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Financing UK rail infrastructure: how does today compare with the past?

In Victorian Britain, hundreds of companies and countless private investors supported railway construction; today, such infrastructure is only financed by the government. Comparing delivery of HS2 and the Great Western Railway suggests that the historical funding model was rather more effective.

Over budget, past deadline, big civil engineering obstacles – plus a public figurehead under severe scrutiny and pressure to resign. This might sound familiar – but the story applies as much to Isambard Kingdom Brunel’s Great Western Railway of the mid-19th century as to HS2, the high-speed line intended to link London to the North of England, the second phase of which was abandoned last year by prime minister Rishi Sunak.

The key difference is that the Great Western Railway actually reached its destination (on 30 June 1841); the same cannot be said about HS2.

The Great Western Railway and HS2 share a similarity in the difficult engineering problems that had to be solved, which led to increased costs and construction delays in both cases.

But how the lines were financed could not be more different. The Great Western Railway faced competition from other train companies to secure funding from private investors with a clear profit motive. In comparison, HS2 was funded through government grants and established as an executive non-departmental body that did not have to compete with other rail companies to secure funding.

Why have the financing models for infrastructure changed so dramatically over time? How have we gone from hundreds of companies willing to provide and finance railway infrastructure to only the government? And why has our modern funding model failed to deliver where historical models succeeded?

What funding options are available?

First, it is helpful to look at the options available for financing infrastructure, and what are the differences between them all. Today, the public sector finances 38% of infrastructure projects in the UK (House of Commons Library, 2023). This compares with 49% from private sector sources, while the remaining 13% is funded through public-private partnerships.

Figure 1: Funding mix of upcoming infrastructure projects/programmes, by sector

Source: HM Treasury, National Infrastructure and Construction Pipeline 2021, September 2021

Public provision and funding of an infrastructure project can take two forms: by direct funding and operation by a government ministry; or through establishing a state-owned enterprise (SOE). Often, both are entirely funded by government revenue. But SOEs have access to other forms of short-term financing.

Transport projects account for over 85% of public investment in infrastructure. Public infrastructure funding is split between national investment from Westminster and regional investment, including from regional governments and local authorities.

Public-private partnerships have become more prominent because large infrastructure projects can present significant downside risks for private investors. For example, Thames Tideway, London’s underground sewage tunnel, is being constructed and financed privately by charging existing Thames Water customers.

The UK government provided assurances that it would step in to provide financial support if events with a low probability of occurring and which would represent a significant risk to the completion of the project actually happen (Institute for Government, 2018). This successfully reduced the downside risk that can discourage private investment.

At the other end of the spectrum are infrastructure projects financed entirely by private individuals, often raising equity on a stock exchange or debt through loans and corporate bonds. In these cases, the government does not offer any protection from unforeseen costs or delays, although it provides guarantees to the company for after construction.

EDF Energy is currently constructing Hinkley Point C nuclear power station in Somerset. In this case, EDF is liable for all construction costs, including delays. The company will only be able to recoup the rewards from the investment when, or if, the plant starts generating electricity.

The government has assured EDF of long-term funding via the contract for difference (CfD) – a legal agreement through which the difference between the opening and closing trade prices is paid.

Table 1: Infrastructure financing methods

Source: Authors’ adaptation of World Bank, 2023

Learning from history

Private enterprises financed nearly all forms of infrastructure in the 19th century, including rail, utilities and telegram, particularly in their infancy.

In part, governments were dissuaded by the risks associated with new technologies or influenced by their political outlook. At the same time, entrepreneurs did not want government intervention in their industries (Milward, 2004). So why did this smorgasbord of financing methods develop?

Railway mania

In Britain, private individuals and organisations financed the development of entire railway projects between the 1820s and the nationalisation of the railway system in 1948.

Initial railways, such as the Stockton and Darlington line, were financed through shares bought by individuals known to the developer. The boom in railway construction of the 1830s and what would become known as the railway mania of the mid-1840s were financed mainly by railway companies issuing common shares on stock exchanges.

By 1843, 70 companies operated 2,100 miles of track in Britain, with the largest company controlling 118 miles. In the next two years, the average railway share price went up by 106%. During this period, parliament received petitions for railway construction from over 700 companies.

Often, railway companies issued partly paid shares, with the rest of the capital uncalled (shares that have not been completely paid upfront by shareholders). It has been argued that this allowed investors to purchase more than they had the capital to back up (Campbell, 2013).

Thus, when some uncalled capital was called to pay for the construction of the line, those who did not have the required money sold their shares. The extent of these sales resulted in prices falling 64.1% from their peak only a few years prior.

