Oxford Parkway Station; Funded by Chiltern Railways and Network Rail

July 2017

  1. Introduction
  2. Network Rail is open for business
  3. Actions we are taking to support this
  4. Appendices
  5. Download The Hansford Review

1. Introduction

Network Rail is ultimately accountable to the public for the safety and operation of the vast majority of the rail network in Britain. But that should not mean that Network Rail is the only body that can build or renew infrastructure on or around the railway. We recognise the power of competition to drive efficiency, creativity and innovation. 

That is why, in December 2016, we commissioned Professor Peter Hansford, former Chief Construction Advisor to the UK Government, to carry out a review into the barriers that prevent third parties building on, and potentially investing in, our railways. Professor Hansford and his review team consulted with over 150 individuals and organisations.

The review was published in June 2017, and made a number of recommendations for Network Rail, which we accepted wholeheartedly. We are now committing to changing our behaviours and approaches so that a range of organisations can come forward with alternative solutions and new ways of working.

Our message to the industry is that Network Rail is open for business.

We have set out below some of the areas where we introduced contestability in the delivery of projects and renewals activity. We explain how we have changed our processes and behaviours to enable third parties to directly carry out projects and renewals on and around the railway.  We know that this will make third party funding easier to achieve, which will directly benefit passengers and taxpayers.  And we are committing to work with the industry to find the right mechanisms to attract and reward third party finance and delivery.

These actions will support our ambition to transform into a more customer-focussed organisation and, most importantly, change the way the rail industry operates to deliver the high performing, cost efficient railway that Britain’s future depends on.

2. Network Rail is open for business

Third party involvement in rail schemes can take many different forms. We believe, however, that there are a number of clear areas of opportunity.

Over the past three years, we have made significant internal changes. We have transformed from a largely centralised organisation to a group of devolved, customer-facing route businesses. Now route managing directors are accountable to customers for the day-to-day running of their routes and for the outcome of projects and renewals. They make decisions about what renewals work is done and when. They are the key interface between funders of new enhancement projects and the operational railway.  So it is right that they should also be able to decide by whom these activities are done and to create opportunities for the market to compete to deliver these activities in novel and different ways. In the future the route managing directors can choose alternative delivery models when this demonstrates overall improved value for money.

There will therefore be opportunities for activities to be directly competed in the market.  The devolved businesses will publish a pipeline of such opportunities by the end of 2017.  CP6 will be built with contestability at its core.  The intent will be that projects listed would still be at an early stage of development (but when required outputs are clear) to allow the maximum degree of creativity and innovation.

Initially these opportunities may be at the smaller end of the spectrum, such as new stations depots, and car parks. Examples of this may include new stations such as those planned at Warrington West, Reading Green Park, Ceredigion Bow Street and Horden in County Durham. Over time we will be able to use learning from initial projects delivered in this way to develop best practice criteria for when to adopt this approach.

The Hansford Review makes clear that the current asset protection arrangements, template agreements and guidelines on risk transfer in Network Rail impede this sort of activity and, as explained below, we are committing to change these so that contractors can have much greater confidence in what they will get from Network Rail.

There are also areas where Network Rail’s own infrastructure organisation will be best placed to manage project delivery, for example due to scale, complexity and risks which a private sector company could not bear. This will also be part of the framework we will develop.

Part of welcoming contestability is recognising that we do not have to play a central role in all rail projects. If a third party has a particular project that they would like to take forward, and is in a position to do so, then the most effective model may be for them to take on responsibility for  the funding, design, and build. Our role will be to provide advice as to the standards and processes required to ensure what is being built is compatible with the rest of the rail network and does not expose us to long term liabilities. Again we know that asset protection arrangements must change to allow these third party delivered projects to succeed.

Network Rail’s System Operator function helps identify future capacity needs on the railway and ensures that the allocation of current capacity is optimised for the benefit of the network as a whole. They can support third parties in understanding how well their projects might fit with the wider strategic direction being taken by the industry.

Examples in this area could include the construction of improved rail links to support power generation plans, such as in Cumbria, or the construction of Sizewell C in Anglia. It could also include local or regional transport authorities fully-funded projects, such as line extensions, depots and stations.

We know there is considerable private sector appetite to invest in long life secure assets such as railways. As there are complexities in ensuring these are financially viable for both government and investors, we are establishing a dedicated team (to be in place by December 2017) to identify suitable opportunities. Projects that require supplier expertise – developing new technology, for example – may be particularly suitable for this.

