Realising future value: how to incentivise investment in railways

By Tammy Samuel

With the re-launch of the franchising system and a return to shorter franchises, the spotlight returns to how operators and investors can be incentivised to invest on a long-term basis. Tammy Samuel looks at the options.

Richard Brown and Sir Roy McNulty acknowledged in their reports that ‘investment’ is needed in the railway. But there does not appear to be widespread use of residual-value mechanisms in the railway to incentivise train operators or investors to improve railway assets with a life beyond the end of a franchise. McNulty’s partial response was to make franchises longer. With the recent re-launch of the franchising system, promised activity over the next eight years and a return to shorter franchises, the spotlight returns to how operators and investors can be incentivised to invest on a long-term basis.

In a railway franchising context, the residual or future value of the asset will be what the asset is worth at the end of the franchise in question. Without an acknowledgement, calculation or payment of this value, then an asset would have to pay for itself during a franchise period — something that could make the investment in question not worthwhile…

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