Network Rail is in the middle of a transformation, a large part of which is structural. Previously centralised power is increasingly being divested to NR’s eight route businesses as part of the company’s devolution strategy, while there are also fundamental changes being made to the way it is funded.
These changes primarily concern NR’s £47 billion financial settlement for Control Period 6 (CP6, April 2019-March 2024). Although representing a 25% increase on funds made available for CP5, it is now restricted to expenditure on operations, renewals and maintenance.
Enhancements are no longer covered. Instead, these will be funded separately by the Department for Transport and considered on a case-by-case basis under the management of a Joint Portfolio Board.
Another key departure from the funding formula used in CP5 is a new commitment to attracting larger amounts of third party investment, alongside making it easier for third parties to compete with NR to deliver work on the network.
Underpinning this change of direction is an overarching ambition to turn NR into a more customer-focused and commercially minded organisation, while also reducing its reliance on central funding.
Securing additional funding became a more serious goal after NR’s reclassification as a public body in September 2014, which has heavily restricted its ability to borrow money. Engaging with third parties to secure these funds should also help NR become more outwardly facing and responsive to local stakeholders, as might be expected from a commercial enterprise.
It is also hoped that by enabling third parties to deliver work in addition to paying for it, greater discipline and efficiency will be instilled in NR’s own project management and cost control capabilities, through the power of competition.
To enact these changes, in December 2016 NR Chief Executive Mark Carne commissioned Professor Peter Hansford to conduct a review into the barriers that currently prevent third parties from investing in and building on the railways – such as a perception that NR is too large for smaller organisations to deal with, and that it embodies a culture more preoccupied with achieving outputs rather than facilitating the inputs of external bodies.
Hansford’s report was published in June 2017, and made 15 recommendations to help NR bring down those barriers. All 15 recommendations were quickly accepted by Carne, and eight workstreams were created to help implement them (see panel) within a new programme called Open for Business.
Programme Director David Ollerhead was appointed last September to head the workstreams.
“Hansford was an interesting report which we responded to immediately by accepting all of its recommendations. A series of commitments came in off the back of that, which is where I come in,” he tells RAIL.
“The review thought about behavioural change, removing barriers, and all of those things so that we would not be a huge faceless bureaucracy that people can’t get into, but actually a welcoming organisation with individual faces that people can deal with directly.
“It’s all very much aligned with the route businesses and bringing us a lot closer to local businesses and communities, and not the big behemoth that is Network Rail.”
Top of Ollerhead’s list was putting in place dedicated project finance teams to explore opportunities for third party investment, while also creating a new governance investment paper.
An important distinction has also been made in the workstreams between what constitutes third party funding and what can be regarded as finance. According to Ollerhead, the former represents a simpler transaction whereby a private business or local authority hands money to NR to deliver a piece of infrastructure for their benefit, while the latter comes with an expectation that there will be a return on investment paid to the third party.
As a public sector body, accepting finance poses more difficulties to NR than funding - it goes onto the Government’s balance sheet, and therefore raises questions around whether the debt should be treated as a public or private liability.
It must also be properly established how investment risk can be properly transferred to a third party, when NR remains legally responsible for the physical assets on its network regardless of how they’ve been paid for.
Finding a suitable mechanism to provide a return on investment also needs further consideration. The sensible decision has therefore been taken to restrict third party finance opportunities in CP6 to a small number of pathfinder projects, such as the trial of a new traffic management system installed by Resonate on the Great Western Main Line.
As part of a two-year contract, Resonate has covered the full costs of deploying the technology, which is designed to reduce train delays by 15%. In return it will receive a share of the reduction in Schedule 8 compensation payments that NR will subsequently have to pay train operators.
Ollerhead adds: “We’re not rejecting finance completely, it’s just really difficult, which is why we’re trying pathfinder projects to try and work it through. We’re also beefing up our corporate finance teams to help navigate those difficult waters and establish the rules for what we can and can’t do.
“There will definitely be opportunities for finance, but for now we’ll find those where it is most obvious where the investors can gain a return. We have already achieved quite a lot, including creating a remit for dedicated project finance teams to oversee these complex financial deals that can be difficult to work through, while also considering how we govern those types of schemes.”
To focus on attracting third party funding, NR has already published a pipeline of opportunities to potential investors.
These schemes have deliberately been started at the smaller end of the spectrum - they include new stations, depots and car parks - but are intended to increase in size as best practice criteria is developed.
Crucially, NR also has an existing track record in facilitating the delivery of similarly sized projects on its network that have been part-funded or fully third party-funded. These include new stations at Maghull North and Kenilworth that both opened earlier this year.
Elsewhere, a 2.5-mile extension of the Barking-Gospel Oak Line to Barking Riverside is expected to open in 2021, fully funded by local housing developers and Transport for London’s growth fund. And the owner of Felixstowe Port is part-funding the double-tracking of almost a mile of the single-line branch to the port, that will add an additional ten paths for freight trains per hour.
The second part of NR’s pipeline of third party opportunities is due to be published imminently, and include further information not just on how projects can be externally funded, but also third party-delivered.
