Written evidence submitted by the Railway Industry Association (INV0013)

Dear Ms Greenwood,

I would like to thank you for calling an Inquiry into rail infrastructure funding.

As you will be aware, rail funding is a critical issue for the supply chain, including members of the Railway Industry Association (RIA) - which represents some 200 companies who build, maintain and improve the UK’s railways.

Our research shows that the current system of funding creates periods of ‘boom and bust’ which affect our members’ ability to deliver for passengers, freight and taxpayers. Fundamentally this means a worse performing rail network, increased costs and reduced economic benefits from rail investment.

This is most starkly demonstrated by the slowdown the industry is currently facing in respect of renewals volumes at the end of Control Period 5, which concludes in March 2019. There remains a £300m renewals shortfall to the end of CP5 and each month that passes, there is less time to plug this funding gap, resulting in job losses, SMEs in the sector going bust and larger companies moving investment overseas or to other sectors.

Given the timescale on CP5, I therefore encourage the Transport Select Committee to conduct its Inquiry as early as possible in 2018, so that the CP5 issue can be discussed urgently, with a view to the Treasury being urged to bring forward funds from CP6 to plug the remaining shortfall.

RIA hopes that this Submission is of use to the Transport Select Committee. Should you wish, we would also be happy to provide further written or oral evidence, as representatives of the railway supply chain.

Yours sincerely,

Darren Caplan                                                                     

Chief Executive                                                        

Railway Industry Association

RAILWAY INDUSTRY ASSOCIATION

TRANSPORT SELECT COMMITTEE

INQUIRY ON RAIL INFRASTRUCTURE FUNDING

DECEMBER 2017

Introduction

The Railway Industry Association (RIA) is the representative body for UK-based suppliers to the UK and overseas railways. It has some 200 companies in membership; the sector employs 240,000 people and, at a conservative estimate, contributes annually £11 billion Gross Value Added (GVA). It is also a growing industry with the number of rail journeys expected to double over the next 25 years and freight set to grow significantly too.  RIA’s membership is active across the whole of railway supply, both infrastructure and rolling stock, covering a diverse range of products and services and including both multi-national companies and SMEs (60% of the membership, by number). 

1. The impact of postponing renewals from the current control period into the next and the implications of the Secretary of State’s decision to remove enhancements from the Control Period process.

Renewals

1.1     The slowdown in renewals work in Control Period 5 (CP5) has created uncertainty for the supply chain, impacting on recruitment, investment in skills and training, and in research and development, impeding the supply chain’s ability to reduce costs and improve efficiency. In early 2017, a cross-section of RIA members reported falls in demand of between 20-45% for the remainder of CP5, particularly in renewals, with the following consequences:

• Redundancies, short-time working, and reduced – or in some cases frozen – graduate and apprenticeship recruitment;
• Early Stage Design, or Network Rail’s (NR)  GRIP 1-3[1], development work not being carried out for CP6 projects – this is critical if continuity of project work between CP5 and CP6 is to be maintained;
• A likely hiatus in investment and project work at the end of CP5 and the start of CP6; and
• A threat to continued investment in the industry, if the UK railway and supply chain are to quickly and efficiently deliver the proposed Digital Railway[2] (DR) and other infrastructure improvements.

1.2              DR products facilitate a move towards improved capacity, service recovery and customer information. DR have been working with the industry (as part of Early Contractor Involvement - ECI), to identify and clarify the DR toolkit elements and benefits. DR products are not a ‘one size fits all’ solution, but rather a toolbox of solutions that can be developed, utilised and deployed in various order dependant on the needs of a particular route or franchise. Industry is working closely with NR/ DR and the Train Operating Companies to link products and delivery to franchise ITT requirements and NR has issued Strategic Outline Business Cases (SOBCs).

1.3              RIA believes that continuity of work is essential to allow Government, Network Rail (NR) and the UK rail supply chain to maintain progress made throughout CP5, and to ensure, not least, that the world-leading Digital Railway (DR) of the future can be delivered in the UK. To deal with the increased activity in Control Period 6 (CP6), it now becomes even more important to address the reduction in renewals volumes during the last 18 months of CP5. Simply put, a backlog of renewals should not be created through an uneven work bank pipeline; this is sub-optimal both for industry and passengers, as postponing renewals may result in greater asset deterioration and more work and higher cost at a later date than might otherwise have been. This is detrimental to the long-term health of the UK railway.

