Mutual Rail Companies: A key to unlocking a rebalanced economy

10^th April 2013

George Freeman MP contributes to ResPublica's Making It Mutual collection

History shows that leaders often turn to infrastructure projects at times of historic economic crisis. It normally pays off. Roosevelt’s dams, Churchill’s radar and Kennedy’s space programme all laid the foundations for long term economic advantage. (Kennedy’s space program is still paying dividends as the platform for the US’s global leadership in IT.)

We need to get the real economy moving again. The collapse of the New Labour credit boom has made it all too obvious that we need a new model of growth. The crash has called time on New Labour’s economic model of relying on debt-fuelled booms in the City, housing market and the public sector. The Government is right to insist on a more sustainable model of long term recovery through a ‘rebalanced economy’. We need a more regionally balanced, sustainable and globally competitive enterprise economy to generate long term savings and investment. New investment in infrastructure is a key part of turning these ideas into reality. So let’s be bold and think of new models – new ways to create the debt-free, asset-backed, real economic engines of growth that we can invest in, to invest in our infrastructure.

I believe mutual rail companies are one such model. There is potential for ‘new Victorian’ mutual rail companies with the power to issue an ‘Infrastructure Investment Bond’ to raise and invest the private capital needed for new high quality housing surrounding a network of fast rail, road and broadband links. Let’s apply the lesson of the Victorians and use the development gains unlocked by road and rail investment to finance it.
Some commentators talk of ‘shovel ready’ Rooseveltian infrastructure ‘schemes’ as if this is about buying growth by putting the unemployed to work in donkey jackets on road building. They completely miss the point. The significance of this investment is not in the speed of the payback –in fact modern road, rail, air, even broadband, infrastructure has quite long lead in times – but in the significance of poor infrastructure in holding back our real economy, the potential of new models of infrastructure funding to unlock new sources of finance and new engines of growth, and the opportunity to ignite a renaissance of localist civic leadership.

Long term infrastructure investment has been one of the great failures of the post war years. For too long, major infrastructure funding in the UK has been the preserve of Government. The privatisations of the 1980s did much to open up the monopolies and unlocked massive investment in some areas, but road, rail and energy infrastructure has severely lacked such investment. But this should come as no surprise: that is what happens to nationalised industries. For too long, large parts of the country have relied on central Government to fund their infrastructure, encouraging a form of ‘infrastructure dependency’ which is every bit as corrosive as our dependency on welfare.

We should be inspired by our Victorian forebears. They blazed a trail in the second half of the nineteenth and early twentieth century with a massive wave of infrastructure investment which still shapes much of our modern landscape – the towns and cities, roads and railways, utilities, and Universities. We need to unleash a revolution in the way we finance infrastructure, applying some of the core principles of the Victorian builders, and look at how we might unlock a wave of modern infrastructure investment based on the enlightened self-interest of local business and communities.

Nowhere is the potential of this more obvious than in my own region of East Anglia.

With Cambridge’s ‘innovation economy’ at its heart, East Anglia is increasingly recognised as perhaps the best exemplar of a region with the potential to drive the Government’s vision of a rebalanced economy. Treated by successive Governments as something of a sleepy rural backwater for farmers, commuters and retirees, policymakers are beginning to see that its strengths in science and innovation, information technology, renewable energy, venture finance, and its large rural area with desirable market towns make it a perfect candidate for the new models of localist regional growth we all want to see.

Underinvestment in infrastructure is holding us back. We will never unlock the potential of our region unless we invest in the necessary rail, road, broadband and sustainable housing development to get our region moving and show how ‘sustainable growth’ can work. How do we achieve the necessary investment and leadership to unlock this model of sustainable growth? What’s the core problem?

It’s not lack of money. There is over £700bn on the balance sheets of UK plc waiting to be invested, and huge reserves of private wealth accumulated during the boom. The FTSE is languishing at the level it was at pre-crisis 5 years ago. Confidence in a consumer-led recovery is weak. The banks are not functioning properly as investment intermediaries. More realistic investment attitudes are replacing the quick-buck mentality of the boom.

As Lord Heseltine has set out so clearly in his report, No Stone Unturned, the UK’s uniquely centralised and top-down political structure based on the functionalism of Whitehall departments of state continues to hold us back. Across the board, the Whitehall model of place-specific interventions through a series of parallel announcements and initiatives all targeted at the place in question does not harness, and very often destroys, the ‘dynamism of place’ – the commitment of people to the places in which they live and are responsible for.

He argues very persuasively that the Whitehall model of splitting up what is actually a vast amount of government money currently being spent on different departments within localities, and allocating by ‘need’, builds a dependency culture, rewards failure, undermines local leadership, militates against joined-up thinking, and actually holds back the ‘dynamism of place’ required for a really sustainable endeavour.

