Economy, Energy and Connectivity Committee

Bore da a chroeso i chi i gyd yma heddiw i Bwyllgor yr Economi, Ynni a Chysylltedd. Nawr, mae hwn yn gyfarfod cyhoeddus, mae e'n cael ei ddarlledu'n fyw ar Senedd.tv, ac mi fydd y trafodion ar gael maes y law. Mae'n gyfarfod dwyieithog, felly mae croeso i unrhyw un gyfrannu yn y Gymraeg neu'r Saesneg. Does dim ymddiheuriadau hyd yn hyn, felly fe af fi'n syth ymlaen i ofyn a oes yna unrhyw ddatganiadau buddiant i'w cymryd? Na. Dwi ddim yn gweld dim, felly diolch yn fawr iawn am hynny.

Felly, prif sylw ac eitem heddiw ydy dechrau'r ymchwiliad i'r Ganolfan Ragoriaeth Fyd-eang ar gyfer Rheilffyrdd. Mae'n bleser gen i groesawu dau westai i'n sesiwn gyntaf. Hoffech chi gyflwyno eich hunain? Diolch ichi am ddod a mynychu yn y lle cyntaf.

Karl, would you like to introduce yourself?

Yes. Hi. Thanks. I'm Karl Hatala. I'm here from the Railway Industry Association. RIA is the main UK-wide trade association, and it represents the views and interests of the railway supply chain. We've got 450 members across the industry and operate in all of the nations and regions across the UK. I'm here as chair of RIA Wales and Western leadership group, which is made up of approximately 30 businesses based across Wales and the west of England.

Thank you very much. Diolch yn fawr. And Professor Paul Plummer.

Thank you. First of all, apologies for not being there in person. My name is Paul Plummer. I'm a professor at the University of Birmingham and Leeds, both of which do a lot of research in rail and transport. Until recently, I was the director of Birmingham Centre for Rail Research and Education and also the lead for the UK Rail Research and Innovation Network, which is 20 universities in the UK doing research in this space, and a similar number of industry partners. So, I'm speaking today, really, from a university research perspective rather than the supply chain, which Karl will more than adequately represent.

Grêt. Diolch yn fawr.

Thank you very much for that. Okay, I'll start off, then—best to set the scene sort of thing.

Sut mae'r diwydiant rheilffyrdd yn y Deyrnas Unedig ac yn Ewrop yn profi systemau a seilwaith rheilffyrdd, gan gynnwys y mathau o systemau sy'n cael eu profi, y cyfleusterau sydd eu hangen, a ble mae hynny'n digwydd ar hyn o bryd?

So, there are a number of test facilities across the UK and Europe. They've got long waiting lists and a high demand for their use at the moment. GCRE, as we see it from a RIA perspective, could provide additional capacity to these current facilities to help and support. With GCRE, they can help with a time and cost-saving solution—so, help solutions reach networks quicker than they currently do because of the high demand in other areas. So, there's an opportunity to get things onto the route in an expedited time.

Right. Okay. Thank you. Paul, have you anything to add to that?

Yes. On top of that, from more of a university perspective, I think it's almost impossible to get access to test track facilities for what might be regarded as research in early stages of development. It is more possible, but still extremely challenging, in the way Karl described, to get access for later stages of testing and validation. But access from this country to those facilities for university researchers, even working in partnership with the supply chain, is extremely difficult.

I think the gap is that there aren't any rail test facilities that exist, where the customers can access integrated, independent facilities with the right layouts and the right test conditions to support the infrastructure. So, rail testing at the moment is spread across laboratories, simulators, manufacturing facilities, specialist test tracks, and closed or segregated infrastructure on the operational railway currently. So, systems tests could include rolling stock, track, civils, infrastructure, train signalling controls, communications, electrification. It goes on in the railway industry—there are lots of different bits that can be used. But some tests do require the live network to test their equipment. So, an offline facility can't replace every test, but it can help iron out early, current, difficult and expensive tests that could go on on a network that's off track, essentially. So, it could save time from working on the open route, essentially, in a safe environment.

Okay. Thank you. Shav, do you want to come in?

Yes. Karl, obviously GCRE has attracted significant industry interest and support, but what evidence do we actually have that this will translate into firm paying customers at the scale and within the time frame that is required to make this facility commercially viable?

So, from a market demand point of view, RIA regularly hears from its members that they would use GCRE to showcase existing or new products. Practical experience of products has been that we've done—. Individuals have done tests out there; so, Furrer+Frey have done tests out there. There have been a lot of expressions of interest, I believe, but that doesn't, in turn—

Yes, when does it become reality?

I think that would be for GCRE to comment on; it's not for RIA, I don't believe.

Okay. And in terms of—. Do you think that we've got significant demand? You've mentioned that there are testing facilities out there already, including classroom-based environments. What makes this so different?

So, early signs are positive. It's likely that RIA members would use it—as I say, to either showcase existing products or test new ones. It's an area that could bring the supply chain together, to work together, to help integrate between new and old technologies on an offline track prior to it going live. So, it would help the industry. Sorry, what was the rest of your question?

So, really, this is about how do we take it forward: do you think that this is realistic or is this pie in the sky?

I could come in on that, if you'd like. So, if I can go back a little bit to where UKRRIN developed some propositions and worked with GCRE a while ago. So, recall that UKRRIN is a partnership of academic institutions and the supply chain. We currently have three centres of excellence—in Birmingham, Huddersfield and Southampton. The University of Birmingham got funding for a further centre of excellence, which would have been at the test track in Wales—a testing, validation and customer experience centre of excellence. That funding was secured in 2022. There was match funding from industry for that facility, and another one in Goole, of around £60 million. Around £30 million of that was associated with independent suppliers who weren't GCRE and they weren't the site owner in Goole. So, there was significant commitment from the UK supply chain at that time to fund research at a facility that didn't then exist, but might have existed or come into existence. So, I think the clarity behind your question, in the sense of proving demand when it isn't there, is challenging. You can see the frustration and the need. I think that showed that when there was a real prospect of it happening, people in the supply chain were willing to make financial commitments to significant research on the back of that facility. That funding lapsed, obviously because of delays in the development of the test track, and the match funding lapsed as well as a result of that, but I think that's indicative.

