Funding Large Transport Infrastructure Projects: Challenges, Risks and Opportunities
Christopher Davis, Oxera Consulting LLP, Michele Granatstein, Oxera Consulting LLP
We examine the challenges, risks and financial issues that arise in the context of large capital expenditure projects in transport infrastructure, including how such schemes can be funded and the interface with government and regulatory policy.
Across Europe, member states are faced with a substantial programme of investment to maintain, replace and enhance transport infrastructure as they look to increase economic productivity and competitiveness, keep pace with spiralling demand and capacity requirements, and mitigate the impacts of climate change. Given the scale of the investment requirement, ensuring a climate that stimulates efficient investment is an important consideration for policymakers, regulators and investors.
In the UK alone, the government has initiated the largest ever investment programme in the rail sector (including Crossrail, HS2 and electrification of significant parts of the network), has committed to over £15bn of investment in the strategic road network over five years, and is currently considering the case for a third runway at Heathrow airport.
Across each of these sectors, the main infrastructure providers (Network Rail, Highways England and Heathrow) are subject to forward-looking five-year funding cycles, with varying degrees of oversight from independent regulatory authorities (the Office of Rail and Road, and the Civil Aviation Authority). But establishing an efficient capital expenditure allowance for a five-year period is complex: projects are often one-offs, and cost forecasts can be subject to considerable uncertainty at the time of the regulatory review. In the GB rail sector, the result of this uncertainty has been significant cost overruns and delays in delivery, and a fundamental within-period review of the enhancements programme. So what lessons can be learned from this process, and how might infrastructure investments be funded and monitored in future?
Drawing on experience from across infrastructure sectors, this paper considers the key challenges, risks and financial issues that arise in the context of large capital expenditure projects, and the implications for future investment in transport infrastructure, including how schemes can be funded and the interface with government and regulatory policy. The main research questions for the paper are as follows.
•How should projects be funded—in particular, who should pay, and how should the recovery of costs be phased over time (e.g. pre-funding; current versus future customers)?
•Given the requirements of EU state aid law, how can projects that would typically be undertaken only with significant state support be delivered with more proportionate state involvement?
•What role should customers play in the process of option identification, specification and selection?
•What are the key risks associated with planning and delivering large CAPEX programmes, and how can these risks best be mitigated?
•Where there is a framework of economic regulation in place, how should large infrastructure projects be treated? Should they be planned, regulated and delivered separately from the rest of the regulated company’s activities (e.g. using third-party funding streams, such as Transport for London)?
•Are approaches such as competitive tendering and public–private partnerships the most appropriate way of delivering large infrastructure, or can these projects be achieved more effectively under the RAB–WACC regulatory model?
Association for European Transport