1.4               RIA has been urging the Government to bring forward £500 million of CP6 funding into CP5 to:

• Bridge the shortfall in renewals funding
• Increase the level of design ‘Development Work’
• Ensure our world-class supply chain can support the UK’s railway both now and in the future.

1.5   Whilst RIA has expressed significant concern that the Treasury has declined to bring forward funding from CP6 to cover the CP5 shortfall, we have applauded the recent decision to allow NR to allocate an additional £200 million from its CP5 allocation to spend on renewals in CP5 to help address part of the shortfall. This is welcome and will go some way to helping deliver a better railway, which is not only good for the rail supply sector, but also the Government, the taxpayer and the travelling public. We are disappointed not to get the full £500 million brought forward from CP6 though, and will continue to urge the Treasury to fully fund the remaining CP5 shortfall. Additional funding might be aimed at keeping together specialist teams delivering rail infrastructure renewals within the supply chain.

Supply chain specific impacts of postponing renewals

1.6               Looking in more detail at the survey conducted in para 1.1 above , it revealed that if nothing is done to remedy the shortfall both in volumes of work at the end of CP5 and the lack of Governance for Railway Investment Projects (GRIP)[3] 1-3 development work to pump-prime CP6, the impact on the supply chain will continue to be:

•              Reduced confidence to invest in developing skills and new products: Investment business cases have become unsustainable, often having negative effects on service delivery. By way of example, British Steel has been forced to down-shift its rail finishing facilities by 40% and the point is made that the current environment will render significant capital, research and development investment unlikely;

•              Reduced Staff Levels: There are examples of redeployment, short time working, graduate and apprentice recruitment freezes and redundancies – notably in the signalling sector at a time when we need to be recruiting and retraining for the future. There has also been the recent announcements of possible staff reductions at Alstom, Babcock and Carillion. In due course, supply chains will have to ramp up staffing levels when deferred work comes to market, assuming the required resource is available – and not at disproportionate cost. This ‘peak and trough’ workload is an inefficient way of working, especially given the work has been identified as needed and, as RIA has said previously, can add up to 30% to costs;

•              Lack of confidence in work banks: A number of RIA members have reported that delays and deferrals of work coming to market have eroded supplier confidence in their client’s forward work programme. This in turn contributes to the reduced confidence to invest (mentioned above).   There is limited opportunity to redeploy resources to other major clients as the TfL programme is already resourced and many HS2 contracts are yet to be issued. If there is no work programme, it may also make the rail sector less attractive to apprentices, who will take their skills elsewhere;

•              Survival of SME/specialist companies: The downturn would impact significantly on these suppliers, some of whom currently have a forward workload visibility of only three months, and some may not survive into CP6; and

•              CP6 development activity: Whilst RIA welcomes the CP6 Statement of Funds Available (SoFA) settlement, CP5 development activity for CP6 is worryingly low, suggesting that the downturn could possibly last upwards of three years, even with the £48 billion announced in the SoFA, as without this design development being started now it will prevent delivery in the early years of CP6.

Enhancements

1.7              RIA awaits the publication of the Government consultation on the future treatment of enhancements, which is due we believe early in the New Year. While the specific breakdown of the £48 billion SoFA settlement for CP6 is as yet unknown, we believe that it does include a significant element for enhancements relating to the works postponed following the Hendy Review[4].

1.8              Although the reasons for separating enhancements from the Control Period process are understood, this in itself creates uncertainty in the rail investment programme because suppliers will have less visibility over the type and scale of enhancement projects that NR may be proposing and which will be announced later. RIA also recognises why the Government would not want at this stage to commit to specific enhancements until a clear business case exists for them. It would, however, be helpful if some form of indicative programme of enhancements could be made available, on a regular basis, so that the supply chain can have visibility of NR’s aspirations. While NR’s GRIP helps in this respect, in the past suppliers typically only become involved in the development and design of individual enhancement projects at GRIP Stage 4 (Preferred Option), rather than more routinely at GRIP Stage 3 (Option Selection).