And following that period, there were further discussions between individual institutions and GCRE and others about things that might have been done at the test track, or at a facility associated with the test track, which I think confirmed some of that interest. Really, that then was put on hold when it became clear that it wasn't imminent that the test track would be available. But I think that does show there is real appetite for the funding of research, which is much needed, and innovation in the railway sector. Much of that could perfectly well have been at GCRE if that had happened. I don't pretend that that would have—

Sorry, Paul. How do we—? Just really quickly, how do we then firm up those commercial commitments that have been made so far? What needs to happen, really quickly?

So, if it was clear that there was going to be a test track and there was going to be a research capability at it, then some of those commitments I'm sure could be re-firmed up. I don't pretend that they would be sufficient to fund the entire test track itself, but they would be incremental on top of testing. There'd be more done by the suppliers that RIA represent.

Thank you. Can I bring in Alun?

It's a quick question. I just wanted to follow up in terms of that research use of the facility. Paul, in your experience, would that use of the facilities be on a commercial basis, on a below commercial basis, or are we looking for some of the partners who may benefit from that research paying for that commercial use, in effect—or any combination of those?

The commitment from the supply chain would have been them doing that for their commercial benefit. It would have enabled universities and university researchers to provide research that can't do it commercially, but they could have their costs funded through that. So, yes, it would be a mixture.

Tom.

Thanks, Chair. It was two questions, really. I think I know the answer to one, but I'm going to ask it anyway. Long Marston in Warwickshire is a 135-acre site tailor-made for rail investment. My understanding is that it's the only electrified loop in the UK, and has over 15 miles of sidings and a high-quality asset management facility. Now, the rail forum, when I looked online and did some research, said that they view Long Marston and GCRE as being able to work in unison. What's your view? Are these two competitors, or can they work as part of a wider industry framework? And if they are competitors, why do we need the GCRE if we seem to have a purpose-built site just over the border in Warwickshire?

Paul, did you want to grab that one?

Certainly. I think they could work together. The capacity is so limited at the moment that I think there certainly would be demand. I can't comment on whether that makes it commercially viable, but there certainly would be people who would want to use more facilities if more facilities existed. Certainly, colleagues of mine use the facilities at Long Marston, which is very positive. I don't think that precludes the need for more.

So, if you go to the capacity piece, then we need the GCRE for the capacity piece.

Essentially, I believe, yes.

Okay. I just struggle with that, because, normally, the market needs additional capacity in something. Private investment follows that, and we haven't seen that in this case. So, do you guys have a view of how we square that off? Because if we're saying that the demand is there and that the industry wants to have this extra facility, why isn't that demand and what the industry wants leading to there being any private investment in the GCRE? How are we balancing those two things?

I haven't sought to claim that anything would or wouldn't be commercially viable. I observe, though, that in the case of research, innovation and unproven products, the benefits to the broader railway and to the broader economy aren't captured necessarily in those commercial decisions a business would make. So, certainly, from a UK railway point of view, having the ability to test and validate new technology in this sort of facility would be useful to the railway, and suppliers simply aren't going to factor that in. It may also have other benefits that you're far more qualified to comment on in terms of what it does locally, but those wouldn't be captured in. So, I haven't claimed it would be commercially viable. Some of those benefits are separate.

Thank you for that. So, in essence, you have a project at the moment talking about capital investment of about £300 million. I think there's about £70 million spent so far. There's a substantial gap from where we are to where it has to be. Perhaps it's an unfair question for you two today, but how likely do you think the commercial sector will be able—and willing, perhaps, more importantly—to plug that gap?

I do believe that there is interest. There was a demonstration a couple of months ago where 70 industry body organisations attended it. However, I think they've made it clear that it's quite difficult to commit with a pipeline at the moment. With a greater pipeline, you may get better, greater commercial benefits when people understand what that is to a greater extent, and therefore they're able to commit from a commercial point of view.

So, what you're saying in essence is that they would need substantially more public money to get in there, to take it to a position where the risk for the private sector would be minimised.

We'd need to understand what the pipeline is so that we can take that forward and understand it.

Very diplomatic. Paul, have you any observations or anything to add?

I certainly can't contradict that statement; I wouldn't do so. The difficulty, obviously, is that you can see that if the facility was there, people would come. If it was to develop in such a way that capability was to cluster there and other people wanted to go and build businesses there, then it could grow into something that, over time, became commercially viable. But that's a judgment that is way beyond where I'm positioned to comment on.

Thank you any way. Alun, and then Janet might want to come in.

What I'm hearing is an echo of the Field of Dreams: build it and they will come, I guess, is what you're saying, which is fine. But I guess there are two things in terms of that: how confident are we in terms of those projections, and also what are the impacts? I wonder whether you could talk a bit more about what you believe the impacts of GCRE could be in terms of the local economy and in terms of building clusters et cetera, et cetera, for the locality, and, from your experience, whether that has been replicated in other areas.

From an economic and wider perspective, it's the potential to make a positive contribution to the local regional economy. Potential benefits include skilled employment, opportunities for local suppliers and expenditure with local businesses. As can be seen, 70 organisations came a number of months ago. They used the local accommodation and hospitality. If you build it—of course, as you say, the Field of Dreams, a great movie—they will come, and there will be wider benefits to the local community that will be there. That can be seen, especially from a hospitality point of view.

I could see Paul nodding in agreement, I think.

I did. And beyond that, without repeating any of that, I think there's benefit to the UK railway and wider economy by being able to test and validate things in a way that we can't do at the moment, being able to have a de-risked implementation of new technology that benefits customers and the economy. I won't repeat what Karl said, but there's an additional factor there.

Thank you. Janet, did you want to—

Sorry, I missed out one other aspect of that which may be worth saying. The previous proposition we had to build the centre of excellence at GCRE was also developed in conjunction with Swansea and Cardiff universities. So, it would have been Birmingham, Swansea and Cardiff particularly, but others as well. I think it could certainly help reinforce the capability of those institutions and UK rail research across Britain.

Janet.

Thank you. Good morning. Bore da. How far are the proposed GCRE facilities likely to meet the UK and European rail industry's current and future needs? Let's see some positivity.

