Not yet cleared for landing – many hurdles ahead for Heathrow expansion

It is trite to say that large infrastructure projects are complex and their development requires activity at the point at which commerce, regulation and policy converge. But there are projects of such magnitude that they may require extraordinary measures in each arena to deliver. Recognition of this has led to a variety of measures, usually involving new law, designed to facilitate them.

airportLet us take the Heathrow Airport expansion as a case study. After a long political process the government has now made the political decision that this is its preferred solution to airport demand in the south of England. But there is a long way to go before the first scheduled flight operates on the new runway.

The next stage of the public process has just commenced; the Secretary of State has consulted on a national policy statement (NPS), which is likely to be in terms that allow Heathrow Airport Ltd (HAL) to submit its planning application (for a development consent order (DCO)). The terms of the NPS are subject to current statutory consultation and parliamentary approval, so will remain to a degree unpredictable until due process has been followed. As the DCO application will be determined by the Secretary of State, he will need to maintain a distance from HAL in relation to the NPS to avoid accusations that the NPS consultation is a sham. If and when granted, the DCO will provide the public permits necessary for HAL to develop the runway.

The second main public process will be airport regulation, principally under the Civil Aviation Act 2012. There are two main matters to be addressed: the government must decide whether the existing scheme of regulation is adequate in the context of the airport expansion and the Civil Aviation Authority (CAA) must decide how that scheme should apply to the airport expansion. Some progress has been made on both fronts.

The government has decided that the current scheme of regulation is sufficient, ie that new law to change it is not anticipated. This is its current view and we question whether, in fact, it may change. The regulation of civil aviation differs notably from other UK schemes of public interest regulation in that it contains no obligation for HAL to build, operate, maintain and provide access to the expanded airport (so HAL could cancel the project) and no ‘special administration’ regime (of the type used to deal with the insolvency of private Railtrack and its metamorphosis into public Network Rail; so if the project bankrupts HAL, a regular insolvency designed to realise business/asset value for creditors will apply, rather than one designed to protect the public by keeping the runways open). Depending on the precise nature and level of government support for the project, this view may not be sustainable, though, and the threat of new law in this area provides government with a powerful lever in negotiations with HAL.

Another area of regulation for which the government may decide to legislate is to control project costs. This is, in essence, the CAA’s role, but it is not necessarily the case that its powers to do so will eventually be seen by government as sufficient. Recent regulatory and government policy tend to require competition for provision of both debt and equity for new infrastructure, rather than merely allowing incumbent sponsors to provide equity at a regulated return. The government may feel it needs to legislate if it wants to achieve that for Heathrow.

Assuming no new law, CAA will regulate HAL’s charges. While CAA is independent of the government, the Secretary of State could potentially support its decision-making by issuing the CAA with statutory directions to inform key decisions.

Other public processes will relate to air quality, carbon and noise, surface water/flood risk, the modernisation by government of airspace and airport flight-paths and the consultation by HAL of airlines, passengers and local communities about project design. Various transport links to the airport will need to be built or enhanced and some perhaps moved. Principal road requirements are for the M25 to be moved/modified, which would require government-owned Highways England to renegotiate aspects of the M25 contract under which the motorway is operated by the Connect Plus (M25) consortium. The A4 and A3044 also need modification and other roads may too.

The threat of new law provides government with a powerful lever in negotiations over Heathrow.

Railway schemes include a ‘Western Rail Link’, Crossrail interconnection and additional services and potentially a ‘Southern Rail Access’. Infrastructure for these is likely to be delivered by Network Rail, services by private operators.

Roads and rail have their own schemes of regulation, both policed by the Office of Rail and Road. Here, potentially, the Secretary of State can, for example, influence decisions to support the project by statutory directions or guidance. Planning and other public processes may be required for all these schemes. Commercial arrangements will be required to provide for HAL’s contribution to their costs to be paid.

By no means less challenging will be HAL’s processes to procure design and construction of the runway, terminal and other changes to the airport (which must stay operational throughout) and to raise substantial equity, commercial debt and bond financing on terms that both satisfy regulatory requirements and are consistent with the requirements for the provision of an infrastructure guarantee by the government, which HAL has stated will be required. HAL’s team, politicians, civil servants, regulators, the finance and contractor community and their in-house and external legal and other advisers have a demanding ten years ahead.

Christopher McGee-Osborne is head of energy, transport and infrastructure at Dentons