1.9              Delivery of some enhancements extend beyond a single Control Period and this needs to be reflected in how they are treated by the Government going forward. Railway suppliers need consistency and certainty of approach.

1.10              RIA would like to see the lessons from CP5 applied to future enhancement programmes, and techniques such as Output Specifications, Early Contractor Involvement and Collaborative / Alliance Contracting adopted in order to best harness the skills of the supply chain and deliver better outcomes for the taxpayer, freight companies and the railway’s customers. The use of ‘ring-fenced funds’ has been a positive approach, which worked well in CP4 and CP5, with savings on early projects being used to deliver more beneficial schemes later on with a focus on what is needed by customers.  Freight is a good example.

2. The adequacy of the Control Period process in enabling the delivery of long term rail infrastructure objectives.

Adequacy

2.1              The current five yearly financial and planning Control Periods provide much increased and very welcome certainty and benefit for the rail supply industry than the previous system of annual British Rail settlements. However, this has led to a ‘boom and bust’ cycle, whereby industry has seen significant peaks and troughs in workload during the transition from one Control Period to the next.  This has impacted efficiency, productivity, workforce retention and skills and strategic investment, all of which have increased costs for the rail supply industry (wage costs alone are increasing at more than double the rate of inflation). Figure 1 below illustrates this ‘boom and bust’ cycle using NR expenditure on renewals over Control Periods 2-4.  The position for CP5 has already been mentioned above.

Figure 1: Network Rail renewals expenditure 1995/6 – 2013/14

2.2     The situation is exacerbated by the Office of Rail and Road (ORR) regulator not making its Final Determination on NR’s investment programme until six months before the start of each CP; this contributes to the ‘stop / go’ element within the CP system, since the investment programme is updated only once every five years. This could be improved through greater transparency on the likelihood of schemes actually going ahead. At present, rail supply businesses spend significant sums on tendering for schemes that either get paused or reduced significantly (cf The Hendy Review). If the costs of tendering were reduced across the industry, the overheads would potentially reduce, saving both the industry and taxpayers money.

2.3     While Government policy and planning cycles for rail focus on five year time horizons, the commercial reality is that business forward confidence is low. A study by the National Skills Academy Rail (NSAR) found the average forward confidence of a rail supplier was between 11 and 24 months.  The return on investment spending on skills and kit will be around three years plus. This dampens short-medium term investment in skills. Yet greater levels of investment in skills would help the industry drive efficiency and innovation, achieving a longer term financial benefit.

2.4     Current skills capability gaps and skills shortages are together costing the industry a 5% real increase for industry staff costs, and Brexit could exacerbate this if the number of employees from the wider EU, who make up 20% of the workforce nationally reduces (based on current assumptions Brexit costs are estimated at a further 3% per annum for five years). This 20% figure hides emerging regional and skills-based variations, e.g. in the south of the country 46% of the workforce comes from the rest of the EU. More investment in systems engineering/ integration resource in the areas of signalling and mechanical and electrical equipment are vital to the successful delivery of major investment programmes including HS2, London Underground and Digital Railway. RIA thinks it would be sensible to class DR as a renewal to remove the inefficient anomaly of separate work banks for DR and other signalling work.

Scenarios for change in rail infrastructure funding

2.5              RIA would not like to see a repeat of the slowdown the sector is currently experiencing at the end of CP5. As illustrated by Figure 1, the current situation is not the first time the industry has suffered a ‘boom and bust cycle’ due to the funding structure of the rail system in the UK; and we need to tackle this to avoid recurrence in the future.

2.6              RIA is therefore keen to initiate a wider discussion around a number of different scenarios as to how to improve the current five year CP funding system. This absolutely does not mean a return to annualised budgets, as was the case before the CP system was implemented; and would not require a complete overhaul of the current mechanism for funding rail, but there needs to be a smoothing of workload profile to ensure rail suppliers do not continue to face a large ramp up in activity at the start of a CP before a drop off in workload at the end. We are suggesting evolution not revolution, as from a supply industry perspective, radical upheaval would not be helpful.