From an innovation point of view, it could certainly help bring some small and medium-sized enterprises closer together to work as a cluster, to come up with new ideas, new ways of working, help develop things faster in a safe environment. But I also think it could help with the testing of existing equipment on the railway as well, where we're looking to do some major projects. It could have helped with projects in the past in terms of some of the integration between some of the older equipment and some of the newer equipment that we're looking to use. So, from an innovation point of view, it will certainly—

Is it in the best location, the GCRE? Particularly in terms of whether it will be accessible for potential customers. 'Yes' or 'no', I guess.

I haven't been there, so I wouldn't want to comment. I guess Paul's been there. For a large brownfield site, how many of them are in the UK that are out where you won't necessarily cause disruption to local communities? There'll be lights, there'll be noise. It's out in a good location, I believe, to cause minimal disruption to people around it. So, when you've got trains running all night, it's not going to disrupt local communities.

Paul.

Paul.

I think Karl made the key point there, really. One can speculate about whether it would be better somewhere else, but I'm not aware of any other location where one could do something on this sort of scale in any practical way.

One aspect of that as well is that some of the research and innovation can be done offsite, in terms of using the capabilities there but having some of the analysis and research done elsewhere. I think one thing that's relevant is that the centre of excellence that was envisaged initially was very much the University of Birmingham with Swansea and Cardiff. To maximise the benefits, one would want to make that much more openly available to all institutions and to SMEs who might not otherwise be able to afford the investment to invest to have early-stage research, but where there could be significant benefits down the road.

Okay, and then—[Interruption.] Sorry, go on. You go for it.

I was going to just ask: are there any specific changes that the GCRE could consider to increase commercial appeal?

I don't have any specific proposals there, but I note that certainly some of my colleagues have worked with GCRE to advise them on what their requirements would be in order to make it appealing—to use your word—to people who want to do research and innovation there. As far as I'm aware, those things have been reflected in their plans.

I believe that RIA have made some suggestions as well, and they've been reflected in GCRE's plans.

Thank you.

Can we have a flavour of the size of the potential market for GCRE, how it breaks down into different types of testing, and whether this could lead to long-term relationships and repeat business?

I'm not in a position to put numbers on that, other than observing the quantum that was committed in the previous round, which was, effectively, say, of the order of £30 million from independent supply chain parties to invest in research and innovation around testing, validation, effectively progressive assurance and integration, and doing research alongside that. We haven't changed the way we do research. We've done innovation and testing for centuries, almost, and doing some fundamental research in that space, as well as actually doing the testing, is what we were looking to do.

I'm feeling here a little unconvinced about this whole thing. So, if I'm feeling like that, how are you going to attract private investment into this? I think it harks back to what you said.

I'm not here to convince anybody of anything, simply to—

No, but we are here to scrutinise and take evidence from you, but I'm not getting many answers, to be honest. Sorry. I'll ask some more questions, maybe.

Shav.

I guess, in order for us to have a vision of what this is going to look like, one of the key things is going to be good jobs, and what those jobs are going to look like, and whether or not we're confident that the local community has the necessary skill set to do those jobs.

Construction is obviously the first thing. So, we can have agreements around having local people in those construction jobs. But, again, if we are building a particular type of facility, have we done some assessment as to whether or not those skills already exist, or whether we're going to have to bring people in from elsewhere?

And then, I guess for me, one of the key things is: what is currently the biggest risk to those projected commercial and employment benefits actually materialising? It goes back to what I said earlier on: is this just an aspirational, pie in the sky idea at the moment, or is this a genuine, real project that is going to deliver locally and is going to—? At the moment, I guess it's difficult for us to have that vision. What does that look like?

I appreciate, Karl, that you've said, 'Well, I haven't actually been there.' But you have, of course, spoken to lots of people—

I have, in the industry, yes.

—who are convinced. And you've said that there were 70 people who got together, and they seem to be convinced about it. So, maybe you can give us an indication of whether or not there's been a discussion around what those jobs for the future look like, and whether we are ready for this centre. We've got people locally, but do we need to skill people up?

I think that it will be a mix.

Okay.

I think that it will be a mix of upskilling individuals, but also using the local community as well.

And what would we need to skill them in?

I think that Paul's better to answer that from an innovation point of view, in terms of what skills we'd be looking to upskill them in. But from a GCRE point of view, I think the first element is the construction, as you quite rightly said, and that will obviously take a number of years. Therefore, while you're doing that, you're able to upskill individuals from the universities that Paul has mentioned as well.

Paul.

Yes, I certainly think that—. I'll say and stress again: I'm not looking to convince you that this should or should not happen. I'm simply providing evidence of the fact that there was a degree of commitment, real financial commitment, from serious players on the basis of the assumption that it was there. So, I think that's a realistic expectation that there would be some. I don't comment on whether that would be enough to make it commercially viable.

In terms of skills, certainly if we had developed this centre of excellence, we had an aspiration that there would be a number of pure research-based staff there, and that there would be other research-based staff coming to and from there, and that they would work with SMEs who may cluster there. So, there would be some quite high-tech roles in doing that. There would obviously be roles in terms of maintaining the facilities, which GCRE is much better placed to comment upon. And there would be other roles that would inevitably be required in order to support those people, in terms of accommodation and living in that part of the world. So, there would be a mixture there, but GCRE, I believe, have done a lot more analysis of that and they'd be much better placed to comment.

I think if you're putting specialist rail equipment on there, then there could be the potential for upskilling and bringing individuals in from signalling, electrification and power, overhead line, and individuals, because this facility could run 24 hours a day, and therefore you would need individuals on there to help maintain it, as Paul said, and keep it operational.

Okay. So, somebody's got a figure, in terms of how many jobs, and in which sectors, and which skills we're talking about.

I believe—

Somebody's got that data.

—GCRE would have that data, yes.

Lovely. Thank you.

Can we come back? I think the crux of the matter, as we can see today, is that we have a £330 million capital investment project. The impression I'm having is that, yes, there could be demand to use and test such a resource and facility, if it were in existence, so that obviously would be a source of revenue income as and when in the future, but the crux of it still is: where does the rest of the £330 million capital investment come from? Do you have any views on GCRE's approach to raising that private capital investment, and whether the industry itself has any suggestions on how this could be achieved?

