HSR Norway Commercial, Contractual, and Organisational

www.pwc.com 15 February 2011

HSR Norway - Long Distance Passenger Rail Transport in Norway Commercial, Contractual, and Organisational

Report Phase 2 February 2011 15 February 2011

Disclaimer This report has been prepared solely for the Norwegian National Rail Administration (“NRA”)'s internal use for the purpose set out in the engagement letter dated 22 October 2010.

The NRA has been mandated by the Government to undertake a study Programme to assess all aspects of developing High Speed Rail in Norway. The study Programme is to be done in three phases. The first phase comprises summarizing already established knowledge. The second phase is intended to form the basis and framework for the third phase, which is a detailed analysis on all aspects the specific potential corridors for HSR. Phase 3 is scheduled to be finalized during the fall of 2011. PwC has been appointed to do one of six different studies in Phase 2 – an assessment of Commercial and Contractual strategies and Organisational Aspects for HSR.

Information supplied by NRA has not been independently verified by PricewaterhouseCoopers (“PwC”) and we therefore do not provide any assurance as to its completeness or accuracy. PwC has not performed any quality assurance or controls of NRA’s business.

NRA is entitled to use information from this report within their business, in accordance with the Terms and Conditions attached to our engagement letter. The report and/or information from the report may not be used or distributed without PwC’s written consent. PwC does not accept any responsibility for losses suffered by NRA or others as a result of the distribution, reproduction or use of our final or draft report contrary to the specified conditions or engagement letter.

PwC holds the property right and other intellectual property rights to the report and ideas, concepts, models, information and know-how that are developed in accordance with our work.

Any actions based on the report are made on the persons own responsibility.

PwC February 2011

PwC 2 15 February 2011

Content

1 Executive Summary ...... 7 1.1 Introduction...... 7 1.2 Scope of work in delivering a HSR ...... 8 1.2.1 Key steps in delivering a HSR...... 8 1.2.2 Structure of the project delivery organisations...... 10 1.3 Contractual strategy ...... 11 1.4 Commercial strategy – scope for self-funding ...... 13 1.5 Organisational issues...... 14 1.5.1 Delivery organisations...... 14 1.5.2 Industry structure...... 15 1.6 Lessons from case studies and market soundings...... 15 1.7 Next steps...... 16 2 Background ...... 17 2.1 Introduction...... 17 2.2 Background to the Mandate...... 17 2.3 Requirements of the Mandate ...... 18 2.4 Purpose of this report...... 20 3 Methodology...... 21 3.1 Structure of this report...... 21 3.2 Background/limitations ...... 23 3.2.1 Review of previously prepared material...... 24 3.2.2 Workshops, meetings and interviews...... 24 3.2.3 Market sounding...... 24 3.3 Scenarios ...... 25 4 Context for the study...... 26 4.1 Introduction...... 26 4.2 Assumptions...... 26 4.3 Alignment of the study with transport policy ...... 27 5 Introduction to High Speed Rail ...... 30 5.1 Overview...... 30 5.2 Scope of a high speed rail project ...... 31 5.3 Structure of the project delivery organisations...... 32 6 Contractual issues ...... 34 6.1 Introduction...... 34 6.2 Procurement Strategy...... 34 6.2.1 Principal steps...... 35 6.2.2 The principal elements of a procurement strategy ...... 35 6.2.3 Key objectives...... 37 6.3 Legal and planning framework ...... 38 6.3.1 Introduction...... 38 6.3.2 The Railway Act ...... 39 6.3.3 The Rail Regulations ...... 39 6.3.4 The Allocation Regulations ...... 40 6.3.5 Alignment of Norwegian law and regulations with EU-regulations...... 42 6.3.6 The “Agreement for purchase of passenger rail services” ...... 43 6.3.7 The Planning and Building Act ...... 44 6.3.8 The Nature Diversity Act...... 45 6.3.9 The Norwegian quality assurance schemes (KS1/KS2)...... 46 6.4 External regulatory environment ...... 47

3 15 February 2011

6.4.1 Legislation...... 47 6.4.2 Procurement ...... 48 6.4.3 Specifications ...... 49 6.4.4 Regulation of safety in the rail industry ...... 50 6.4.5 Other considerations ...... 52 6.5 Contract strategy options ...... 53 6.5.1 Issue...... 53 6.5.2 Summary ...... 63 6.6 Ancillary contracts...... 64 6.6.1 Introduction...... 64 6.6.2 Funding/finance related agreements ...... 64 6.6.3 Operational ancillary agreements...... 65 6.6.4 Property related ancillary agreements ...... 66 6.7 Encouraging Innovation...... 66 6.7.1 Issue...... 66 6.7.2 Issue - Are bidders/contractors to innovate?...... 67 6.7.3 Issue - How to leave room for innovation over the life of a contract?...... 68 6.7.4 Options ...... 68 6.7.5 Advantages and disadvantages ...... 69 6.7.6 Compliance with standards...... 71 6.8 Responsibility for delivery ...... 72 6.8.1 Issue...... 72 6.8.2 Options ...... 72 6.8.3 Advantages and disadvantages ...... 75 6.9 Packaging and Procurement Process...... 78 6.9.1 Introduction...... 78 6.9.2 Packaging ...... 79 6.9.3 Single or multiple contracts ...... 81 6.9.4 Advantages and disadvantages ...... 83 6.9.5 Practical examples ...... 85 6.10 Approach to whole life and whole system cost ...... 89 6.10.1 Introduction ...... 89 6.10.2 Issue...... 89 6.10.3 Options ...... 90 6.10.4 Advantages and disadvantages ...... 91 6.10.5 Whole system costs...... 93 6.11 Approach to risk allocation ...... 94 6.11.1 Issue...... 94 6.11.2 Approach ...... 95 6.11.3 Options for allocating risk...... 97 6.11.4 Example of how to address risks...... 98 6.11.5 Ongoing management of risk...... 99 6.12 Performance and payment mechanisms ...... 99 6.12.1 Introduction ...... 99 6.12.2 Specifying what is required ...... 99 6.12.3 Measurement of performance...... 101 6.12.4 Payment for performance...... 102 6.13 The need for cost detail in bids and contracts ...... 112 6.13.1 Benefits of recording detailed costs...... 112 6.13.2 Options ...... 113 6.14 Procurement plan ...... 114 6.14.1 Introduction ...... 114 6.14.2 Benefits of detailed planning of procurement...... 114 6.14.3 Types of procurement processes...... 115 6.14.4 Advantages and disadvantages ...... 117 7 Commercial – Funding and financing HSR in Norway ...... 120 7.1 Introduction...... 120 7.2 Accessing private finance ...... 120

4 15 February 2011

7.2.1 Introduction...... 120 7.2.2 Sources of funding ...... 120 7.2.3 Sources of finance...... 122 7.3 Engaging with providers of private finance ...... 125 7.3.1 Introduction...... 125 7.3.2 Issue...... 125 7.3.3 Engaging providers of Private Finance ...... 126 7.4 Appropriations from the budget ...... 128 7.4.1 Issues with public funding ...... 128 7.4.2 Options – capital grant or ongoing support...... 129 7.5 Potential for self-funding ...... 130 8 Structure of the industry including a high speed railway...... 133 8.1 Introduction...... 133 8.2 Ownership of the HSR infrastructure assets...... 134 8.2.1 Introduction...... 134 8.2.2 Issues with ownership of the assets...... 134 8.2.3 Current organisation of the rail industry in Norway...... 136 8.2.4 Options ...... 140 8.2.5 Advantages and disadvantages ...... 141 8.3 Management of the HSR infrastructure and operation of HSR services on the infrastructure ...... 143 8.3.1 Issue...... 143 8.3.2 Options ...... 143 8.3.3 Advantages and disadvantages – operation of infrastructure and services...... 144 8.4 Single provider of passenger rail services on HSR or multiple? ...... 145 8.4.1 Issue...... 145 8.4.2 Options ...... 146 8.4.3 Advantages and disadvantages ...... 147 8.4.4 Term of operating contracts...... 150 8.5 Regulation of service quality and fares for HSR services...... 150 8.5.1 Issue...... 150 8.5.2 Options ...... 150 8.5.3 Advantages and disadvantages ...... 151 8.6 Determination of safety rules and operating standards...... 153 8.6.1 Issue...... 153 8.6.2 Options ...... 153 8.7 Allowing other operators to use HSR infrastructure with existing rolling stock...... 154 8.7.1 Closed network or integrated with classic network? ...... 155 8.8 Approach to capacity allocation and access charging...... 155 8.8.1 Introduction...... 155 8.8.2 Allocation of access to the infrastructure...... 155 8.8.3 Should users pay for access? ...... 160 8.8.4 Design of access charging regimes...... 161 9 Organisation of the procurement of HSR...... 165 9.1 Introduction...... 165 9.2 Roles to be fulfilled in project delivery...... 165 9.3 Role of Government...... 166 9.4 Role and organisation of the Procuring Authority...... 167 9.4.1 Introduction...... 167 9.4.2 Organisation of the Procuring Authority...... 168 9.4.3 Accountability ...... 170 9.5 The Project Delivery Company ...... 172 9.6 Organisation goals of the Procuring Authority ...... 173 9.6.1 Introduction...... 173 9.6.2 Why are the different goals important? ...... 174 9.6.3 How do the different goals affect the way the organisation needs to be structured? .. 174 9.7 Organisation tasks (by delivery activity) ...... 175 9.7.1 Introduction...... 175

5 15 February 2011

9.7.2 Tasks...... 176 9.7.3 Example of structures used to address organisation tasks ...... 181 9.8 Addressing interface risk...... 188 9.8.1 Introduction...... 188 9.8.2 Physical interfaces ...... 188 9.8.3 Project Phase Interfaces ...... 189 9.8.4 Interfaces with existing network...... 190 9.9 Other interfaces outside the HSR programme organisation...... 191 9.9.1 Issue...... 191 9.9.2 Approach ...... 192 9.10 Governance processes and controls...... 195 9.10.1 Introduction ...... 195 9.10.2 Portfolio direction...... 196 9.10.3 Project sponsorship ...... 197 9.10.4 Project management effectiveness and efficiency ...... 197 9.10.5 Disclosure and reporting...... 199 10 Applicability to the Scenarios ...... 200 10.1 Background ...... 200 10.1.1 Reminder of the Scenarios ...... 200 10.1.2 Introduction to the Corridors ...... 200 10.1.3 Application of discussions to Scenarios ...... 201 10.2 Scenario B ...... 201 10.2.1 Features...... 201 10.2.2 Contracting strategy ...... 202 10.2.3 Self funding ...... 203 10.2.4 Organisation – Procuring Authority...... 203 10.2.5 Organisation – Industry arrangements...... 203 10.3 Scenario C ...... 204 10.3.1 Features...... 204 10.3.2 Contracting strategy ...... 204 10.3.3 Self funding ...... 205 10.3.4 Organisation – Procuring Authority...... 205 10.3.5 Organisation – Industry arrangements...... 206 10.4 Scenario D ...... 206 10.4.1 Features...... 206 10.4.2 Contracting strategy ...... 207 10.4.3 Self funding ...... 207 10.4.4 Organisation – Procuring Authority...... 208 10.4.5 Organisation – Industry arrangements...... 208

Appendix 1 – Case Studies Appendix 2 – Risk Schedule Appendix 3 – Market Sounding Summary Appendix 4 – Outline risk allocation matrix for non-integral infrastructure

6 15 February 2011

1 Executive Summary

1.1 Introduction

The Norwegian National Rail Administration (“NRA”) has been given the task of assessing the possibility of introducing of high-speed rail services in Norway. The specific requirements of the NRA are set out in a mandate from the Government (“The Mandate”).

The Mandate covers the broader subject of long distance passenger train transport which includes different solutions based on the existing railway, enhancements to the existing railway and delivery of high-speed rail services based on the existing InterCity strategy and an all new high-speed railway. For the purpose of this report, HSR refers generically to the introduction of higher speed rail services in Norway regardless of the solution chosen (“HSR”).

According to the Mandate the Study is expected to include:

“...recommendations about which long-term strategies shall form the basis of the development of long distance passenger train transport in the southern part of Norway”1 and therefore encompass a broader perspective than merely a high speed railway. Phase 3 is required to assess possible solutions under the following scenarios (the “Scenarios”) as described in the Mandate: A Current railway: the reference project – provision of higher speed services based on the plans of the current railway according to what is set out in the National Transport Plan (“NTP”) 2010-2019. The scope of the NTP 2010-2019 includes actions to develop and strengthen InterCity services i.e. services within an area bounded by Oslo-Lillehammer, Oslo-Skien and Oslo-Halden (“InterCity Area”). B More investment in rail infrastructure both within and outside the InterCity Area. C Provision of high speed services relying on the existing InterCity rail network and improvements or new infrastructure outside the InterCity Area. D Provision of high speed services operating largely on dedicated new high speed infrastructure.

1 Mandate from the MTC dated 19th February 2010

7 15 February 2011

The terms of reference require this study to address contractual and commercial strategies and organisational issues associated with procuring major, new infrastructure. In developing the report it has become clear that most issues do not fall exclusively under one of the commercial, contractual or organisational headings. Topics have been assigned on the basis that:  Contractual strategy deals with what is being procured and how it is procured;  Commercial strategy broadly deals with how what is to be procured might be funded and financed; and  Organisation is about who will do the procuring and what issues the entity, or entities, leading any procurement required to deliver HSR (the “Procuring Authority”) need to address. The discussion is split into two chapters – the first considering the organisation of the rail industry in Norway after HSR has been introduced and the second addressing the requirements of the Procuring Authority. Organisation is necessarily last in this sequence as it is the enabler for delivering the solutions to the contractual and commercial questions.

This Phase 2 report refers to procuring HSR infrastructure and services. It is recognized that this is work that NRA has done traditionally and may be capable of undertaking in connection with delivering HSR. However, it is understood that NRA does not have significant in-house capability to undertake construction work itself and therefore even if NRA was leading it would have to procure third parties to deliver the work. Therefore the considerations set out in this study would be valid even where NRA led the work.

This Phase 2 study builds on the Phase 1 review of previous studies of the case for a high speed railway in Norway. It draws out the key, generic issues and considerations that will inform the development of bespoke commercial, contractual and organisational strategies for each solution for each corridor under each Scenario. Work in Phase 3 will look at the delivery of specific solutions to deliver HSR in each corridor.

1.2 Scope of work in delivering a HSR

1.2.1 Key steps in delivering a HSR

To deliver a high speed railway project the following elements of the project need to be considered and in most cases specified and procured through contracts of various types:  Planning of the network and land acquisition: preparation of detailed plans, business cases, environmental impact assessments and management of any statutory planning processes to obtain relevant planning consents; and acquisition of land for

8 15 February 2011

the line(s) and for construction and access, including compulsory acquisition. All activities need to include consideration of integration with other land uses and transport modes and a plan to ensure the benefits of the project are realised.  Design: concept design through to detailed design of each work package – different levels of design could be carried out by different parties.  Construction of the new infrastructure: new build dedicated high speed lines plus enhancements to and interfaces with the existing network so that high speed trains can be operated on the existing line as necessary. This work will typically comprise civil engineering (for example tunnelling, excavation, structures, and permanent way including ballast, sleepers and rails) plus signalling, communications and power supply and distribution.  Maintenance of the infrastructure: scheduled lifecycle refurbishment such as periodic renewal of track, unscheduled maintenance such as repairing damaged power lines and routine inspection and servicing.  Operation of the infrastructure: signalling and control systems plus safety management including providing appropriate levels of security and responding to incidents.  Rolling stock manufacture: designing, manufacturing, testing and commissioning any new high speed trains being acquired to run on the network.  Rolling stock maintenance: scheduled and unscheduled maintenance and servicing. Scheduled maintenance may include periodic major overhauls.  Train operations: the day to day operation of the train service including dispatch, driving, on board customer service and ticket sales and inspection.  Property construction (stations and depots): stations, depots and stabling facilities for the rolling stock. This may require existing property assets to be upgraded and new assets to be built as well as integration with neighbouring property such as roads bus/ tram stations, offices or retail facilities.  Property maintenance: unscheduled and scheduled maintenance for new and enhanced property assets.  Funding and financing: this relates to how all of the above activities will be paid for in the short term and, if financed by loans or equity, how such amounts will be serviced in the long term.

Whilst the operation of passenger services and the provision of rolling stock is outside the scope of the Mandate, reference has been made to these issues in this study for completeness and because these issues are relevant to the consideration of contractual and commercial strategies.

9 15 February 2011

1.2.2 Structure of the project delivery organisations

The national strategic importance and profile of HSR combined with the likely requirement for substantial public funding means that public sector leadership for such a project is essential. In addition, the Norwegian Government will need to ensure that the new HSR meets safety standards and that the specification of the project meets its (the Government’s) strategic objectives. Given Norway’s approach to EU regulations, it is highly likely that the Government will want to ensure that the HSR solutions comply with EU interoperability requirements.

The private sector will likely have an important role to play in the delivery and, possibly, operation and financing of HSR. The Government will therefore need to put in place a structure that optimizes the role of the private sector. Currently, national network track infrastructure and the delivery of significant enhancements are managed by NRA. Manufacture of rolling stock is undertaken by the private sector and operations are undertaken by NSB. A number of large non-rail infrastructure projects have recently been procured in Norway using PPP-type structures and/ or private finance.

The delivery structure for the project needs to have the following attributes:  Ability to define and focus on key strategic objectives  Ability to mobilise appropriate levels of resource and expertise  Ability to secure funding and finance  Minimal bureaucracy and overhead costs  Not a distraction from delivering existing infrastructure which is safe and reliable

A very simple outline of the key roles to be fulfilled in an HSR project delivery structure is as follows:

10 15 February 2011

Figure 1, Key Roles in an HSR Project

Given the likely complexity of HSR schemes, interfaces with the existing infrastructure and operations and the need to maintain focus on delivering the existing infrastructure and operations to appropriate standards, careful consideration will need to be given to how, and the extent to which, NRA and NSB are involved in project delivery activities.

1.3 Contractual strategy

The main messages arising from a review of contractual issues and international case studies are:  The delivery and procurement strategy needs to be focused on delivering an effective operating model rather than on procuring infrastructure assets efficiently or suiting a particular financing solution – the success of the solution is the consistent delivery of an appropriate quality of passenger services for many years, not simply the completion and acceptance of new infrastructure.  There is no dominant contractual structure being used to deliver major rail infrastructure projects internationally. Instead, structures have been tailored to circumstances and the key objectives of the project.  There is a range of contractual strategy options relating to who takes responsibility for the design, build, operate and maintain phases of the project. It is important to understand the strengths and weaknesses of the different options and recognise that success depends not only on the selection of the right approach but also on ensuring that it is implemented effectively.  Contracts are a key means of allocating risk and providing incentive mechanism to manage the risk. Careful thought needs to be given to who is best placed to manage each risk and the implications for price of transferring risk.

11 15 February 2011

 Careful consideration needs to be given to decisions around packaging – bundling up activities (e.g. design, build, operate, maintain or even individual activities in construction – preparatory works, track laying, signalling, structures, tunnels, rolling stock) or breaking down activities. Major drivers of decisions to bundle will be the transfer of interface risk (e.g. the risk of technical or physical incompatibility or work not being complete on time and holding up the next activity) offset by the need for bidders to form consortia and the potential value of contracts which could serve both to limit bidders (because the risks can become too great) and reduce competition.  There is a need to address early the adequacy of the framework for acquiring land and obtaining planning permission. These can be costly and time-consuming activities as evidenced by the case studies and feedback from the market soundings. Consideration may need to be given to specific legislation to simplify these activities.  External regulatory requirements (EU Directives, technical standards etc) should be adopted both to facilitate interoperability and to enable the use of best, proven technology rather than encouraging the procurement of something that is unique to Norway as this would likely be much more costly and result in dependencies on particular suppliers in the future.

A number of strategic issues will need to be addressed properly to create appropriate incentives for contractors. These include:  How to encourage / enable innovation and the application of emerging best practice? This might best be addressed by setting specifications based on outcomes or outputs rather than inputs.  How to incentivise contractors to address whole life costs (build and maintenance costs) and whole system costs (impact of a specific asset or activity on the rest of the system) in order that their proposals represent best value for money? Whole life costs issues are often addressed by requiring the builder also to provide quotes to maintain the relevant asset for a significant part of its life. Whole system cost issues may be dealt with by identifying particular problem areas (e.g. weight of vehicles), setting out clear requirements, perhaps incentivizing the right behaviours, and evaluating bidders’ solutions.  What payment mechanisms to employ in order to transfer risk effectively and ensure that infrastructure and services are delivered on time and to specification? This is typically addressed by defining clearly how satisfactory delivery will be measured and linking compensation to delivery.  What levels of performance (e.g. availability, reliability, maintenance downtime, capacity) are required of assets and services in order to deliver a level of service that

12 15 February 2011

will support the demand forecasts? Such specifications need to be underpinned by performance mechanisms (e.g. payment deductions where performance levels not met, such deduction set both to compensate the operator/ passengers for poor performance and to incentivize the owner of the assets to rectify problems) where they are believed to be critical. A challenge is to ensure that the performance of the infrastructure is not determined on a standalone basis but is, instead, linked to the required standard of services necessary to attract forecast levels of ridership.

1.4 Commercial strategy – scope for self-funding

Funding relates to how the procurement of an asset is ultimately paid for. Financing refers to how the project is paid for in the short term. As a result the cost and repayment of financing ultimately has to be funded.

The scale of major rail infrastructure projects presents a funding challenge. Whilst passenger revenue might cover the cost of operations and elements of infrastructure maintenance, it is extremely unlikely that such revenue will make any meaningful contribution to construction costs or any financing costs. Nevertheless it may be appropriate to use private sector finance serviced (part or in full) from passenger revenue net of operating cost as means of effecting the transfer of risk. Private finance may also provide a potential for better flexibility in managing the project in an optimal manner.