This may include third parties delivering and providing finance for schemes, which would then remain on the government’s “balance sheet” and be paid by government over the long-term. These would typically be opportunities where the benefits of innovation and risk transfer outweigh the likely higher cost of capital, i.e. they represent better value for money. Such projects will still need to fit in the available government funding envelope to be viable. 

As the Hansford Review identified, there is currently a lack of visibility for potential investors of the opportunities available to them. As with the Network Rail funded project pipeline mentioned above, we will also publish a regular pipeline of potential projects at a national level. When we have established that third party development is the best way forward, and included projects in this pipeline, we will not compete for them ourselves. 

Often people and organisations outside Network Rail have good ideas or new technology that they want to develop and that will improve services and reduce industry cost. We want to make it easier for organisations to do this and allow them a share in the benefit. We are already adopting this approach in the development of digital traffic management systems and we believe that there will be many other areas within Digital Railway that lend themselves to this type of third party investment.

3. Actions we are taking to support this

We know that there is a common perception that Network Rail is difficult to work with. The Hansford Review identified one of the barriers to third parties entering the rail market is Network Rail’s own behaviours. Currently, a potential funder may have to engage with a number of different Network Rail departments, who may offer conflicting advice, and it can be unclear where accountability for decision-making sits.

Asset protection agreements can be a particular barrier for third parties. During works on or adjacent to the railway, it is essential that Network Rail has proper procedures in place to ensure that rail services are not disrupted, that equipment and structures are not damaged, and that safety is given the highest priority. The Hansford Review identifies, however, that “the perception is that Network Rail’s approach is excessively risk-averse, and not incentivised to help third parties.”

This needs to change. We will:

  • Provide a single point of contact for third parties, a project sponsor who will be responsible for liaising on their behalf with the other relevant parts of Network Rail. They will be given greater accountability for asset protection (ASPRO), agreeing with the third party what is required and then agreeing a project plan with the ASPRO team and putting the necessary commercial arrangements in place.
  • Develop a Service Level Agreement (SLA) for third parties, setting out what they can expect from us, processes and timescales, as well as our escalation process if they are not satisfied. We want those who might enter into future SLAs with us to inform this work, so we will establish a working group, led by Amey’s CEO Andy Milner, to agree what the key elements of the SLA should be.   From 2018, we will publish our performance against the SLA, by route, highlighting best practice and areas for improvement.
  • Standardise our approach to ASPRO across our nine routes, so that requirements and expectations are consistent and transparent whatever part of the country the project is in and whether it is being delivered by a third party or by one of Network Rail’s own delivery teams.
  • Establish budget for ASPRO teams and an adequate resource pool to respond to third party requirements quickly.

We will trial this approach on the Anglia route in autumn 2017, before rolling it out across Network Rail in spring 2018.

The Hansford Review found that “inappropriate application of standards is perceived as an excuse for ‘gold plating’ Network Rail’s requirements, to the cost of the third party”.

We recognise that whilst standards are extremely important to ensure safety, compatibility and quality, when applied indiscriminately they can also add unnecessary cost and complexity. As well as our own review of our policies and standards, which we will complete by March 2018, we want to enable our suppliers to proactively challenge standards that are considered to drive increased cost without comparable benefit, with particular focus on the early project design stages.

We have held initial discussions with the industry in the Commercial Directors’ Forum to get their views on the current barriers to challenging standards and how we might best incentivise suppliers to provide that challenge. This could involve, for example, providing a financial reward structure based on the savings that will be achieved following an improvement to a standard, or providing formal industry recognition for outstanding innovations put forward by suppliers that challenge our current requirements and practices.  We will be conducting a pilot which will focus specifically on reviewing, updating and challenging our electrification standards.

Based on the findings of the pilot and lessons we can learn from other industries we aim to introduce these incentives from 2018.  We believe this will enable us to harness the creativity of the industry and ensure that our standards constantly represent the latest cutting edge thinking, as well as creating potentially significant cost savings. From 2018, we will publish an annual list of industry-inspired changes to standards, and the industry benefit they have generated (and are likely to generate in the longer term). 

These measures are intended to turn Network Rail standards, and the standard-setting process, into standards that have far greater industry buy-in. Our vision is for standards forged through collaboration, which not only support the safe and efficient running of the network but also contain the very latest thinking and innovation in the industry. 

