Embrace alliancing to drive greater efficiencies, experts urge rail industry

Out-Law Analysis | 14 Jun 2017 | 1:33 pm | 5 min. read

ANALYSIS: Embracing collaborative 'alliancing' models at an earlier stage in the rail franchising process will improve collaboration between Network Rail, contractors and train operating companies - and ultimately lead to better outcomes for passengers.

Nostalgia for British Rail's integrated past often crops up in discussions of the rail industry's current difficulties.  The Labour Party's recent manifesto talked about the possibility of taking rail franchises back into public ownership as they reached the end of their term, although remained notably silent on the ownership and management of the infrastructure. The Conservative manifesto was silent on the subject – in contrast to the activities of the Department of Transport before the election when there was talk of plans for reform to provide a vision of a better model for the industry, one which addresses the important and complex interface between 'wheel and rail' and reunites those with responsibilities for providing passenger services with infrastructure maintenance.

However, the voice and interests of the industry supply chain remain conspicuously absent from the discussion. New models cannot ignore the need for engineering contractors to know who their employer is, and from whom instructions should be taken. There is a growing culture of 'alliancing' in the rail construction sector, and a number of contractors that have rapidly embraced a 'best for project/no disputes' approach with some degree of success – but, to date, this model has largely been developing on terms provided by Network Rail, without franchisee involvement.

Alliancing, which came to prominence in the North Sea oil and gas industry during the 1990s, provides the closest collaboration between multiple players and allows for the closest sharing of risks and rewards. Under an alliancing model, the parties align their interests so that all can enjoy the upside when a project is a success, often through a key performance indicators linked to minimum conditions of satisfaction setting out minimum conditions of satisfaction.

Deepening alliancing to include the rail franchising companies will enable the engineering contractors to design with the full knowledge of the types of rolling stock and the future strategy which will be used on the line once opened. This will optimise the design specification of the railway and lead to a true long term value for money solution.

In some of the alliances entered into by Network Rail, there has been provision for stakeholders to attend board meetings and make representations including changes to the scope of the works. This is only a short step from full alliancing including the franchise and full accountability as a client

Ironically, the pre-election announcements came at precisely the same time as Network Rail sought to reverse out of the closest existing example of a contract designed to achieve these kinds of outcomes: the so-called 'deep alliance' between the infrastructure owner, train operator and contractors for South West Trains' Wessex routes. A cynic might say that without contractual sticks and carrots involved, principles of integration may be at best purely aspirational and, at worst, a source of additional complexity and buck-passing.

Rail franchising: the current system

With the 1993 Railways Act came the separation of privately-run passenger services and publicly-owned rail infrastructure. The result is an issue with which many members of the traveling public will be only too familiar: a train is delayed due to over-running track works, which of course is nothing whatsoever to do with the train operating company (TOC) that operates the franchise. In traditional contracts, these costs are passed to the contractor who will pay them as damages. In an alliance these schedule 4 and schedule 8 costs are costs which count as project costs and thereby erode the profit or increase the loss that the project suffers.  It is this kind of complex system that has been criticised in the past as a "not fit for purpose" privatisation model, which notably has not been followed by any other jurisdictions looking to change ownership of railways.

From a legal perspective, Network Rail (or, prior to 2002, its predecessor, Railtrack) possesses the statutory licence which makes it responsible for the maintenance and renewal of physical infrastructure assets, while the TOC possesses the franchise giving it the right to operate services over those assets. The current franchising system is a form of competition 'for' the market, in which successful operators are awarded regional franchises for a specified period which is typically of around 10 to 15 years.

Notionally, the costs of maintenance and renewal work, together with amounts to be paid by the TOC, are subject to statutory regulation by the Office of Rail and Road (ORR). Any disputes between Network Rail and the TOC are dealt with through fault attribution processes set out in various contracts with the Department for Transport (DfT) and network rules governing the industry.

Alliancing – a better way?

At present, it would appear that there is no intention to incorporate hard-edged commitments into franchise agreements, requiring franchisees to take responsibility for delivery of specific construction projects. Franchise agreements may, however, incorporate infrastructure-related commitments on a case by case basis: see, for example, the Wales and Borders franchise, which appears to contain a franchise specification requiring the franchisee to take on a much greater hands-on responsibility for infrastructure, given the unique requirements of the Valleys Lines.

It is far easier to envisage a set of 'softer' principles. These could, for example, require franchisees to provide personnel and management for joint operating terms, or possibly the setting up of joint ventures to deliver specific initiatives. The challenge with these kinds of arrangements is that they are often very difficult to document, and it can be even more difficult to incorporate appropriate incentives and allocations of responsibility to encourage good performance and to deal with problems as they arise.

This is where alliancing comes in. Again, pre-election the DfT indicated a desire for future franchises to establish joint management teams made up of TOC and Network Rail representatives, but there is no reason why this should not go further and to include contractors and even local authority representatives. Integrating management teams, risk and reward sharing and the knowledge and expertise of the various project partners right at the start of the process will reduce inefficiencies, ultimately cutting costs and improving the passenger experience.

One notable barrier to the success of the Wessex Alliance was the fact that it was grafted onto an existing contractual framework. Indeed, the alliance agreement was explicitly drafted so as not to supersede the complex contractual arrangements between Network Rail, the TOC and the various contractors. Far better for the TOC and contractors to team up on franchise bids with the support of Network Rail, and to propose the necessary infrastructure improvements as part of their wider plans to operate the franchise.

This will require a degree of rethinking by all concerned. Network Rail is already part of the way there, as shown by the way in which devolution of the various rail routes has been developing over the last few years. Companies bidding for and running franchises might feel a little differently, given that they may be required to develop new engineering-focused skills to address the challenges that the new model might require.

The pace of change is likely to be set by the existing franchising programme. Retrofitting these kinds of arrangements onto existing franchises seems unlikely, given the potential cost; so it is far more likely that any changes will take place as new franchises are being let. Additionally, and perhaps of paramount importance, any new approach cannot come at the expense of National Rail's exceptional safety record.

Like so many other things, the recent general election was lacking in proper consideration about changes to the governance of the railways, especially once some of the froth in headlines about a return to the 1970s was blown away.  There is clear opportunity to have a rethink about how things are done – but again, whether there is sufficient political oxygen to enable this thinking to be converted into practical change remains to be seen.

Jon Hart and Nigel Blundell are infrastructure law experts at Pinsent Masons, the law firm behind Out-Law.com.