Consideration might also be given to how to reduce the funding burden on the state budget. Possible sources of funds include:  Hypothecated charges on road or aviation users, additional levies on local taxes (personal or business) and environmental charges  Funding by regions or cities – used extensively in the funding of the latest high speed lines in France and in Japan  Some form of planning levy, property tax or share of development gain reflecting the enhanced value of land and buildings adjacent to stations which are better served by the new infrastructure  Contributions from businesses – Crossrail, a major rail project in the UK, has attracted significant funding from both the City of London and the businesses of Canary Wharf which will both be served by the new line

13 15 February 2011

The decision to use private finance is a complex one. A case needs to be made to demonstrate that the premium paid for private finance over the cash cost of Government debt is less than the benefits achieved from transferring risk to the private sector.

1.5 Organisational issues

1.5.1 Delivery organisations

An effective organisation structure is key to the successfully delivery of major infrastructure procurements. In simple terms there are three critical roles:  Government: to set policy and retain ultimate responsibility for key strategic decisions such as defining the objectives of the project.  Procuring Authority: to develop the detailed specification of what to procure, run the procurement process to select parties to fulfil other roles and oversee the delivery of projects. The Procuring Authority would have to ensure compatibility between different projects on the Norwegian rail network.  Project delivery company: such a company would be responsible for delivering the project to specification, timescale and budget including integrating the different aspects being delivered by different parties and ensuring the overall functionality of the project.

Beneath the Procuring Authority or the project delivery company as appropriate there will be a range of construction and maintenance contractors, covering infrastructure and rolling stock, as well as operators of services.

In recent years, major rail infrastructure has been procured using a variety of organisational structures. The HSL Zuid infrastructure was delivered with the Procuring Authority contracting directly four main pieces of work and managing the interface risk. By contrast, the Crossrail infrastructure is being procured by a substantial team fulfilling the role of the Procuring Authority but also using a project delivery company as its programme delivery partner to coordinate all the major strands of work being let. The thinking behind this is that the size of the project and the risks involved necessitate a close working relationship with the contractors and a need to encourage good working practices between contractors.

The appropriate organisation structure for delivering HSR will depend on the scale and complexity of the works required, the degree of interface with the existing infrastructure and operations and the need to assemble adequate resources and skills to focus on

14 15 February 2011 delivering the project. In the Gardermoen project, structuring of the project companies as limited companies (not public administrative bodies) was believed to have been beneficial in part because it enabled the project organisation to finance the project in a flexible manner through both grants and loans2.

1.5.2 Industry structure

Careful consideration needs to be given to a range of technical (e.g. technical standards, systems to be used, gauge), commercial (how access will be allocated, who pays who for what? etc) and operational (e.g. timetabling, ticket sales, fares, passenger information) and industry structure issues if high speed rail services are introduced in Norway. Appropriate solutions will largely be driven by the extent to which the HSR solutions rely on and interface with the existing network and operations. In general, the greater the overlap the stronger the case is for following the existing industry structure. However, under Scenario D, where the infrastructure is relatively separate it will be necessary to consider issues such as who should own and maintain the infrastructure? Who can use the infrastructure and how should access charges be determined?

In general it is best to avoid creating a complex, two tier industry structure which can divert attention away from providing the best service for customers. On the other hand, the final industry structure must adequately accommodate high speed rail services and provide the right incentives to deliver both existing and high speed services to appropriate standards in the long term.

1.6 Lessons from case studies and market soundings

A range of relevant case studies have been considered including TAV in Italy, Gautrain in South Africa, the Channel Tunnel Rail Link, Heathrow Airport terminal 5 and Crossrail in the UK, TGV in France as well as major projects in Norway such as Gardermoen Airport and Gardermobanen, and the E-18 road Public Private Partnership (“PPP”). These are included as Appendix 1 to this study.

Drawing lessons from both international and domestic case studies is difficult because it is necessary to understand the objectives of each procurement before being able to assess whether a particular approach has worked well or not. Nevertheless, some important general lessons can be identified:

2 NOU 1999:28 – Gardermoprosjektet – Evaluering av planlegging og gjennomføring (The Gardermoen project – Assessment of planning and execution)

15 15 February 2011

 The costs and timescales associated with delivering major new rail infrastructure projects mean that strong political support is required to give assurance as to the continuity of the programme and availability of public sector funding.  Strong, dedicated project organisations are critical to the successful procurement and delivery of working infrastructure. Such organisations need to be adequately resourced with the right skills and experience and lead the project in a manner which gives confidence as to the deliverability of the project against realistic timescales.  Strong project organisations need to be supported by clear objectives provided by Government, a lack of political interference and a clear governance and decision making process.  The case studies demonstrate a wide range of different approaches to packaging or bundling of activities and the allocation of responsibilities and risk. It is clear that this has occurred as authorities have sought to tailor solutions to their particular circumstances and priorities.  Careful consideration will need to be given to the volume of work that can be tendered, undertaken or financed at any point in time. The scale of rail infrastructure projects is such that they can use up all available capacity leading to shortages of key skills and self-induced cost escalation.  Even when letting a design, build, operate/ maintain contract it is vitally important that the Procuring Authority continues to monitor progress and the completion of milestones. This is because whilst much/ all of the risks may have been transferred to the contractor, if the contractor does not manage the risks properly they will likely revert to the Procuring Authority.

The market soundings generally endorsed these lessons. The other major themes coming from the market soundings was an unwillingness of both contractors and financiers to take demand risk and the need for the public sector to take responsibility for land acquisitions and obtaining planning consent.

1.7 Next steps

Phase 3 of responding to the Mandate will leverage the understanding and lessons set out in this study to develop specific contractual, commercial and organisational solutions for each infrastructure Scenario specified for each corridor in order to inform a cost-benefit analysis for each option.

16 15 February 2011

2 Background

2.1 Introduction

The NRA has been given the task of assessing the possibility of introducing high speed rail services in Norway. The specific requirements of the NRA are set out in a Mandate from the Government. The Mandate requires that the assessment should

“...include recommendations about which long-term strategies shall form the basis of development of long distance passenger train transport in the southern part of Norway. The assessment shall include an analysis of whether developing high speed railway lines could contribute to obtaining socio-economically efficient and sustainable solutions for a future transport system with increased transport capacity, improved efficiency and accessibility.”3

The deadline for the NRA's recommendation to the Ministry of Transport and Communications (“MTC”) is February 1, 2012. It is expected that recommendation will propose specific solutions for each of the corridors being considered. One solution could be to do nothing.

2.2 Background to the Mandate

Many countries have implemented and/or plan to construct high speed railway lines. This is one of the reasons why, in 2005, the MTC gave the NRA the task of assessing the potential for high speed rail in Norway. Following an international tender a German assessment syndicate, headed by VWI, was chosen to undertake a feasibility study. The last part of the study was delivered in the autumn of 2007. The NRA and the MTC undertook another five partial assessments using different consultancies. These studies each addressed further some specific issues raised by VWI's work. This material formed the basis for what the MTC communicated about high speed railway lines in Report No. 16 to the Storting (2008-2009) NTP 2010-2019.

3 Mandate from the MTC dated 19th February 2010

17 15 February 2011

The assessment performed by VWI showed a strong, positive, benefit-to-cost ratio. However, the assessment was based on German rather than Norwegian guidance for assessing benefit-to-cost ratios. The conclusions were therefore the subject of considerable criticism. Analysis performed by ECON Pöyry AS, based on the Norwegian methodology, showed a far weaker benefit-to-cost ratio.

In Report No. 16 (2008-2009) to the Storting, the Government recommended improving and developing a railway network with better capacity in the Intercity Area. There was no intention of constructing separate high-speed railway lines during the plan period. The report emphasised that concepts for high-speed railway lines must be developed further and adapted to Norwegian conditions before any construction could take place in Norway. Thus, in Report No. 16 to the Storting (2008-2009), it was proposed that the Government should ask the NRA to continue working on how the potential concepts for the construction and operation of high speed rail services could be adapted to Norwegian conditions. More consideration was to be given to the possibilities for mixed traffic on the high speed rail network. Also, more reference was to be made to the experience of introducing high speed rail across Europe and in the rest of the world, especially with regards to the choice of technology and how high speed railways had been financed and funded.

When preparing the NTP 2010-2019, the majority of the Standing Committee on Transport and Communications was in favour of further development of capacity on the railway network in the Intercity Area, as well as of the necessity of a further assessment of opportunities to introduce high speed rail services in Norway. Parliament and Government agreed that, since the different assessments that had already been undertaken adopted different approaches and reached different conclusions, a further, complete assessment of the how high speed rail services could be introduced in Norway was required.

2.3 Requirements of the Mandate

The requirements of Parliament and the Government are set out in the Mandate. The Mandate focuses on the construction of a HSR in line with the conditions set in Report No. 16 to the Storting (2008-2009) / Innst. S. nr. 300 (2008-2009). Specifically the Mandate requires an assessment of the business case for the construction of a HSR on specific corridors in Norway. The Mandate requires the assessment to be completed in

18 15 February 2011 time to enable a decision on the future of HSR in Norway to be made prior to setting the Transport Plan for the period 2014 -2023.

The Mandate further requires that the assessment work related to the HSR is closely coordinated with:  The Norwegian National Rail Administration's work in developing the InterCity rail network for the InterCity Area, as set out in the NTP 2010-2019.  The NRA’s assessment of the capacity in the Oslo area on a short-, semi-long- and long-term basis.

In order to meet the Mandate’s requirement, the assessment has been broken into three phases:

Phase 1 Since several studies have already been undertaken regarding the potential for a high speed railway line in Norway, the first step was to present an overview of these studies. The relevant studies included those made by the NRA and the MTC, and also available studies made by different stakeholders such as Norsk Bane AS, Høyhastighetsringen AS, Coinco North a.o. This material was set out in a report prepared by COWI. The report summarised the strengths and weaknesses of the work done to date and included recommendations about which issues needed the further investigation.

Phase 2 The principal objective of Phase 2 is to identify which high speed concepts are appropriate to Norwegian conditions. This includes explaining and analysing common problems with delivering high speed railways and prerequisites for their success. The work in Phase 2 has been broken down into several work streams4:  Market Analysis: this principally comprises an assessment of the market conditions and traffic assumptions for different types of passenger and freight traffic in the different corridors and Scenarios.  Railway-specific development planning analyses: this includes analyses of the use of single track / twin track and separate high speed tracks, station development, stopping patterns, regional development opportunities and the consequences for public transport in general.  Financial and socio-economic assessments of investments: development of costing methodologies and models, consideration of risk, and consequences for other modes of transport.

4 Tender document

19 15 February 2011

 Assessment of different commercial, contractual and organisational strategies in the planning and construction phases of high speed rail systems.  Technical and security analysis: this includes an assessment of the use of high speed railway standards, technical aspects of construction a high speed rail network in Norway reflecting its climatic conditions, consideration of different technical solutions, safety analyses linked to different speeds and types of mixed traffic.  Environmental analysis: this addresses the impact of introducing high speed rail services on greenhouse gas emissions and how HSR might help to meet national environmental and climate targets, assessment of the impact of high speed lines creating barriers in the countryside, assessment of noise levels and energy consumption etc.

Phase 3 Based upon the results from Phases 1 and 2, Phase 3 is to deliver a proper analysis of the different alternatives for each corridor with recommendations regarding a long-term development strategy for HSR adapted to each corridor. The relevant corridors (“Corridor”) are:  Oslo – Bergen  Oslo – Kristiansand – Stavanger  Oslo – Trondheim  Oslo – Gøteborg  Oslo – Stockholm  Bergen – Haugesund – Stavanger in combination with 1 and 2

2.4 Purpose of this report

This report responds to the requirements of the fourth work stream outlined in Phase 2 above. However, since the work in Phase 2 of this project lays the foundations for the work in Phase 3, which will look at the cost-benefit analysis associated with specific solutions for specific Corridors, it is not practical to make recommendations in Phase 2. This is because any recommendations need to be tailored to delivering the Government’s objectives of and the specific construction solutions and delivery challenges appropriate to each Corridor.

The Phase 2 report therefore focuses on identifying the different ways of addressing specific issues and, where practical, the advantages and disadvantages of a particular approach.

20 15 February 2011

3 Methodology 3.1 Structure of this report

This report has been developed both to address the requirements of the Mandate and the terms of reference for this work stream. It addresses these issues in the following chapters:

 Chapter 4 - Context for the Study: this chapter sets out some fundamental assumptions underpinning the work set out in this report as well as how the study fits with Norway’s transport policy.

 Chapter 5 - Introduction to high speed rail: this chapter describes the key considerations in delivering a new high speed railway.

Contractual section  Chapter 6 - Contractual issues: this chapter sets out some of the key contractual issues that will need to be addressed in procuring HSR, concluding with a discussion of issues surrounding the development of a procurement plan.

Commercial section  Chapter 7 – Funding and financing HSR in Norway: this chapter considers the potential for self financing of HSR and outlines potential sources of finance and funding.

Organisation section  Chapter 8 - Structure of the industry including a high speed railway: this chapter describes a range of decisions that will need to be made surrounding the structure of the rail industry once it includes high speed rail operations.

 Chapter 9 - Organisation of the procurement of HSR: this chapter sets out some of the key considerations in delivering a high speed rail project, the key roles of a project delivery organisation and issues to be considered in determining the structure and role of a Procuring Authority.

Applicability to the Scenarios

 Chapter 10 - Applicability to the Scenarios: this chapter consolidates the discussions set out in this report and offers preliminary views on how the organisational, contractual and commercial solutions might be different for Scenarios B, C and D.

The three main topics of the report have been written up separately in accordance with the terms of reference. However, many interdependencies exist between the topics and this has been reflected in our work and the drafting.

21 15 February 2011

Contract Commercial

Organisation

Figure 2, The interdependencies between Contractual, Commercial and Organisational topics

In developing the report it has become clear that most issues do not fall exclusively under one of the commercial, contractual or organisational headings. Topics have been assigned on the basis that:  Contractual strategy deals with what is being procured and how it is procured;  Commercial strategy broadly deals with how the procurement might be funded and financed; and  Organisation is about who will do the procuring and what issues the entity, or entities, leading any procurement required to deliver HSR need to address and the skills required. This discussion is split into two chapters – the first considering the organisation of the rail industry in Norway after HSR has been introduced and the second addressing the requirements of the procurement. Organisation is necessarily last in this sequence as it is the enabler for the answers to the contractual and commercial questions.

The illustration below shows the contents of the report regarding the Contractual Strategy, within the wider context of a Procurement Strategy.

22 15 February 2011

Government’s objectives

Context • Legal and planning framework (6.3) • External regulatory issues (6.4)

Output specification

Allocation of risk • Contract strategy options (6.5) Packaging and Structure of Procurement plan • Ancillary contracts (6.6) procurement process • Encouraging innovation (6.7) procurement (6.14) • Responsibility for delivery (6.8) (6.9) • Packaging and procurement process (6.9) Both: • The need for cost detail • Approach to whole life cost • a means to allocated risk (6.13) (6.10) • a means to deliver the • Approach to risk allocation procurement (6.11) • Performance and payment mechanism (6.12)

Financing and funding strategy (7)

Market conditions

Figure 3, Procurement Strategy

Where practical and appropriate, sections within chapters in this report are structured to:  describe the relevant issue and its significance;  suggest options for addressing the issue; and  set out the advantages and disadvantages of each option.

In some cases the identification of options would not be relevant and in such instances the report describes the steps to be taken to address properly the issue identified.

This Phase 2 report refers to procuring HSR infrastructure and services. It is recognized that this is work that NRA has done traditionally and may be capable of undertaking in connection with delivering the improvement to rail services in Norway encompassed by the Mandate. However, it is understood that NRA does not have significant in-house capability to undertake construction work itself and, therefore, even if NRA was leading it would have to procure third parties to deliver the work. Therefore the considerations set out in this study would be valid even where NRA led the work.

3.2 Background/limitations

The methodology used to prepare this report reflects:  the approach set out in our proposal of 10 August 2010;  the Mandate from the MTC to the NRA;  discussion of the tender documents issued by the NRA and clarification of certain of the requirements;  the briefing of all advisors at the project inception meeting held on 30 September; and

23 15 February 2011

 the updated list of deliverables, interdependencies, and project plan submitted to the project co-ordination team on 15 October.

The methodology described here has been developed from the inputs described above and our own internal planning meetings. The work has also been guided by inputs from other work streams which provided insights into the key risks and possible issues in delivering HSR in Norway.

3.2.1 Review of previously prepared material

The objective of Phase 1 of the HSR-study was to document and evaluate the existing knowledge, reports and analyses of the case for HSR in Norway as a basis for further assessment. The result is presented in a report by the consultancy COWI titled “Status of knowledge on high-speed rail lines in Norway”. Since this report focuses on the different approaches used to undertaken cost-benefit analysis in the different studies we have not placed any significant reliance on it in preparing this report.

There are several publicly available reports on high speed rail development from other countries that provide an important perspective on issues that might impact HSR development in Norway. We have used this information in developing our case studies, together with the experience of PwC offices in relevant territories, in order to better understand the different approaches to procuring a high speed railway.

3.2.2 Workshops, meetings and interviews

We have participated in a number of progress meetings organised by the project sponsor and involving the consultants advising on the other work streams in Phase 2. We have also taken part in the internal workshop (held on 22/23 November 2010) and the external workshop (held on 16 December 2010). This has enabled us to understand the principal risks and opportunities identified in the other work streams and consider their implications for this work stream.

3.2.3 Market sounding

We believe that it is important to get the view of potential key contractors and providers of finance on what would attract them to be part of delivering HSR in Norway. This is not about understanding whether or not they would be interested in participating in the

24 15 February 2011 development of HSR in Norway, but whether there are particular contractual, commercial or organisational issues that would make the opportunity more or less attractive.

We have undertaken the market soundings as outlined in Appendix 3 which includes the briefing text, a list of parties we spoke to and the key matters arising.

3.3 Scenarios

According to the Mandate, the study is expected to include:

“...recommendations about which long-term strategies shall form the basis of the development of long distance passenger train transport in the southern part of Norway”5 and therefore encompass a broader perspective than merely high speed rail services. Phase 3 is required to assess possible solutions under the following Scenarios as described in the Mandate: A Current railway: the reference project – provision of higher speed services based on the plans of the current railway according to what is set out in the NTP 2010- 2019. The scope of the NTP 2010-2019 includes actions to develop and strengthen InterCity services in the InterCity Area. B More investment in rail infrastructure both within and outside the Intercity Area. C Provision of high speed services relying on improvements to the existing infrastructure outside the Intercity Area and improvements made in the Inter-city Area. D Provision of high speed services operating largely on dedicated new high speed infrastructure.

Chapter 10 describes how theoretical options for addressing commercial, contractual and organisational issues might be applied to Scenarios B, C and D.

5 Mandate from the MTC dated 19th February 2010

25 15 February 2011

4 Context for the study 4.1 Introduction

This chapter sets out the context in which this study has been undertaken. It addresses:  The assumptions underpinning the work; and  The alignment between the goals of the HSR study and Norwegian transport policy.

4.2 Assumptions

Specific assumptions underpinning the report are:  NRA does not have sufficient resources to carry out the construction works itself. Whilst NRA might lead a procurement, third party contractors will always need to be procured to undertake the relevant construction/ manufacturing works. This is an important assumption because it means that this study looks at the implications of a procurement of all of the works necessary to deliver HSR, rather than NRA undertaking the works in house.  There is no requirement that NRA leads the procurement of the HSR infrastructure or that they should not do so.  There are no budgetary constraints. There is however a requirement that the procurement of HSR is implemented in a cost efficient manner6.  There are no restrictions on the ability of the Government to commit to fund the development of HSR over time.  The project is funded by the public sector and from passenger and freight revenues. The mix of sources for funding will be part of the assessment of Corridor specific solutions in Phase 3.  All licenses to buy (land acquisition) and build (planning permissions, import of labour and expertise) HSR can be obtained.  The existing network operator (NRA) and service provider (NSB) provide appropriate support for the implementation of HSR.  There is political support, throughout the procurement and construction periods, for the delivery of HSR.  There are no political constraints, for example regarding the impact that developing HSR services could have on domestic air services or airports.

6 Ref. the Mandate

26 15 February 2011

 There are no constraints on the structure of the industry (both existing and high speed infrastructure and services) post the introduction of high speed rail services other than a need to comply with EU Rules for the rail sector.  There are no constraints surrounding the ownership of HSR assets.  There are no constraints on how HSR services might be regulated.

4.3 Alignment of the study with transport policy

The HSR study goals are derived from the Mandate which in turn is based on NTP 2010- 2019 and Parliament’s deliberation on this document. Specific objectives for Phase 2 of the project have been derived from the Mandate by NRA and expressed in the Tender Documents of 29th June 2010.

The NTP 2010-2019 describes the Government’s plans for the development of transport infrastructure in Norway for a rolling ten year period. A new NTP is prepared every fourth year and the aim of it is to provide a clear, long term, strategic perspective and technical basis on which to make decisions and ensure an effective use of resources.

The goals of the HSR study are to be aligned with the goals of the transport policy as stated in the NTP 2010-20197. The overall goal of the transport policy is:

“To provide an effective, safe, accessible and environmentally friendly transport system that covers the society’s transport requirements and encourage regional development”8.

To support this primary goal another four main goals have been established. These relate to:  traffic flow and travel time  traffic safety  contribution to Norway’s environmental objectives and obligations  universal design9

These four main goals have been operationalised into measurable goals for the planning period as described in the table below.