Table 2: Timeline

1830 – Liverpool-Manchester Line opens, initiating boom in railway construction
1843 – 70 railway companies operating in Britain
1844 – First major railway merger forms Midland Railway
1844-45 – height of railway mania, over 700 companies petition parliament
1872 – 16 companies owned 85% of total track miles
1894 – Railway and Canal Traffic Act of 1894 freezes freight rates at 1892 levels
1907 – Great Northern and Great Central are the first of several railway companies to announce new ‘alliances’ that were mergers in all but name
1913 – 13 companies own 88% of total track miles
1914-21 – Railways under government control
1923 – The 1921 Railways Act merges railways into four groups
1947 – Two accidents in October result in 60 deaths
1948 – Transport Act 1947 nationalises the railways
1963 – The Beeching Report leads to 30% of track miles and 55% of stations closing
1994 – Privatisation of the railways, including rail infrastructure with Railtrack
1999 – London Paddington crash
2000 – Hatfield derailment
2002 – Railtrack is renationalised as Network Rail

Diversion in the tracks

In Britain, government intervention in railway construction took two forms: granting right of way petitions; and regulating fares.

Companies wishing to construct railway lines had to petition parliament for the right of way often across private land, sometimes receiving pushback from individuals (more on that later). Those that received a right of way had a monopoly over the line.

In response, government oversight increased regarding safety, financial stability of the company and the introduction of maximum prices for freight and passenger fares (Milward, 2004).

In comparison, governments in France, Germany, (modern day) Italy and Spain intervened to bridge the gap between themselves and the British railway network in an early example of public-private partnerships.

Guarantees on interest rates were provided and, in Italy and Spain, construction costs were subsidised to reduce financing risks. This interventionist approach would later develop into the complete nationalisation of railway networks decades before this happened in Britain.

Meanwhile, railway construction in the Netherlands was carried out variously by SOEs and private corporations, the latter often having quite exotic financial instruments designed to shield shareholders from downside risk (De Jong and Madertoner, 2022).

Everyone wants the railway; no one wants to invest; and some don’t want the noise

During the construction of Brunel’s railway in the 1830s and 1840s, some nearby residents opposed the construction of railways over noise and pollution concerns. One such example is a notable story of the then Eton schoolmaster preventing the construction of a stop near Windsor over fears his students would have ready access to London.

But due to the restrictions in the voting franchise – at the time limited to men who owned property or paid certain taxes – local MPs could discount the opinions of their constituents. What’s more, when the benefits of the railways became apparent, most residents switched to demanding further rail expansion.

Similarly, certain interest groups were outspoken against the construction of HS2, including environmentalists and constituents concerned about habitat destruction or noise pollution. The pressure that local MPs experienced was substantial, resulting in alternative more expensive routes being adopted. This included the construction of tunnels not budgeted for as MPs scrambled to placate their constituents and secure their re-election.

Back in the 19th century, issues of public opinion were dwarfed by financial concerns. In the aftermath of the railway mania, the returns to investment in the railways were significantly lower than investors had expected. Indeed, railway share prices continued to fall until 1850 (Campbell, 2013).

Shareholders were reticent to allow extensions of parent lines or the construction of new ones. The introduction of new financial instruments, such as preferred shares and debentures, encouraged an increase in investment and spurred the construction boom of the 1860s. The rail network increased from 10,000 miles in 1860 to about 15,000 miles in 1870.


During the same period, the industry experienced growing concentration as smaller firms, which were less efficient and less profitable or had failed, were bought. Amalgamation of lines became common as larger firms sought to maximise cost efficiencies from scaling their operations (economies of scale).

In 1865, 78 companies operated 11,451 miles of track, with the most prominent company controlling 1,274 miles. By 1872, 16 companies owned 85% of the total track mileage. The market had experienced further concentration: down to 13 companies owning 88% of all tracks by 1913 (Foreman-Peck, 1987).

Research shows that based on revenue, the five-firm concentration ratio – which refers to when the top five firms account for more than 60% of the market – did not change much (Arnold and McCartney, 2005).

Therefore, there was no significant structural change between 1870 and 1912. But if the local nature of transport is considered, many lines were monopolistic as passengers did not have a choice of provider if they were travelling between certain destinations (Crafts et al, 2007).

The industry started to resemble an oligopoly – a market controlled by a small number of firms – particularly at a local level. Barriers to entry were substantial and price competition had been replaced with product differentiation, such as faster services or more lines. The latter severely reduced the profitability of the lines.

