Transport and infrastructure | Winter 2016/17
Transport and infrastructure has long been viewed as one of the less glamorous legal practice areas, best suited to lawyers with the patience for ploughing through the minutiae of statutes. But with ever-increasing public and political scrutiny and a rush of private investors looking to park their money in safe assets, it has become one of the most high-profile – and demanding – areas of legal work.
According to Patrick Mitchell, global head of infrastructure at Herbert Smith Freehills, it is now competing with finance as a home for ambitious young lawyers. ‘Big, sophisticated investors are getting into the game now and that’s turning a lot of heads. Pension funds are waking up to their financial power and are looking at infrastructure returns as a way of matching their liabilities; sovereign wealth funds are looking for stable returns in a period of uncertainty; and, in the UK at least, politicians are becoming even more acutely aware of the relationship between infrastructure, productivity and national competitiveness. We’re seeing a huge demand for legal work in the sector and the types of deals we’re working on are politically very significant.’
Ashurst partner Mark Elsey agrees: ‘Infrastructure is an increasingly important and high-profile topic, both from a government perspective and for investors. The government clearly sees infrastructure as one tool to negate the impact of Brexit and boost growth, so there is a big political focus on it now.’
The increased profile has led to heightened scrutiny for lawyers in the sector but, says Jane Mee, general counsel of Hitachi Rail Europe, that is part of the attraction. ‘The level of pressure we operate under is inevitable when you’re dealing with members of the public and a large workforce, politicians and regulators and handling big bits of kit that are of national importance. It’s what makes the job fun.’
Infrastructure is big news again. In the US, Donald Trump has campaigned to spend more than $500bn on new projects. It could be bluster, but if even a fraction of that amount ends up being committed it will lead to a significant windfall for the sector’s lawyers. The UK has set equally ambitious targets, with the most recent National Infrastructure Delivery Plan outlining £425bn worth of projects scheduled to be completed between now and 2021. Perhaps more important for counsel in the sector, 60% of these projects will be funded by private investors.
There is always a talent shortage when it comes to legal advice for very significant projects.
Stephen Swan – Edinburgh Airport
At the individual project level, the figures involved are significant. High Speed 2 (HS2) – the first phase of which, running from London Euston to Birmingham Curzon Street, is expected to be granted royal assent by a parliamentary bill in January 2017 – comes at a total cost of €56bn, making it the largest infrastructure project in Europe. Hinkley Point C, which will eventually supply 7% of the UK’s energy needs from a single station, is set to cost £18bn and will be the first nuclear power station in the UK funded by private capital.
Mitchell, who has been closely involved with both HS2 and Hinkley Point C, says the new wave of megaprojects is testing legal structures like never before. ‘When you reach this scale of project, almost everything raises new legal questions. Even something like early works contracts – moving existing infrastructure out of the way – becomes an enormously challenging process. The rolling stock procurement for HS2 is also novel in terms of how it is funded. We’re seeing a lot of new approaches at both the private and government level unfold.’
Robbie Owen, head of infrastructure planning and government affairs at Pinsent Masons and founder of the National Infrastructure Planning Association (NIPA), has been advising a number of major interests affected by HS2, including the Mayor of London and Transport for London (TfL). ‘The first phase of HS2 showed the compulsory purchase orders process was not as fast or responsive as it needs to be,’ says Owen. ‘Both the Commons and Lords are looking at updating the procedures, which is to be welcomed. There are also concerns that the consents regime, which came into force in 2010, has become too inflexible. If you’re a contractor and you start out building a large-scale project you don’t know what is going to change along the way, so a bit more flexibility in the consents would help these projects along.’