7 Ref. the Mandate 8 NTP 2010-2019 9 Universal design refers to broad-spectrum of architectural planning ideas which are meant to produce buildings, products and environments that are inherently accessible to both the able- bodied and the physically disabled (http://en.wikipedia.org/wiki/Universal_design)

27 15 February 2011

To provide an effective, accessible, safe and environmentally friendly transport system that covers the society’s transport requirements and encourage regional development

Improvedtraffic flow and Transport policy shall be based Transport policy shall The transport system shall be reducedtime oftravelinorder onavision ofzero accidents contribute to limiting universally designed to strengthen the resulting in fatalities or serious greenhouse gas emissions and competitiveness of industry injuries in the transport sector, reduce the environmental and contribute to maintain in the “Vision Zero”. impactsof the transport the settlement pattern. sector, and help to achieve national targets and Norway’s international obligations in environmental protection.

F!: services and S1: The total number of M1: Contribute to T1: The public reliability in the persons killed or achieve the climate transport system shall transport system shall seriously injured in target in the sector so be more universally improve during the road accidents shallbe that greenhouse gas designed in the period. period.. reducedbe atleast emissions are reduced one-third by 2020. by 2.5-4.0 million tons of CO2 equivalents in relationto expected F2: Time of travelin emissions in 2020 and between regions shall be reduced in the M2:Reduce Nox period. emissions in the sector

F3: Rush-hour delays for industry and public M3: Contribute to transport in the four achieving national largest conurbations targets for local air and shall be reduced in the noise pollution. period.

F4: Improved infrastructure for M4: Avoid encroaching pedestrians and on important natural cyclists in the period. territories and to safeguard important ecologicalfunctions.

F5:Reduce the costof distance between M5: Limit the regions within the encroachmenton period important national heritage sites, cultural environments, the culturallandscape and farmland.

M6: avoid the discharge of oil and other hazardous chemicals as a result of undesirable events at sea.

Figure 4 - Hierarchy of goals for the Norwegian transport policy as set out in the NTP 2010- 2019

The Government has increased its spending commitment as set out in the NTP 2010-2019 considerably compared to previous NTPs. For the entire ten-year period spending is set at NOK 322 billion (approx. € 40 billion). This commitment includes investments in infrastructure and allocations for operations and maintenance. This is NOK 100 billion (approx. € 12.5 billion) more than the previous plan, representing an increase of 45 per

28 15 February 2011 cent. Amounts allocated to the railway sector have increased 58 per cent (NOK 3.4 billion/€ 0.43 billion on average annually).

29 15 February 2011

5 Introduction to High Speed Rail

5.1 Overview

High speed rail, which is broadly defined by the industry as trains travelling in excess of 250km per hour, began in Japan in the early 1960s. The first high speed line, measuring just over 500km in length, operates between Osaka and Tokyo. Japan now has a high speed network of over 2,000km and, since opening, the network is estimated to have provided around 6 billion passenger journeys.

The first European high speed line was inaugurated in 1981. It delivers services between Paris and Lyons. The graph below shows the growth of high speed rail route kms in Europe since 1981.

Figure 5, Growth of high speed rail route km in Europe

Arguments for high speed lines include the following:  Encourages regional regeneration and the spread of economic prosperity by making it easier to access cities and regions outside the capital city and facilitating access of these regions to the capital.  Spreading economic prosperity can relieve pressure on housing, transport and other scarce infrastructure enabling the economy to be more efficient.

30 15 February 2011

 The sums spent on building lines are significant and can themselves stimulate economic growth.  The construction of high speed lines and the technology surrounding the delivery of the infrastructure can be a showcase for a country’s expertise and create export opportunities.  Competes with air transport and therefore frees up air space and scarce landing spots at capital city airports.  Constitutes an alternative form of long distance transport that has less impact on the environment and the climate than road or air transport.

5.2 Scope of a high speed rail project

To deliver a high speed rail project the following elements of the project need to be considered and in most cases specified and procured through contracts of various types:  Planning of the network and land acquisition: preparation of detailed plans, business cases, environmental impact assessments; management of any statutory planning process in force to obtain relevant planning consents; and acquisition of land for the line(s) and for construction and access, including compulsory acquisition. All activities need to include consideration of integration with other land uses and transport modes and a plan to ensure the benefits of the project are realised.  Design: concept design through to detailed design of each work package – different levels of design could be carried out by different parties.  Construction of the new infrastructure: new build dedicated high speed lines plus enhancements to, and interfaces with, the existing network so that high speed trains can be operated on the existing infrastructure. The work will typically comprise civil engineering (for example tunnelling, excavation, structures and permanent way including ballast, sleepers and rail) plus signalling, communications and power supply and distribution.  Maintenance of the infrastructure: scheduled lifecycle refurbishment such as periodic renewal of track, unscheduled maintenance such as repairing damaged power lines and routine inspection and servicing.  Operation of the infrastructure: signalling and control systems plus safety management including providing appropriate levels of security and responding to incidents.  Rolling stock manufacture: designing, manufacturing, testing and commissioning new high speed trains to run on the network.

31 15 February 2011

 Rolling stock maintenance: scheduled and unscheduled maintenance and servicing. Servicing includes refuelling/ checking power equipment, watering, tank emptying and the cleaning of both the inside and the outside of the trains. Scheduled maintenance may include periodic major overhauls.  Train operations: the day to day operation of the train service including dispatch, driving, on board customer service, ticket inspection and the provision of refreshments. Train operators also play a key role in marketing and attracting customers to use rail and typically carry out a range of other activities as part of their business such as station and car park operation and the provision of customer information.  Property construction (stations and depots): stations, depots and stabling facilities for the rolling stock. This may require existing property assets to be upgraded and new assets to be built as well as integration with neighbouring property such as roads bus/ tram stations, offices or retail facilities.  Property maintenance: unscheduled and scheduled maintenance for new and enhanced property assets.  Funding and finance: this relates to how all of the above activities will be paid for in the short term and, if financed by loans or equity, how such amounts will be serviced in the long term.

On most high speed lines the private sector is typically responsible for all of the above activities for new lines except for planning of the network and land acquisition, specification and implementing the procurement of each of the elements which the public sector is normally best placed to manage. Responsibility for operating services has varied, with some countries relying on their existing, public sector operator and other countries introducing a new operator.

5.3 Structure of the project delivery organisations

The national strategic importance and profile of HSR combined with the likely requirement for substantial public funding means that public sector leadership for such a project is essential. In addition, the Norwegian Government will need to ensure that the new high speed railway meets safety standards and that the specification of the project meets its (the Government’s) strategic objectives. Given Norway’s approach to EU regulations, it is highly likely that the Government will want to ensure that high speed railway solutions comply with EU interoperability requirements.

32 15 February 2011

The private sector will likely have an important role to play in the delivery and, possibly, operation and financing of HSR. The Government will therefore need to put in place a structure that optimises the role of the private sector. Currently national network track infrastructure and the delivery of significant enhancements are managed by NRA. Manufacture of rolling stock is undertaken by the private sector and operations are undertaken by NSB. A number of large non-rail infrastructure projects have recently been procured in Norway using PPP-type structures and/ or private finance.

The delivery structure for the project needs to have the following attributes:  Ability to define and focus on key strategic objectives  Ability to mobilise appropriate levels of resource and expertise  Ability to secure funding and finance  Minimal bureaucracy and over head costs  Not be distraction from delivering existing infrastructure which is safe and reliable

A very simple outline of the key roles to be fulfilled in an HSR project delivery structure is as follows:

Figure 6 Key Roles in an HSR Project

33 15 February 2011

6 Contractual issues

6.1 Introduction

The purpose of this chapter is to consider the major issues that will need to be addressed through contractual mechanisms if HSR is to be successfully procured, delivered and operated. The chapter addresses both what is to be procured and how it is to be procured.

The issues raised in this chapter represent a high level review and focus on identifying, where appropriate:  key issues;  options for dealing with those issues; and  the principal advantages and disadvantages of each option.

Case Studies (see Appendix 1) and example projects have been used to illustrate the lessons learned. The example projects, in particular, represent high level summaries of a situation that arose on a project. They do not reflect a criticism of that project. Indeed, in some instances the solution chosen may have had the consequences highlighted but have been successful in resolving the key concern it was designed to address.

This demonstrates a key message – contracting for the procurement of complex capital assets has no right solution which will meet all objectives. Instead, the approach adopted for each project needs to identify correctly and prioritize the key objectives and then find a compromise solution that best reconciles the different objectives.

6.2 Procurement Strategy

Procurement strategy is used to refer to the way in which an asset and/ or service is procured. It therefore encompasses all activities from the decision to procure through to the final signing of the contracts. Arguably the procurement strategy should be extended through to the management of the contracts once signed but this is not within the scope of this study. A procurement strategy needs to address:  The principal steps in delivering new infrastructure  The principal elements of a procurement process  The key objectives to be delivered by the procurement strategy for HSR.

34 15 February 2011

6.2.1 Principal steps

The principal steps involved in delivering new HSR infrastructure are outlined in the diagram below:

Figure 7 Principal Steps in Delivering New HSR Infrastructure

Each of these steps needs to be properly delivered to enable the next phase of work and to ensure the overall success of the programme. In practice, there is considerable choice over who does each step and whether phases of work are combined or packaged. This is discussed further in section 6.9.

6.2.2 The principal elements of a procurement strategy

Even where NRA is responsible for a phase of work it is likely that it will need to procure specialist support. Depending on the complexity of the help sought, the value of the work and the choice of potential contractors, it is likely that there will need to be one or more formal procurements. The procurements will need to implement a number of key inputs as outlined in the chart and discussed further in this chapter:

Draft for discussion

Government’s objectives

Context • Legal and planning framework (6.3) • External regulatory issues (6.4)

Output specification

Financing and funding strategy (7)

Market conditions

Figure 8 Procurement Strategy PwC

35 15 February 2011

The Structure of the Procurement is informed by six key inputs:  The Government’s objectives: this is about defining clearly what is to be achieved. Two objectives for HSR might be regional development and encouraging modal shift from air to rail. These objectives tend to conflict because modal shift will best be achieved by minimizing stops and journey times between the cities at the end of the lines. Regional development will be achieved by introducing stops, perhaps even where none exist today. The Norwegian Government will need to take a leading role in reconciling these objectives or at least defining priorities. It will also likely have to specify an objective around balancing cost against the benefits that can be realized by HSR i.e. affordability versus value for money. The objectives of other stakeholders who have influence over the project (internal and external) will also need to be taken into account.  The context in which the procurement is being implemented: the procurement strategy needs to have regard to the legal and planning framework and the external regulatory environment.  The output specification: this is about defining the nature of services to be procured e.g. speed, journey times, routes, capacity, frequency of services, single or double track, requirements of rolling stock. These questions will be answered by the other work streams responding to the Mandate. The high level issues around the specification of requirements are covered in section 6.7 (Encouraging Innovation).  Allocation of risk: major infrastructure projects are generally extremely risky because of their size (value and multiple contractors and stakeholders) and complexity. The Procuring Authority will need to identify the principal risks (e.g. responsibilities for delivery, innovation, whole life cost, interfaces, how and when contractors will be paid and performance requirements) and decide how they are best managed. For each major risk the Government will need to decide whether it should bear the risk, whether the contractor should bear the risk, whether a third party should bear the risk or whether the risk should be shared in some way.  Financing and funding strategy: the financing and funding strategy can have a major influence on the structuring of the procurement because if the private sector is to finance or fund parts of the infrastructure it will want specific protections around the risk of not being paid and absolute clarity over the triggers for payment. Similarly, where risk is being transferred, making part or all of a payment conditional on successful management of the risk should enable the public sector to transfer the risk more effectively. Issues surrounding the financing and funding of major infrastructure are outlined in chapter 7.

36 15 February 2011

 Market conditions: the approach to the procurement will also need to take account of market conditions such as the appetite of contractors and financiers to be involved in the project, the availability of resources and skills and the geographic spread of the project.

The structure of the procurement therefore defines to whom responsibilities and steps involved in delivering the new HSR infrastructure are to be allocated. The range of possible parties is broad and can include MTC, the Procuring Authority, NRA, NSB, contractors and consultants, manufacturers, local authorities and private companies e.g. utilities providers. This activity is described in more detail in section 6.5.

The packaging and procurement process deals with two linked activities:  Which of the steps should be procured together in a single package e.g. design and build or build and maintain and which should be procured on their own?  How many contracts are to be let and in what order? This relates to decisions surrounding breaking major pieces of build work into a number of contracts (for example because the project would be too big for a single contractor) or letting a single contract across several pieces of the build work (for example, having chosen a signalling or communications systems provider it may not be practical to have different contractors providing these system on different pieces of infrastructure).

The packaging and procurement process is considered in more detail in section 6.9.

Finally, the Procurement Plan is concerned with the detailed mechanics of the procurement. It addresses issues such as what is to be priced and engaging with suppliers as well as more tactical questions such as how many rounds of bidding? What information is to be made available at each stage of bidding? How long to keep multiple bidders involved? How to enable the Procuring Authority to have a strong position in negotiations? This is considered in more detail in section 6.14.

6.2.3 Key objectives

Clearly defined key objectives, as outlined in section 6.2.2, should be the driver of the procurement strategy. This is because if the procurement is to be a success it should deliver the key objectives specified at the outset, not something that is designed during, or for the convenience of, the procurement. Since Government will likely be a major funder of the project, Government should take a leading role in defining the objectives.

37 15 February 2011

6.3 Legal and planning framework

6.3.1 Introduction

It is important to understand the legal and planning framework when developing the contractual arrangements for procuring HSR because it is unlikely that entirely new arrangements will be put in place to enable the delivery of HSR. This is because the existing arrangements will:  be well understood;  reflect experience built up over a number of years; and  be tested and proven, which should facilitate any procurement.

In practice, if the procurement of HSR is sufficiently large or complex, such that it is not covered by the existing legislation, and new legislation needs to be enacted, this should be identified at an early stage. At the same time, a clear understanding of the extent of the necessary changes should be developed and consideration given to whether the changes should be in alignment with Norway’s commitments towards the EU e.g. the EEA Agreement.

This section provides a brief summary of the following issues which are largely legislative although some of the latter points are procedural or provide more context to the contracting environment:  The Railway Act  Rail Regulations  The Allocation Regulations  Alignment of Norwegian requirements with EU regulations  Agreement for purchase of passenger rail services  The Planning and Building Act  The Nature Diversity Act  Norwegian quality assurance schemes (KS1/ KS2)

38 15 February 2011

6.3.2 The Railway Act

The Railway Act10 is the primary law regulating the construction and operation of the railway in Norway and a number of Regulations are addressed in this law (including the Rail Regulations and the Allocation Regulations).

The Railway Act regulates competition for passenger rail traffic11. Effectively it states that the MTC should determine any regulations regarding competition for passenger rail traffic. Moreover, to enable competition, MTC can direct the incumbent operator (NSB) to provide access for other operators to rolling stock, depots and sales/distribution systems in return for a level of compensation set by MTC.

Planning and construction of permanent way shall, according to The Railway Act, be done in accordance with the Planning and Building Act12 (see section 6.3.7).

6.3.3 The Rail Regulations

The Rail Regulations13 address:  access to the national rail system;  license and safety certificate required by rail operators to operate freight and/or passenger rail services on the national rail system; and  safety approvals given to the infrastructure administrator to operate rail infrastructure that is part of the national rail system.

Licenses to operate and safety certificates for operators of rolling stock and the safety approvals for the Rail Infrastructure Operator (NRA) are issued by the Norwegian Railway Authority in accordance with Directive 2004/49/EF.

A license to operate is required by both freight and passenger service operators and is provided on the basis of the operator’s financial capability, technical skills, and necessary insurance/warranty. A license issued in any EEA country or in Switzerland is valid in Norway.

10 Jernbaneloven (The Railway Act) – jbl.(LOV-1993-06-11-100) 11 The RailwayAct §8a-g. These clauses were amended 10th June 2005 in connection with the commercialization of the Gjøvik Line 12 Lov om planlegging og byggesaksbehandling (plan- og bygningsloven) (2008-06-27) – The Planning and Building Act 13 Jernbaneforskriften (The Rail Regulations) - FOR-2010-12-10-1568.

39 15 February 2011

To obtain a safety certificate an operator must have in place a safety system of work in accordance with requirements in the Safety Regulations14 and meet the requirements of Technical Specifications for Interoperability (“TSIs”) and other relevant EEA regulations. Operators with license issued by another EEA country must also provide insurance or warranties for claims that might arise as a consequence of operating in Norway.

A safety approval is an approval from the Rail Inspectorate that the Rail Infrastructure Operator has implemented a safety system as required in the Safety Regulations and is capable of operating and maintaining the rail infrastructure in a safe manner.

The Rail Regulations set out who are the operators that are permitted to operate on the national rail system. They currently include NSB AS, Flytoget AS, freight rail operators, and passenger rail operators that are contracted by the public sector to deliver passenger rail services on a specific part of the rail system15. In addition, operators can apply to operate passenger rail services on sections of the national rail system on which NSB has suspended operations16.

6.3.4 The Allocation Regulations

The Allocation Regulations17 principally cover:  levying of rail access charges;  allocation of access to the railway; and  requirements regarding the Network Statement.18.

6.3.4.1Levying of access charges

The services provided on the rail network are divided into three:  Rail Access: this includes administration, use of allocated capacity, use of necessary tracks and connections between tracks, traffic control, provision of all other necessary information for operation of the service, as well as access to prioritised services (not the services themselves);  Prioritised Services: these relate to use of fuel facilities, stations, freight terminals, depots etc; and

14 FOR-2005-12-19-1621 Sikkerhetsforskriften 15 The Rail Regulations §2-1 16 The RailRegulations §2-2 b) 17 Fordelingsforskriften (The Allocation Regulations) - FOR-2003-02-05-135. 18 The Network Statement is the Norwegian National Rail Administration’s product description, in which they describe the services they provide, where they are provided and how customers can gain access to them

40 15 February 2011

 Additional Services: these could comprise power, pre warming of passenger trains, provision of fuel etc19.

Charges for Rail Access are set by MTC. Charges for Prioritised Services and Additional Services are set by the infrastructure manager (NRA)20.

Access charges are in principle based on the cost incurred as a direct consequence of operation of the rail service, with potential uplifts to reflect full utilisation of capacity and costs related to environmental impact of operating trains. These principles do not apply to Prioritised Services where market prices can be determined21.

MTC may increase Rail Access charges to recover in full the costs of the infrastructure administrator if the market can bear it. However, charges should not be set at a level which absorbs all of the profit of operators, in order to maintain an incentive to work efficiently.

MTC can approve higher charges based on the long term cost of specific infrastructure projects provided the projects are delivered efficiently and could not otherwise be undertaken without increased charges22. There is also provision for incentivising improved performance through fines, compensation or bonuses23.

Even though the principle is that operators should pay an access charge that reflects the cost of use of the infrastructure, charges for Rail Access are currently only paid for rolling stock with payloads of more than 25 tons per axle. This approach has been adopted by the MTC to strengthen the competitiveness of rail transport compared to other means of transport24. Effectively access charges are thereby paid only for transport of ore on the Ofotbanen (the Ofot line) and for Flytoget’s use of Gardermobanen (the Gardermoen line).

Reflecting the costs incurred annually by NRA and the shortfall in revenue from access charges, in 2011 NRA will be funded by appropriations from the National Budget amounting to NOK 9.2 billion.

19 The Allocation Regulations §3 20 The Allocation Regulations §§4-1 to 4-3 21 The Allocation Regulations §4-5 22 The Allocation Regulations §4-6 23 The Allocation Regulations §4-7 24 St.meld. nr. 16 (2008-2009) Nasjonal transportplan 2010–2019 (NTP) (http://www.regjeringen.no/nb/dep/sd/dok/regpubl/stmeld/2008-2009/stmeld-nr-16-2008- 2009-/6.html?id=548878)

41 15 February 2011

6.3.4.2 Allocation of access to the railway

Capacity is allocated annually. The Infrastructure Manager (NRA) coordinates an allocation process whereby the rail operators apply for access to the infrastructure. It also coordinates all applications and determines final allocations as necessary.25

The normal period for a Rail Access Agreement is one year. It can be extended for more than five years through framework agreements26setting out the key commercial arrangements. These might be used where an operator’s decision to use particular infrastructure is underpinned by specific investments it has to make or there are other risks related to the decision. In exceptional cases, where alternatives exist, the Infrastructure Manager can, subject to approval from MTC, commit the infrastructure for certain kinds of traffic (ref. §7-12) and accept framework agreements of more than 15 years. For a new HSR operator, a long access agreement would be necessary to enable it to recover the start up costs of a relatively high risk investment and service any finance raised (e.g. for rolling stock).

6.3.5 Alignment of Norwegian law and regulations with EU- regulations

As a member of the EEA, Norway has sought to align its national laws and regulations with the relevant EU directives for the rail transport sector. Most of the relevant directives are reflected in The Railway Act, The Rail Regulations and The Allocations Regulations as described above27. In addition, the following regulations should be taken into account when developing HSR:  TSIs relating to national high speed rail systems: these TSIs are designed to ensure compatibility with the Trans European high speed rail system and cover matters such as maintenance, controls and signals, infrastructure, energy, operation and rolling stock.  Traffic Coordination Regulation: the intention of these regulations is to establish the terms (TSIs) that must be fulfilled to achieve interoperability across the Trans European Rail system.

25 The Allocation Regulations §7 26 The Allocation Regulations §6-1 27 http://www.regjeringen.no/nb/sub/europaportalen/eos-notatbasen/eos- avtalen/vedlegg/vedlegg-xiii-transport/iii-transport-med-jernbane.html?id=524386

42 15 February 2011

The technical and safety work stream has given much more detailed consideration to these issues.

