Transport and Infrastructure - What to watch in 2019

Mon Jan 07 05:00:00 UTC 2019
Daniel Hanson

I took this photo when I was on holiday with my family in the summer. We stayed at a campsite about 90 minutes to the north of Bordeaux and had been playing football on the beach one fantastic evening. Then the storm came in. People—including my family and I—stood around watching and taking pictures as it approached. But then we literally had to run for our lives because things were changing fast; chairs were flying through the air, trees were being uprooted and blown over, and the rain was so torrential that the paths back to our campsite became rivers.

Over the holiday break, I found myself wondering whether UK transport and infrastructure is in a similar situation at the start of 2019. And if it is, what changes will public and private sector organisations need to make if they are to succeed? Just like on the beach, things could be about to change dramatically.

They could change in at least five ways.

First, the government is carrying out a “root and branch review” of the rail sector—chaired by the Keith Williams, the former Chief Executive of British Airways. The stakes could not be much higher, with about £20 billion spent every year in the sector, about four million passenger journeys being made every day, and given the importance of the sector to numerous companies and approximately 190,000 employees.

There are also big issues to consider, such as:

1.      What level of service should the railways be providing and how can this be defined and made clear to avoid the ongoing “expectations gap” that plagues other sectors (like audits)? The railways cannot and will never run perfectly, but what service failures are reasonable rather than symptomatic of a real problem?

2.      Is vertical integration better than vertical separation coupled with more competition between train companies? The current “direction of travel” seems to favour the former, but is this right? Why or why not?

3.      How do we design a structure that will be “future proof” given the massive technological disruptions facing the sector and which could profoundly affect the fundamentals of why, where, and how we travel? More on this topic later.

4.      Is there a one-size-fits-all approach to the railway, or is there a more nuanced and flexible approach (e.g., with vertical integration in some areas but not in others) that would be better?

I had the opportunity to discuss these issues at a dinner hosted by David Moore from the law firm CMS before Christmas, but much more—and very clear—thinking will be required.

Second, the government recently launched a Green Paper on the country’s aviation strategy. It is hard to think of a subsector facing a more challenging time and with more issues that need to be solved. Aside from issues related to Brexit, some of the most pressing are:

1.      How to ensure the country has the right levels of international and domestic connectivity. The International Transport Forum recently published an important report on the latter, and former colleagues from PwC and I have done some under-reported, but (I think) useful, work for the Airports Commission on the former (see for example, pages 326 to 336 of this).

2.      How to develop a new approach to slot allocation and the financing of a new runway, given the way a new runway will change the demand and supply for new slots, as well as the approach required to economic regulation and therefore financing of the new runway itself.

3.      How to do all of the above in a way that is “policy coherent”. The approach to connectivity and slots and economic regulation needs to be developed in a way that fits with overall policy objectives and socioeconomic conditions that are being challenged by profound disruption.

Third is the appraisal and financing of major projects. These range from digitally enabled rail signalling and 5G-connected roads to transport infrastructure designed to facilitate housing development and projects aimed at safeguarding the cultural and physical foundations of the country (e.g., renovation of the royal palaces and the safe disposal of nuclear waste). All these projects cost many, many billions of pounds and therefore require new approaches to appraisal.

The fundamental challenge is how to ensure that these new approaches can be, and actually are, used in a way that breaks new ground rather than attracts criticism. More light and less heat is required in an area that is—often quite rightly, but sometimes very wrongly—risk-averse and prefers the “standard” approaches to be applied. I recently took part in an excellent workshop on appraising transformational projects hosted by Professor Tony Venables and Josh Nava from the Department for Transport in which we, and others, discussed how to do this using “accredited” peer reviews, the sharing of best practice, and joint working groups with the ultimate users and recipients of such appraisals. Some lateral and effective thinking on process and governance could be crucial if progress is to be made.

Fourth is the role that could be played by economic regulation in unlocking finance for projects before they are actually built. The key role that economic regulation can play in unlocking finance after infrastructure has been built and/or for companies that already exist is well-established—see, for example, how the concession for High Speed 1 has been sold twice, each time for considerably more than expected. See also how the UK’s RAB-based model of regulation has enabled companies in numerous sectors to unlock many billions of pounds of low-cost finance. However, there are now a number of potential projects in the UK where regulatory frameworks, if designed well, could be the “deal-maker” by unlocking the finance required for the project to go ahead at all. Likewise, the principles of economic regulation could and should be applied to ensure that costs are controlled instead of, as often happens, spiralling out of control. I will be speaking more about these topics at a conference later this month.

Finally, there is technological change. I have written before about how this and people’s perceptions could be the future of transport but—just a few days after China has landed on the side of the moon that did well for Pink Floyd—it is worth reiterating that the why, where, and how of travel could be about to change:

1.      If people are increasingly able to work from home, this could affect where they will live, the shape and size of our cities, and therefore what networks of physical infrastructure we need. Are the networks of today the ones we will need in the future? Probably not.

2.      If in the future people purchase trips using some type of system that makes Uber seem basic, then the bargaining power shifts from the natural monopolies of physical infrastructure to the new natural monopolies of data. Will the demand models of today be able to reflect this change? Almost certainly not.

3.      If shared autonomous vehicles go mainstream as quickly as people increasingly believe they will, then the capacity of the road network could be massively increased (as could the demand for travelling by road) and travel by road could increasingly become a substitute for travel by rail. In turn, this could create significant financial issues in a sector characterised by high fixed costs and large and sunk investments. Will the commercial models of today be able to cope? Take a guess.

The key point is that if there is even a reasonable prospect of these changes occurring—in rail, aviation, and the other aspects of transport and infrastructure referred to above—then policymakers (in their reviews, Green Papers, and appraisals) and private and public sector organisations (in their investment decisions and daily decision making) need to take account of them and act now.

If that happens, then we could all make it back to the campsite rather than find ourselves swept away by the storm. We managed this when on holiday, but it was a close thing and the issues we had to grapple with were not anywhere near as complex!