Some Tier 1 contractors are re-evaluating their relationship with Network Rail following a radical shake up in the way the client’s enhancement projects will be procured for its next five year spending programme, control period 6 (CP6).
Network Rail has said that the focus for CP6’s £49bn funding pot will shift to renewals, maintenance and operations work, with most major enhancements now procured separately. CP6 runs from 2019 to 2024.
Tier 1 contractors expect a two year lag in enhancements work – new infrastructure projects – and as a result are already scaling down their operations ahead of the expected fall off in workload.
They have told New Civil Engineer that switching from working on enhancements to renewals requires a difficult business model shift, and that the renewals market is already saturated with tier 2 contractors who carry out most of this work. Sources from tier 1 firms now say they are also concerned that when a major enhancement project does come to market, the sector will have lost the necessary skills.
“I think they [Network Rail] think because there is this big pot of money still to be spent on the rail industry that everything will be ok,” said one contractor. “But what they don’t seem to take into account is renewals work is very different to enhancements and we can’t just switch over.”
Enhancement projects, he said, are big and complex. The margins are higher, but so is the risk, which is why large tier 1 contractors are needed. Renewals, operations and maintenance contracts are smaller, have less risk and require a more agile business model more suited to tier 2 contractors.
Tier 1 contractors told New Civil Engineer they would now be looking to move away from Network Rail as a client.
“There’s a short term for a couple of years where we’re heading into this dip where we’re going to having to find work elsewhere,” said one insider. ”I think we will be looking to Highways England, Transport for London and High Speed 2 for work in the future. The problem will be for Network Rail is if we’ll actually come back when they’ve got stuff for us to do.”
One industry insider said redundancies are already being made in response to the fall off in work.
“Hundreds and thousands of jobs need to be created in rail to meet the demand, but the reality for businesses like ours is that we’re downscaling the skilled workforce for the future, because we can’t see a viable future,” said another contractor.
Network Rail has £49bn of funding for CP6.
Last month Network Rail chief executive Mark Carne confirmed there were no new major projects on the books for CP6. The majority of major enhancement projects are legacy projects from CP5. Of the £10.1bn enhancements funding, broadly £7bn will be for delivery of schemes that are in Network Rail’s existing pipeline, £1bn for design and development work with the remaining £2bn covering delivery of projects not currently in Network Rail’s pipeline.
The new funding set up comes as Network Rail faces severe funding pressures. The company is expected to finish CP5 in 2019 with £50bn worth of debt, over £8bn more than in 2015/6.
New enhancement projects will have to apply for funding separately, either competing against other national infrastructure projects or seeking other sources of finance.
Across the industry, the new set up is broadly being seen as a good start to changing a system which was inherently broken. One industry source commented that major projects would now no longer have to be “shoehorned into an artificial timeframe to suit the regulators”.
But concerns that the full impact on the industry have not been thought through, are now starting to surface.
In response, Network Rail said it wanted to be an industry client of choice and had generated £22bn of work for the supply chain over the first three years of the current control period, CP5 which ends in 2019. It said 99% of the work was going to UK-based companies and that stable and consistent activity levels were “critical” for efficient delivery by the supply chain.
“We must avoid the huge variation that we have previously had for some activities so that we can better support the supply chain in delivering the country’s major programme of infrastructure investment,” it said.