Companies constructed lines in direct competition with incumbents. By the early 20th century, revenue growth began to slow while expenses rose. Increasingly, it was hard for companies to raise finances profitably, so they turned to public agreements, which represented amalgamations in all but name. But these were blocked by parliament in 1913 over fears of a monopoly (Cain, 1972).

The desire of companies to merge – or in other cases, to reach agreements to reduce price-based competition to restore profitability – supports the argument that the railway industry is a natural monopoly, certainly on a regional level, with high fixed costs from infrastructure requirements.

From regional oligopolies to regional monopolies

In the wake of the First World War, the 1921 Railway Act was introduced. This grouped the railways into four amalgamated companies to improve efficiency by maximising the available economies of scale.

It was an attempt to avoid nationalising the industry, which had been under government control during the war. But it would prove to be a preamble to 1948, when these regional monopolies were nationalised into British Rail.

Although the market for railways increased in concentration over time, it never represented a true monopoly or oligopoly when taking account of other forms of transport. In the 19th century, the railways faced competition from the canals and shipping. By the 20th century, this also included municipal trams and later the expansion of the road network (Cain, 1972).

For the next 48 years, railway infrastructure was solely the provision of the state. This was a period of managed decline in railways. Competition from other forms of transport services, especially from containerisation and roads, left the railways unable to cover their costs.

The Beeching Report, published in 1963, attempted to return British Rail to profitability through cuts to railway lines and stations. The initial report proposed closing over 5,000 miles of track and 2,363 stations. As a result of the backlash from the report, the cuts were reduced but still accounted for a third of all British railway lines.

Figure 2: Railways across Europe, total active track (km), 1825-2021

Source:Eurostat and Mitchell, 2007

Tunnel vision or path dependency?

The Conservative Party’s privatisation wave started by Margaret Thatcher in the 1980s eventually reached railways in 1994. The sector was vertically disintegrated, split between infrastructure and operations. Rail infrastructure came under the ownership of Railtrack, a publicly listed monopoly corporation that owned all of the UK’s railway infrastructure.

Following three major crashes, where Railtrack was perceived to be at fault for a lack of investment in infrastructure, the company experienced financial difficulties. Railtrack share prices fell from a high of over £17 to £2.80 in the aftermath of the Hatfield crash in 2000.

After this brief experiment with a sole private infrastructure provider in Railtrack, infrastructure came back under the ownership of the state through Network Rail in 2002. Network Rail is financed by grants from Westminster and Holyrood (70%), charges levied on train operators (25%) and income from commercial real estate (5%).

The history of the British railway companies in the 19th and early 20th centuries points towards the market for railway infrastructure in Britain becoming a natural monopoly. Initially, firms voluntarily merged. In the 20th century, this developed into government-mandated amalgamations. Eventually, all were put into one firm under national ownership, in part to maximise economies of scale.

The bottom line

A private company financing and constructing one, or even a few railway lines, would struggle to achieve the economies of scale necessary to compete in this sector, unless the government provided subsidies and entered a partnership.

The experience of HS2, with substantial delays due in part to objections from residents, will only further discourage private investment. This is largely due to the unpredictable but substantial downside risk. Returning to private finance in the railway industry seems unlikely, despite the wishes of directly elected regional mayors to pursue this option.

Connectedly, it is important to question why our modern funding methods seemingly failed where past models succeeded. Both the Great Western Railway and HS2 had to alter their planned route due to ‘not in my back yard’ protests (NIMBYism – although it wasn’t called that until the 1980s).

A significant difference is, as mentioned, the increase in influence and number of NIMBYs due somewhat to franchise extensions. In 1830, whether or not you wanted the Great Western Railway in your back garden only mattered if you were one of the lucky few to have the vote. The rise of NIMBYism has been highlighted as a core factor in infrastructure costs in the UK being significantly higher than elsewhere.

Alongside increased regulation, NIMBYism increases the time required to plan infrastructure and expands the risks of unexpected outcomes that exacerbate what Bent Flyvberg calls the ‘iron law of megaprojects’ – that large infrastructure projects always go over their budgeted costs and time (Flyvbjerg, 2014).

Where can I find out more?

Who are experts on this question?

  • Gareth Campbell (Queen’s University Belfast)
  • Rui Pedro Esteves (The Graduate Institute, Geneva)
  • Bent Flyvbjerg (University of Oxford)
  • Aldo Musacchio (Brandeis University)
Authors: Padraig McKee and Chris Colvin (Queen’s University Belfast)
Image: Aerial view of the construction site for HS2 Railway project in Birmingham city centre by Teamjackon on iStock
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