Efficiency drive being pushed for rail spending CP4
16:52 23 Feb 2009
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With £28.5bn set to be spent on rail projects in the next five years, workloads will continue to be strong. But with lengthy framework agreements and Network Rail's last ditch decision to alter its workflow, is everything rosy for rail contractors?
The rail sector has been witnessing unprecedented levels of spend over recent years. Now the economy is officially in recession, the huge wads of cash waved at contractors working on track renewals, station revamps and infrastructure improvements are being eyed ever more enviously by those unfortunate enough to sit outside one of infrastructure manager Network Rail's framework agreements.
But at the turn of the year Network Rail, under pressure to cut cost by 21%, announced plans to pinch work volumes for its track renewal framework contractors until they had introduced more efficient methods of working.
Despite being on the brink of agreeing a £28.5bn spending budget from the Office of Rail Regulation for the funding period April 2009 to March 2014, labelled 'Control Period 4', it told its four track renewal contractors that it was ready to squeeze funding for track renewal projects until March 2010. This, it claims, will give time for more efficient work methods to come on line before it ramps track renewal spending back to its projected £4bn for the period until March 2014.
"We continue to invest in our railway but we must deliver value for money for this work, and it makes sense to take advantage of new, more efficient methods of working in our future planned work," says Simon Kirby, Network Rail's director of infrastructure investment, of the funding rejig.
And although there is no question of the overall cash pot being raided, the decision has hit contractors, particularly the four on Network Rail's track renewals framework: Jarvis, Balfour Beatty, Amey Colas and Babcock Rail. Industry insiders claim the move sends out the wrong signal at a time when contractors need all the financial support they can get - if cash has to be redirected around the budget, why not do it later in the Control Period when the economic climate is hopefully looking a little rosier?
Adjusted cost structure
Since Network Rail's announcement, Jarvis has agreed an adjusted cost structure with the infrastructure manager, but it was forced to warn investors that it is unlikely to make anywhere near the amount of money it had hoped this year because of the decision. In a trading update delivered to the City, Jarvis announced that it would "reduce its operating costs to reflect these lower levels of activity".
How it decides to reduce its operating costs is the focus for executive chairman Stephen Norris as he continues to drive the business forward in the aftermath of the 2002 Potters Bar train crash. The Network Rail move is a blow to that recovery.
"The company has performed strongly this year as the various strategic initiatives taken over the past three years to reshape the business have taken effect," he says. "The board is naturally disappointed that Network Rail has decided to adjust the phasing of its five year tracks renewal programme."
Other contractors will feel the effects of the Network Rail decision too - even Balfour Beatty, which manages to juggle a healthy slice of UK rail network spend with its interests in rail projects around the world.
"We have not been as hurt by the decision as others may be," says Manfred Leger, managing director of Balfour Beatty's rail arm. "Although it is disappointing, the work makes up a smaller percentage of our total than others. We are a little more insulated from it."
£30bn waiting to be spent
Despite the funding rejig there is still almost £30bn sloshing around waiting to be spent in the rail sector over the next five years, and in these trying times that guaranteed spend is hugely attractive to contractors.
Network Rail has indicated that it is ready to splash out more than £7.5bn on projects designed to relieve crowding - platform lengthening projects and increasing capacity. It will spend almost £11bn on replacing the older rail, signalling and bridges around the network and a further £10bn on day-to-day maintenance and running costs.
Unfortunately, most of this cash is tied up either within Network Rail's own track maintenance arm or through its existing framework contractors for track enhancement work, track renewals and station enhancements. Those not on any of these lists are left to take the scraps from those lucky enough to be sitting in the first class carriages of the procurement express.
Track enhancement framework contractors
- Amey Colas
- Babcock Rail
- Balfour Beatty
- Carillion
- Grant Rail
- Jarvis
- Trackwork
Station renewals framework contractors
- May Gurney
- J Murphy
- G Osborne
Three companies - Carillion, Grant Rail and Trackwork - sit alongside the four contractors on the track renewals framework to make up the seven-strong list of those vying for work through Network Rail's track enhancement framework. A further three contractors - May Gurney, J Murphy and G Osborne - make up its station renewals framework and it is from this list that the winners of work at some of the key projects such as Thameslink and Reading station enhancement will be drawn.
Unfortunately, these frameworks are set in stone and will roll across the next five years of CP4. The only list which may be open to change before the end of the control period is that of the station renewals framework. Introduced in April 2008, this agreement will bag the companies an estimated total of £15m in Network Rail investment in its first year, with a further £25m to £30m set to follow on in subsequent years.
The framework is set for an initial two year period with an option to extend by a further three years. Having these lengthy agreements is an almost uniquely British system, one which is not replicated across Germany, Italy and much of Europe, but the current level of capital expenditure on railways makes rail work all the more appealing to contractors battling against the recession.
"There are not that many countries which have frameworks of these lengths," says Leger. "In most of mainland Europe they are usually only for one year. Most have positive rail programmes, as do countries further afield, such as Hong Kong. The level of spend on railway projects is very strong at the moment, that is why it is so attractive."
Control Period 4 in numbers
- £28.5bn - total spend on Britain's rail infrastructure over the next five years
- £7.6bn - rail expansion including platform lengthening and capacity enhancement
- £10.8bn - renewal of rail, signalling and bridges
- £10bn - day to day maintenance