6.3.6 The “Agreement for purchase of passenger rail services”

The State, represented by MTC, purchases passenger rail services from the service operators. A framework agreement (The Traffic Agreement) has been signed between MTC and NSB for NSB to provide passenger rail services on the Norwegian rail system. The provision of services is contracted annually through a call-off agreement. The call-off agreement sets out the extent of services, timetables, fares levels, the compensation payable by MTC to NSB and any changes to the Traffic Agreement. These annual call-offs are subject to Parliamentary approval28. The Traffic Agreement does not cover rail traffic on the Gjøvik Line as the right to operate services on this line was awarded to NSB Gjøvikbanen AS under a concession. We assume this agreement complies with EU requirements for negotiated Public Service Operator (PSO) contracts.

According to the State Budget for 2011, MTC will pay NSB about NOK 2.1 billion for the provision of passenger rail services and NSB Gjøvikbanen AS about NOK 74 million. In addition MTC buys passenger rail services from SJ (the Swedish national rail operator) on the Ofotbanen between Kiruna and Narvik in the northern part of Norway. Flytoget AS is operated on a commercial basis and is not subject to state purchase of services in the same way as NSB AS and NSB Gjøvikbanen AS29.

The latest Traffic Agreement was entered into in 2007 and expired in 2010. At present an interim agreement for 2011 and a new framework agreement for 2012 and onwards are being negotiated. There are no indications that the principles of the new framework agreement will differ significantly from the previous one30.

For a new HSR operator, a longer agreement would be needed, for the same reason as a long access agreement would be required. This could be a negotiated PSO31 contract or a

28 Avtale om utførelse av persontransport med tog “Traffikkavtalen” mellom Samferdselsdepartementet og NSB AS (The Traffic Agreement) 29 State Budget 2010-2011, (http://www.regjeringen.no/nb/dep/fin/dok/regpubl/stmeld/2010- 2011/meld-st-1-20102011/6/2/5.html?id=616531) 30 State Budget 2010-2011, Chapter 1351 (http://www.regjeringen.no/nn/dep/sd/dok/regpubl/prop/2010-2011/prop-1-s- 20102011/5/5/3.html?id=616674) 31 The PSO is an arrangement whereby a governing body or other authority contracts for the provision of defined services in return for subsidy payments. The winning company is granted a monopoly to operate a specified service of public transport for a specified period of time for the given subsidy.

43 15 February 2011 tendered private concession – discussion of these options is outside the scope of this study.

6.3.7 The Planning and Building Act

The construction of rail infrastructure is subject to the provisions in the Planning and Building Act32. The Planning and Building Act is enforced by the Ministry of the Environment.

Responsibility for planning lies with the municipalities, the regional planning authorities or the Government33. The responsibility for planning can be transferred from local authorities to regional or Governmental authorities. In the case of transport infrastructure the respective responsible authority (in this case NRA) can develop and suggest plans for transport infrastructure projects34.

Where construction of infrastructure might significantly impact the environment and society more generally a programme of necessary planning activities must be developed35 and a specific assessment of the social and environmental effects (Konsekvensutredning, Assessment of Consequences) is required to be included in the description of the plan36.

6.3.7.1 Planning of rail infrastructure – example from planning of Follobanen

Obtaining planning permission for a rail infrastructure project is usually undertaken at the Municipal level with the relevant municipalities acting as planning authorities. Below is a diagram illustrating the process adopted for planning the Follobanen project37 (19 km tunnel between Oslo and Ski with double track) which was undertaken through cooperation between NRA and the municipalities of Oslo, Ski and Oppegård.

32 The Railway Act §4 33 The Planning and Building Act, §3-2 34 The Planning and Building Act, §3-7 35 The Planning and Building Act, §4-1 36 The Planning and Building Act, §4-2 37http://www.jernbaneverket.no/PageFiles/8384/Planlegging%20og%20bygging%20av%20Follo banen%20august%202009.pdf

44 15 February 2011

Planningprogram– scope of planning

Municipal sector plan – assessment ofmultiple routes

Developmentplan– oneroute is detailed

Constructrion of the railway

Figure 9 Example of planning process within the rail sector - Follobanen (Source: NRA, pamphlet “Planlegging og bygging av Follobanen)

In principle the planning could have been done at Government level and the Municipal sector plan stage would thereby have been excluded from the process. At both the Municipal sector plan stage and the Development plan stage there are requirements for assessments of consequences. These assessments are more thorough and time consuming at the Development plan stage. Therefore it was decided to use the Municipal sector plan stage to reduce the number of alternative routes assessed and perform a more thorough assessment of the consequences of only one route at the Development plan stage.

In developing HSR, careful consideration will need to be given as to how to meet the planning assessment requirements as efficiently as possible and avoid undertaking detailed studies for routes and options that are highly unlikely to be implemented. It will also be necessary to find an efficient way through the planning process.

6.3.8 The Nature Diversity Act

The Nature Diversity Act38 is concerned with protecting the diversity of Norway’s biology, landscape, and geology as well as the ecological processes. This Act regulates protection and conservation measures, including national parks. The Act includes provision for dispensation from protective measures to the extent this is necessary for safety reasons or reasons of significant public interest. Where it is agreed that a party can take actions that threaten the areas protected by this Act, that party may be required to bear the cost of compensatory measures implemented in another part of the country.39

38 LOV 2009-06-19 nr 100: Lov om forvaltning av naturens mangfold (naturmangfoldloven) – The Nature Diversity Act 39 The Nature Diversity Act - §48

45 15 February 2011

6.3.9 The Norwegian quality assurance schemes (KS1/KS2)

The Norwegian Parliament has adopted a regime of external quality assurance of major public investment projects - in practice those larger than NOK 500 million. The development of HSR will likely have to undergo such external quality assurance. This should be recognised in the planning and preparation phase of a project to ensure that all requirements in this regard are met and do not cause any unnecessary delay.

The overall goals of the quality assurance scheme are to ensure that projects are more successful, reduce government expenditure and realise greater benefits for the money spent. Selected private sector consultants have framework agreements with the Ministry of Finance for conducting external quality assurance of public investment projects. External reviews of large public investment projects are carried out at two stages:

 QA1: regarding the choice of concept; and  QA2: regarding the basis for control and management, including cost estimates and uncertainty analysis for alternatives to the chosen project.

6.3.9.1Quality assurance of choice of concept (QA1)

The objective of the QA1 review is to demonstrate that the choice of concept is subject to adequate control through ensuring appropriate quality (breadth, detail, consideration of alternatives, evaluation approach etc) in the documents underpinning the decision(s). The QA1 review takes place at the end of the pre-study, before a decision by Government. It comprises quality assurance of four key documents:

 The needs assessment;  The top-down strategy document;  The top-down requirements document; and  An alternatives analysis - this includes a socio-economic analysis of alternatives according to Ministry of Finance guidelines and risk/uncertainty analysis of the budget.

6.3.9.2 Quality assurance of management base and cost approximation (QA2)

The purpose of the QA2 review is that the sponsor of the project should have an independent analysis of the project and the solution undertaken before the project is presented to Parliament for approval. QA2 therefore takes place at the end of the pre-

46 15 February 2011 project phase of work. The QA consultant is expected to provide recommendations in a report covering:  the budget, including an assessment of the adequacy of provisions for uncertainty of costs; and  how the project should be managed to stay within budget.

6.4 External regulatory environment

In planning the implementation of any works to deliver HSR, it is important that the Procuring Authority considers how it will comply with the external regulatory environment.

This section highlights the principal regulatory, legal and/or specification requirements that may have a particular bearing on the commercial and contractual considerations for delivering HSR in Norway.

6.4.1 Legislation

Consideration needs to be given to whether the existing legislation will provide sufficient power to the Procuring Authority to deliver relevant HSR works in a timely manner. This can be a particular problem for land acquisition and planning activities where existing legislation is likely to require a time consuming and piece-meal approach which may be unwieldy and inefficient for all parties.

In the UK new legislation is often put in place for major projects to give a procuring authority the power to procure the building and operation of major new infrastructure assets. In the UK, rights conferred by such legislation on the authority responsible for delivering infrastructure have included:  the power to grant permission centrally for the construction of railway infrastructure in different local planning authority areas where individual consents would otherwise have been required;  exemption from other acts of parliament, such as the Electricity Act 1989 which requires prior approval from the Secretary of State in order to build overhead power lines;  powers to enable the compulsory acquisition of land along the route of the proposed infrastructure with strictly limited rights of appeal; and  other powers, including the power to require the diversion of utilities.

47 15 February 2011

6.4.1.1 EU Rules on Open Access

EU Directive 2007/58 addresses the opening up of international passenger rail services to competition from 1 January 2010. The EFTA Surveillance Authority is responsible for enforcing the EU competition rules in Norway40. Following a conformity assessment reported in EFTA’s Annual Report 2009, Norway’s implementation of Directive 2007/58/EC is listed as a ‘closed case’41.

The Directive states that railway undertakings must be given a right of access to the infrastructure in all member states for the purpose of operating international passenger services (including the rights to pick up passengers at any station location on the international route and to set them down at another station, including rights to ‘cabotage’ i.e. to pick up and set down within the same member state). The Commission notes that when railway undertakings request access to infrastructure with a view to operating an international passenger service, the service should be presumed to be international if the train crosses at least one border of a member state, independently of whether the service includes cabotage (picking up and setting down good within one state) or not.

6.4.2 Procurement

Although it is not a member of the EU, the Norwegian legislation on public procurement is based on and implements EU Directives. The current legislation is in the form of the Act of Public Procurement 1999 as amended by regulation in 2006.

According to the Public Contracts Regulations there are four different tendering procedures that may be used in Norway:  The open procedure, which is applicable to all types of contracts. This procedure allows for all interested providers to participate and negotiations between the public purchaser and the potential providers are prohibited.  The restricted procedure is also applicable to all types of contracts. The difference compared to the open procedure is that only invited providers are allowed to participate in the tendering procedure. Negotiations are prohibited.  The competitive dialogue procedure provides for a dialogue about the specification between the procuring authority and potential delivery companies before the tenders

40 http://uk.practicallaw.com/1-107- 3698?q=%22EFTA%20surveillance%20authority%20(also%20based%22 41 http://www.eftasurv.int/media/annual-reports/Annexes.pdf

48 15 February 2011

are submitted. This procedure is only allowed where the contract has a value above the European Economical Area (EEA) threshold.  The negotiated procedure is one in which the procuring authority negotiates with one or several potential delivery companies. This procedure is allowed for contracts with a value over the national threshold.

Norway has no special procurement rules in relation to privatisations or PPPs. However, such transactions will require a procurement procedure in accordance with the procurement legislation if the awarded contract falls within the scope of the procurement legislation. Equally there are no specific rules around the award of concession based contracts. A more detailed discussion of the application of the above procedures to HSR is in section 6.14.3.

6.4.3 Specifications

In accordance with the regulations on public procurement, the specification of the product/service to be purchased should be outlined either as an input specification describing the purchasers’ needs, or an output specification setting out the required performance functions of the facility. The procuring authority is obliged to take into consideration both life-cycle costs and environmental issues when outlining the criteria and to the extent possible, it should set out clear environmental requirements for the product or service being procured.

The regulations also require that technical specifications set out in the tendering documents must ensure that all potential providers are treated equally and not unnecessarily hinder competition. The specifications are therefore not allowed to refer to a specific trademark, origin or production process. Such references are only allowed when it is impossible to describe the requirement in another manner and, where reference is made to a trademark or a specific source or production process, it must always be followed by the wording “or the equivalent”

Under Norwegian law, any high speed rail solutions developed in response to the Mandate will be required to comply with the EU Council Directive (96/48/EC) of 23 July 1996 on the interoperability of the trans-European high-speed rail system. This Directive is incorporated into Directive 2008/57/EC which has been implemented in Norwegian law by Regulation 16th June 2010 no.82042. The aim of this Directive is to achieve the

42 Samtrafikkforskriften, FOR-2010-06-16-820

49 15 February 2011 interoperability of the European high speed train network at the various stages of its design, construction, commissioning and operation and to reduce non-tariff barriers to competition in the supply industry. The Directive's provisions relate to the parameters, constituents, interfaces and procedures which are required to ensure and guarantee interoperability within the high speed train network. These provisions are collectively known as TSIs. In Norway the Norwegian Railway Authority is responsible for ensuring that relevant TSIs are complied with to the extent they have been incorporated in Norwegian legislation43.

National and specific standards are lower tier legislation. They are published documents that contain a technical specification or other precise criteria designed to be used consistently as a rule, guideline, or definition. Standards take the form of specifications, methods, vocabularies, codes of practice or guides. It may be necessary to review or change existing standards because they may have become out of date and inhibit innovation in the context of HSR e.g. existing railway standards may not allow for certain requirements of a high speed railway e.g. proving for camber on bends/ operating line speeds/platform heights/curvature etc.

6.4.4 Regulation of safety in the rail industry

Rail safety regulation within each country in Europe tends to be undertaken by a body which is independent from the railway infrastructure manager and the operators of rail services. Rail regulation in Norway is carried out using the following model:

43 Ref. Instruks for Statens jernbanetilsyn. Fastsatt ved kongelig resolusjon 12. juni 2009

50 15 February 2011

Rail regulation, Norway

Ministry of Transport and Communications

Reports to and Advises

Norwegian Railway Authority - Statens jernbanetilsyn (Independent Government Authority) Provides licences to operators of railway assets Jurisdiction embraces all railway operations including Ensures Safety and authorisation for rolling stock, heavy and light rail , metro and tram. adhered to putting in to service

Norwegian National TOCs & FOCs Rail Administration - Jernbaneverket

Train Operating Companies Owns and Operates, maintains Freight Operating Companies and renews the railway, including the track, stations, classificationyards, traffic management and timetables

Figure 10 Rail Regulation Norway44

The figure below illustrates the generic requirements with regard to safety, access and licensing needs.

No Doyou intend tooperate Yes trains?

Doyou intendtohold accessrights onlyor operatea Doyou intendtooperate passengertrainsor freight network? trains?

Network Access Passenger Freight

Youwill need: Youwill need: You will need: Youwill need:

•safety authorisation •Atrack access •safety certificate •safety certificate •Anetwork licence or contact •An operator's •An operator's licence exemption licence licence •Atrack access •Atrack access contract contract •Astationaccess •Astationaccess contract contract •Adepot access •Adepotaccess contract contract •Authorised vehicles

Figure 11 Safety, access and licensing needs45

44 Derived from Johnsen, E., The Norwegian Railway Inspectorate’s work and projects in today’s climate. (http://whww.europeanrailwayreview.com/err-magazine/past-issues/the-norwegian-rail)

45 Derived from; Starting mainline rail operations: A guide to the regulatory framework. November 2008.

51 15 February 2011

The Norwegian Railway Authority (“Railway Authority”) reports to MTC but is independent of Government. It is responsible for regulating operations and equipment across the rail sector including heavy rail, light rail, metro and tram. In accordance with applicable railway laws, the responsibility for regulation rests with the MTC which in turn delegates this task to the Railway Authority. The Railway Authority’s powers and tasks include actions to:  Assess and grant, suspend or revoke licences and safety certificates;  Provide advice and guidance to the industry on how to comply with relevant laws;  Authorise infrastructure and rolling stock to be operated. This includes ensuring that the asset is compatible with the infrastructure and meets any of the additional environmental conditions specific to Norway e.g. contending with extremes of track temperature - from 40°C to 60°C;  Ensure co-operation with the operators and infrastructure managers to reduce risks;  Operate national registers related to the railway;  Maintain a database of accidents and near misses; and  Enforce all Government issued health and safety legislation that is applicable to the railway environment and carry out related audits and inspections.

It is the Railway Authority's responsibility to supervise the market, to ensure competition on equal terms and to also secure the passengers' rights. The Railway Authority was allocated the responsibility of market surveillance in 2009.

There will be extensive interaction between the Procuring Authority, the delivery company and the Railway Authority in the development of HSR irrespective of the scenario that is eventually preferred. However, the Railway Authority’s need to be independent can add to the amount of work and therefore the cost and time required at both planning and construction stages.

6.4.5 Other considerations

Other key regulatory-related requirements which need to be considered in procuring HSR include:  Environmental issues  Security issues – bomb proofing station buildings and track, safety checks of passengers etc  Animal welfare issues (e.g. to stop animals straying onto the track)

52 15 February 2011

 Disability related legislation  Tax planning requirements and any special rules relating to special taxes  Any regional rules or regulations  Local content/ use of local supplies/ employees etc  Any legislation reflecting the works that will be undertaken over fjords and other stretches of water

6.5 Contract strategy options

6.5.1 Issue

The main function of a contracting strategy is to allocate risk between the parties and ensure the project’s objectives and benefits are delivered within budgetary constraints.

The main types of contract are  Construction Contracts: this involves the design being prepared by the procuring authority and the contractor simply taking responsibility for building the asset(s) to the agreed design. The procuring authority may undertake the design work itself or, more likely, it will engage a specialist contractor or consultant to undertake the design work.  Contractor Designed: this involves the contractor designing and building the assets and includes international turnkey contracts. A variation on this approach is the Preferred Contractor approach. Under this scenario the contractor is appointed early to provide design input during the design phase.  Contracts with Specialist Management: these contracts provide for the main contractor to take a pivotal role in organizing and managing the work of other contractors required to deliver the whole project. This type of contract includes Management Contracts, Construction Management contracts and Project Alliances.  Term Contracts and Frameworks: these contracts involve the engagement of contractors under pre-defined terms (costs and/ or rates) and then specific work is called off under these pre-agreed terms.  Concession Contracts and PPPs: these contracts involve the contractor taking responsibility for building and then operating and maintaining the asset for a defined period.  Joint Ventures: these involve two or more parties forming a vehicle to undertake an activity together.

53 15 February 2011

This section describes the contracting structures, the advantages and disadvantages of each approach and concludes with an indication of when each approach may best be used.

6.5.1.1 Construction Contracts

This traditional route involves the procuring authority or its advisor carrying out the design and then letting a contract to deliver their specification. The contractor will be expected to build the facility as designed within any constraints and will likely be selected and supervised by the organization (“Contract Supervisor”) that designed the facility with support from the procuring authority.

The construction contractor is responsible for procuring the necessary subcontracts to deliver the work. In Norway, this type of contract strategy is referred to as “utførelsesentreprise”.

Construction Contracts Advantages Disadvantages  Can run a good competition to get the best  Lack of contractor involvement in the design price as requirements are clear limits his ability to use his expertise and may  Evaluation is relatively straightforward – mean unnecessarily high build cost or even lowest reasonable price = best value difficulty in delivery  Procuring authority gets exactly what it  Contract Supervisor, being a designer, may specifies (this is specified in the design) not have commercial know-how to administer  High price certainty provided client does not the contract change requirements  Contract Supervisor appointed by client and administering the contract can seen as a conflict of interest because, if there are problems, the Contract Supervisor is likely to blame the contractor rather than acknowledge that the design is flawed  Variations are costly and add time – chance for contractor to renegotiate  Contractors may bid a low price and then seek to maximise profit through expected variations

It is possible to introduce variants to the construction contract approach to address some of the issues raised in the table above. Refinements include:  involving the contractor(s) in the design;  allowing alternative bids e.g. small changes to design to deliver better value for money;

54 15 February 2011

 independent checks of the sums bid;  selection based on quality of contractor and his solution as well as price; and  contracting procedures to enable known/ likely variations e.g. priced as options at the outset.

6.5.1.2Contractor Designed

This is similar to the Construction Contract approach except that the procuring authority or his adviser only undertakes a scheme or concept design. As the contractor is brought in earlier in the process, after the scheme design, there is more time for the contractor to develop bespoke solutions together with the designer and propose changes which offer better value or reduce risk using its own expertise. The bid evaluation process will need to take account of quality as well as price.

Under this approach the scheme designer’s contract with the procuring authority along with the design itself is often novated to the contractor in order that there is a direct relationship between the design team and the contractor. This is similar to the “tiltransportert sideentreprise” in Norway.

Contractor designed contracts are also referred to as:  Turnkey or Engineer Procure Construct (“EPC”) contracts in the power, process and heavy engineering sectors, where performance specifications are used  Design and construct contracts in the civil engineering sector  Design and build contracts in the building sector

Contractor Designed Advantages Disadvantages  Project timescales may be reduced compared  Making the contractor responsible for the to the Construction Contract approach design and build of something may not be because there is a better interface between value for money where there are major risks design and construction activities (constraints) associated with the design  Price is generally claimed to be reduced due to  There needs to be a clear specification of the possibility to introduce solutions which requirements in the contract offer value for money and due to a better  Changes may be expensive as only the dialogue between contractor and designer contractor will have the information to assess  Transfers design responsibility giving less the cost of changes and it will therefore be in a scope for dispute relating to design strong negotiating position information and specification.

55 15 February 2011

Contractor Designed contracts tend to be of most use where timescales are tight, a high level of price certainty is sought and/ or the contractor is better placed (for example because of expertise or recent relevant experience) to undertake and manage the design.

6.5.1.3Contractor designed – Preferred Contractor approach

This is similar to the Contractor Designed approach but the Preferred Contractor is selected earlier in the design phase based on expertise and possibility indicative rates. The design remains the procuring authority’s responsibility but the contractor is brought in early to provide advice on construction issues and the scope to improve value. The final solution is developed jointly. The development can continue until the procuring authority is content with the design then there is a negotiation process where the construction price is agreed. If a price cannot be agreed then the procuring authority can pay the contractor for the work done during the design phase and tender a new construction contract.