From a RIA perspective, we don't advocate a type of funding arrangement. We'll support either way.

Paul, did you have any observations on that?

No, other than to say that I have been there a few times and engaged with them over quite a number of years in the context of what we were proposing, which depended upon what they were planning to do. And through those stages, I'm aware that they've explored a huge range of commercial and financing options. So, they've explored everything that sensibly you might expect them to explore, and you're still in the position you described.

Okay. Perhaps it's not a fair question for you, but I'll ask it anyway. Seventy million pounds of public money has already been spent on this project. There's a need for potentially another £250 million in capital investment. At what point does the public sector say, 'Enough'? And if you feel—.

I think that's the question you're considering. I can just provide input to that.

Okay. Tom, do you want to—?

Yes. Just picking up on that, Chair, going back to the Warwickshire site, they actually managed to secure £170 million of private money to upgrade that site in the summer of 2021. So, how have they been able to attract £75 million of private money, but the GCRE hasn't? What's the difference? Explain why one site has attracted all this money and the other hasn't been able to, in your view. I'm not asking you to speak on behalf of the private company that spent that money, but just broadly. Go on, Paul.

Their site—

Oh, go on, Paul.

Sorry. Their site performs a number of purposes, including their own fleet and maintenance of their own fleet, and so, I think, it's mixing in that way, and I'm sure that they would have a very good answer to that question. I don't wish to offer one here. Sorry.

Likewise, yes, I haven't got a response to that. I'm sure that we could provide that, if required.

Okay. Thank you. Alun.

One of the reasons why the public purse might be used is if there are tangible economic benefits down the line. GCRE have made some claims in terms of jobs created, 1,100 jobs over the first decade, adding £300 million to the gross value added. What I'm looking for, and again, I'm not trying to push you into a position where you're making the case, but do those sound credible figures in terms of what could be generated, and are they credible based on other similar facilities? Do we see those kinds of jobs created in other facilities? Do we see that kind of contribution to GVA in other facilities, if you've got that kind of—?

I haven't got that level of detail here and now. It would be in the business case, one would assume, as to what's in there.

Yes. I can see that GCRE have put it in. What I am trying to do is to—

Ascertain—

—ascertain whether that is credible.

Correct, yes, based on previous facilities. Understood, yes. I haven't got a view.

I can say that I think they're asking and you're asking exactly the right questions. The nature of research and investment in innovation is that the benefits accrue down the road and potentially they go to those who don't put in the investment. So, I think it's entirely credible to believe that those benefits are significant and they're of the nature that you describe. I don't have a view on whether the precise numbers in their business case are optimistic or pessimistic.

Okay, thank you.

Thank you. Janet, did you want to come in?

GCRE say that more than 200 companies have indicated support, 20 per cent of which are overseas. Now, I could indicate support as a businesswoman, it doesn't mean I'm going to deliver on my indication of support. How actual—in terms of being concrete—are those indications of support?

That would need to come—. Oh, go on.

I can speak for the 16 independent supply chain members who gave formal commitments of cash or benefits in kind. That was very real. It obviously lapsed, because the facility wasn't there—

Can I just interrupt you for one second? Have they actually put—? We can all fill in forms as well, but has it actually cost them anything as yet?

No, they were contractual commitments that would have materialised if the facility had come into existence.

Right, okay. I'm so sceptical.

Okay, we've got about five minutes left, both guests will be pleased to hear. Anything else?

We're trying not to shoot the messenger here. [Laughter.]

Yes. This is clearly really difficult because we're asking you questions and you're in a position where you're saying, 'It's just not possible for us to answer those questions.' Clearly, we're pressing you for detail; it sounds like we've got to go elsewhere for the detail. But speaking generally, you've obviously come today because you feel that this is an important project. So, can you give us some sense of this being real and worth while? Has this been a good investment? Is there anything that you can tell us that can convince the committee, and help us to see that future, that potential opportunity?

Paul, do you want to go first?

I came here today partly for those reasons, but partly because of the previous involvement where the University of Birmingham and the UK Rail Research and Innovation Network, with a number of suppliers with specific financial commitments, came together and said that this would be a very good thing and put firm commitments behind that. Research England committed money to it as well. So, there are a number of people who gave real, tangible, firm, enforceable commitments to funding if it came into existence. None of those people were in a position to make it come into existence. But I think that's all I can offer.

Okay, thank you.

I think there has been a lot of interest shown, as can be seen, but I think it is a case of bringing industry together, SMEs and other organisations, to help support the railway network, to test things before they go on the live environment, so that therefore it can hopefully make it cheaper for the projects in the long run. Having this test facility to test things in advance of going live on a project, and then seeing a delay of two to three years potentially, could bring significant cost back on other projects going forward.

So, if this comes off, then others will also park their cars on the lawn as well, then—potentially.

Potentially.

It's all potential.

It's all potential, yes.

Okay, thank you.

Thank you. Can I start wrapping it up, perhaps? Janet and then Tom.

Where's the £70 million gone? Who would we as a committee need to ask for a breakdown on that £70 million of public money, taxpayers' money?

Perhaps that's more appropriate for the next session, I would suggest.

Do you have any idea?

I haven't seen the detail of it, no.

No, okay, fair enough. Paul?

I think that's for you to ask GCRE.

Fair enough.

Tom.

[Inaudible.]—question is you've mentioned 16 organisations committed to spend with GCRE if they get all this money and if the project becomes live. Do you know what the value of those 16 contracts were? Are we talking £5 million or £500 million-worth of potential business?

That was £30 million from 16 people, plus another amount from GCRE and from Siemens, whose facility it would be at. So, it was £30 million from independent parties, as it were.

Okay, thank you.

Okay, I think, at that point, we will call it a day with you for this session. Can I thank both of you very much indeed, Paul and Karl? I know it's been challenging at times, but you can see how keen we are to get a full picture of the situation over the coming days and weeks. With that, can I thank both of you?

We will have a 10-minute break before the next session, therefore we'll have a break here. Diolch yn fawr iawn.

Thank you. Cheers.

