Financial Case

Introduction

The Windsor Link Railway has a ‘very high’ value for money statement so could be eligible for state funding. However, as it is also forecast to be profitable, it is arguably more appropriate for it to be privately funded as far as possible.

At this stage the project remains open to a number of options for operating. These include, in order of likelihood: the WLR as an infrastructure building company, handing the railway over to an infrastructure operator (such as Network Rail or Amey) on completion, the WLR as builder and infrastructure operator, charging train operating companies a track access fee; and the WLR as an independent train company running its own trains and track (similar to the Heathrow Express). The focus at this stage is on the underlying viability rather than the attractiveness of a particular structure

Costs

Capital Expenditure

Building the link between Slough and Staines, Phase 1 of the WLR, is anticipated to cost £40 million for civil engineering plus £35 million for rail engineering. A further £25 million is allowed for upgrading the line for more frequent trains, allowing at least 4 trains per hour in each direction, making a total of £100 million in capital expenditure.

Phase 1 costs could theoretically be covered by revenue from property, as the project enables much land to be put to better use. However, this might put unwelcome pressure on the scale of development so the forecast that the rail project in isolation is revenue positive allows for greater flexibility, with the property subsidy option being used as a worst-case scenario.

Phase 2, the connection to Heathrow has been estimated at a further £250 million, although there is less certainty over this number as the alignment has yet to be defined in detail.

Phase 1 and 2 are independent, so the money for each can be raised at different times. However, the DfT has confirmed that the phases combined are compliant with the requirements for the High Level Output specification so, if necessary, this money (amounting to up to £450m) could be applied for phase 2. It may be preferable, however, to raise any shortfall for phase 2 via the airport regulated asset base (RAB) from the airlines as phase 2 is primarily a scheme to promote the airport.

In summary, there are four possible funding sources for the rail project and any one or mix of these could be used: rail RAB, airport RAB, private rail funding and property cross-subsidy.

Property

Property costs (or benefits) from property do not form part of the economic case for the rail link. However, these are potentially very significant as the property has a potential gross development value of up to £1 billion. Clearly, however, this would not be built all at once so as not to flood the market, but over a number of years and the property build costs would also be thus spread.

The property is envisaged to contain a mix of housing and community facilities (e.g. a cinema or leisure centre). The latter category can be easier to finance with specialist pension funds.

It is envisaged that the entire capex cost should fall on the private sector, certainly for phase 1. Phase 2 may require a mix of private and state funding depending on the final costs and route chosen. State funding would be via the RAB either of either Network Rail or BAA, or a combination. Further guarantees, possibly in the form of the new service becoming part of an existing rail franchise, may also be required depending on the state of financial markets, which are difficult at the moment. However, the DfT has already indicated that this is possible, subject to the business case.

Operating Costs

Operating costs are estimated to be between a small net saving to a net cost of £60 million NPV. These should comfortably be covered by fare revenue even in a stress scenario.

The savings come from removing the diesel unit between Slough and Windsor and going from two old, expensive to maintain listed, stations and a viaduct to one new station. The new station will be further inexpensive to maintain as it is proposed that this would be part of a new shopping centre, sharing many of the same overheads. This way a grand station can be built but most of the cost will fall on the shopping and property side of the project, further increasing the returns of the rail project.

For the purposes of comparison in the economic case, a discount rate of 4.75% has been used, in line with DfT guidance for state-backed projects. Increasing this to a private sector rate of say 17% decreases the BCR but still produces attractive returns, which is the prime consideration for a private investor, particularly in the current low interest rate environment. More accuracy over funding costs will be available once the details of the structure of the joint venture have been negotiated with Network Rail.

Budgets and Funding Cover

It is estimated that up to £10 million will be required for planning permission via, a Transport and Works Act application. This early-stage funding is the most difficult to obtain and will be critically dependent on the stance of the government and a collaborative attitude throughout the process.

Thereafter the funding requirement, for a combined property and rail project with a gross development value of £1.5 billion in total, is estimated as follows:

£m at FY end

£m at FY end

Y1

Y2

Y3

Y4

Y5

Y6

Y7

Y8

Y9

Y10

Y11

Y12

Bank Finance

65

168

331

537

603

513

416

314

206

204

Equity

10

25

65

95

95

95

95

95

95

95

95

95

Clearly, other models than the pure bank finance are possible and these will be developed in conjunction with potential investors. The model above represents a worst case, that is, the most expensive type of funding. Potential investors have already expressed interest contingent on the financial structure agreed between the parties.

More detail on forecast cash flows, costs and revenues is available under non-disclosure.

Accounting Implications

For phase 1, the Windsor Link Railway proposes to form a dedicated special purpose vehicle (SPV), as suggested by Network Rail, in partnership with them. Ownership of this company would be between WLR founders, Network Rail and property investors. It is anticipated that the local council would also be an important stakeholder (but not necessarily a shareholder) as the owner of much of the land that the project would use.

The main purpose of this initial SPV would not be transport but property. This is appropriate because the main focus initially is untangling the property to enable the railway. The rail project would still be an important part but this would be carefully ring-fenced and whilst the

SPV would enable the rail project it would not dictate what that should be. This point is crucial for compliance with EU law. A separate company, in which the SPV would be a shareholder, would then be formed to take the rail project forward once it gains permission. This provides the project with extra flexibility, protects the public interest as well as that of different investors and puts a firewall between the property and rail projects whilst still moving them forward for mutual benefit. This structure also makes it easier to obtain private finance as risks are separated.

Phase 2 would be a more straightforward rail project, as there is less complexity to deal with in terms of property. This can grow out of phase 1 or it can be brought forward as an independent, but complementary, project. In either case it would be primarily a rail project and tendered as such in accordance with EU rules. This would apply whether the project was wholly privately funded or had an element of state funding.

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