Preferred Contractor Advantages Disadvantages  Early selection of contractor allows  Client needs sufficient expertise to engage construction expertise to be utilised during effectively with the preferred contractor the design phase  More time required pre-contracting  Procuring authority will be more certain that  Early selection of preferred bidder can be the solution meets its needs when signing the used to contractor’s advantage in subsequent contract so less likelihood of variations price negotiations  Procuring authority should gain a greater insight into the contractor’s costs making it easier to agree changes  Contractor’s involvement can help engineer solutions that will bring value and mitigate risks

The Preferred Contractor approach is best used where the procuring authority believes there is value, perhaps through improved quality, deliverability or a better price, in having the contractor contribute to the design but not have total control over the design. This approach should also provide greater certainty over the price to deliver the final design.

Three routes (accounting for 85% of the works, with stations and systems making up the other 15%) for the TAV SpA in Italy were let under the Contractor Designed – Preferred Contractor approach. Lump sum contracts were agreed for the works. At the time of agreeing the contracts, the procuring authority (TAV) was able to demonstrate value for money through the appointment of independent advisors to undertake reviews of the

56 15 February 2011 estimates. The main reason behind using a lump sum cost approach was to pass on as much risk as possible to the contractors – it is unlikely the contractors would have accepted this approach had they not been so involved in the design prior to providing a price. Some of the major risks built into the fixed price included:  technical modifications due to developing design, changes in law and third party objections;  unknown geological conditions;  archaeological finds; and  exchange rates.

6.5.1.4Contracts with Specialist Management

Management Contracts are arrangements where the contractor is employed because of his management expertise and therefore the contractor may not do any of the construction work. There are two forms of Management Contract:  Management Contracting: here the Management Contractor awards works to specialist works sub-contractors. The Management Contractor takes responsibility for the works and sublets packages of work to trade contractors and suppliers using contract routes which give price certainty. Designers will normally be contracted to the procuring authority but may be taken on by the Management Contractor. This approach is similar to the “Generalentreprise” in Norway.  Construction Management: Under a Construction Management contract the designer and all the trade contractors and suppliers are contracted by the procuring authority but the Construction Manager is responsible for managing all of them and bringing the project to a successful conclusion.

57 15 February 2011

Contracts with Specialist Management (generic) Advantages Disadvantages  Early contractor input into the design and the  The Management Contractor may over specify programming of the project aspects of the design or costing in order to  Contractual arrangements can be tailored to ensure on time/ on budget delivery each work package  No price certainty at the start of  This can lead to a better allocation of risk as implementation because the Management each package can be more fully scoped/ Contractor has not sought prices at this stage designed prior to being let  Potential for duplication of roles between the procuring authority and the Management Contractor because both seek to supervise/ monitor construction contracts  Efficiencies, or the advantages of greater certainty over costing and deliverability, may not justify the increased management cost due to the dual roles

Management Contracting Advantages Disadvantages In addition: In addition  Management Contractor is highly incentivised  Management Contractor may simply ‘dump’ to complete the project successfully risk on contracts leading to disputes or premia  Management Contractor will tightly manage being built into costing risk, passing it to contractors as appropriate  A Management Contractor’s desire to defend  Procuring authority has to adopt a more his position may conflict with representing his hands off approach client’s best interest by resolving problems in a timely manner

Construction Management Advantages Disadvantages In addition In addition  Construction Manager has a clear role  Lack of contractual relationship with focused on his core skills designers and works contractors could make it difficult to enforce rights and could blur communications

Contracts with Specialist Management can be used to engage organisations to fulfil the Project Delivery Company role described in section 9.5.

A form of these contracts is being used on the procurement of Crossrail (where Transcend and Bechtel are fulfilling Contract Management-type roles) and was also used on the

58 15 February 2011 procurement of the Channel Tunnel Rail Link (“CTRL”)46. Although bespoke arrangements, they are considered a hybrid between Construction Management and Management Contracting because they tie in the specialist management contractor by incentivising him to share a proportion of the burden in the event that the target price is exceeded. Both cases are discussed in more detail later in this report.

6.5.1.5 Project Alliances

Project Alliances are variations of specialist management contracts. They are like Construction Management contracts and are used in similar but more complex circumstances. Usually the procuring authority and the companies responsible for delivering the project form an alliance to deliver the work. The alliance members develop the scope of the work so that they can agree an alliance target (typically base around price or margins). Each alliance member then enters into a contract with the client. However, there is an overarching alliance agreement which links payments to the contractors (or part thereof) to the success of the alliance in achieving the defined goals rather than their individual contracts. This incentivises all of the contractors to help each other.

Project Alliances Advantages Disadvantages  Alliances can be used to incentivise  Contractors could free load – rely on others to contractors who would otherwise be rivals to deliver the alliance benefits work together effectively e.g. tunnelling  May be difficult to define and measure contractors responsible for segments of a achievement of alliance goals tunnel which is only usable when all segments  Could be costly and time-consuming to are complete establish the alliance agreement  Aligns the goals of all contractors and encourages them to support each other e.g. to share equipment and expertise

Project Alliances are best used on large projects where a Management Contract might otherwise be used but encouraging partnering may realize significant improvements to the approach and/ or where a limited number of strong contractors must work together to deliver the project. An example of this exists on CrossRail where the tunnelling responsibilities have been split into four packages, delivered by four strong contractors who are being encouraged to work together to deliver the whole tunnel on time.

46 CTRL relates to the construction of a high speed rail link between the Folkestone (the entrance to the Channel Tunnel) and St Pancras station in London. In late 2010 a 30 year concession was let to operate and maintain this rail link, raising £2.1 billion for the UK government. At this time the rail link was generally referred to as HS1.

59 15 February 2011

6.5.1.6Term Contracts and Frameworks

Term or Framework contracts typically involve a client selecting a contractor or contractors, at agreed terms, for a series of, as yet, undefined projects. Framework Contracts are usually established for a defined period of time or for the life of a project. When a project is to be let it is defined and scoped and there is a competition between only those contractors on the Framework Agreement or the client may choose to negotiate with only one of the contractors on the basis of terms already agreed in the framework.

Term Contracts and Frameworks Advantages Disadvantages  Once the framework is in places, calling off  Can be expensive to start up – select and work should be quicker and less costly than a negotiate full procurement  Complacency can set in with contractors  Allows the procurer to break up the activities confident that they will be awarded further as it sees fit without having to go through a work full procurement process for each piece of  Constrains competition for any work let work through the framework i.e. can only select  Contractors on a framework contract are from contractors on the framework incentivised to do a good job because of the scope to be re-employed with little or no competition/ bidding cost  Framework contract can include performance parameters driving continuous improvement and realisation of efficiencies

Framework Contracts are best used where there is a series of similar projects and their value justifies the set up costs, where workload is likely to be continuous and consistent and/ or where there is scope for continuous improvement over time.

6.5.1.7 Concession Contracts and PPPs

The principle behind a concession is that the contractor will build and operate that asset for a period of time. The work will be paid for during the operating phase and therefore the contractor will have to raise finance for the construction works. The contractor is generally referred to as a Concessionaire and will likely be backed by a consortium of banks, equity providers, suppliers, constructors, maintainers and an operator for the maintenance period. Part of the payments to the concessionaire will likely be conditional on the proper performance of the service/ the availability of the asset.

60 15 February 2011

A PPP is a type of concession where the private sector builds and operates the asset for the public sector. The asset normally returns to the public sector at the end of the concession period.

Concession contracts Advantages Disadvantages  Reduces the immediate drain on the public  Costly to establish – can involve changes to purse – asset is paid for when used legislation to enable them  Payment can be linked to performance over  Once established, relatively inflexible the term of the contract  Private sector borrowing more expensive than  Enables greater risk transfer public sector – efficiencies and transfer of risk  Construction and maintenance packaged required to justify this premium together encourages concessionaire to address  As a concessionaire will be paid over time it whole life cost issues will need to be satisfied as to the  Introduces stronger commercial disciplines, creditworthiness of the counterparty. Taking including due diligence, to the management of such credit risk could result in a risk premium the projects. This is because the providers of being charged finance will take great care that the commercial arrangements are appropriate

Concessions are costly to set up so only appropriate for large projects where there are significant benefits from risk transfer. They can also be inflexible so may not be appropriate where a rapid change in terms of service delivery or technology is expected. A fuller discussion of the role, advantages and disadvantages of private finance is in chapter 7.

Concession contracts will require the concession lead company to fulfil the Project Delivery Company role described in section 9.5.

This concession based structure was employed on Gautrain where the goals were to foster economic growth, local and foreign investment, deliver new infrastructure and create jobs. In selecting the concession based contract, the procuring authority sought for the concessionaire to:  take all completion and integration risks;  offer a fixed price, fixed specification and fixed time frame (turnkey) contract; and  provide innovation and world-best-practice during design, construction, operations and maintenance.

The structure was also used on the London Underground PPP contacts where the work scope was predominantly refurbishment of infrastructure, stations and depots as well as

61 15 February 2011 the provision of some new rolling stock and signalling systems. The structure used was different from Gautrain because the London Underground PPP delivery companies did not operate the train service. Instead they carried out maintenance against certain performance criteria and were paid a monthly fee (known as the infrastructure service charge) which fluctuated with their performance.

Concessions and PPPs can be controversial but this is often because attention is drawn to the higher cost of private finance. They have a mixed record of success but so do other forms of contract where the lack of risk transfer to contractors can lead to cost and time overruns which might have been avoided by the use of a PPP. In the case of Eurotunnel, there was a large cost overrun which was entirely born by private contractors and financiers because it had been contracted as a concession. In the case of the Perpignan- Figueras link between France and Spain, the PPP contractors have delivered on time but services have not yet started due to delays in connecting the link to the rest of the network.

6.5.1.8 Joint Ventures Joint Ventures are not a contract strategy per se because the procuring authority will have to use one of the contract strategies outlined above to engage with the joint venture. Nevertheless it is helpful to understand the rationale for a joint venture, in particular if the procuring authority is to be a party to a joint venture.

A joint venture is a contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. Generally the joint venture parties agree to share in the profits and losses of the enterprise. Joint ventures tend to be formed where none of the parties individually has the skills or resources to meet the businesses requirements. For this reason many joint ventures relate to technology, combining of skills or to enabling entry into a new market.

Joint Ventures Advantages Disadvantages  Possibility to exploit an opportunity that  Costly and time consuming to set up could not be pursued alone i.e. independent  Potentially inflexible if over-defined or the organisations share in order to realise opportunity changes revenue/ profit that they could not earn by  Often takes time and is costly to integrate the themselves cultures of the parties to joint venture  A means of aligning goals and interests of  Joint ventures tend to under-perform independent entities expectations and are unstable as a result

62 15 February 2011

6.5.2 Summary

The principal contracting options and the relative timing of activities are outlined below. The choice of contract type involves a trade off between the three objectives of managing cost, time and quality. The figure gives an indication, for each main type of contracting strategy, of which aspect of the time/cost/quality triangle is compromised. The compromised activity is shown in black lower case e.g. the traditional procurement strategies (Construction Contract) are appropriate if cost and quality are the procuring authority’s priorities whereas completing on time is not so important.

Construction contract time Design

Cost Plan Tender Documents

COST QUALITY Tender (costs established after design completed)

Construction (commences only when design and costs are known)

Contractor designed Cost Plan quality

Tender Documents

Tender (Based on Procuring Authority Requirements – not full design)

Design Development (by contractor) TIME COST

Construction (commences after cost established but before design completed)

Contracts with specialist management

Design (completed after construction started on initial work packages) cost

Cost Plan Tender Document (for appointment of management contractor)

Tender (for appointment of management contractor) QUALITY TIME Tender Documents (for work packages)

Construction (commences only when design and costs are known)

Term contracts Cost Plan Cost

Tender Documents (Shorter period by virtue of being on framework)

Tender (Shorter period by virtue of being on framework)

Design Development (by different providers) QUALITY TIME

Construction (also by different providers , commences after design of modules completed)

Concession Contracts Cost Plan Time Tender Document (for appointment of concessionaire)

Tender (for appointment of concessionaire)

Design (completed after construction started on initial work packages)

QUALITY COST Tender Documents (for work packages)

Construction

Figure 12 Contract Strategy Options

63 15 February 2011

6.6 Ancillary contracts

6.6.1 Introduction

The importance of early identification of ancillary contracts required to address interface issues is that the Procuring Authority must factor time and/ or resources into its project plan to enable all relevant agreements to be developed, negotiated, agreed and put in place in a timely manner.

Ancillary agreements are the agreements, in addition to the main procurement agreement for delivering HSR, that either the Procuring Authority and/or the delivery company will have to enter into for the purpose of assisting in delivering HSR and operating it within the wider Norwegian rail network.

The number of ancillary agreements that would need to be put in place will differ with the Scenario. For instance Scenarios B and C may require a significant amount of integration with the existing network and therefore may require many ancillary agreements. The number of agreements will also be affected by the chosen contract strategy and the complexity of the delivery vehicle – a specially formed delivery company will likely require more new agreements to be put in place than an existing company.

These additional contracts may fall into the following broad categories:  Funding/finance related agreements  Property/land related ancillary agreements  Operational and construction ancillary agreements

6.6.2 Funding/finance related agreements

These include:  Parent company guarantees or sponsor support agreements given by the shareholders of the delivery company to its providers of finance.  Financiers’ Direct agreements i.e. to address financiers’ rights in the event of termination of the delivery company.  Security and/or step-in rights agreement between a delivery company and its financiers’ in the event of financial failure of the delivery company.  Open book agreement between the delivery company and its financiers’ technical advisors. This gives the funders’ technical advisers access to undertake due diligence.

64 15 February 2011

 Shareholder agreements in order to form the company if the delivery company is set up solely to deliver the facility.  Agreements with secondary funders’ e.g. private sector developers setting out their rights and what they will share.  Planning Agreements if it is decided that developers benefitting from HSR must make some form of financial contribution to the project.

6.6.3 Operational ancillary agreements

The principal operational-related agreements are:  Safety agreements between the Procuring Authority, delivery company and other train operating companies to set out obligations surrounding the safe delivery of the new HSR infrastructure.  Co-operation agreements amongst the different delivery companies on the HSR and the existing network to enable them to work together, especially where there is an interface between their respective scopes.  Agreements for access at depots for maintenance of equipment and storage of materials and at stations and on the existing network to be able to carry out construction works and to operate the service.  Asset licensing or asset-sharing agreements in the event of a joint venture, depending on whether the contributing party wishes to continue utilising the asset.  Agreed procedures between a joint venture and the contributing party for dealing with product liability claims. The contributing party may require the joint venture to take responsibility for product liability claims.  Agreed procedures between a joint venture and the contributing party relating to intellectual property rights’ infringements. The contributing party may seek to retain intellectual property rights.  Agreements as necessary to enable participation in timetabling discussions, ticketing and retailing initiatives and sharing of revenue.  Agreements for the provision of traction power if this is required.  Ancillary service agreements between the Procuring Authority and the delivery companies to set out who is responsible for the supply of ancillary services (e.g. accounting) and also to set out the terms on which those services will be provided.  Interface agreements between the procuring authority and the sub-contractors. This will regulate the way in which sub-contractors are able to recover sums from each other for any liabilities incurred.

65 15 February 2011

 Network benefits agreements – the parties may need to sign up to benefits agreements in place that affect the way the rail network is operated. For example, these could relate to security procedures required by the Railway Inspectorate or a centralised system for ticketing and sharing revenue.

6.6.4 Property related ancillary agreements

There will likely a broad range of property related agreements pertaining both to the purchase of land and buildings and to enable access over land both during the construction and operating phases. These include:  Land purchase agreements in order to secure land for the rail network.  Property assets agreement e.g. assignment of lease agreements with third parties from the procuring authority to delivery companies e.g. stations owned by municipalities, airports etc  Asset protection/ asset access agreements between the contractors and NRA, possibly NSB and third parties in which the owner of an asset/ property allows a contractor to work on it subject to indemnities.  Agreements relating to the re-routing of roads and utilities.

6.7 Encouraging Innovation

6.7.1 Issue

This study was specifically requested to consider how certain issues surrounding innovation might be addressed in the contractual considerations surrounding HSR. This is an important issue for an HSR because of the length of time it will take to build, the life of the assets and the pace of technological change in the sector.

In defining the function of a high speed rail programme it is important to consider a number of questions surrounding innovation:  How to get what is required? Are bidders/ contractors to innovate and, if so, how to encourage them to do so? How much innovation is sought?  How to leave room for innovation and change over the life of the delivery of a contract?  Compliance with standards.

66 15 February 2011

The key conclusion from the following discussion is not to be over-prescriptive and to allow, where possible, the designers and constructors to determine the most appropriate technologies and processes to use in delivering HSR.

6.7.2 Issue - Are bidders/contractors to innovate?

Consideration needs to be given to whether to allow bidders/ contractors to innovate – come up with their own solutions and, potentially, change their methodology for delivery over the life of a project. This is generally not a binary decision – to innovate or not to innovate – but one of extent of innovation. It is an important issue because whilst on the one hand innovation has the potential to deliver best in class solutions, it also brings uncertainty about whether the innovation will, itself, work and whether other parts of the rail system will interface appropriately with the innovative approach. Some procurements have addressed this issue by requiring that technology or specific solutions must have been in existence/ in use for minimum periods.

In most high speed rail procurements potential contractors have considerably more relevant and up to date expertise than the procuring authority and it makes sense both from an efficiency and value for money perspective to leverage this know how. However, there may be instances, for example where infrastructure has to be closely integrated with existing infrastructure, where innovation would introduce unnecessary and unwelcome complications. Similarly, there may be aspects of the physical characteristics of the land or the climate in Norway which are best met with tried and tested solutions.

The degree of innovation sought needs to be properly addressed as part of setting the objectives for the programme. Many rail contracts will encourage a certain amount of innovation but clearly define the limits because of:  the interface issues inherent in anything but a new, dedicated high speed rail network; and  the long life and cost of rail infrastructure and rolling stock – mistakes will be expensive to rectify or will have to be lived with for a long time.

Equally importantly, where a contractor is deciding on the level of innovation to introduce he will decide this based on commercial considerations and the extent of risk this brings to him being able to meet his contractual obligations.

67 15 February 2011

6.7.3 Issue - How to leave room for innovation over the life of a contract?

The scenarios under which innovation might be encouraged or denied over the life of a contract are similar to those for the initial solution. However, when looking at long term construction contracts it should be recognised that responding to lessons learned in the early stages of construction may have significant benefits for the overall project e.g. more efficient working to deliver better value for money, changes to approach to improve deliverability or timeliness. Given the potential benefits of allowing scope for innovation it is always important to consider how to specify requirements in a manner that leaves scope to make changes to the approach and put into practice lessons learned.

6.7.4 Options

There is a range of options whereby the procuring entity can specify its requirements. These are relevant to any requirements which are to be procured, not just deliverables that might be the subject of innovation. The principal options are to tender for and specify in the relevant contract(s):  Inputs: the traditional approach when procuring rail-related infrastructure is that experts have defined exactly what is required and then contracts have been drawn up setting out clearly those inputs. The contractor then delivers those inputs without any responsibility for achieving the end objective. Examples of input specifications are:  The type of signalling system to be used, possibly even including the supplier  The specification of the track and sleepers to be used  Detailed designs for bridges or other structures that need to be built  Detail of facilities at stations e.g. number of heated waiting areas, ticketing facilities, security provision (number of CCTV cameras, station manning levels etc)  Specifications of maintenance arrangements for rolling stock and depots  Detailed depot designs including the equipment to be provided  The type of train to be used  Outputs: an output specification is one where the outputs of the asset or service are specified but the contractor is free to determine how to construct the asset or organise the service. Examples are:  Journey times between points on the route taking account of speed, acceleration and deceleration capabilities  Capacity e.g. ability to carry x passengers per hour between two points  Availability of infrastructure e.g. average train miles between delays to a service caused by an infrastructure failure  Energy consumption of rolling stock  Capacity (i.e. number of passengers to be carried) of trains  Maximum queuing times to buy tickets  Reliability of rolling stock or overall service e.g. minimum average distance between breakdowns in service or level of delay experienced by passengers. This has been

68 15 February 2011

specified in connection with both the Inter City Express and Thameslink rolling stock procurements that are ongoing in the UK  Several outputs could be included in a specification  Outcomes: an outcome specification is one where the impact of the outputs is what is specified. In health, for example, an outcome might be specified as a reduction in mortality rates relating to a disease or condition. The health service provider is encouraged to use his expertise to decide the best approach (e.g. prevention, earlier diagnosis or better treatment) to achieve that outcome. Typically there will also be an outcome measure around patient or customer satisfaction to mitigate against unacceptable practices. A similar approach could be used on the railways with measures around passenger satisfaction (part of the performance of the operator of the Southern rail franchise in the UK is measured around passenger satisfaction surveys) or, in the case of Norway, maybe some measure of passenger numbers e.g. modal shift from air to rail or from road to rail.

It may be appropriate to use a combination of these specifications when procuring HSR. For example, where track and signalling systems have to tie in to the existing network it may be appropriate to specify inputs. However, where a new, largely independent line is being built (Scenario D), it will likely be more appropriate to specify outputs or outcomes.

6.7.5 Advantages and disadvantages

The tables below summarise the principal advantages and disadvantages of the three approaches to specifying requirements:

Inputs Advantages Disadvantages  Simple and well understood approach  Limits the choice of technologies and  Should ensure proper integration with the processes which may constrain use of best existing network practice and innovation  Relatively easy to bid against – requirements  Limits the choice of technologies and should be clear processes which could adversely impact value  Highly specified requirements should be for money relatively easy to evaluate – bids easy to  If inputs are not correctly specified may not compare deliver the results sought and contractor is  Relatively easy to measure which inputs have not incentivised to raise concerns been delivered/ achieved  If inputs are incorrectly specified can be costly  Relatively easy to link payments to delivery of to negotiate variations inputs/ milestones

69 15 February 2011

The input approach traditionally tends to be favoured by the rail industry, possibly because many procurements are led by engineers who tend to favour detailed specifications. Input specifications may be appropriate for HSR where the new railway has to interface with existing infrastructure and there is a need to ensure that systems (e.g. communications or signalling) are compatible.