Diolch am ailymuno efo ni. Gaf i groesawu yn arbennig Richard Harper yma efo ni ar gyfer yr ail sesiwn ynghylch yr ymchwiliad i'r ganolfan ragoriaeth fyd-eang ar gyfer rheilffyrdd? Richard, hoffech chi gyflwyno eich hunan?

Would you like to introduce yourself?

Bore da. Good morning, everyone. My name is Richard Harper. I'm a director at the global infrastructure and transport consultancy Steer. In over 30 years of experience, I've worked for and advised the private sector, largely around infrastructure and operational change projects in rail.

Diolch yn fawr.

Thank you for the opportunity to come today to give you some evidence.

Thank you for coming and assisting us with this discussion.

Felly, y cwestiwn cyntaf ydy: beth ydy'r ffactorau allweddol, efallai, y byddai buddsoddwyr preifat yn eu hystyried wrth benderfynu a ddylid buddsoddi mewn prosiectau fel GCRE?

Sure. Look, so investors are going to focus first on whether the project can produce dependable returns for them. We know GCRE has outline consent, £70 million of public seed funding, and stated interest from more than 200 companies. The core developments are going to need private finance, which is the reason you're seeking evidence today, isn't it? But those points indicate substantial public commitment and significant market engagement, but not necessarily bankability. Investors are going to test the proportion of revenue that's contracted. They're going to want to understand pricing and utilisation assumptions, construction cost, programme risks, the capability of GCRE as an organisation to deliver the outputs that are expected, and the route to a viable, safe operating business, and fundamentally, in the case of perhaps things not going so well, what is recoverable from the underlying assets in the facility.

So, there are a lot of factors that the private sector will consider here. Based on published material, I'm not really able to comment on expected investor returns or risk allocation between the parties. I suspect that's something we might talk about a little bit more in a few minutes. So, it's quite hard to draw conclusions as to whether, at the moment, prospective returns are considered adequate to compensate the private sector for the risk that it's expected to take, but that's fundamentally the lens through which the private sector will seek to evaluate a proposition.

What do you think is the risk appetite these days from private investors in such projects?

So, I think this is the key question, and I think I'd like to take it and look through it in three particular ways. So, it partly depends on the role that you expect the private sector to fulfil. There are then obvious and clear key sources of risk in the development and delivery of the project to consider, and then there is the allocation of that risk in the commercial model. So, if I take each of those in turn, because the risk appetite of private investors won't be assessed in abstract, it really depends on that role.

So, we have essentially three parties in the development here: we have the Government, we have GCRE Ltd, as your arm's-length body, promoting and developing the proposition, and then you have the private sector organisation or organisations, potentially, who can partner and support on that. So, depending on the final delivery and operating model, the private sector could be asked to provide capital alone. It could be asked to provide specialist design and construction expertise, operating capability, commercial development expertise, or a long-term combination of all of those factors. So, that distinction in terms of those functions and those asks of the private sector is fundamental to the risk appetite.

So, if we were talking about a general infrastructure finance practice, a financial investor providing long-term capital against predictable payments would expect to have a low tolerance for demand or operating risk, whereas a strategic rail industry investor can contribute technical capability, customer relationships, or potential use of the facility, depending on what the organisation is and what it does.

But a strategic investor may not be willing to fund the whole scheme or accept risks outside its core business. So, it really depends on what the party is, what they bring to a development such as this. But there are published relationships already in place with the likes of Hitachi and CAF, Network Rail and Transport for Wales, and, as I said earlier, stated interest from more than 200 companies. So, it's not like there isn't appetite there. But that doesn't establish that any party has committed capital, contracted testing volumes or accepted a long-term delivery role. And so I'm still not clear, based on the evidence I've reviewed, what the preferred outcome is in terms of whether that would be an equity investor, a consortium, a concessionaire, a contractor-financer, or a narrower delivery partner. So, there's a big relationship here between what the private sector might expect and might offer and the role that is being offered to it.

In terms of the risks that are really going to affect the private sector appetite and also their financial expectations, obviously construction risk is a major part of that. So, an investor will be looking at design maturity, looking at the status and limits of the consents that have been made available. Ground or remediation works are going to be an important aspect here, given the history of the site. There are then some basics around procurement strategy, programme. Is a private sector partner going to be responsible for securing the procurement of a construction company to build the site? Is that part of their responsibility? Are they taking that risk? There are all of the usual risks you'd expect around inflation, energy costs, staff costs et cetera, who is responsible if programme overruns occur—all the basics that you'd expect for any construction project around a risk profile. And so the private sector will be helped by understanding how assured a final cost for completion of the project is, what the contingency arrangements are, is there a fixed-price construction package, what does the downside case look like for the construction of the facility. That kind of information will enable investors to assess what they might expect through a risk premium or what contractual protections they might wish to negotiate.

I guess you've then got a risk around how to mobilise the facility and take it from construction into operation. And if the private sector partner is to be a long-term partner and part of that operation, they're going to seek a safe and reliable operating model, quality staff, maintenance and control arrangements for the facility. So, all of the basics around how the facility is going to operate, a detailed operating cost model, an operational readiness plan and understanding when the break-even point is are all basics of an operating model that a private sector investor would seek.

But of course the most significant risk in this opportunity is likely to be around revenue. So, if you are expecting a full-risk investor to come in and take revenue risk, they're going to need evidence of who the paying customers are going to be. We know there's a lot of interest. We know that manufacturers, rolling stock owners, operators, Network Rail and other network operators, technology suppliers, universities, SMEs have all expressed interest. They all think the concept is sound and something that they might use. But what services will they buy, at what price and for how long, is going to be a critical factor for the private sector to consider. They'll also consider that with competitors.

So, one of the reasons that this is an opportunity is that existing conventional network capacity for testing is significantly constrained compared to where it was decades ago. So, actually testing trains off network is becoming increasingly important and has been over the last few decades. There are locations in the UK. Network Rail has facilities at Melton and Tuxford. Porterbrook, the leasing company, has its own facility at Long Marston. Manufacturers over the last 30 years have increasingly sent new rolling stock for testing to Velim in the Czech Republic. There are competitors, but they all offer different capabilities. And so, really, the success here relies on what is the point of difference and what are the economics of the facility.

