1. The investment case

There is a big gap between current levels of rail investment and what is needed to meet key objectives including a clean and climate-resilient railway which is attractive to passengers and freight and supports net zero and levelling up. There remains a gap between public sector investment and the volume required to address the UK’s infrastructure needs. A rough estimate of the UK rail infrastructure investment gap is provided by Global Infrastructure Outlook, which compares current trends in investment and infrastructure needs to identify a £4.12bn2 annual gap (equivalent to about 0.15% of UK GDP), rising to £112bn3 cumulatively over time.4 Depending on the level of ambition for rail as an enabler of economic growth and social mobility, this may well be an underestimate.

Climate resilient infrastructure will present a growing challenge: RIA’s early analysis of funding for Network Rail in the next five year period 2024-2029 suggests that whilst it is broadly constant in real terms, it is unlikely to be sufficient to maintain the assets in a sustainable condition.

Transport is the largest emitting sector of greenhouse gas emissions in the UK, producing 24% of the UK’s total emissions. 5 While rail is a small part of the problem, it can be a big part of the solution. In 2019, rail made up 9.5% of all passenger kilometres (across all transport modes), but only 1.4% of UK transport’s CO2 emissions, and only 0.5% of all UK emissions.6 This means that a modal shift towards rail, connecting new communities to the rail network and providing the capacity for more journeys, creates enormous potential for reducing emissions. UK rail passenger numbers are continuing to grow and were reaching 100% of pre-covid levels in early 2023.7 There is strong evidence of growing demand for clean public transport post-Covid. 8

The UK currently has an uneven profile of stop-start investment in key rail assets, which is wasteful and undermines productivity: private investment could help smooth the profile.

The most efficient and cost effective approach to decarbonisation requires a steady workbank of rail upgrade projects as well as required renewals and maintenance of the network, in particular to accelerate rail electrification. Around 38% of the UK rail network is electrified – much less than comparable European countries, which are typically 60% or more electrified.9 Data from the Office of Rail and Road shows that the UK is electrifying its railway at less than half the rate needed to decarbonise by 2050.10 The UK profile of investment has also been much less steady than countries such as Germany, where unit costs of electrification are lower (figure 1).

Signalling also requires consistent investment, as 65% of current signalling needs to be replaced in the next 15 years (figure 2).11 Upgrading to digital signalling will be vital for improving the passenger experience, making trains more reliable and increasing capacity, as well as for improving safety on the UK rail network.

Figure 2. There is a substantial increase in signalling required, not currently funded14 Source: Office of Rail and Road

The UK also needs to boost economic growth and productivity. The National Infrastructure Commission has recognised that there is a need for private investment in infrastructure to achieve key goals, including levelling up.15 A steady programme of investment supports productivity by:

● Giving companies the confidence to invest in training and apprenticeships

● Ensuring that skills developed on projects are not lost when projects are completed, but redeployed on new UK projects

● Providing employment in high skilled jobs across the entire UK, and includes everything from local SME manufacturers to large international companies.

Investment in rail infrastructure, whether public or private, generates economic growth and public benefits, both during the construction of projects and as a result of the services they deliver.

Investment in rail delivers a range of economic, environmental, and social benefits including time savings, higher wages, job opportunities, improved public health and improved access to key services for communities.16 The number of people in “transport poverty” in England has previously been estimated to be around 1.5 million people (2.4% of the population).17 There is a significant opportunity to connect more communities to the network, transforming local areas. Rail investment, both private and public, is needed to achieve economic growth and a boost in productivity, connectivity, and social mobility.

Rail projects do not only provide positive benefits as a result of the services they provide, but also as a result of the productivity associated with the rail industry. For every £1 spent in rail, £2.50 of income is generated in the wider economy. Not only does the rail industry support 710,000 jobs – these green jobs are also more productive than the UK average, contributing more Gross Value Added per person than average.18

THE VALUE OF UK RAIL:

An independent 2021 report by Oxford Economics, commissioned by RIA, found that the UK rail industry supports:

● £43 billion GVA in economic growth

● 710,000 jobs

● £14 billion in tax revenue each year

● For every £1 spent in rail, £2.50 of income was generated in the wider economy

Because of the large extent to which rail delivers public benefits, rail systems and public transport are often subsidised.

In addition to passenger rail, rail freight also has enormous potential to deliver benefits. A 2023 report shows that rail freight contributes £2.45bn in economic benefits to UK PLC every year, with a single rail freight service having the potential to remove up to 129 HGV movements.

Globally there is considerable investor appetite for rail as a ‘green’ investment opportunity – but more could be done to leverage this investment into UK rail infrastructure

Green investment and green finance has experienced significant growth in the past decade. According to a 2022 report, the green finance market has grown from £4.2bn19 in 2012 to £441bn20 in 2021.21 Both in the UK and internationally, strategies such as ‘impact investing’ and ‘ESG investing’ have grown and garnered considerable interest. Unlocking private capital in infrastructure has recently been identified as a key priority for the G20 countries, especially in the wake of the pandemic.22 At COP26, the Glasgow Financial Alliance for Net Zero was established, with 550 financial institutions worth £106 trillion23 committing to using science-based guidelines to align their assets with net zero by 2050.24 Private finance for green infrastructure is not in short supply.

In the UK, private finance is being successfully used in the rolling stock market. As well as from traditional banking, the UK rolling stock market has access to significant funding earmarked for ‘green’ ESG financing. Looking at a European example, the European Investment Bank supported the purchase of high-speed trains by Trenitalia using green bonds – this was the first time the bank had used such a designated green subscription.25 The appetite for rail as a green investment is clearly there.

How can the UK railways secure more private investment?

In contrast, private funding or finance plays a relatively much smaller role in wider UK rail infrastructure. Pockets of private sector involvement exist. Rail freight brought in £2.8bn investment over 1997-2018 (c£140m per year)26 and HS1 is a privately run 30 year concession. There have also been recent plans by Network Rail to work with a third party consortium to upgrade telecoms infrastructure. However, data from the Office of Rail and Road shows just 10.5% of investment in new infrastructure is from private sources, with the majority in rolling stock, and a small amount of investment in stations and track and signalling.27