Outputs Advantages Disadvantages  Generally well understood  Can be more difficult to evaluate bids as  Should be relatively easy to define clear different bidders’ solutions may be difficult to requirements in terms of outputs compare  The delivery of outputs should generally be  May be difficult to get comfortable that a easy to measure bidder’s proposal will deliver the outputs  Allows for innovation and application of required expertise by the contractor  Possibility that delivery of outputs in practice are difficult to measure,  If outputs are not delivered, possibility that contractor can blame other parties e.g. speed of a train is the fault of the infrastructure not the train design, leading to lengthy disputes

Large infrastructure procurements are tending to move towards output specifications because this opens up competition amongst contractors and allows them to use their experience and introduce best practice in their approach. For HSR, the specification of lines (track and structures), rolling stock and stations would likely be specified in output terms to realize best value for money. However, certain aspects of any of these items might need to be specified in input terms in order to minimize interface risk.

70 15 February 2011

Outcomes Advantages Disadvantages  Probably best reflects what the programme is  Can be more difficult to evaluate bids as intended to achieve different bidders’ solutions may be difficult to  Should be relatively easy to define compare requirements in terms of outcomes  Many desired outcomes are not directly  Together with competitive bidding process, controllable by bidders e.g. economic encourages value for money solution regeneration of the area around a station, so  Reduces the number of measures private sector may not be able to manage the  Encourages innovation and application of degree of risk which is transferred by this expertise approach  Can increase the number of potential bidders  May be difficult to get comfortable that each because less likely that bidders will be bidder’s proposals will deliver the outcomes excluded for technical reasons required  Possibility that delivery of outcomes in practice are difficult to measure,  If outcomes are not delivered, possibility that contractor can blame other parties  May be difficult for another contractor to pick up the work if the original contractor fails  When to pay and when to measure that what was contracted has been delivered?

Outcomes are probably the best way of incentivizing contractors to think about how to deliver the key objectives of HSR. However, as noted they can be very difficult to measure and contractors will be reluctant to accept the risk of delivery unless there is a clear linkage between their responsibilities and the factors they can influence and the delivery of the required outcome. The standard of service delivered, measured in terms of customer satisfaction, or market share of long distance journeys may be output measures that can be set for the operator of HSR services. It may also be appropriate in a concession-type structure where the concessionaire is responsible for building and operating HSR services.

6.7.6 Compliance with standards

In the UK and Italy, contractors to the rail industry have had the flexibility to develop their own solutions provided that they have been compliant with local industry standards. However, standards can be unduly prescriptive often because they were drafted for a particular historical set of circumstances and can therefore result in a project being effectively input-specified despite intentions to focus on outputs. In the UK there is some discussion over whether local standards are too prescriptive and stifle innovation and this will be an issue to consider in delivering HSR in Norway. In the case of the London

71 15 February 2011 underground PPP, a specific exercise was carried out to review all standards and abolish or restrict those which were no longer necessary or useful.

6.8 Responsibility for delivery

6.8.1 Issue

One of the key decisions when procuring infrastructure is what responsibilities and risks relating to delivery are to be transferred to the contractor or to other third parties. This decision has significant implications for a range of activities including:  the complexity and timescales of the procurement;  the contractual documentation to be provided;  the specifications to be developed and other information to be provided to bidders;  bidders’ pricing of their responses;  the evaluation of bids; and  how the Procuring Authority engages and manages the contractor after contracts have been signed.

A diagram of the principal phases of delivering infrastructure is shown below.

Figure 13 Phases of Work

6.8.2 Options

Either the Procuring Authority or a third party could lead on each of the following phases of activity:  Planning and approvals: this phase of work involves getting all the necessary approvals, planning, environmental, regional licenses etc for the project to be implemented. Based on experience from other major infrastructure projects and the results of the market soundings (see Appendix 3), the risks and uncertainties related to obtaining planning permission and approvals means that third parties would have no appetite for undertaking this work. If they had to do so, it is likely that the third

72 15 February 2011

parties would charge a significant risk premium for such work. This work therefore has to be led by the public sector, probably the Procuring Authority.  Land acquisition and access: this is about procuring all the land that is required for the infrastructure (track, stations and depots) and obtaining permission for access to undertake the construction and maintenance works. The argument surrounding the involvement of third parties is the same as for planning and approvals phase. This work therefore has to be led by the public sector, probably the Procuring Authority.  Design: this phase of work relates to the detailed design of the infrastructure such that orders can be placed for materials and equipment and a detailed plan for the build phase can be developed.  Build: this phase of work relates to the construction of the infrastructure through to its acceptance and dealing with any conditions attaching to the acceptance. This work is likely to have to be undertaken by the private sector because NRA does not have sufficient resources and depth of expertise.  Maintenance: this relates to the ongoing maintenance of the infrastructure such that it is in proper working order and meets availability and reliability requirements.  Operations: this relates to the management of the infrastructure such that services can be delivered to the required standards. It also includes the provision of passenger services on HSR.

The principal risks vary according to the phase of work and need to be considered in determining who should take responsibility for principal activities in a phase of work. They key risks can be summarized as follows:

Planning and approvals  Availability of land  Obtaining consent to use/ access  Obtaining planning permission – process and risk of challenge  Having to make compromises/ do deals to get permission  Timetable  Consistency with design i.e. risk of having to revisit permissions

Land acquisition  Identifying ownership  Willingness to sell  Timetable

73 15 February 2011

 Cost

Design  Cost of design works and final approvals  End design much more expensive to deliver than assumed in business case  Design constraints frustrating delivery or adding to cost  Physical constraints frustrating finalization of design or adding to cost  It may not be possible to build what has been designed

Build  Risk of environmental or heritage finds  Contamination or ground condition  Site health and safety issues  Interface with existing railway during build including access  Diversion of utilities requiring engagement with third parties  Skills shortages  Quality control  Cost control  Commissioning/ acceptance of work

Maintenance  Cost  Access to undertake maintenance  Latent defects in new infrastructure i.e. maintainer having to address build or design problems  Change in specification of what is built  Unexpected interface issues e.g. rolling stock is wearing the track more than anticipated

Operation  Cost  Interface between existing and high speed rail services e.g. scheduling, timetabling, ticket sales  Delivering revenue projections  Infrastructure failures impacting reliability and perception of services  Managing passenger demand

74 15 February 2011

In practice, bespoke solutions have been developed for most complex projects reflecting the specific circumstances of those projects, the skills and resources available to the public sector/ procuring authority and the planned allocation of risk.

6.8.3 Advantages and disadvantages

The principal advantages and disadvantages of the different approaches to allocating responsibility for delivery are summarised below. The issues raised should be considered alongside the discussions on packaging because any of the phases could be combined or let in a single package.

Design – By Public Sector Advantages Disadvantages  Gives the public sector greater control over  The public sector may not have sufficient, what is delivered relevant design expertise and might struggle  May be easier to ensure that new HSR to recruit resource with appropriate infrastructure is compatible with existing experience infrastructure  Does not leverage the skills and expertise of  Public sector can control design compromises the private sector e.g. something that is leading edge against the  Public sector designs are likely to follow the need to control cost ‘safe’ option

Design – By Public Sector engaging an independent designer Advantages Disadvantages  Gives the public sector greater control over  Public sector may struggle to be confident that what is delivered through engaging with the the design is buildable designer and shaping the design  Designer may not be able to address properly  Significantly reduces the requirement for whole life costs and other issues relating to resources and expertise from the public the value for money aspects of the design ’ sector  Independent designer reporting to the public  Can ensure that key interface issues are sector may follow the ‘safe’ option properly addressed  Offers more scope to understand design options and indicative cost to help determine the final design

75 15 February 2011

Design – By Third Party independently or as part of design and build Advantages Disadvantages  Leverages the skills, expertise and experience  Contractor may not correctly interpret the of the private sector public sector’s requirements  Likely to be able to bring prior experience to  Contractor is likely to make design bear to get a better, more efficient design compromises to meet the public sector’s  A private sector contractor also responsible output requirements – the public sector may for construction and maintenance can develop not understand what compromises have been a design that addresses whole life cost issues made  Contractor can be expected to take the risk that his design works

The design activities fit least well with the simple analysis provided in this section. This is because there are likely to be a range of issues where NRA, NSB or other public sector entities have information and insights which are critical to the development of the final design. It is therefore probable that the procurement of design activities will have to enable these parties to input to the design, perhaps by developing a concept specification and a clear description of constraints by working with a third party designer. Once the concept design has been developed it may be appropriate to let the contract(s) for construction under a design and build arrangement or variation thereof.

Build – By Public Sector Advantages Disadvantages  Public sector can build what it wants to the  Limited or no competition which is likely to specification it wants. It can therefore ensure impact value for money that operation and maintenance aspects are  NRA is not resourced to deliver the addressed properly construction of HSR  May make variations easier to incorporate  Public sector contractors unlikely to have the because two faces of the public sector should incentives and skills to deliver cost effective be able to negotiate solutions more efficiently solutions than where the private sector is involved  May be more difficult for a public sector contractor to fill skills gaps from outside of Norway – politics of not using local workers

76 15 February 2011

Build – By Third Party Advantages Disadvantages  Contractor can leverage in skills and  Private sector may lack expertise regarding expertise, subcontracting or forming consortia certain aspects of the railway in Norway e.g. to fill any skills gaps technical requirements or constraints on  Private sector has considerable experience of access over the existing infrastructure building high speed rail infrastructure  Private sector my offer a cheap build solution  Private sector contractors are likely to without consideration of operating and compete aggressively to be awarded build maintenance issues contracts

Operate – By Public Sector Advantages Disadvantages  There is existing service operating expertise at  High speed rail services may require a NSB and infrastructure expertise at NRA different and innovative approach  Enables full co-ordination of timetables,  If undertaken by NSB, high speed rail ticketing, marketing etc across the railway services may not be given the priority they  Reduces interface issues in areas such as the require to make them a success prioritisation of services, agreeing to  If undertaken by NSB, high speed rail services communications and signalling protocols may be a drain on top level management resources at NSB

Operate – By Third Party Advantages Disadvantages  Takes advantage of private sector expertise, in  Can create a range of interface issues between particular in areas such as marketing and any third party operator and NSB and NRA customer experience  If the business performs below expectations  Profit incentive encourages a third party initially a private sector operator might lose operator to invest in and build the business, interest and stop investing including devising innovative ways to attract  Limited control for the public sector over new passengers issues such as fares and ticketing – though  Enables the new high speed rail services to customer demand should be the incentive for establish their own reputation rather than be the private sector operator to get things right closely linked to the reputation of NSB and there is scope for Regulation  May allow competition which should improve customer choice and experience on certain journeys over time

77 15 February 2011

Maintain – By Public Sector Advantages Disadvantages  Work can be closely coordinated with the  If the public sector has not built the work of NRA thereby leveraging know how infrastructure or rolling stock it may not know and efficiencies what maintenance is required  Maintenance assets may be better utilised  Similarly it will not be best placed to know rather than being duplicated how problems should be solved e.g. with design changes or changes to the maintenance plan  If undertaken by NRA, the extra work could stretch existing resources or lead to decision to prioritise high speed rail or the existing network  Harder to transfer risk if construction contractors are not responsible for maintenance

Maintain – By Third Party Advantages Disadvantages  Contractors have considerable experience of  Two contractors on the network (the other maintaining rail infrastructure being NRA on the existing infrastructure)  Where the build work can be packaged with could be difficult to co-ordinate and could the maintenance work so that there is a result in duplication of resources and common contractor this acts as an incentive expertise to address properly whole life costs  Efforts by two maintainers to recruit could  Reflecting its knowledge of the infrastructure, lead to cost inflation the contractor should be able to develop an optimised maintenance programme

6.9 Packaging and Procurement Process

6.9.1 Introduction

The Packaging and Procurement Process refers to the planning and execution of the procurement required to deliver HSR in a co-ordinated and holistic manner. The need for a clear Procurement Process reflects the potential size and complexity of delivering HSR. As a result there will be a need to award and manage multiple contracts to ensure that they support each other effectively rather than being a distraction or source of competition for scarce resource.

78 15 February 2011

6.9.2 Packaging

Packaging refers to the way that works might be assembled for contracting purposes. It therefore encompasses two issues:  Buying more than one component of work (see below) in a single contract.  Breaking up activities, which might normally be undertaken under a single contract, into multiple contracts. This might occur where a single contract would be too costly or too resource intensive for a single contractor to undertake.

The main components of work that would expect to be found when procuring railway services and assets are:

Planning, approvals Design Build Operationsand and land acquisition maintenance  Preliminary land  Concept  Site investigation Maintenance assessment design  Advanced/  Infrastructure  Define route  Detailed preparatory works  Signalling and  Development of design  Service diversions communications requirements e.g.  Re-routing  Project management systems single or double track, of utilities  Civils/ structures  Stations passing loops  Tunnelling  Depots  Dealing with the  Track interface with the Operations existing railway  Signalling  Commissioning network  Rolling stock  Stations  Infrastructure  Depots  Signalling and communications  Power systems services  Communications  Train Services  Handover  Stations  Depots

These activities can be put together in a large range of combinations to facilitate issues such as work planning, access and technical dependencies. For example:  Signalling systems might be combined with rolling stock to ensure that the trains work effectively with the infrastructure. In Taiwan the signalling systems were European but a late decision was made to procure the rolling stock from Japan. This led to problems at the interface between the trains and the track and ultimately this contributed to delays in the commencement of services47.  Advanced or preparatory works might be combined with diversions of utilities (e.g. gas, electricity, water or sewerage) or other infrastructure such as roads or the existing infrastructure because they are likely to require similar work in similar areas.

47 Source: Kyodo News 22 December 2004, Taipei Times 10 August 2005 and Taipei Times 11 March 2003

79 15 February 2011

 Rolling stock maintenance might be combined with rolling stock manufacture to incentivise the contractor to have regard to whole life cost issues and design a train that is easy to maintain.  Track might be contracted with structures (e.g. construction of bridges, tunnels, embankments and cuttings) because it might be more efficient to lay track immediately after the structures are completed. This approach would also address the interface risk that the track cannot be laid because the contractor is arguing that the civils have not been completed to a high enough standard.  It may be desirable to package extremely complex or risky sections (e.g. particularly deep fjord crossings or complex tunnelling) separately so that the risk associated with delivering these components of work does not contaminate a much larger contract.  The existence of specific constraints may limit the number of packages with a similar work scope so components may be grouped together for practical reasons e.g. the same installer for several systems (which may be treated as a nominated/required sub-contractor).  Some components of work may be packaged together or separately because they are best carried out in certain climatic conditions or at certain times in the programme e.g. stressing rail heads may be best done during the spring when the temperature is not too extreme and the summer months may be more appropriate for testing signalling systems.

Decisions surrounding packaging also need to take into account:  Timing: if the Procuring Authority decides to procure design and build as a package then the contractor can determine how much of the design work needs to be completed before starting to build. However, if they are procured separately the Procuring Authority will have to make this decision and will be at risk that, if the build starts too early and there are subsequent changes to the design, this could lead to delays or increased costs.  Competition: in any major procurement it is crucial to maintain competition, If there are limited suppliers for a particular activity (e.g. two suppliers of only of appropriate signalling systems) but the procuring authority wishes to let a package of work which includes signalling as one of its activities, this means that there can only be two consortia formed to bid for that work. On Crossrail in the UK tunnelling has been kept separate from other works because of the limited number of suppliers.

Particular issues relating to the introduction of HSR are likely to be:  Planning the route and obtaining planning permission

80 15 February 2011

 Land acquisition  Diversion of utilities in the major towns and cities HSR connects with  The volume of tunnelling and the lead time for specialist equipment e.g. tunnel boring machines and specialist resource  The likely volume of bridges to be built  Construction resources – expertise, equipment and labourers

A short review of package combinations that have been developed on specific contracts is provided in section 6.9.5.

6.9.3 Single or multiple contracts

The reason why what might normally be a single contract may be broken into several packages is the potential scale and complexity of delivering HSR. Contractors recognise the risk of any major building contract. They will therefore take a view on how much exposure their organisation can take to a particular project. This will manifest itself in a maximum value of work (across several contracts) it is prepared to be contracted to deliver at any point in time. It may also manifest itself in the maximum value of a single contract. The same principle is relevant in thinking about the maximum exposure the Procuring Authority would want to any single supplier.

Based on the market soundings and practical experience from other major infrastructure projects the maximum value of a single contract is probably around € 1 billion, although contracts let on both Italy’s TAV and the French TGV have been bigger than this. It should also be recognised that there will be a limited number of contractors prepared to take on this level of exposure and there might well be resourcing constraints. Therefore, in order to maximise competition, it may be necessary to create smaller packages with a maximum value of around € 500 million. As experience builds, together with confidence in the project and the contracting strategies, it is quite possible that it will become practical to procure larger contracts.

6.9.3.1Options

Packaging and Procurement can be addressed in a number of ways. The main options include:  Single contract: this option envisages creating one very large package for the whole of the procurement of HSR in Norway. In practice this could be one package per Corridor or even one package for each major, discrete piece of infrastructure on a

81 15 February 2011

Corridor. The size and complexity of the contract will likely make the formation of consortia to bid a necessity.  Vertical packages: this would involve letting contracts for the provision of parts of infrastructure where all the components of work required to deliver that piece of infrastructure are contained in a single contract. This could involve breaking the project into a number of segments of line and then letting each of the segments at the same time. In practice, rolling stock and operations would not fit this approach because having separate suppliers of rolling stock and operations for each segment would not be practical.  Horizontal packages: this would involve letting contracts for each component of work for the length of a corridor or the whole system i.e. there would be one contract for signalling systems, one contract for civils, one contract for track and so on.  Bespoke packages: this is the solution that is adopted on many major infrastructure projects. It involves combining activities in packages or breaking them out as individual components as required within a corridor or system. In practice the result could be a mixture of vertical and horizontal packages with some discrete packages (individual components) e.g. operations.  Pilot project: this option recognises that there may be many lessons to be learned from the procurement of HSR in Norway. It therefore envisages that contracts for a discrete piece of infrastructure are let and built so that lessons can be learned before a more extensive procurement is rolled out.

An illustration of how these approaches might be applied to deliver HSR between two cities is shown in the chart below.

82 15 February 2011

Operation of services including stations

Design, build and maintain new high speed rolling stock

Design & build Design & build Design & build Station A Station B Station C

Design, build track, signalling and communications infrastructure and maintain all infrastructure

Design & build structures (bridges, Design & build structures (bridges, viaducts) viaducts)

Design & build tunnels Design & build tunnels Design & build tunnels

Design & build embankments and cuttings and lay ballast

Concept design

Programme management thought to acceptance/commissioning

Origin Destination

Figure 14 Application of different approaches to deliver HSR between two geographical points 6.9.4 Advantages and disadvantages

The principal advantages and disadvantages of implementing the main options for procuring contractors are outlined below:

Single contract Advantages Disadvantages  Simple for the Procuring Authority to let  Requirements may be so great that contract  Clear allocation of risk – all interface risk value or risk transfer is too large for some or taken by the contractor all potential contractors  Allows contractor to determine the best way  Requires consortia to be formed which can to address and manage interface risk between result in sub optimal combinations of the different activities and subcontractors contractors  Consortia may fail to form or may not work together effectively  No of potential bidders is limited by the lowest number of contractors capable of delivering each key piece of work i.e. if only three contractors are capable of delivering required tunnelling skills, only three consortia can bid  Can be difficult for the Procuring Authority to see how risk is planned to be, and is actually, managed

83 15 February 2011

 Procuring Authority not required to plan the procurement in as much detail as the multiple contract options. This could lead to issues being overlooked/ not being properly addressed in the procurement  The larger the contract the greater the scope for material mis-costings

Vertical packages (contracts for segments of lines) Advantages Disadvantages Advantages are similar to the single contract Disadvantages are largely the same as for the approach plus: single contract approach  Allows the procurement to be broken into more manageable chunks  Majority of interface risk still managed by the contractor – procuring authority just has to manage the risks associated with joining the packages together

Horizontal packages (Contracts for components for the whole route) Advantages Disadvantages  Allows the procurement to be broken into  Horizontal packages could still be too big and more manageable chunks may need to be further subdivided  Allows for greater tailoring of the  Interface risk increased significantly putting procurement burden on the procuring authority to manage  Number of bidders not constrained by the this – contractors may look for gaps to argue minimum number of specialist contractors for for increased prices any key part of the package i.e. that  Procuring Authority will need significant component of work can be let separately and resource and skills to manage the interface competed for by the small number of risks specialist contractors

84 15 February 2011

Bespoke packages Advantages Disadvantages  Allows for a tailored solution which should  Could be expensive to develop tailored enable optimised management of interface solutions for each piece of infrastructure risk  Bidders and procurers will not be able to build  Scope to maximise competition where familiarity with the approach as each set of appropriate tailored contracts will need to be understood.  Packages can be tailored to the specific This could lead to different perceptions of risk characteristics of each piece of work – letting transfer and adversely impact value for money a contract to build 50km of railway of which 80% is in tunnels may require a different approach to 50km of railway which is to be built in a level, open environment

Pilot Advantages Disadvantages  Provides a good opportunity to learn lessons  Likely to delay the start of delivery of the  Assuming that the pilot project is relatively whole project small and discrete, offers opportunity to be  If there are unique aspects of the pilot chosen innovative and test what is possible then lessons learned may not be applicable  Contractors likely to bid keenly and deliver  The pilot project may reveal problems with an properly because of scope to gain insight on approach but not provide the solution future contract lets

In practice the introduction of HSR will likely have to be phased because of financial and resource constraints. Early projects should be viewed as pilots from which lessons can be learned to improve the contracting for work on further Corridors.