What I'll do is I'll bring Shav in, perhaps, to follow this up.

Sure.

So, Richard, you've given us this picture that tells us that there's clearly a chicken-and-egg situation here, where, private investors, they want certainty. It sounds like they want everything set up and done and dusted before they actually put any money—real money—on the table. Because it seems like what you are setting out, to me, is that they want to know exactly what the construction risks are, as you've said. They want to know about the design maturity. They want to have real assurances around the final costing and the pricing of the construction. They need to know who's going to be responsible for procurement, and who's going to be responsible for the upkeep going forward. So, I guess, how far should Government then go in providing that certainty before it, effectively, takes on the risks that the private sector seems to be unwilling to bear?

I think, really, what I'm trying to say here is that the private sector will take risk.

Okay.

It will certainly take on risk. But the issue is about how containable that risk is for the private sector. So, it needs to understand the risk that it's taking, and then it can price that risk. So, it isn't saying that the private sector won't take risk and it just wants an oven-ready project that it will invest in. It will take risk, but it will want a degree of certainty, or a degree of depth of understanding of those risks, so it can price them, or it will want some means of recovery or sharing of risk, either with GCRE or with Government, so that there's some protection. So, fundamentally, if you're expecting the private sector to take a lot more risk, you're going to pay for it.

So what would be a reasonable balance of that risk, then, between the taxpayer and the private investor? And then, equally, what level or duration of contracted revenue would investors normally need to see before a project like this then becomes investable?

So, I think this takes me to risk allocation and a potential route to a contracting model, because I think that really does give choice in terms of how you could proceed. So, in general, the governing principle is to allocate risk to the party best able to manage it. And so I think if there is a construction partner as part of a consortium, well they understand construction risk, they're in a strong position to help take some or all of that risk and to help support and manage it. If you've got a strategic rail partner, who understands the market for the services that are going to be offered, well they're in a stronger position to understand the opportunities than someone who isn't in that field.

So, there's a position here that says, 'Well, actually, if you want to create a full risk transfer to the private sector, someone who could design, build, finance and operate this on behalf of GCRE, they're going to need to understand all of those aspects. They're going to have to understand that, have all of that capability in their organisation so they can effectively manage that risk.' But that isn't the only model. So, you could have a limited risk long-term partner who designs, builds, finances and operates the facility, but is paid principally through an availability-based charge. That could widen investor appetite, because it substitutes some exposure for testing income to them with a predictable contractual payment stream, but, necessarily, obviously, causes revenue risk to remain with GCRE or Government.

And this information at the moment isn't available for investors?

I haven't been in a position to talk to investors, and, in terms of publicly available information—

It's not there.

—I haven't got that.

Thank you.

Can I bring in Alun, and then Leti?

Thank you for your introduction, and I think that's really useful. What I—. I'm going to test my own understanding of what you've told us around clarity of what we're expecting from investors, and what I'm getting is that maybe you're not sure whether that clarity is there in terms of what model we're going to use, how risk is going to be shared, and maybe that is the reason why investment has not been forthcoming, because the clarity in terms of role is not there. Is that—?

Well, it is in terms of my position—

Yes, your position. Yes, yes, yes.

—in terms of what I've been able to understand from all available sources, which is, clearly, the case. I've not been party to the conversations GCRE has had with the private sector, and I'm not clear what options around that investment model could be on the table. So, getting some clarity around that, I think, would be helpful to understand what is being expected of the private sector and, I suppose, really, for you, what has caused, at this point, the private sector not to have the willingness or the appetite to invest, given the opportunity that's been presented to them so far.

Okay.

Leticia.

Thank you. Are there any ways or means of offering potential investors any additional assurance about their return on investment, or ways to help safeguard their investment and mitigate any perceived risk they see?

Look, there are many commercial models that can be deployed here. I've talked about a couple. There are other ways of mitigating, I think, what you're talking about, really, which I think is, particularly, revenue risk here, which is around perhaps setting some benchmarks or minimum amounts, outside of which there might be some funding available, so that, actually, the risk can be limited even if it's not removed completely.

Investors are going to look at not just, shall we say, a run rate of revenue and the risks around the run rate that they might be expecting, but also how cyclical it might be. Rolling stock is a major long-term asset with a 40-year life. If we think that the core business here is testing and commissioning of new rolling stock, that's clearly a sizable market opportunity, but not the only opportunity for the facility. And it really depends on the extent to which we are going to see major fleet replacements. But the opportunity isn't just in the UK, is it? Velim I mentioned, in the Czech Republic, is testing and commissioning rolling stock from all over Europe. That's a market this facility could be in for other countries in Europe, not just in the UK, if the capability of the system is set up to enable that testing to be carried out here.

Look, I suppose I'm trying to answer your question by saying there are different ways in which the opportunity can be presented here. In terms of safeguards, the one extent I've mentioned is, essentially, taking away revenue risk from the private sector so they have a guaranteed availability payment on the facility. That leaves GCRE and you as the Government with the revenue risk. A revenue risk share mechanism in a commercial arrangement is one way to share that risk and potentially mitigate some of the more concerning aspects of revenue risk for a private sector investor.

It strikes me that there are two big aspects, basically. There's the initial capital investment of £330 million—and we know capital costs increase, so that's a big question, and can the private sector, in what form, be part of that—but also that will only happen if we have clarity about the revenue income potential, as for any business, basically, that it is sustainable and viable with income streams afterwards. So, how important as a barrier, do you think, is a lack of contracted early-years revenue to securing private investment in GCRE? What I find challenging—. We've seen these declarations of support from various parties. It reminds me of—. Many of us, in the past, have supported organisations doing lottery funding bids and that type of thing. We support them in principle and things, but there's a fundamental difference between supporting the principle and the project and actually being a funder to part of it at a future date.

I think revenue, and particularly early-years revenue, is a material financing constraint because, in the opening years, you are combining ramp-up risk, so starting from zero, to a run rate. You've got—. I wouldn't call it operating uncertainty but, obviously, the facility is new, and actually getting everyone to be confident that it's working and functioning as everyone expects and then delivering the outputs and the results to the market is something that you can only do with your first customers.