2.7              To initiate discussion, RIA has looked at some ‘scenarios for change’ as set out in Figure 2 below.

Figure 2: scenarios for change to the Control Period system

• Scenario 1 would be a rolling five year programme with no start/stop date with regular reviews. However, there is a clear risk that would result in a return to annual reviews, which would be a retrograde step and not supported by the wider industry;
• Scenario 2 considers longer Control Periods of, say, 7-10 years. While this would mean a longer period of stability in the middle of the CP, it would not remove the winding down and ramping up of work between successive CPs; and
• Scenario 3 looks at a baseline of work and funding to deliver a steady state ahead of a SoFA announcement/Final Determination for the following CP. Government funding of operations, maintenance and renewals (OMR) work will not suddenly cease, as there is an ongoing need to invest on the rail network, such that NR would have the (financial) confidence and security to plan ahead. A complimentary approach to this scenario might be for NR to have a rolling design stage to plan works to avoid the hiatus in contract awards between successive CPs. Effective planning enables a smoothing of pipelines and provides greater certainty for suppliers.

3. Whether Network Rail’s long term planning process is effective in providing the industry with strategic direction beyond the five year Control Period.

3.1     In many respects, our response to question two is applicable here.

3.2     While NR remains a fully nationalised entity, reliant on funding from the Department for Transport (DfT), there will always be limitations about the extent to which it can develop long term planning processes. This can inhibit NR’s level of ambition and shape its attitude to risk. NR planning would benefit from taking a similar approach to the businesses in the supply chain, many of which produce long term business plans that include a strategic view of investment, projects and pipeline. Such an approach by NR would also support innovation.

3.3     From a supply chain perspective, NR’s ability to develop a long term strategic investment programme can be enabled by NR entering into long term collaborative partnerships with its strategic suppliers, compared to the current framework agreements, to provide greater certainty over future work banks. While the introduction of framework agreements, provided they are not zero-value, has helped to provide suppliers with greater confidence in their future work banks, they have been relatively short term and have not removed the need for competitive processes for the award of specific projects within the frameworks. While NR does develop route studies which assess the long term demand for rail travel on particular routes, these do not address the issues of when and how particular investments might be funded.

3.4     The supply chain would be better able to deliver significant efficiencies if suppliers were able to enter into long term collaborative relationships with NR Routes, facilitated by NR Infrastructure Projects. The performance of these relationships would be carefully measured and good performance would allow for them to be extended from one CP into the next. It would also be possible to include expectations, for example, around regional jobs and skills growth, investment and SME engagement,

4. The reasons for the apparent regional disparity in rail infrastructure funding, and the mechanisms by which regions may have a greater input into planning and delivering rail infrastructure, including through route devolution within Network Rail and entities such as Transport for the North and Midlands Connect.

4.1   The devolution of Routes within NR and devolved budgets should reduce regional disparity in rail infrastructure funding. In addition, the Government is increasingly devolving transport funding to sub-national transport bodies, such as Transport for the North, to combined local authorities, to Local Enterprise Partnerships (LEPs) and to bodies including Midlands Connect which bring together local authorities, LEPs and other business bodies and government departments and agencies into a single entity[5]. However, as these entities are at varying stages of maturity, their ability to plan and deliver rail infrastructure is not yet tested.

4.2   There may be lessons to learn from Scotland. Transport Scotland, the national transport agency, has developed a clear long term strategy with high visibility. Supporting Transport Scotland are seven Regional Transport Partnerships (RTPs), whose role is to strengthen the planning and delivery of regional transport developments[6]. Transport Scotland works to ensure close liaison with the RTPs and local authorities to ensure that transport policy in Scotland is properly co-ordinated. The first task of each RTP was to prepare a regional transport strategy. This is supported by a delivery plan where RTPs set out when and how projects and proposals would be delivered.

5. The possible implications of the Government’s policy of increasing the share of private sector financing in rail infrastructure.

