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Category Archives: Rail

Publications on issues involving the rail sector

Budget 2016 – A budget for small business and savers

This year’s Budget is one that small companies should be excited about, the chancellor not only announced his intention to lower corporation tax to 17% by 2020 but also a raft of measures to shift support towards smaller businesses and savings.

Many will ask, why is such a shift important? SMEs make up a significant proportion of businesses and economic activity in the UK. The FSB estimate that small businesses accounted for 99.3% of all private sector businesses at the start of 2015. That is a lot of activity and economic potential that could be unlocked.

Whilst there have been some announcements that add costs of items such as the implementation of the National Living Wage, assistance to small companies during the transition until 2020 will help to relieve cash flow issues.

There were also new saving products in the budget with the launch of Help to Save and the lifetime ISA. These will be a welcome relief to individuals that have struggled to improve their financial position give the historically low interest rates.

Infrastructure was another potential beneficiary with the announcement of HS3, Crossrail 2, several road investments and extra funds for flood defences. Such investment is key to ensuring the economic potential of the UK in the future. Caution should, however, be urged. Whilst the commitment to these projects is sound progress the UK still struggles in the international rankings for its infrastructure and its investment levels are generally considered to be below where they need to be.

Below is a summary of the key announcements from the budget documents (click here)

Announcements

Permanently double Small Business Rate Relief from 50% to 100%.
Increase the threshold for the standard business rates multiplier to a rateable value of £51,000.
From April 2020, switch in the annual indexation of business rates from RPI to CPI
By 2022 local authority business rate systems will be linked to HMRC digital tax accounts
From April 2018, Class 2 NICs will be abolished
The government will reform Class 4 NICs
The introduction of two new £1,000 allowances for property and trading income.
From 6 April 2016, the higher rate of Capital Gains Tax (CGT) will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%.
A restriction of the amount of profit (in excess of £5m) that can be offset through losses carried forward.
Abolish the CRC energy efficiency scheme following the 2018-19 compliance year
The reform of stamp duty on commercial property
Increase the VAT registration threshold in line with inflation to £83,000 from 1 April 2016
A further £3.5bn of savings from public spending in 2019-20
Around £1.5bn investment in areas such as housing, schools and transport over the next three years
Increasing the personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18
Increase the higher rate threshold by £2,000 to £45,000 in 2017-18
The devolution of power to school leaders, expecting all schools to become academies by 2020
Create a National Funding Formula for schools from 2017-18.
Invest £20 million a year of new funding in a Northern Powerhouse Schools.
A new soft drinks industry levy targeted at producers and importers of soft drinks that contain added sugar.
The ISA allowance will rise from £15,240 to £20,000 in April 2017
From 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in
A new Help to Save scheme for those on low incomes
Increase the existing £150 Income Tax and National Insurance relief for employer arranged pension advice to £500
The delivery of 13,000 affordable homes by bringing forward £250 million of capital spending
Move to a more zonal and ‘red line’ planning approach
The new mandatory National Living Wage (NLW) will come into effect from 1 April 2016, set at £7.20 an hour for workers aged 25 and above.
The main rate of the NMW, which applies for workers aged between 21 and 24, at £6.95 from October 2016
An individual lifetime limit of £100,000 on gains eligible for Capital Gains Tax (CGT) exemption through Employee Shareholder Status
£300 million of funding to improve northern transport connectivity and is giving the green light to High Speed 3
The green light to Crossrail 2, supported by £80 million to help fund development
Deliver a 5G strategy in 2017
Launch of the second Roads Investment Strategy, which will determine the investment plans for the period from 2020-21 to 2024-25
Allocate a £50 million Pothole Action Fund for England in 2016-17
Boost spending on flood defence and resilience by over £700 million by 2020-21
£50 million for innovation in energy storage
Auction Contracts for Difference of up to £730 million this Parliament
Establish a new Broadband Investment Fund
Commit to the 750MHz public sector spectrum in bands under 10GHz being made available by 2022
New devolution deals with the West of England, East Anglia, and Greater Lincolnshire

ACE – Signals to invest

There has recently been an increased level of debate as to how the structure of the railways operates and the manner in which franchises are provided. Whilst this paper does not look at the franchise mechanism itself it does pose the question as to how we could further incentivise train operating companies (TOCs) to invest in the system on which they operate.

Most franchises in Great Britain are awarded by the Department for Transport (DfT), following an invitation to tender. Companies that tender do so according to a number of service criteria and targets that are outlined by the DfT to be achieved during day-to-day operation.

However, as with most regulated industries the franchise model is not without its flaws. Some companies perform well, others do not. There have been instances of fare increases significantly above the rate of inflation, with questionable service provision and improvements taking place. There is also anecdotal evidence that the confusing terms and conditions and negotiations within the franchise system making performance achievement hard to measure and value hard to judge.

Part of the reason for such occurrences is a reduced willingness to improve an infrastructure asset which the TOC does not own.

As we have seen from the government‟s recent announcements in the Comprehensive Spending Review, the level of subsidy provided to the companies that operate these franchises is due to fall, and fares rise. This will not please rail users unless service levels continue to improve and investment continues to take place to upgrade Britain‟s ageing rail network.

The questions once again arise: are franchise companies willing to invest in the network, are they able to invest in the network, and are they willing to make these investments given the current length of the franchise agreements and that they do not receive the full market return for the investment that takes place?

There is a willingness among TOCs to invest in physical assets. Virgin, for example, has bid for the design, build and operate contract for the new Tampa to Orlando high speed line in Florida. Train operators in the UK have invested in station refurbishment, while alternative models (such as “adopt-a-station”

schemes) have been applied to harness alternative resources and community efforts.

Other solutions have been proposed which include lengthening franchises to encourage franchise operators to take a long term view of investment, or privatising the system allowing all decisions to be made on a cost/profit basis with ownership of the asset under private hands. However, privatisation holds the potential for the formation of an uncompetitive monopoly and brings into question how the asset is treated in terms of its national efficiency, importance and strategic value.

Ways in which such investment issues could be alleviated include creating regulatory frameworks which incentivise investment (effectively subsidising the TOC) and extending the term of franchises to extend the period under which a return is made.

As well as the financial issues explored in this paper, there may be other obstacles to bringing private investment into the physical rail network. These include issues of planning law, compulsory purchase mechanisms and regulatory and procurement processes, all of which would impact private sector efforts to build new railway infrastructure. This paper only considers the financial mechanisms by which investments could be encouraged.

Company website:
http://www.acenet.co.uk/

ACE – Infrastructure: a case for funding 2010

This report from ACE aims to review and analyse a range of material that is openly available (such as economic papers, cost benefit analysis and case study evidence) in an attempt to ascertain what effect infrastructure investment has on the economy. This paper will not however go into the mechanisms that would fund such projects but attempt to demonstrate the scale of potential the contributions the construction and infrastructure sector could make.

The economic rationale behind investment decisions has not been as important as it is during this economic cycle given the recent recession, tightening credit conditions and proposed public sector cuts. Projects need to demonstrate that they will improve the future growth prospects of the UK.

The return upon infrastructure investment was found to vary significantly not only between projects, but also across countries. Theory suggests that achieving a positive economic effect from investment relies on the current level of provision in respect to that of the optimal (equilibrium level), maintaining the long run competitiveness of the economy, investor certainty, access to capital, accounting for externalities and market failure, and creating a conducive regulatory environment.

Company website:
http://www.acenet.co.uk/