It's also a point at which we've got high debt service pressure. So, revenue is ramping up but the debt has already started to require servicing because you've already invested the capital. The rate of ramp-up of revenue and whether the ramp-up is achieved in the timescales expected is obviously a major source of risk, because get off that glide path and the financial risks are just mounting very rapidly.

As you've said, there are plenty of expressions of interest, but what would really help here is committed volume: having some early customers, giving a commitment—which is possible; an expression of interest turned into a commitment—finding a couple of anchor organisations who will contractualise once the facility is available, or finding a minimum volume commitment that doesn't lock a potential user into all of their service requirements, but perhaps a proportion that they could commit to offering here. That would really, really help. It's about any kind of retail business, almost, setting itself up and starting: what kind of campaigns or pre-booking or offers are available and on the table to actually get some customer appetite and get some conditional support for the facility? Turning those 200 expressions of interest into 20 commitments to use once the facility is functioning and available would make a real difference to the risks around early years revenue for me.

I'll repeat a question I asked to others. We're talking about a £330 million capital project as it stands at the moment, there's over £70 million of public money already invested or gone into it; at what point does the public sector say, 'Enough'?

I don't think that's how I'm seeing this. If the £330 million is being expected from the private sector, we're in a situation here where the private sector will invest if it can see the conditions for a sensible, reasonable return coming from its investment. The private sector organisations that have been approached up until now clearly haven't got to that position where they are willing. Is your question really around how long you continue to seek that, or is it around how much more public money might be at risk to get it over the bar?

The thrust of it, I think, is are we talking about public money—another £100 million, £200 million?

I think I would see that through the lens of risk. I don't think a sum of money is the solution here, I think it is what risk might GCRE or Government need to retain in order to secure the private finance that's required. If you're in that situation, as we've described it through the meeting, where perhaps GCRE retains revenue risk, or a large chunk of that revenue risk, if that risk materialises, that's when public money is at risk, to cover for shortfalls in the revenue, isn't it? So, it's not an amount of money that Government needs to continue to invest, but it's potential risk that further Government money might be funded in order to secure a commercial deal that the private sector is prepared to accept.

Tom, then Alun.

Thank you, Chair. I feel like you've kind of answered what I was going to ask, but I'm going to ask it anyway. What is the general availability of private investment in the rail market across the UK broadly? Are companies there ready and waiting to invest, they just need to be convinced of the right project, or is it that, actually, we're seeing a shortage of willingness of private investment in the rail industry more broadly? Because that's what I'm trying to understand. We spoke previously about the Warwickshire site getting £75 million back in 2021, so there was a lot of money spent then from a private business. I know it's a different site doing different things, but what is it—is it that there's just not a lot of private investment out there right now, or is it that there is, they're just not convinced by this business case yet?

Private capital continues to be an active part of the UK rail market. There's a particular focus on rolling stock. Porterbrook is one of the major owners of rolling stock who've invested that money in Warwickshire themselves, as a facility particularly focused on their needs. There's also significant private finance activity in rail freight operations in the UK. It's not a sector or an area that private finance is not willing to invest in. I would also say that the nationalisation of English train operators under Great British Railways isn't expected to change those two market areas and areas of investment for private sector in the UK.

I don't see a barrier to private investment considering, on merit, a proposition that demonstrates the benefits and the returns that we've talked about. I think there are some conditions that are relevant here. I think the GCRE has identified higher borrowing and construction costs as factors contributing to both delay and investor appetite in the facility. That kind of headwind for the private sector in a project like this likely increases required equity returns or reduces debt capacity, potentially raises contingency requirements, but it doesn't make it an uninvestable proposition for me. There is competition from lower risk infrastructure and energy assets. There is competition for private sector finance. So, the private sector is not unwilling to invest, but it's going to be smart about where it invests its capital. It's going to look for confident returns in its investment.

So it's not that there's a lack of willing from private investment, it's that private investment, in your view, isn't convinced by the business case of this particular project.

There's a bit of detail there that I'm not really able to comment on, having not properly reviewed the business case, having not properly understood investor responses to the proposition that has been—

But based on the fact that we haven't seen private money go to that yet, it would suggest to me that they're not convinced.

I think you can draw that conclusion, yes.

Okay. Thank you.

Alun.

To what extent is location a barrier, the location of this particular site? Are there any barriers to investment because of the location? I'd just like to follow that up with something you talked about earlier on, which is the facilities elsewhere in Europe, for example, and whether we could compete on a European scale, given some of our history in terms of Brexit as well, whether there are any barriers in terms of that.

And while I'm here, another question. You also mentioned a bit earlier on—this isn't connected to location—around what would be the ask from the public sector, and whether it's capital or, potentially, guaranteeing revenue. This may be difficult for you, but for us to understand, it's sometimes easier for Governments to commit capital, a fixed amount, rather than, 'Here's £100 million, we know we're going to invest that.' But in the same way, for private investors looking for certainty, it's sometimes more difficult for the Government to say, 'We'll guarantee £30 million to £50 million for the next 10 years, but we don't know whether that's going to be needed or not.' Because there's a political risk, which is different to an investment risk. I know that's not a potential question for you, but in terms of potential models, I think we have to think about what the political risk is as well.

If I take that question first, I fully understand that point exactly about Government's ability to fund capital versus revenue support. That's not unusual in relation to any public transport project that I've ever worked on that's got a Government behind it. I guess the only kind of area that might be worth examining is whether Government-backed increased capital expenditure would reduce operating costs over the life of the business. Investing in enhanced facilities that then reduce long-run costs is a potential area worth examining in that. But I completely get the point, and I don't have a simple straightforward answer to it. It's life in a Government/operating sector project, isn't it?

To your point about location, I think location is only relevant to the extent that it affects revenue, cost and deliverability. The site is not brilliantly located in terms of railway geography in the UK and in terms of the manufacturing base, but if the alternative is the Czech Republic, it's not a barrier to use. Price will be a barrier to use. So, if the Czech facility is cheaper than this facility to use, then it will be more attractive, unfortunately. So, the issue there, really, is around what type of testing or operations will be sought by customers.

