How private investment could fund Wales’ transport future

Professor Stuart Cole, CBE. Emeritus Professor of Transport Economics and Policy, Prifysgol de Cymru / University of South Wales

In market-orientated economies such as Wales, or the wider UK  economy, commercial businesses can derive financial benefits (e.g. better market access, lower costs) from the  construction of new or improved transport infrastructure.

Arguably they should contribute to the cost of that infrastructure as a payment for what is called  ‘development gain’. It can take several forms.

 Development gain from new infrastructure

There are  those rare occasions where high value sites no longer needed for railway or bus purposes have been sold for private development. The sale of development rights above public transport facilities or relaxation of land use planning regulations has also been a means of funding new stations or new lines.

This is not a new process. In the 1890’s the Metropolitan Railway Limited  procured the land required to construct the 41-mile railway between London and the open countryside. The company had also bought farm land surplus to train operations at agricultural land prices.

By the 1920’s a parallel business, the Metropolitan Country Estates Company, with largely the same directors created  new-style commuting by fast train advertised as being from ‘your country home to your London office’. The railway company , it seems only paid a dividend twice. Metropolitan Country Estates made a substantial development gain from selling houses at a substantial profit per acre.

Washington Metro

The Washington Metro was partly funded from selling development rights land above underground stations whose positioning in the central business district had increased their value.

In New York the refurbishment of the subway and the provision of a multi-million-dollar fleet of new buses was funded from profits on toll-bridges owned by the Port Authority of New York and New Jersey.

In many European countries local business taxes are imposed on companies to provide a specific funding source for public transport  based on company turnover, profitability or in the case of the French tax versement transport, employees’ salaries. In 2013 a BBC Wales Week In Week Out programme, on which I advised, compared the Valley Lines proposed electrification with the construction of the tram system in Bordeaux.

In the French case, the funding came from what the Maire referred to as a ‘war chest’ of investment Euro derived from a tax on business, local funding and a grant from the French Government. These forms of taxation  have been used extensively in for example the Portland, Oregon tram system and Vienna’s underground railway. Such tax provisions are not used in the UK.

Central areas of cities such as London can only function with high-capacity public transport which can result in high land values. In individual schemes, high-density commercially-valuable property has been developed close to or even above main line railway stations – Montparnasse (Paris), Victoria (London), New Street (Birmingham) are three examples.

Does improved transport infrastructure bring financial or economic success?

If such transport infrastructure had a positive impact on the success of, for example, a factory, housing estate , or commercial development, then a development gain payment  to transport authorities could be justified.

Transport investment can play its part in attracting investment, serving more peripheral areas and encouraging economic development of  countries such as Wales in relation to a much larger England or the European Union (EU). Good quality transport links has an effect on competitiveness and can reduce costs by reduced road (or rail) congestion.

The relative weight that companies put on the level of transport costs and the predictability of delivery times will determine how new infrastructure affect business decisions and the link between traffic growth, transport investment and economic growth.

Surveys of companies consistently show transport as one of the top four factors in determining the location of their developments which would suggest that development gain is prevalent in some decisions. On this basis there might be a rationale for charging private companies who benefit from the investment.

The south and north Wales primary road routes were improved to enhance inward investment and attract tourists. However, research  in EU member states has shown that transport is a ‘secondary consideration in company strategy when deciding where to locate their activities’. This weakens the argument to ask private companies to pay a share of the capital cost.

However companies moving into regeneration areas could argue they would have gone there anyway and proving the link is difficult. In any event neither Welsh Government nor local councils would want to deter any inward investors into Wales’ old industrial regions where new employment is essential.

Joint public / private developments

There is another way in which the private sector can become directly involved in what might traditionally be seen as a public sector responsibility. This is not a case of the public sector borrowing from commercial banks but one of the private sector directly becoming involved in the infrastructure itself.

The Prince of Wales Severn Crossing was exclusively a private sector project (so keeping the investment off the UK government balance sheet) charging tolls. The A55 across Ynys Mon was a ‘Build-Own-Operate-Transfer (BOOT) scheme enabling the 4-lane dual carriageway road to be built sooner and charging shadow tolls paid by Welsh Government. Both structures would transfer to government ownership at the end of a financial / contractual period.

The Cardiff Bus Interchange is part of the wider Welsh Government and private sector-led building project involving Rightacres Property and the financial company Legal & General. The land was purchased by Welsh Government which fitted out the bus area. This provided a positive partnership of commercial and public uses – the bus services operating area, ground floor retail units, residential apartments and the Legal & General headquarters.

In Great Britain very little of the necessary finance for public transport infrastructure has been raised through development gain. Electrifying 170 miles of the Cardiff commuter network (Valley Lines) required funding of £1.1 bn. This was primarily from Welsh Government, along with UK government and EU Regional Development Fund

To maximise public service development gain from transport infrastructure investment requires a commercially savvy  team representing the government or its agencies – who mostly own the land involved.

Commercial partners will, of course, look to gain a profitable return on any investment whether directly from a building or a financial contribution to a railway / road development.