6.9.5 Practical examples

This section outlines some examples of issues that influenced the packaging decision on some recent large scale capital projects.

6.9.5.1CTRL

The CTRL project to deliver a high speed line linking the Channel Tunnel to London (now known as HS1) was originally to be built as a privately financed and funded project and was tendered and awarded as a concession to a private consortium. As a result of revenue shortfalls the project has had to be refinanced on two occasions in 1998 and 2002 with the UK Government providing increasingly significant support to enable the project delivery company, LCR, to raise private finance such that in the end, it effectively

85 15 February 2011 transferred into the public sector and the contract type used was akin to a Contract with Specialist Management as described in section 6.5.1.4. In late 2010, once the project was fully operational, a 30 year concession to operate the completed infrastructure was let for about £2.1 billion.

After restructuring, the overriding goal , as far as packaging was concerned, was to get teams working together for a common goal rather than across interfaces as is the norm on major infrastructure projects where there are a large number of suppliers. Primary responsibility for supervising the integration of project teams throughout the programme, handling key interfaces and managing the client’s interests rested with the procuring authority, LCR. Rather than have each system supplier install their own equipment taking up the scarce resource of space and creating an integration risk, a single system wide installer was appointed.

The work was packaged into the categories shown below from which individual contracts were let to suppliers. All contracts had clauses which provided that work scope could be removed and given to another supplier in the event of none or poor performance.

The tunnelling contractors were procured separately, reflecting the likelihood that if let as a single contract this would be too big for any single contractor to respond to. However, the contractors were asked to form a tunnelling alliance with each other to enable the sharing of resources and the use of common plant. In addition, the procuring authority procured all assets such as the tunnel boring machine (‘TBM’) because it had purchasing power and could take the initiative on long lead items in the certain knowledge that it would be letting contracts in due course.

Generally the approaches on the CTRL project were seen as a success in terms of delivering the project. Some commentators have not held this view because its finances had to be re-structured. However the project participants’ view is that three external events that had an impact on the financing of the project:  In 1995 there was a fire in the Channel Tunnel which stopped Eurostar services for three months. This was not long after the service had started; it was an unfortunate external effect which impacted on the project’s privatisation.  The birth of the EasyJet airline and low cost flying had not been anticipated. This event had a detrimental effect on ridership revenue forecasts that formed the business case for CTRL project.

86 15 February 2011

 The failure of Railtrack, which was supposed to purchase Section 1 and have an option on procuring Section 2. Railtrack was eventually taken into administration in October 2001 which meant it could not fulfil its obligations to buy the railway.

The CTRL project was very successful in packaging the work required and managing the interface risks although the funding structure did not work so well. However the project reported two instances where the strategy for packaging could have been better:  The interfaces between the stations and track packages could have worked better with two different contractors trying to integrate the two components of the network.  Problems were also experienced at the entrance to St Pancras station where there was an interface between French and English signalling systems. In retrospect, St Pancras was not considered the best geographical location for this interface.

6.9.5.2 Terminal 5

The procuring authority, British Airports Authority PLC (“BAA”), divided the programme into 18 projects ranging in size from £10m to £200m. This was then split further into 150 sub-projects which were split into around 1000 work packages. The suppliers were engaged as and when their skills were needed. BAA accepted all interface risk on the procurement and instead focused on incentivising the suppliers to work together. BAA chose to adopt a framework contract strategy which encouraged contractors to view BAA as a long term client and so were incentivised to deliver their obligations in the knowledge that it was a long term relationship rather than a short term contract. BAA also procured insurance /indemnity cover (against financial risk) for the project as a whole rather than the usual scenario of each supplier providing its own insurance. Contractors were encouraged to pool resources and buy materials and equipment together to buy at a discount.

BAA was prepared to adopt this approach because the most important objectives were on time delivery of the terminal and exposing contractors only to those risks they could manage thereby minimising the charging of risk premia.

The contractual approach on Terminal 5 is regarded within the industry as a pioneering approach to contracting by a client body. To many it makes sense that the client chose not to pass on risk to the contractors because the client eventually in one way or another pays for risk that is passed on to the contractor. BAA’s philosophy was that if that risk was passed on, the contract became confrontational and the timetable would be put at risk,

87 15 February 2011 with contractors motivated to manage their liability rather than providing solutions to problems.

Terminal 5 is generally seen as a successful project because it was completed in time and to budget. The planning, development, design, construction and commissioning were all delivered successfully. However, there were well documented and publicised problems with the baggage handling systems at the handover stage due to insufficient live testing of the system.

6.9.5.3 Crossrail

A separate, dedicated procuring authority has been established for this project which has an estimated cost of about £16 billion. The procuring authority has also chosen to manage the programme itself and accept the key risk, given the extensive tunnelling and underground structural work, of unforeseen ground conditions. This is reflected in its packaging of the works, where it has divided this project, including 21 km of new tunnels under central London, into 60 tier 1 (i.e. directly with the procuring authority) packages of work with principal suppliers. The following types of activity have tended to be grouped together in packages:  Civil engineering works packages including tunnels, portals and shaft works packages  Civil engineering station works packages including piling, diaphragm walling, ticket halls, mechanical and electrical, fit-out requirements and urban landscaping  Railway systems works  Rolling stock, depot and maintenance  Logistics including materials transportation and traffic signage

6.9.5.4 Gautrain

On Gautrain, in South Africa, the desire to transfer interfaces risks to the delivery company was one of the drivers for the procurement strategy, which was a concession agreement to design, build and operate the Gautrain network. This included designing and building the civil engineering structures, laying the track, building various stations, design and manufacturing the trains and all associated systems, culminating in commissioning and operating the network.

The first phase of the Gautrain project was delivered on 8 June 2010 in time for the 2010 FIFA 2010 Soccer World Cup. Phase 2 is due for completion in early 2011.

88 15 February 2011

In some cases work scope may be packaged in order to deliver or realise certain project goals or benefits. That benefit may rest outside normal project goals and may be a benefit to the wider environment in which the project sits. In South Africa, apart from satisfying a transportation demand, Gautrain had other goals including economic growth, local & foreign Investment and job creation. Consequently bidders were encouraged to employ local people and use materials from local suppliers and this was reflected in the way that all work components were let e.g. the Black economic-empowerment shareholder in the Bombela Concession Company, the Strategic Partners Group (SPG), trained and employed local resources.

6.10Approach to whole life and whole system cost

6.10.1 Introduction

This section considers how whole life costs might be addressed when contracting to procure major infrastructure. If whole life costs are managed, there is an implicit assumption that performance of the system and assets is being managed for the whole life also.

Consideration should also be given to the issue of whole system costs i.e. the impact on the whole rail network of the procurement. This issue is addressed at the end of the section.

6.10.2 Issue

Whole life costs comprise the costs of using an asset for the whole of its life. Whole life costs therefore include all relevant construction costs, maintenance costs over the life of an asset, replacement or refurbishment costs of components if required and costs associated with decommissioning or removing the asset.

Owing to the extended life and hard use of rail infrastructure assets, it is often the case that maintenance costs can be as great as the original construction costs. It is therefore necessary to take account of maintenance costs in developing a business case and deciding whether or not to make an investment in rail infrastructure. Having decided to make the investment it is important that all steps involved in delivering that investment underpin the optimisation of whole life costs.

89 15 February 2011

When assessing maintenance costs it is important that the maintenance provided for is adequate to ensure that the infrastructure delivers the required levels of performance. This helps to address the risk that a contractor offers a low cost, low maintenance solution that cannot deliver required levels of performance in practice.

Decommissioning costs may not be significant in the rail industry where the general trend is to refurbish and extend the life of the relevant asset, but in the power generation sector, for example, decommissioning is a very important issue when considering the use of nuclear power. In rail, one-off renewal and refurbishment costs may be significant as different components have different lives.

6.10.3 Options

There are a number of types of contract that can be used for capturing whole life costs in evaluating bids and subsequently contracting for the delivery of the asset and provision of maintenance. These include the following contract types:  Design, construction and maintenance for the whole life of the asset.  Design construction and maintenance for a defined period - a maintenance period which is for a shorter period but sufficient to assess the costs of maintenance, say 10 – 15 years.  Design and construction only: bidders are required to supply a detailed, costed maintenance plan and the procuring authority’s advisors assess the adequacy of those maintenance costs. The constructor of the asset is not automatically contracted to maintain the asset though it could tender for such work in competition with other maintainers. A variation on this would be for the procuring authority’s technical advisors (or NRA in the case of a project in Norway) to develop or adapt a base maintenance plan based on bidders’ solutions. It is not unusual for maintenance plans to be developed by the procuring authority as part of developing a specification. On the Norwegian rail infrastructure today, NRA does not construct significant new infrastructure but it maintains it.  Construction only: based on national/ international standards and experience, specifying the design life of the infrastructure to be consistent with infrastructure norms for high speed infrastructure. Under this approach it may be possible to assess the maintenance costs based on the known maintenance costs of the existing, comparable infrastructure.

90 15 February 2011

In each case the evaluation of bids should take account of the whole life costs, even though these are not all bid by bidders and bidders may therefore not be on risk for ensuring performance, depending on which type of contract is used.

6.10.4 Advantages and disadvantages

The advantages and disadvantages of the four approaches outlined above can be summarised as follows:

Design, construction and maintenance for whole life Advantages Disadvantages  Captures and contracts whole life cost  Bidders will likely build in a significant risk  Since constructor has to deliver maintenance premium relating to contracting to maintain it is incentivised to optimise construction and the asset over a long period of time at a fixed maintenance costs together i.e. not to price minimise construction costs if this will result  It is likely there will be complex mechanisms in higher whole life costs to determine future maintenance or  Bids relatively easy to compare availability payments (indexation,  Creates opportunities to pay for the benchmarking, market testing etc) reflecting construction over time on the basis of outputs the length of the maintenance contract. received through use of a concession and an Such mechanisms may incorporate elements availability charge which are very similar to renegotiating  Part of the payment stream could be made maintenance costs i.e. the end result is not a conditional on the availability of the fixing of maintenance costs infrastructure  Fixing maintenance costs and re-pricing  Incentivises efficiency improvements over the mechanisms up front can present barriers to life of the contract (which should be reflected introducing new approaches and techniques in the bid price) and realising and sharing efficiencies over the life of the asset  Fixing maintenance costs means there is no opportunity to take advantage of changes in commodity prices  If the maintenance is not being done properly it may be complicated and costly to remove the maintainer  The incumbent infrastructure operator may be better placed to undertake the maintenance or the manufacturer may be a higher cost maintainer  The operator/owner may become too dependent on the supplier

The approach discussed above may work much better for simple pieces of infrastructure employing tried and tested technology where the maintenance costs can be projected with

91 15 February 2011 some certainty or long life infrastructure, like tunnels, which require relatively little maintenance.

Design construction and maintenance for defined period Advantages Disadvantages  Provided the period is of appropriate length,  The principal disadvantages are the same as this approach should enable a good estimate for design, construction and maintenance for of whole life costs to be made the whole life of the asset  Encourages the bidder to make a proper  May be less effective than whole life assessment of the trade off between construction and maintenance costs  Bids should still be relatively easy to compare although there is increased potential for ‘gaming’ e.g. designing infrastructure so that major works occur just outside the maintenance contract period  The shorter period of maintenance should enable the mechanisms for updating maintenance costs to be simplified  Creates opportunities to pay for the construction over time through use of a concession and an availability charge  Part of the payment stream could be made conditional on the availability of the infrastructure  Lower risk premium as contractor does not have to take risk on the cost of mid-life refurbishments which are difficult to prices because they are so far into the future

Design and construction only Advantages Disadvantages  Clarity of design and construction costs  Unlikely to encourage bidder to make a  No maintenance risk premium will be built in proper assessment of the trade off between  Gives freedom to compete the maintenance maintenance and construction costs contract and the constructor could bid for  Creates an interface risk between construction such a contract and maintenance  Gives freedom to let maintenance contracts  Highly dependent on ability of advisors to for whatever period is appropriate and to assess the maintenance costs proposed by the break up maintenance activities as bidder appropriate  Separating construction and maintenance  Some of the benefits of contracting may result in an increase in costs because the maintenance with construction can be maintainer was not involved in the achieved through manufacturer warranties construction of the assets  Allowing the constructor to bid for the

92 15 February 2011

maintenance contract sounds attractive but may put off other bidders for the maintenance contract i.e. undermines the competitive process  Where a constructor does not maintain an asset this may limit the warranties the constructor is prepared to give for the work undertaken.

It may often be necessary to separate aspects of maintenance activities. This can occur where there is significant overlap with the existing network, particular activities are capital intensive or require specialised equipment and the incumbent maintainer of the existing network is better placed to do such work.

Construction only Advantages Disadvantages  Maintenance issues can be addressed in the As for Design and Construction, plus: design of the infrastructure and through  Removes the need for the constructor to give contractor warranties careful consideration to designing and  Clarity of construction costs building the infrastructure in a way that is  Advisers should be able to make a good easy to maintain e.g. accessibility of key assessment of maintenance costs where they components. can be based on actual experience  This approach addresses a scenario where the new infrastructure is extensively mixed up with the existing infrastructure, interface issues are critical and it is not practical or value for money for the constructor to maintain the new infrastructure

6.10.5 Whole system costs

Whole system costs can be an important issue when introducing new assets to operate on an existing network or even where new rolling stock is being procured to operate on a new network. This is because the use of one asset on a second asset could have implications for the cost of operating or maintaining that second asset. For example, in the UK there has been a trend towards better built, more reliable, more technically flexible rolling stock to be able to provide a better service to customers. Many of the recent procurements have addressed whole life cost issues but one of the consequences has been increasingly heavier rolling stock. This has had an adverse impact on energy consumption and the wear and tear on the track.

93 15 February 2011

As a consequence of the growing recognition of the importance of looking at whole system costs, the evaluation of a number of recent rolling stock procurements has introduced formula-based measures of key whole system issues such as energy consumption and wear and tear on the network. These measures have been added to the procurement cost to arrive at a total cost which has formed part of the evaluation.

6.11 Approach to risk allocation

6.11.1 Issue

The correct allocation of risk in any procurement is extremely important because it will be crucial to delivering a best value for money solution. Moreover an inappropriate allocation of risk could result in a failure to attract bids and achieve effective competition amongst contractors even for a simple build project.

Conventional wisdom is that risk should be allocated, through contractual mechanisms or formal agreements, to the party best able to manage the risk. A wide range of parties may be capable of managing risk during the delivery of HSR. These include:  MTC  Ministry of Finance  NRA  NSB  Local or municipal authorities  The Procuring Authority  Utilities providers  Specialist delivery partners  Contractors  Customers

The decision as to who is best placed to manage the risk is often one of judgement – hence different solutions in different high speed rail procurements. For example, it is generally felt that the procuring authority should take the risk of obtaining planning permission because the process is time consuming, costly, may be subject to political considerations and might ultimately be facilitated with legislation. However, if the contractor is to be responsible for the design of the solution it may be felt that since the design will influence obtaining permission the contractor should have to design with this in mind and therefore seek planning permission himself.

94 15 February 2011

Contractors are used to assessing the riskiness of any project and will generally address such risk by building in (costing) work to manage and mitigate the risk and risk premia where they are uncertain that they can contain the risk. However, on projects the scale of a high speed railway the value of certain risks (either due to the scale of the project or the inherent uncertainty) to be borne by the contractor may be such as to undermine the financial standing of the contractor. Whilst there may be ways that the contractor can manage (specific actions, insurance etc.) or cap such risks, for example through the use of special purpose vehicles, concerns may ultimately result in a contractor declining to bid.

We are aware of a situation where three bidders pre-qualified to build a new railway line. The procuring authority chose to let a PPP-type contract with the contractor responsible for building maintaining and operating the infrastructure. One of the prequalified bidders, with strong construction experience, declined to bid. It has been suggested that this was due to its assessment of the allocation of risk during the operating phase.

When allocating risk it should be recognised by the procuring authority that even where risk is allocated to a third party it may still in practice revert to the authority (e.g. if the contractor is not financially robust and becomes insolvent). Consequently it will be incumbent on the authority to ensure that the contractor is properly managing and mitigating the risk. An example of this is the delivery of assets for a major event such as rail links for the Olympic Games or World Cup. Whilst contractors may have a clear deadline for delivery and can be incentivised around that deadline, the authority will receive all of the blame and criticism if the assets are not ready for the event.

Appendix 2 to this report outlines the major risks for delivering HSR in Norway that were identified at a workshop held on 23 November 2010 involving all of the advisors working on Phase 2 of the study.

6.11.2Approach

A risk management regime should be put in place to manage risk throughout the delivery of HSR. In order to arrive at an appropriate allocation of risk a typical risk assessment procedure would involve:  Identify the risks: this can be done by leveraging the experience of the Procuring Authority’s advisors, NRA, NSB, and from other similar projects undertaken in Norway (e.g. the roads projects and the airport express train Oslo - Gardermoen).

95 15 February 2011

 Assess how the risks could be managed/ mitigated: it is important to understand what actions can be taken to manage and mitigate the identified risks (e.g. select a different route to go round an environmental or planning problem). This is critical to determining the quantification of the risk and assessing who is best placed to manage the relevant risk.  Quantify the key risks: a large number of risks are likely to be identified and it is important to focus on those that could have the biggest impact (taking account of value if they occur and likelihood of occurrence) on the project in terms of delays or cost overruns. The quantification process will likely reveal that some high value risks are relatively easy to manage/ mitigate and that there are medium value risks that are extremely difficult to manage and are therefore likely to crystallise.  Prioritise the risks: having quantified the main risks it should be relatively easy to prioritise which risks the Procuring Authority needs to focus on in terms of determining their allocation and other actions the Procuring Authority might put in place to manage and mitigate the risk.  Identify the parties that could bear the risk: where an asset/ service is being bought it is easy to think that risk can only be allocated to the contracting parties. In practice there is a much wider range of parties who might be best placed to take responsibility for specific risks. Such parties include NRA, NSB, several of the stakeholders and other parties with whom the project will have to interface. For example, where a local Authority agrees to provide transport links or land for construction of a station it might be appropriate to make the Authority responsible for the consequences of the links or land being available late.  Evaluate which party is best placed to manage or mitigate the risk: this should reflect (i) who is best placed to take action to manage the risk;(ii) the capacity (financial strength, resources, expertise etc) and willingness to take the risk; and (iii) the actions that can be taken to mitigate the risk and who is best placed to implement them. For example, it is not unusual for a party to be prepared to manage a risk provided that the potential impact of that responsibility is not so great as to threaten the viability of that party. Where such concerns exist it may be necessary to allocate the risk to someone else or agree a mechanism for sharing or capping the exposure to the risk.  Develop a risk allocation matrix: this risk allocation matrix should become a key tool for managing the allocation of risk and checking that defined actions are actually being taken. This matrix will need to be reviewed at key points during the project to ensure that priorities and allocations remain valid and appropriate in light of practical experience and as the project moves from the delivery to the operating phase.

96 15 February 2011

 Sense check the allocation: whilst the process described above is logical, it will nevertheless be important to sense check the conclusions. For example, whilst each individual allocation of a risk to a party may be fully justified the total risk transferred to a party may represent too great a burden. If this is the case, the Procuring Authority will need to consider how to reallocate or help manage the burden.

In the context of HSR it will be necessary to undertake this risk analysis on each Corridor because the environment in which each solution will be delivered and the particular circumstances of each Corridor will be different.

6.11.3Options for allocating risk

A range of approaches can be adopted for the allocation of risk on the HSR projects. These include:  Procuring Authority takes all risks beyond contractors delivering to specification: this may be appropriate whether the Procuring Authority needs to tightly control the specification and the contractors have little influence on the approach and merely have to do the work as specified. Even in this scenario it would be reasonable to expect the contractors to take price risk and risk relating to delivery to specification unless there was uncertainty over the scope of work at the beginning. This solution was used by BAA when procuring its new Terminal 5.  Procuring Authority allocates specific risks to another party but the value to which that party is exposed if the risk crystallises is capped.  Procuring Authority allocates specific risks to another party and the value to which that party is exposed is uncapped.  Another party takes all risks: this may be appropriate where there is a main contractor who is responsible for the design, build and operation of the relevant asset and is therefore in control of all key aspects of the project. This is broadly the approach that was adopted to deliver Gautrain in South Africa. However, this approach is unlikely to be appropriate for the HSR projects where issues such as route definition and planning risk will be largely outside the contractor’s control.

In practice there can be variations around any of these approaches and the answer for HSR is likely to be a combination of different approaches for different risks as each risk needs to be separately reviewed and allocated. For example, the Procuring Authority could engage with contractors and get risk priced or an indication of the caps that would be sought before determining the final allocation of risk. This approach has been used in the UK when letting the operating contracts for Docklands Light Railway and rail services

97 15 February 2011 in Scotland. On both occasions bidders were asked to submit initial bids with and without them taking passenger revenue risk. Appendix 4 provides risk allocation matrices proposed in a paper prepared by PwC titled “Upgrading the Rail Network” which addressed ways to upgrade the UK rail network.

The success or failure of the approach adopted tends to rest with whether all relevant risks have been correctly identified and quantified and whether there is a common and clear understanding between the parties as to their respective roles and responsibilities.

