From next April Network Rail investment projects director Simon Kirby will start to morph his internal infrastructure delivery division into an independent, standalone subsidiary organisation ready to compete for work on the open market. Antony Oliver reports.
More from: Network Rail: Changing track
The McNulty report last May in many ways underlined what Network Rail had perhaps known for some time - that the cost of maintaining and enhancing the nation’s rail network is too high and a new approach is needed to justify and secure long term public investment.
Even before McNulty laid out his challenge to reduce costs by 30%, Network Rail had already started its current process of fundamental changes (see feature, p14). The arrival of David Higgins as chief executive provided the catalyst and vision to move forward from the necessary, post-Hatfield crash, centralised command and control era.
Into a different place
“Pretty much all that we are doing here is getting Network Rail into a different place for Control Period 5 (CP5), which starts in 2014,” explains investment projects director Simon Kirby, the man responsible for delivering value from the £3.5bn of public cash ploughed into the network each year since 2009 under Control Period 4 (CP4).
He points out that implementing the process of change started earlier in the year, when operation and maintenance of the network was devolved from the centre to 10 new route managing directors. The theory is to push responsibility closer to the centres of local knowledge and to drive innovation through increased local collaboration.
This process of change will now move beyond the day to day running of the railway. The plan, to be rolled out from next April, will see a radical reorganisation across renewal and enhancement project work as Network Rail seeks greater efficiencies from the vast programme of capital expenditure ongoing to renew and enhance the network.
“It’s about being more effective, aligning our objectives with our delivery partners, and more collaboration. We get suppliers engaged early”
“We want to open up a more competitive market for what we do,” says Kirby. “Today I am effectively a monopoly supplier of all Network Rail’s big capital projects, [which means] you can’t ever truly demonstrate value for money.
All you can really do is produce benchmarks without demonstrating true competitiveness.”
So fundamental change is required, and from April Kirby’s organisation will effectively separate from the bulk of Network Rail. It will move swiftly and decisively from being simply a cost centre to become a separate business unit with its own profit and loss account and a new private sector delivery ethos.
The change kicks off with a number of pilot projects to be launched next year. The plan is that, rather than simply being handed projects to manage and deliver, this new business will actually start to compete for its work against the private sector.
If these pilot projects are successful, the plan is that this arms length organisation will eventually morph into a fully fledged separate subsidiary company able to compete for programme management and deliver contracts for clients beyond Network Rail.
“We need to demonstrate that we are competitive, and a lot of the changes that we are about to make are the right things to do anyway,” he explains. “It’s about being more effective, aligning our objectives with our delivery partners, and more collaboration. We get suppliers engaged early and basically we have all got skin in the game.”
Today, explains Kirby, his major project delivery division works as part of Network Rail to manage the supply chain, develop and deliver an agreed enhancement so as to hand back an asset meeting a new output requirement.
“There are no skills required that the organisation hasn’t already got”
“There isn’t a market there today but we believe that the market will be created,” he explains, emphasising that competition is unlikely to be with traditional contractors or consultants.
Instead it would be with a new breed of holistic delivery organisations competing as overall programme manager, but taking risk and working collaboratively with other contractors and consultants to deliver greater efficiencies.
And he is the first to accept that, in reality, the way that the competition evolves will really depend on how the market embraces his ideas. There is likely to be no single model.
“You could easily see a model where you had a programme management organisation in a joint venture with a contractor and a consultancy, or perhaps you could see an overseas rail infrastructure company competing in the UK,” he says. “I believe the market is there - there are no skills required that the organisation hasn’t already got, it’s a question of packaging those skills around the need from the market.”
Quite how big the potential market might be is still being worked out, as Network Rail has yet to do a deal for CP5. However, Kirby reckons if it is in the same order as CP4 then it will be a sizeable market, worth perhaps£500M a year.
Although the main competitive work will not start until CP5 in 2014, Network Rail is looking to pilot projects across all the main categories of current workload - some station work, carparks, canopies, structural stations, all the way down to smaller enhancements. Precise details, he explains, will be communicated to the market in the new year.
“We have been very transparent about the direction of our journey and it is two years until the start of CP5. Some of our partners are asking will they be partners or competitors in the future,” he adds. “The reality is that they will probably be both.”
And he rejects the notion that this change is simply a so-called “stalking horse” geared toward driving down the price of suppliers who will be forced to bid against Network’s Rail’s lower borrowing costs and profit expectation.
“We operate not for dividend rather than not for profit - the profit gets put back into the railway,” he explains, adding that his new business will be forced to stand up on its own two feet.
“We must operate under the same commercial pressures as the rest of the market and create something that is operating on the same competitive level as anyone else in the market,” he insists. “My business has got to look and feel different from the rest of Network Rail.”
Quite how much of the Network Rail project work will eventually be let in this way remains unclear, he says, pointing out that it really is a brave new world where the organisation needs to learn to walk first before running.
But major projects such as Thameslink will not be competed as they remain core to Network Rail business and success. However, important though such projects are, Kirby highlights that they account for a relatively small proportion of activity.
“The reality is that 80% of our projects are below £25M,” he says. “They are in the relatively small parkway stations, multi-storey carparks and small enhancements and those are the kind of projects that should be competed.”
Kirby is also keen to stress that many of the gains could well come from work outside the main railway activity.
“Take stations - why does Network Rail have so much interest in inputs?” he says. “We want an output, a station that meets planning regulations with this much people flow, this much retail. Should we care, for example, what the lighting system is?”
It is at that fundamental delivery specification level that he expects the main innovation - and hence cost saving - to flow. The introduction of competition should force this innovation to flow into projects.
Kirby’s new organisation will be split into four regions with four directors running their own business. Each region will embrace a discreet number of the 10 devolved routes across the country which will act as the client and openly procure the work.
“The clients in the routes will make a decision around whether they compete or not, depending on whether they can package the risks so that people can quantify them and take them on,” explains Kirby. Kirby also points out that the separation of his business opens up the possibilities to work with clients beyond Network Rail, and says he will be looking at perhaps working with water companies, developers and retailers to embrace potential air rights development.
“It is all about shifting perception, and if that means we end up with a reasonable amount of work outside the regulated business for third parties then again that demonstrates we are a competitive business,” he explains.
“It is a dramatic shift but it is also an exciting shift,” he says. “Now we are pretty good at delivering a project on time. This is about getting into a different place.”
The new project delivery business will also potentially include a new global rail consultancy capable of competing for advisory work around the world.
Work is currently underway to scope out what such a business might look like and whether or not it is a viable proposition.
“We haven’t yet committed to this as something we will definitely do but we have an idea that there is an opportunity to offer advisory expertise outside our core business,” says Kirby. “It would be low risk advisory work to non-regulated rail markets - so pretty much outside the UK but not necessarily definitely.”
A business case will be presented to Network Rail’s board early in 2012. If approved the new business would be created within the project delivery business in April “to harness the vast range of skills within Network Rail to demonstrate British expertise overseas”.
Network Rail: Doing it differently