The rush of investors looking to secure a piece of the UK’s infrastructure market is also leading GCs to change their approach. ‘There is a lot of private capital out there with no home to go to,’ says Louise Ruppel, who joined the UK’s largest airport operator, Manchester Airports Group, as GC and company secretary in August 2016. ‘Airports have been more dynamic and private-capital driven than other parts of the transport and infrastructure market, but the sector as a whole has certainly been slow to find a way of responding to this un-met demand. There seems to have been a change in stance in terms of the government’s view of private investment and that is shaking things up, so GCs need to start thinking creatively about how forthcoming projects are likely to be funded.’
With HS2 set to eventually connect to Manchester Airport, Ruppel says the big question now is how infrastructure and transport providers from a number of sectors can work together. ‘We are heavily involved in the Northern Powerhouse project and a big part of that is working with other stakeholders to ensure it gets facilitated. Road, rail, airports and other infrastructure providers need to be working more closely to make sure plans for tenders and other knock-on effects are co-ordinated.’
This, says Owen, captures a trend among policymakers and lawyers. ‘The need for a co-ordinated approach is being increasingly recognised. It’s no good bringing in funds for projects if they end up being siloed from other infrastructure needs. The question of whether a motorway junction or rail station is built nearby is incredibly important, and that represents a change in thinking on how projects are delivered.’
While there is a recognised need for counsel in the sector to work together, competing pressures make it tricky. As Andrew Levy, legal director at transport group Stagecoach points out: ‘Owners and operators are on the other side of the table from each other, so in that sense we have a close relationship, but we face very different pressures. Passengers don’t care if their train is late because of maintenance work by the infrastructure owner, they care because it’s late. That means we need to be more sensitive to the customer’s reaction than the typical infrastructure owner. Conversely, owners face big issues we don’t have to wrestle with, such as with maintaining infrastructure on a congested service.’
Building for the future
Many working within the sector feel the rail industry is due a shake-up, and the growing public and political groundswell seems to favour this also. The Shaw report, led by then High Speed 1 (HS1) chief executive Nicola Shaw, rejected privatising the UK’s rail network outright but recommended exploring a greater role for private finance. Since that time the calls for wholesale privatisation have grown stronger, with a breakup of Network Rail now seen as a distinct possibility.
Ruppel, who was formerly legal director of transport operator FirstGroup, has seen the system’s struggles from the inside. ‘Having been in the rail industry, I can appreciate the frustrations with the whole model. There are more frictions than perhaps there should be, but there are many factors at play and it is a difficult situation to put right. It’s certainly a lot easier to get things done in the airline space where you have a dedicated regulator.’
The profusion of megaprojects is also likely to stretch the UK’s pool of skilled labour to its limits. Finding enough engineers and construction workers to go around will pose a challenge, but suitably qualified legal advisers are also scarce. ‘There is always a talent shortage when it comes to legal advice for very significant projects,’ says Stephen Swan, legal director of Edinburgh Airport. ‘Lots of people say they have aviation experience when what they actually mean is aircraft finance experience. There are very few people who really understand the sector, who know the regulatory framework, whether there’s some sort of arcane piece of legislation that affects what you can do on an airfield and who to go to when you’ve got a problem.’
Our decisions will have more impact on people’s lives than almost any other government department.
Department for Transport
A similar issue has led Nick Olley, GC at the Department for Transport (DfT), to introduce his own dedicated rail panel as part of the forthcoming Crown Commercial Services tender. The panel, which is currently under review and is set to be awarded in early spring, is an attempt to remove irrelevant bids from the tender process.
‘Previously, if we put out a request for lawyers to help with a franchise letting we would get a dozen responses, a few of which were from people putting their fingers in the air,’ Olley says. ‘Rail is so specialist that you really need a dedicated panel, and a lot of firms that do specialise in rail are not able to provide services to me because they’re providing services to people who want to bid for rail franchises. We want to find the firms that really want to act for government and for whom public sector work is their primary focus in the transport space.’
While a wave of megaprojects will keep the UK’s transport and infrastructure lawyers occupied for many years, there are concerns that the grandstanding will draw attention away from the huge un-met need for small-to-medium-size deals that can get off the ground quickly.