“A lot is going to be happening in the next few months. We’re planning to put out a contestability guide with the second part of the pipeline later this summer, as we try and encourage more investment,” adds Ollerhead.
“I can give you some examples of how we’re doing it anyway, but it’s about how we follow up on that and respond to Hansford. The Felixstowe loop is a great example. Having one track from the port to the network is clearly a constraint for them and so, part-funded by Hutchinson Ports, we’ve added massive amounts of flexibility and capacity to that bottleneck.
“Maghull North and Kenilworth stations have also both recently opened and will make a big difference to their local areas and urban regeneration. But how can we do more of this stuff?”
To help encourage third parties and to more collaboratively generate ideas for investment opportunities, NR has recruited dedicated business development directors within its route businesses.
They will enable closer and more personal relationships to be developed with local stakeholders, while providing a single point of contact within NR to help guide external funding partners through the process.
Ollerhead explains: “Business development directors have been appointed as the go-to people in each route and the go-out people to talk to Local Enterprise Partnerships, local councils and businesses, and provide a tremendous boost in the quality and depth of those conversations.
“Depending on the type of scheme, they will broadly act as account managers alongside our sponsorship teams, and we’re working through exactly how that’s going to work.”
To facilitate third party delivery, Ollerhead’s team has also been busy overhauling NR’s application of standards and asset protection arrangements.
While upholding standards remains crucial to ensuring safety, compatibility and quality, Hansford encouraged NR to review its standards - particularly where they are deemed to increase costs without comparable benefit, and often applied indiscriminately.
Suppliers are to be incentivised, through both financial rewards and formal recognition, to challenge these standards so that they may be improved, contain more innovative thinking, and potentially create significant cost savings.
“Standards was a big theme in Hansford, so we’ve updated 400 of the biggest standards to make sure they’re up to date with the latest legislation,” says Ollerhead.
“We still need standards to underpin the safety and delivery foundations of what we do, but we don’t want them to be a barrier.
“If you’re a supplier with a better way of doing things, let’s have a conversation about it. If you’ve used a different type of material to do the same thing in another industry, for example, we want to learn from that. And we have already had an encouraging response with the 400 standards that have been challenged already.
“It’s not just good to allow standards to be challenged, we should be incentivising third parties to do just that. Where we win, they win too. And if they can do something more effectively and cheaper and we accept that standard, then financially it’s good for them and us.”
Hansford also found that asset protection agreements can be a barrier to third parties, and that NR’s existing procedures to ensure that train services are not disrupted and that equipment or structures are not damaged are excessively risk-averse.
In response, NR has created the role of professional head of asset protection and optimisation (ASPRO), to give strategic leadership and direction in this area, alongside a national ASPRO framework to drive a more consistent approach.
Mona Sihota was appointed to the role in June, while all NR’s route-based ASPRO teams must be compliant with the framework by next month (September). The adoption of this framework follows a year-long trial of a new more streamlined ASPRO approach on NR’s Anglia route.
Meanwhile, NR has also worked with AMEY in an advisory capacity, to create new service level agreements so that third parties can hold NR to account on the level of service its ASPRO teams provide.
Says Ollerhead: “Mona has only been in the role a few weeks, but she is already making great waves. We’re really trying to up our game with ASPRO, as the easiest thing to protect your assets in the past has been not to let other people anywhere near them.
“Asset protection can’t be contestable, but giving ASPRO this new focus and accountability on each Route is really key to recognising that asset protection is a profession in its own right, which is a large step for this organisation.
“Underwriting all of this is a move away from being very prescriptive about what project specifications must contain to more of an outcome-based spec, and then - as long as asset protection is in there - how you go about doing that is completely up to you.”
Finally, Ollerhead addresses a source of concern among third party funders around how compatible NR’s Open for Business programme is with the Department for Transport’s separate call for Market-led Proposals from developers (see pages 64-65).
On the one hand, NR is still creating its own pipeline of projects which in many cases it will deliver and interface with through the application of standards and its asset protection processes. On the other is a strategy from DfT to enable developers to define their own schemes and ways of delivering them entirely independently.
According to Ollerhead, Open for Business is complementary to MLPs, with clear blue water between the two in terms of scale and complexity. There does seem scope for some crossover, however, where NR is deemed best-placed to deliver on discrete elements of MLPs. But whichever route is taken, the net result for the taxpayer will remain the same.
“We work really closely with DfT on this, to be aligned with them. But, particularly with our business development directors as our eyes and ears at local level, I think we’re more likely to be able to identify funding opportunities at a local level.
“We have local intelligence and should use that knowledge, whereas DfT is more likely to have much better ingress into bigger institutional type investors.
“But what we don’t want to do is close minds. Let’s have a conversation and see if what you suggest makes sense, and it might be that one or two things pop out of the MLPs and we take them forward.
“The reality is that a lot of big enhancements probably still need a large element of state funding because of the nature and size of them and the difficulty of getting financial returns, but the main message is that we’re trying to make this stuff easier to do and bringing down the barriers.”