This is why mutual rail companies could be the key to unlocking a rebalanced economy. Mutual rail companies with long-term franchises, ownership of the land corridors and the duty and powers to develop them, could become real engines of growth. We need truly radical ideas to get us out of our funding rut. We need to free the public sector and local government and allow them, through frameworks such as rail bonds, to create major sustainable businesses of FTSE 100 standing that are capable of raising finance in the capital markets to invest in UK infrastructure and growth.

How might it work?

An East Anglian mutual rail company

If we’re serious about generating economic growth and a rebalanced economy, areas like East Anglia are vital in driving forward innovation and entrepreneurship. For too long, the eastern region rail network has endured under-investment despite a growing demand for more capacity. As has been demonstrated in the East Anglian Rail Prospectus, woeful rail infrastructure is holding the region – and the UK – back. Fast rail links between the three key cities of Cambridge, Norwich and Ipswich and the regional airports (Stansted and Norwich), and the redevelopment of hundreds of redundant stations neglected by Network Rail, have the potential to unlock a major wave of regional growth, and a new Innovation Economy based on a wave of Cambridge-style start-ups and spin-outs across the region.

We will never build a 21st century economy on 19th century infrastructure.

Here’s how it could work:

• Reintegrate the Network Rail and train operating companies, granting the mutual rail company a twenty year franchise to run an integrated Anglian rail network, conditional upon commitment to a long-term housing and infrastructure investment programme along the rail network;
• Grant the new company special development rights along the rail corridor, with generous compulsory purchase and compensation (as they have in France);
• Empower the company to issue a (perhaps government backed) 5% coupon to investors;
• Encourage a wide range of individual, corporate and pension fund investors;
• Allow local authorities in the region to be shareholders with a stake in the wider regional infrastructure vision;
• Structure the company so that it is led by a regional figurehead, and is accountable to its regional shareholders and local councils.

At a stroke we could create a major sustainable business of FTSE 100 standing, with major property and train operating assets, capable of raising finance in the capital markets to invest in UK infrastructure and growth.

It’s bold. Some would say radical. We have no reason to be timid. Our country is being held back by stale top-heavy structures – big government, big banks, big utilities – which are preventing the entrepreneurial and innovative recovery we desperately need.

A mutual model of rail?

Some will ask: is there really the appetite and ability for the necessary local leadership? I would argue that the post-war years have built a deep dependency culture in both our regions, and our attitude to rail. We have lost the capacity to imagine a different model based on rail as the expression of a region’s aspirations for itself.

The banking and government debt crisis is the perfect opportunity to explore the possibilities of a more sustainable model of financing.

All the evidence suggests that co-operatives and social enterprises have been out-performing mainstream businesses. In the UK, the co-operative sector grew by more than 25% between 2008 and 2011. [1] RBS report that social enterprises are “flouting the fiscal gloom to grow faster than the rest of the UK economy”, and are outstripping SMEs for growth, business confidence and innovation. [2] Spanish co-operatives have seen an increase in employment by an average of 7.2% in the last quarter of 2011, despite wider unemployment at record levels. Research suggests that co-operatives have higher resilience in economic crises. [3]

Evidence also indicates that the public are ready. Recent polling highlighted by Christian Wolmar shows that: [4]

• Almost 75% of regular rail users in the UK would like to have a greater say in the rail company they use most frequently, rising to 79% for those who use trains at least once a week;
• Almost two thirds of UK adults (63%) believe passengers should have a greater ownership stake in train companies;
• On average, regular commuters would be willing to invest over £840 personally in a co-operatively owned TOC. Even people who are travelling once a week are still willing to invest over £500 per head.

The Government has rightly identified rail infrastructure as a key priority and is thinking radically about how to tackle the challenge. But what is the right model for the railways of tomorrow? We need coherent track and train management, the ability to plan long-term investment, the integration of development planning with transport, and a commercial vehicle capable of generating a return. And above all, we need bold leadership and joined-up thinking.

Imagine an East Anglian Rail Company which controlled the track and trains and stations, enjoyed a long term franchise and ability to attract the very best management, secured the billions of new finance needed to fund new rail, train and station infrastructure, and had the necessary planning powers to develop a coherent model of sustainable development along our rail corridors. Imagine if we, the rail users and taxpayers of East Anglia, had a stake in it.

The Treasury will probably say that they do not have the freedom to raise finance using government guarantees because it adds liabilities to the public balance sheet. The Department for Transport will probably say it is impossible. The rail industry may prefer the comfort of a system they know, rather than a system that they don’t. Local councils may worry about how planning powers could be exercised by a different vehicle.

But if we are serious about unlocking a new model of sustainable, resilient, localist growth, and the billions of pounds of private investment we need to upgrade our ailing infrastructure, we need to be prepared to be bold.
Above all, we need to unleash the local leadership and ‘dynamism of place’ destroyed by the dependency on Whitehall. It’s time to give mutual rail companies a serious look.

This article was originally published in ResPublica’s Making it Mutual: The ownership revolution that Britain needs, a collection of essays covering all areas of policy – energy, financial services, education, infrastructure, welfare, public services, competition – proposing entrepreneurial and innovative policy proposals for structural reform.