‘Governments have relied on trophy projects for many years and, yes, there are big figures associated with them that makes it look like lots is happening,’ says Elsey. ‘But there are questions to be asked on the value of some of these larger projects. If you’re looking for activity across high streets and towns, you need smaller programmes. There’s a huge backlog of schools and healthcare facilities that need building.’
It is certainly a valid point. But Olley says that moving in-house at the DfT has given him a better appreciation for the role of government in the process. ‘I had worked on some of the biggest government projects as a private practice lawyer and I often interfaced with government and its legal function, but until you come inside the tent you don’t completely understand it. You appreciate the complexity a little bit more when you can see it all from the inside and you realise the degree of thinking that goes into a decision at government level and appreciate the rigour with which all these proposals are looked at from a value for money perspective.’
Planes, trains and automobiles: transport GC perspectives
‘Whenever I tell someone I’m a lawyer for the airport their response is usually: “What does an airport need a lawyer for?” The answer is that like most businesses there’s a lot that can go wrong and, at some level, everything will go wrong in some way. There’s also a huge retail side to the business that involves a lot of legal work.
‘The big issue for the sector at the moment is undoubtedly Brexit. If we end up with a cliff-edge exit, which looks increasingly likely, then working out what our legislative framework fall-back is will be a huge task. Our biggest fear as a sector is we may end up out of the European Common Aviation Area. That’s got a real consumer-facing impact. It’s not esoteric regulation, it is something that could potentially reduce the number of flights out of the UK quite drastically.
‘Because we serve Scotland’s capital city and because Edinburgh is a popular tourist destination anyway, we get far more inbound passengers than the typical UK airport. As a result, we’re quite optimistic about the situation. Flight numbers tend to fall off as the pound weakens, but we’ve actually benefited from inbound numbers increasing to become one of the fastest growing airports in the UK.’
Stephen Swan, legal director, Edinburgh Airport
‘We are the government department that probably affects every single person every day. In that respect, we have to keep in mind that our decisions will have more impact on people’s lives than almost any other government department. We are also pretty central to the UK’s economy. Building infrastructure is an important way to generate economic capacity and growth.
‘In terms of a transformational infrastructure project that is going to make a difference for generations to come, it’s hard to see beyond HS2. There’s a lot of legal work I’ve been involved in there, and it will shape the sector for quite some time. The next biggest thing on my priority list is passenger rail franchising. The sheer number of people who commute means it’s an issue for everyone. I’ve got about 95-100 lawyers, around 25 of whom are looking after passenger rail franchising in its widest sense. Dealing with the letting and re-letting of franchises as they come up in the franchise programme is a big issue from the DfT’s perspective.
‘These things take an enormous amount of resource to process and, as the letting authority, we can only handle so many. The broad consensus is we shouldn’t be trying to do more than three or four a year. We stagger that so there is a consistent throughput and a consistent number that the bidding market can respond to and have their bidding teams moving through the process.’
Nick Olley, general counsel, Department for Transport
‘Winning a rail franchise is really like doing a big M&A transaction. The rail side of my work is incredibly demanding. Working out how the contractual matrix works, where you fit into it and how you get things done is fascinating as a lawyer. It’s a real problem-solving job and a great place for a lawyer to be.
‘Developments in the bus sector are also particularly interesting. The Regulated Bus Services Bill is going through Parliament currently and will potentially grant new franchising powers to local councils, in effect introducing a regional equivalent of the franchise powers granted to Transport for London. In what has been a traditionally de-regulated market this is a cause for concern and it is something that I am monitoring closely.
‘More broadly, payments technology will be a big change to the bus transport sector. Obviously in London one pays on an Oyster or bank card, but in the rest of the UK it’s still largely a cash payment system. Introducing something similar across the UK will represent a big change.’
Andrew Levy, legal director, Stagecoach