5.1   The main implication is that NR would need to give up some control over the specification and management of projects which are privately financed, which will facilitate innovation. While NR should continue to have a strong role in determining what investments outcomes are required, where these investments are needed and where these investments are proposed for private financing, NR should allow companies providing the financing to specify the project and to have control over how it is delivered. If NR retains control over the specification of projects, it is hard to see how private sector financing can make a material contribution to the investment programme.

5.2   Private sector financing has the potential to unlock innovation in the design and delivery of individual projects. This, however, also requires the current approach to the application of industry standards to be open to challenge. At present, the requirement of the use of tightly defined standards in their entirety can be excessive for the particular project, add unnecessary cost and stifle innovation. A more proportionate approach to the applicability of standards can halt this ‘gold-plating’, by moving from an input to an outcome based approach to procurement. This would encourage innovation by the supply chain and reduce costs.

5.3   RIA has therefore joined forces with NR to examine how the industry can modernise standards to ensure they allow for innovation and greater cost efficiencies in the supply chain. This work builds on one of the key focuses on the Hansford Review into contestability in rail[7]. NR want to enable suppliers to proactively challenge standards that are considered to drive increased cost without comparable benefit, with particular focus on the early project design stages. Currently, standards are being updated using a risk-based approach with over 200 standards reviewed and updated to date, and a further 190 standards to be updated by March 2018. Network Rail is keen to seek supplier involvement in the process and to explore and evaluate incentives for encouraging change. This has been welcomed by RIA who have facilitated industry engagement with NR to design the standards challenge process.

6. Whether steps taken by the Government and Network Rail to increase private sector investment for rail infrastructure are adequate and how continuing barriers to private sector investment might be addressed.

6.1   This is a complex area requiring certain conditions to be in place before private sector finance can become a material contributor to rail infrastructure investment. The primary assumption is that while NR remains a fully nationalised organisation, any private financed project will remain on the Government’s balance sheet. It also requires:

• A collaborative approach to risk sharing;
• That the revenue stream from a project is sufficient to secure private financing; and
• A whole life costing approach to procurement is used.

In short, private sector investment cannot simply be a way of addressing short term affordability issues.

6.2   RIA is aware that the DfT will be publishing shortly a guide to third party investors to help them compete for and deliver railway projects and thereby attract more private sector investment in rail infrastructure improvements.

6.3     NR is currently delivering the Hansford Review recommendations, including route devolution, publishing regular updates on upcoming opportunities, demonstrating flexibility around standards and drawing up a service level agreement that establishes the terms of business between Network Rail and third parties.

6.4     The UK railway supply industry is ready and willing to rise to the challenge of introducing third party financing into UK railway infrastructure. RIA is working with stakeholders to deliver this; we continue to work with NR to deliver the recommendations in the Hansford Review.

Barriers

6.5     The government has identified major infrastructure investment needs in the UK to 2020 and beyond, amounting to £460 billion (around 25% of 2014 GDP). A significant proportion of the £460 billion will need to be financed by the private sector. However, long-term institutional investors (such as pension funds and life insurers) still allocate only a limited share of their resources on direct infrastructure investment. Also, they appear to prefer the secondary market, as capital can be deployed quickly across a broader range of assets and the planning, construction and start-up stages of projects involve high risks that investors prefer to avoid.

6.6              The Government should therefore bolster ready-to-finance projects in both the National Infrastructure Pipeline and Rail Strategy to attract more private investors. Private investors are interested more in ready-to-finance infrastructure projects, as the initial stages of projects – scoping, planning and consents – involve large additional risks. Transport projects which provide investors in infrastructure with significant gains from housing or commercial developments are more likely to attract private sector financing than schemes without such opportunities. Between 2013 and 2014, the share of infrastructure projects having reached the stage of ‘Consents Approved’ (that is before the construction stage) declined from 15% to less than 5%; those in the construction stage increased from 45% to more than 60%; those in the ‘Planning and Consents’ stage were stable at around 10%[8]. Thus the level of involvement of long-term equity investors is not due to shortage of private capital[9].

15 December 2017