We will make a number of changes to our internal structures to ensure we have adequate resource to achieve our ambitions:

  • As part of our programme of increasing devolution of responsibility to route managing directors, we are in the process of recruiting into route leadership structures to enhance our commercial capability, including the appointment of business development directors. We expect all posts to be filled by autumn 2017.
  • We will create a Head of Asset Protection in each route, who will work with project sponsors on third party requirements. They will be directly accountable to the industry for ensuring that the SLA service levels, mentioned above, are delivered and reported on. This will be part of the changes outlined in section one, to be trialled in Anglia in autumn 2017 before rolling out across Network Rail in spring 2018.
  • We will also create a national director of Asset Protection to lead the transformation of ASPRO and develop policies and processes.

To support these changes, Network Rail’s Chief Financial Officer (CFO) will take overall accountability for a governance and reporting framework to support and monitor third party involvement on the network. This will be supported by a comprehensive reporting system from the route finance teams which will be reported externally and up to the Network Rail Board. This will be in place by December 2017. This will allow us to be explicit, internally and externally, about the efficiency gains we expect to make from contestability and to incentivise internal behaviour change through performance objectives and performance-related pay.  Specifically, the CFO will ensure that we report annually on the pipeline of third party contestable opportunities, the asset protection SLA performance and the incentive payments made for positive changes to standards.

In addition the CFO will act as the final point of escalation for any disputes and will champion the removal of obstacles that are hindering third party investors.

One of the deterrents to investment in the railway is the degree of risk that can be realistically borne by a third party. We will clarify what risks can be excluded by a third party and assess where Network Rail alone is in a position to bear certain risks. We also expect certain risks can in future be transferred to the insurance markets rather than being ultimately borne by Network Rail or the third party and already have products in place to support this.

4. Appendicies

Autumn 2017 – Anglia trial of new approach to third parties/ ASPRO.

Autumn 2017 – route leadership teams, including business development directors, in place.

December 2017 – new governance and reporting framework in place.

December 2017 – routes publish pipeline of opportunities for third parties.

December 2017 – team in place to identify schemes suitable for third party finance.

2018 – introduction of incentives to encourage industry challenge of standards.

March 2018 – internal review of policies and standards completed.

Spring 2018 – roll out of new approach to third parties/ ASPRO.

By December 2018 – publish performance against third party SLA, by route.

By December 2018 – publish industry-inspired changes to standards.

  Hansford recommendation Network Rail Response
1 Network Rail to develop and embed processes and specialist commercial capability within the routes to establish and execute a range of alternative design and delivery options for infrastructure projects. See 3.1.
2 Network Rail to demonstrate its commitment to creating a more contestable market and evaluate resulting gains. 2.1 and 3.4.
3 Network Rail in conjunction with government to develop clear and transparent principles and processes for considering contestability at each investment decision stage. See 3.4. We will work with DfT to take this forward.
4 Government to ensure that it gives due consideration to contestability in its business case methodology, and to publish appraisal guidelines to assist third parties to realise financial benefits associated with rail infrastructure projects. [DfT action]
5 Government to establish an early development fund with clear criteria to assist in the creation of high quality investment proposals. [DfT action]
6 Network Rail in conjunction with government to create and maintain a forward view of the scale of third party investment opportunities, giving visibility and confidence to the market. See 3.4. We will work with the DfT to take this forward.
7 Network Rail in conjunction with government to identify a range of pathfinder projects to demonstrate the removal of barriers and the benefits from alternative funding and delivery models. Network Rail will have created a pipeline of opportunities by the end of 2017, in conjunction with DfT. Some projects may then become ‘pathfinders’.
8 Network Rail to define roles and accountabilities, build capability and provide support to the routes for engaging with third party investors (funders and deliverers); and to define the respective accountabilities of the routes and Network Rail Infrastructure Projects directorate. See 3.3 and 3.4.
9 Embed within Network Rail’s transformation programme the behavioural changes required to create a welcoming, predictable and trusting environment, providing more cost and risk certainty. See 3.3, 3.4 and 3.5.
10 Network Rail to convert its Code of Practice into a Service Level Agreement, refreshing its template agreements, asset protection agreements and guidelines reflecting a more balanced risk transfer, in consultation with industry. See 3.3, 3.4 and 3.5.
11 Create a transparent process to enable and facilitate third party challenge of scope and standards application during project development, fixing them before funding commitments are made. See 3.2 and 3.4.
12 Establish effective oversight arrangements to provide strategic direction for a more contestable rail market, building on existing Network Rail governance structures and involving government as appropriate See 3.4. We will take this forward in conjunction with DfT and ORR as required.

Download the Hansford Review