in illiquid investments like infrastructure. Banks will need to be convinced that the returns will be high enough before they invest. And they’ll be wary of a repeat of the Channel Tunnel experience, where several banks that had invested got their fingers burnt when passenger numbers initially failed to meet expectations.
Alternatively the government could use bond finance, which involves a pledge to pay a fixed amount of money to investors over time.
This is the model being used in California for the proposed £44bn high speed rail project linking San Francisco and Los Angeles.
The problem with bond finance is that a bond’s value is fixed before construction starts – which could leave the government with an expensive shortfall if the project goes over budget. If this approach is used, HS2 will have to ensure a rigorous and responsive cost management programme is in place to ensure that the budget is not exceeded.
The government is the only entity that could take on this
level of debt, and the risk of meeting the bond repayments, even if revenue from the finished HS2 scheme is less than predicted. Any shortfall would have to be met from Treasury coffers. Some have mooted the idea of a sort of levy to recoup some of the project’s construction cost.
This could take the form of a passenger levy. However, this is currently being ruled out by HS2 as it tries to promote the new line as a ‘people mover’ and not a ‘rich man’s railway’. More controversially, a levy on businesses in the areas that would most benefit from the improved connections provided by the project could be used.
Such a scheme has worked well for London’s Crossrail, where business levies are contributing roughly a third of the cost of construction. But getting approval for the 2p in the pound levy on London businesses was relatively straightforward, given that there is only one political authority involved, the GLA. With HS2, where the levy would potentially apply to businesses at both ends of the line, things would be much more problematic. The scope for arguments about which city derives the most benefit from the line, and who should pay more to fund it, is considerable. If the councils in London, Birmingham, Leeds and Manchester chose to go their own way on this issue, a business levy could easily become all but unworkable. Ultimately the most likely scenario is a ‘mixed economy’ of public and private sector funding for HS2 being used. PPP, the funding model darling of the 1990s, is now somewhat tarnished in the eyes of the public. But as HS2 gets off the drawing board, it will almost certainly be rehabilitated, rebranded and called into service once again.
Anooj Oodit is the director of rail at the programme management consultancy Turner & Townsend.
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www.barnwell.co.uk SEPTEMBER 2012 PAGE 51
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