If you're testing a brand-new sort of rolling stock, you're going to move one or two train sets to a testing facility, and you're going to be testing them for several months to get through all of the normal processes and procedures around operational compatibility and system integration. So, actually, where the facility is doesn't really matter if that's the kind of life cycle of the project that is coming to the testing facility. If you want to access it once a week, and bring something, and test it, and then take it away again, then it would be somewhat different—location would be more important, I think. So, it really depends what the customer wants, but I don't see location necessarily as a challenge.

What might be a challenge is the extent to which the operation, once it's mobilised and running, can maintain and demonstrate it's got a skilled workforce, it's got a supply chain to support it. As a technology hub—and I know that there are wider investment opportunities on the site being considered—that's something that would also then give confidence to anyone who wants to use it that you've got the skills that you need. So, I think that's more important than where it is, if I'm honest.

Shav.

Richard, you've just mentioned diversification, and there is the proposal of an energy and data centre there as well, which, ultimately, could offer investors a stronger commercial return than rail testing. Is there a risk that future investment is directed towards that part of the site, rather than the core rail facility? How do you ensure that success in the more profitable part of that site then supports investment in rail rather than simply attracting more investment into that?

I think this is partly about the location and the contiguous nature of any additional or diversified investment, but it's really about what is the proposition for those alternatives. An investor is going to look at whether it creates credible separable cash flows or whether there are lower shared costs on the site. I think you could expect an investor to look at this in relation to looking at the components of the investment separately and together. You may find that getting different investors for different components answers some of my points earlier about what does the investor bring in terms of knowledge and experience. Those different sectors might attract different investors. So, again, I think it depends on investor appetite for the particular asset that is coming to the site.

The thing to be careful about, I would suggest, is the extent to which they compete with the rail investment for management time and any enabling infrastructure. So, if there is competition for organisation and management resources to deliver the outcomes on the site as a whole, and that detracts from the rail scheme investment, that's a potential area of risk to watch out for. But I think, overall, these are investments that could come to Wales in any location. And if this is a suitable location, well, they might attract an investor that might then help support the mobilisation of the site as a whole.

Sure. And if you're creating a rail innovation cluster, ultimately, skilled employment in Wales is obviously going to be a very important public objective. How can Government then ensure that diversification strengthens that objective, rather than gradually reducing the importance of that rail element?

I think this is about really being clear what the proposition is and what the outcomes are. And if that's clear to investors, if that's clear to users of those facilities, both in terms of business and the wider economy, it just creates clarity over what the purpose of the investment is.

And do you think that we've got enough skilled people in Wales? Are they skilled in the right things that we need in order to build, in terms of the construction to begin with, let alone everything else that could follow?

Well, I think from a rail perspective, there's been substantial investment in Cardiff's rail network in the last decade. An investment opportunity such as this, particularly if it's diverse and includes other capabilities like data centres as well as the rail facility, will rely on local skills and competencies, and also will rely on skilled organisations who have a footprint that's national and global, potentially, in terms of bringing the project skills to develop and deliver the scheme that's expected. So, I wouldn't see that as being a particular barrier at all, but it clearly needs those skills and competencies to be available.

And do we know what those skills are?

There are some core railway skills here, aren't there, in terms of civil engineering and railway systems engineering to support, develop and deliver the facility that's required, certainly from a rail perspective. You're not short of having brought those skills and competencies into the Valleys lines upgrade. So, I don't see it as a barrier necessarily. In terms of the development and the delivery of this project, we're talking about 7 km of rail and a number of significant rail systems to make it relevant to the whole of the UK rail network, but those skills and competencies are present in the whole of the UK rail network, and the geography here is not a constraint to that being deployed.

Thank you.

Following on from that, are you aware of, perhaps, any examples of best practice in relation to securing private investment in similar projects to the one proposed?

I'm afraid exact comparators are quite limited. [Laughter.] The Velim test centre in the Czech Republic was developed in the early 1960s. That might be the closest direct comparator that we've got. And obviously, at the time, that was a somewhat difficult political environment, was it not? So, look, there are some useful operational and competitive benchmarks, but the ownership, funding and development models aren't directly comparable, as we've said. I would start to look at a wider set of infrastructure and innovation projects, but I think it's quite difficult to see how you can easily identify directly comparable best practice to draw on.

If I was looking at just, in general, good project discipline and certainly, in an innovation space, delivering success in projects, I'd be looking at how clear the sponsorship and the commercial mandate for the project is. We've talked about maturity of design, consents and cost assurance. We've talked about how you can anchor customers, how you can stage investment against demand. But I think it's very difficult to find a comparator that's similar, where you can point to some direct best practice.

Okay, thank you, Richard. Finally with this, what do you think—? Obviously, we've got another session in a couple of weeks' time with Welsh Government and GCRE themselves. I think you've already touched on many of these, but what do you think are the key issues we should consider when we have that session?

I think the key thing I'd be looking to understand more about is the response that's been found from the private sector so far. What are the barriers to investment that the private sector have fed back that are preventing them from having the appetite to invest in this project? I think, when you can understand that, you can then understand what actions need to be taken next. So, is that around the construction, the construction cost and the risks of delivering a viable operational facility, or is it around that point that we've talked about a lot, which is whether we're going to turn this into some customers who are really going to use it, and whether we can be confident that we've got a viable business with a revenue that can support its costs of operation in the long term?

Thank you very much. I think, unless there's anything else, we'll wrap it up there. I think that's very timely. Can I thank you very much? I think that's been a very informative and very helpful session.

Absolute pleasure.

Diolch yn fawr iawn. Thank you.

Thank you very much.

Meanwhile, therefore, the next part, and we have a number of papers to note, Members. Unless I hear otherwise, I take it you're content to note those papers under section 4 in particular. However, I will draw your attention to 4.9 in particular, which is relevant to today, of course. That has been presented as part of the further discussions about GCRE. If everybody's content with that, under section 5, we will go to private section.

Dwi'n cynnig, o dan Reolau Sefydlog 17.42(vi), (vii) a (ix), i benderfynu gwahardd y cyhoedd o weddill y cyfarfod. Dwi'n cymryd bod pawb yn fodlon efo hynny. Os felly, diolch yn fawr. Mi awn ni i sesiwn breifat. Diolch.