6.11.4Example of how to address risks

This section reviews briefly the steps taken to address properly a risk. The example used is the performance of the infrastructure. Key steps would be:  Confirm the required operating performance of services delivered to passengers – the measures and the standards.  Using this information, define the required performance of the infrastructure – this is likely to be measured in terms of availability but could also include the period for which the infrastructure is unavailable i.e. recognise the time it might take to resolve problems and encourage the infrastructure provider to respond quickly.  Assess the potential sources of lack of reliability of the infrastructure.  Determine who is best placed to manage each risk – is it best addressed in the design, in the build, in the maintenance of the infrastructure or how it is operated and inspected?  Build requirements into contracts with the provider of the relevant service. Where the contracts are relatively short term (e.g. construction) but the risk lasts for years decide who can take over responsibility for the risk and how they might be willing to do so e.g. commissioning or acceptance testing of the asset before it can be handed over with the relevant risk then transferring to the maintainer. Where components are packaged, risks may not need to be disaggregated and interface risks may therefore be reduced.  Develop performance measurement and payment mechanisms to incentivise the required level of performance e.g. usage charges in any period are reduced to reflect periods of non availability of the infrastructure.  Monitor performance throughout the life of the contract/ asset – understand why and how improvements might be made and the value implications of seeking higher standards of performance.

98 15 February 2011

6.11.5Ongoing management of risk

The approach outlined above might be read to suggest that risk is addressed on a one-off basis during contracting and construction. It is extremely important for the successful delivery of any project that this is not the case. The management of risk needs to be considered frequently over the life of any project to ascertain whether:  new risks have arisen;  old risks have changed;  the allocation of risks remains appropriate;  actions to mitigate the risk have been implemented/ remain appropriate; or  the actions taken have mitigated the risk as intended.

In every case, where such consideration reveals gaps or potential weaknesses in the risk management plan, actions should be designed and implemented to address the emerging issues. In particular, the procuring authority should always be aware that if it has transferred a risk to another party, and that party is not managing the risk properly, it is quite likely that the consequences of the mismanagement will come back to the procuring authority. The ongoing management of risk should therefore be a key activity of the Procuring Authority.

6.12 Performance and payment mechanisms

6.12.1Introduction

The construction, operation and maintenance of HSR will be extremely costly. It is therefore important that the HSR delivers what is required. There are three key steps to achieving this objective:  Specifying what is required  Measuring that it has been delivered  Paying for that performance

6.12.2 Specifying what is required

There are two main types of performance requirements in connection with building HSR:  Project acceptance related  Operating performance related

99 15 February 2011

Project acceptance performance criteria are likely to relate to the on time delivery of the asset in a usable form. This is likely to mean that the performance measures will include formal acceptance or testing and commissioning of the asset where this is possible. In certain cases this could be extended to the proper performance of the asset in service for a minimum period of time. It is not unusual for the final acceptance of a new fleet of rolling stock to be linked to the performance of that fleet in service over several months and for part of the manufacturer’s final payment to be dependent on achieving this threshold.

Performance requirements and methods of measuring them need to be determined up front as part of developing the goals for the programme as performance requirements of infrastructure and rolling stock will drive costs. This is because higher performance standards and/ or penalties are likely to be met by contractors designing and building infrastructure and rolling stock to a higher standard or in a greater quantity and planning for more intensive maintenance.

In determining levels of performance required it is important to consider not only what are the requirements necessary to allow current, planned levels of service to be delivered, but also a realistic assessment of future requirements needs to be made. This is because infrastructure is very costly and disruptive to construct and therefore it is important to ‘future proof’ new build infrastructure. However, flexibility involves cost so there is a limit to what can be affordable or offer good value for money.

The determination of operating performance requirements for infrastructure and rolling stock largely depends on the quality of service believed to be required by customers and potential customers in order to deliver the levels of ridership that underpin the business case for making the investment in HSR. Typically, customer satisfaction with a rail service and willingness to use the service again depends on perceptions surrounding the following quality measures:  Reliability: did the service run or is there a perception of a high incidence of cancellations?  Punctuality: assuming the service does run, does it arrive on time i.e. can a customer plan the rest of his journey/ day on the basis that the train will arrive on time? If this is not the case and the customer has to take an earlier train then this will add to effective journey times and undermine the case for HSR.  Ease of use: buying of tickets, access to stations, availability of timetable and comfort.

100 15 February 2011

Performance requirements therefore need to be developed in a number of interrelated steps:  Define the standard of performance required to attract the intended levels of ridership i.e. the performance to be delivered by the operator.  Determine the level of performance from the infrastructure required to deliver the required operating performance.  Assess the level of performance to be delivered by the rolling stock to deliver the required level of operating performance.

6.12.3 Measurement of performance

There need to be clear and efficient ways of measuring whether the infrastructure, rolling stock and service operators are delivering specified levels of performance both during the build and the operating phases. Consideration also needs to be given to whether measures should be one off or there needs to be more regular reporting.

Aspects of infrastructure performance that might need to be measured include:  On time achievement of specific milestones, for example because a project is on the critical path  On time delivery of infrastructure  Availability to be used  Line speed  Energy efficiency  Environment – external noise during construction and operation, handling of spoil etc.  Passenger experience e.g. bumpiness, in-train noise  Operational flexibility i.e. if something goes wrong can the system/service be recovered quickly, particularly with regard to safety critical components such as the signalling system

Aspects of rolling stock performance that might need to be measured include:  Incidence of, and delays caused by, in service breakdowns  Availability of rolling stock to be used in service  All on-board equipment functioning properly e.g. doors, windows, on board heating, information systems  Energy consumption  Weight

101 15 February 2011

 Passenger experience e.g. bumpiness, in-train noise  Time between failures  Speed  Acceleration and braking rates

In measuring performance of both infrastructure and rolling stock, consideration needs to be given to the performance of such assets when new and how to ensure that manufacturers and maintainers properly support such assets throughout the performance improvement phase. It is also not unknown for problems to emerge in the early years of an asset as a result of manufacturing or design defects and such problems need to be put right or, better still, mitigated during the design and build phase e.g. by using proven technology.

Aspects of operating performance that might need to be measured include:

 On time arrival of services (punctuality)  Operation of all services set out in the timetable (reliability)  Customer satisfaction  Quality of services (e.g. cleanliness, availability of information, ease of buying tickets)  How customers are looked after in the event of disruption.

Whatever the performance requirements, it is important that they are converted into a performance criterion for which a contactor or service provider can, and will, take responsibility. For example, an operator of services will likely take responsibility for the reliability and punctuality of services where he controls the rolling stock and infrastructure but this risk will likely have to be shared if third parties undertake such roles. Choosing inappropriate criteria can result in contractors charging a significant risk premium which could undermine the business case for HSR.

6.12.4 Payment for performance

There are two aspects to paying for performance:  The payment mechanisms that might generally be used to pay for assets and services; and  How these might be flexed to provide incentives to deliver performance requirements.

6.12.4.1 Payment mechanisms

102 15 February 2011

Payment mechanisms often used on major infrastructure projects include:  Fixed price  Fixed price – milestone payments  Schedule of rates  Re-measurement or ad measurement  Cost reimbursable  Target costs  Output based

A number of considerations other than incentivising appropriate performance will influence the choice of payment mechanism. These include:  What is the chosen contract strategy - e.g. traditional Construction Contracts, Contracts with Specialist Management, Framework, or Concession?  How important to the Procuring Authority is certainty on price?  The allocation of risk e.g. how does the payment mechanism need to support the transfer of risk?  How much flexibility is required by the Procuring Authority in contractual arrangements e.g. the ability to change the scope during the build?

6.12.4.1.1 Fixed price

A fixed price payment mechanism is one in which the contract is agreed on the basis of a pre-determined estimate of the cost of delivering a pre-defined scope of works. Typically the contractor’s price will include an allowance for risk or a contingency sum because the contractor is at risk for any cost overruns. The procuring authority pays the pre-agreed price irrespective of the actual cost incurred by the contractor (subject to agreed changes to scope and programme).

Successful fixed price payment mechanisms rely upon the scope of the works, design parameters and specifications being sufficiently well developed to identify all items required to deliver, and therefore cost, the work. They also ensure that there is strict control over the scope of the work during the delivery phase to avoid the contractor de- scoping the work if he finds that he has under-estimated the costs. Sometimes a provisional sum may be included in the fixed price where certain items of scope are not fully understood or are unknown. This will form a starting point for subsequent negotiations.

103 15 February 2011

Fixed price payment Advantages Disadvantages  Provides a high degree of price certainty  Post contract scope changes tend to be more  The contractor is incentivised to complete the difficult to negotiate and therefore more costly work efficiently in order to maximise its  Unless the specification is tightly defined, the margins contractor may deliver a lower quality than  Transfer of cost risk tends to incentivise on envisaged to protect its margins time delivery  The duration of the procurement may be extended due to the need for the design work to be complete (to enable pricing in contract) prior to starting construction  May not be seen as being good value for money due to the risk premium built in by contractors and charged irrespective of whether the risk materialises or not  Complex projects cannot be priced this way due to inherent uncertainty

6.12.4.1.2 Fixed price contracts – milestone payments

Under this variant of a fixed price contract, the contractor is only paid a contracted amount when specified milestones along the route to completion (e.g. design is approved, asset is ready for commissioning) are achieved. These milestones can be set out in the contract and should be chosen for their ease of measurement and for being tangible indicators of progress towards completion. For example, a construction contract might have a milestone payment linked to the final sign off of the design with planning permission.

Fixed price – milestone payments Advantages Disadvantages  As there may be few milestones  Milestones need to be easily measured or they administration is generally easy could lead to disputes  Cash flow is very visible  Contractor can receive substantial payments  The contractor is highly incentivised to meet before delivering anything that works/ is of its programme use  May be better than simple fixed price option  The milestone triggers are unlikely to match because it reduces credit/ payment risk and the contractor’s programme of activities. This financing costs for the contractor and reduces cost transparency and can increase provides intermediate check points for the financing cost procuring authority to see progress

104 15 February 2011

Milestone payments work best where the work is simple to define or the scope is limited, where very little change is expected and/ or where the procuring authority is happy to adopt a ‘hands off’ approach.

6.12.4.1.3 Schedule of rates

This approach is typically used on call off contracts where the client calls off a quantity of inputs which have been pre-priced. These rates can be tendered at a fixed price or with escalation factors or other pre-agreed adjustments over time.

Schedule of rates payment Advantages Disadvantages  Simple  Only works for commodity type products  No scope for unexpected price variations  Much less easy to take into account quality  Useful as a supplement to other options  Procuring Authority has to satisfy itself that what is being bought will work  Does not transfer quantity risk or incentivise efficiency

6.12.4.1.4 Re-measurement or ad measurement

This approach is similar to a schedule of rates except that the estimated quantities for doing a particular piece of work are developed by the client and set out in its tender documents (“Bill of Quantities”). The bidders will quote against each Bill of Quantities item and enter a unit rate or a unit price to build up a total contract price on the basis of the Bill of Quantities. During the construction period, the actual quantity of work executed under each Bill of Quantities item will be measured at pre-agreed points (typically time periods) and valued at the quoted rate for interim payment purposes. On completion, the exact quantity of work finally executed will be determined and valued at the contracted rates to arrive at the final price.

105 15 February 2011

Re-measurement payment Advantages Disadvantages  Simple  Only works for deliverables that can be  Cheap to implement defined in terms of discrete inputs  One of the potential sources of price variation  Much less easy to take into account quality (rates) is removed because measurement is of an input not an output  Risk that contractor bids relatively high rates for items that are likely to increase in quantity and uses lower rates elsewhere to win the tender  The build up of rates themselves is usually not transparent

The re-measurement payment mechanism is generally considered old fashioned. It works well where there is uncertainty over the quantity of the work e.g. civil engineering work in the ground.

6.12.4.1.5 Cost Reimbursable

Under cost reimbursable contracts the contractor is reimbursed actual costs plus a fee. The fee can be expressed as a percentage applied to the actual costs or it can be fixed. This fee represents the profit that the contractor makes on the contract after the deduction of any project specific administration or management costs the contractor incurs.

As the contractor is reimbursed all its costs, this option sees the procuring authority carrying all the risk. However, this approach may be appropriate in certain circumstances, for example where the procuring authority wishes to control the scope, timing and/or direction of the work.

106 15 February 2011

Cost reimbursable payment Advantages Disadvantages  Work can be started without the need to have  No incentive for the contractor to work a fully developed scope efficiently or to exert control in preventing  Ideal for front-end investigative work or for costs rising other than reputation risk emergencies or where engineering design  The procuring authority carries substantially needs to be progressed all cost risk as the delivery company is paid  The client pays no premium to cover the risks for the costs it incurs that may materialise - pays only for those  Where fee is fixed irrespective of costs risks that actually materialise incurred this may incentivise the contractor to cut corners to minimise time spent and maximise his profit

Cost reimbursable contracts work well where time or quality is the priority or where it is difficult to fully define the scope or assess at the outset the risks in delivering a project.

6.12.4.1.6 Target Costs

The target cost payment method is often seen as a variation of the cost reimbursable approach. The basic philosophy is that through setting a target payment, the delivery company will be incentivised to deliver the work economically and efficiently through the sharing of a proportion of the risk with the procuring authority.

The essential feature of the target cost payment mechanism is that (excluding the agreed changes) the difference between the estimated and the actual cost of the work is shared, in a way that can be tailored, between the procuring authority and the contractor or delivery company. The usual approach is that if the actual cost is more than the estimate, the parties share the pain. Similarly, if the actual cost is less than the estimate then they share the gain. However, the risk/ sharing could be capped for either party.

This pain/gain share can lead to market behaviour where delivery companies submit high estimates to protect their position. Procuring authorities can protect against this by encouraging strong competition between potential contractors or by employing a third party to undertake a peer review of the estimate. The parties then negotiate a target on this basis.

A guaranteed maximum price payment approach is variation of the target cost method. This is commonly achieved by setting a cut off point for cost reimbursement (e.g.15%) above the target price.

107 15 February 2011

Target cost payment Advantages Disadvantages  The contractor is likely to require a reduced  Accurate measuring and transparent cost risk premium owing to the protection offered control required, therefore it can be expensive (sharing of risk) for the procuring authority to manage  Protects contractors and therefore encourages  Significant risk remains with the procuring bids in a situation where the workload is not authority – risk sharing may not be adequate well understood at the outset incentive to manage costs  Open book accounting required for this  Potential for failure on insufficiently well approach may encourage openness in other scoped projects owing to misunderstandings areas of the operation of the incentive mechanism  Incentive for the contractor to work  Reliant on project management best practice economically and efficiently and a competent project manager  Encourages active risk sharing, based on a clearly defined allocation of risk agreed at the outset

The target cost payment approach is traditionally used in circumstances where the potential for variability of costs is relatively low. Cost reimbursable contracts are preferred by contractors where costs are difficult to estimate, otherwise they would have to build in a risk premium that would not represent value for money. This approach is most frequently where the procuring authority wants to encourage partnering behaviours and the sharing of risk and upside.

Target cost contracts were used extensively on CTRL and are being used on Crossrail. On CTRL, the project team reported that the use of the New Engineering Contract 3 (NEC3) version of the target price contract benefitted the project by48:  aligning the interests of the procuring authority and other contractors to create a constructive atmosphere in which to approach project related issues;  allowing the contractors to tender for work at outline design level instead of the traditional end of detailed design stage (this allowed the contractors to introduce problem solving solutions and changes to deliver better value for money at a point where change was not costly for the projects); and  convincing rival and individually procured tunnelling contractors to form an alliance and work towards one target thereby reducing interfaces and introducing economies of scale e.g. sharing resources.

48 Delivering High Speed 1: The success and the lessons. Report of seminar 139 on 7 February 2008 by the Major Projects Association

108 15 February 2011

6.12.4.1.7 Output based payment

Under an output-based approach, as normally used for PPPs, the contractor is paid through a combination of a periodic (typically monthly) fixed charge and a variable amount based on the delivery of certain performance criteria. Performance criteria might include:  The availability of the asset  Usage of the asset  Reduction in incidents

Output based payments Advantages Disadvantages  User only pays in full for receiving the  Costly to make changes to requirements as expected standard of service (i.e. risk of concessionaire will fix solution at the outset delivering the service is transferred to the  May be seen as not being good value for contractor) money due to financing costs and premia for  Reasonable cost certainty within a defined risk transfer margin.  Costs may not be transparent because a range  Allows the procuring authority to procure the of activities are covered by a single charge facility without large initial capital expenditure  Strong incentive for contractors to deliver required outputs  Purest form of risk transfer to the private sector

6.12.4.2Flexing the payment mechanisms

There is a range of ways of flexing payment mechanisms to incentivise good performance. In linking payments to performance it is important:  not to set the performance threshold too high, because this introduces a risk that the contractor is incentivized to deliver an expensive, high cost asset or service the benefits of which cannot be fully utilized; and  to try to create an environment where, provided the required standards of performance are delivered, the asset or service provider is in receipt of modest incentives or at least paid in full. A structure which focuses only on rewarding significant over-performance, or which only results in penalties, can be bad for morale and undermine the relationship between parties.

109 15 February 2011

As explained at the beginning of this section, it is important to look at performance in terms of the delivery of assets and the quality of services provided over time. Described below is a range of mechanisms that can be introduced to the payment mechanisms to encourage appropriate levels of performance. All of the mechanisms will need to be contracted for both in order to be enforceable and to provide an appropriate incentive for the contractor which he understands from the outset.

Delivery of assets  Liquidated damages: these are typically related to the loss arising from an event occurring (e.g. late delivery or non availability) but could be linked to the loss arising due to an asset failing to perform to the required standard. Because of the potential for liquidated damages to make a contractor insolvent, it is likely that there will be an agreed maximum cap (per instance, contract or period). In connection with delivery a contractor might ultimately be paid the full contract price but the liquidated damages will be lost.  Indemnities: these are similar to liquidated damages except rather than a pre- determined amount of claim the client is protected against defined costs arising from an event occurring or failing to occur. An example would be an infrastructure provider indemnifying the operator against an accident arising as a result of failure of the infrastructure.  Withholding or milestone payments: where it is possible to link payments to performance events e.g. on time completion of a phase of work, it may be appropriate to provide that payment will not be made for that work until the asset is delivered.  Warranties: the contractor may contract that an asset will perform to a particular standard (for a defined period of time) or have certain characteristics and the counter-party can make a claim under the warranty if this proves not to be the case.  Retentions: a percentage of the contracted payment is withheld and the contractor is not paid in full until the asset is delivered or demonstrated to be performing properly, typically over a defined period of time. This provides an incentive to remedy any issues but has a financing cost. Retentions can be linked to warranties whereby monies are retained until the warranty period has expired and there has been no claim under the relevant warranty.  Bonding: this is an alternative to a retention whereby the contractor is paid in full but a bond has to be made available against claims until the asset is delivered or demonstrated to be performing to the required standard. The bond will typically be issued contractor’s parent or a third party financial institution.

110 15 February 2011

 Award of further contracts: in many sectors, including construction in the oil industry, the possibility of being awarded further contracts acts as a strong incentive to deliver good performance on existing contracts. The more direct the link that can be made between good performance and the award of further work, the greater the incentive. This is likely to be a credible approach on HSR if construction works are likely to be spread over several Corridors and a long period of time.  Removal from framework panels: Many large construction projects have a panel of prequalified contractors to whom work will be let in the future. A sanction for failure to perform to required standards would be removal from such a panel.

Providing services  Penalties/ rewards for not meeting/ exceeding performance requirements: these may ratchet up or down depending on how close the contractor is to the required level of performance. Similarly the performance measure may get tougher over time reflecting the time that might be necessary to deal with ‘teething problems’ and get the infrastructure performing to its optimum level. Because of the potential for such fines or penalties to make a contractor insolvent, it is likely that there will be an agreed maximum cap (per contract or per period) for such fines and damages.  Contract extensions: in the UK rail industry most of the franchise contracts with passenger service operators now specify that the operating contracts can/ will be extended (on pre-agreed terms) if specified levels of performance (usually related to punctuality and reliability of services and/ or customer satisfaction) are achieved.

The performance mechanisms highlighted above can generally be used with any of the payment mechanisms but it may be necessary to consider the detail. For example, it may be difficult to use the milestone performance incentive when using a cost reimbursable payment mechanism because it may simply not be possible to determine how much value to attach to the milestone payment. Similarly, applying delivery related mechanisms (liquidated damages or milestone payments) to the target cost payment mechanism may generate conflicts for the contractor – is the objective to be on time or efficient? This means that the solution will always have to be tailored to the circumstances and objectives. Also, some mechanisms, such as extensions, will not be appropriate for one off projects.

A key lesson from practical experience is not to make the arrangements over-complicated.

111 15 February 2011

6.13 The need for cost detail in bids and contracts

6.13.1Benefits of recording detailed costs

When letting contracts to deliver HSR the Procuring Authority will need to consider:  What activities should be ‘packaged’ together e.g. Design with construction, permanent way with structures, signalling systems with rolling stock; and  What elements of an individual activity should be separately priced as opposed to being wrapped up in a single price for that activity.

Issues surrounding packaging are addressed in section 6.9. This section considers why a detailed breakdown of costs should be required for different elements of contracted work.

On the face of it, the Procuring Authority should just be interested in the cost to deliver the contracted input, output or outcome. However, there are good reasons to seek more information than this, particularly with regard to outputs or outcomes:  In evaluating bids it will be important to consider the deliverability of proposals if only to check that bidders have a common understanding of the requirements. In order to mitigate against cost creep it may also be necessary to assess the adequacy of the principal costing. Unless the costs of the main inputs, activities and deliverables are separately identified it will be extremely difficult to make such an assessment.  The Procuring Authority may have to negotiate variations. An understanding of the breakdown of the original bid costs should help with the assessment of the business case and subsequent negotiations.  Disagreements often occur on major long term contracts. One way of preventing/ limiting the scope for disputes is to provide for transparency of cost at least in respect of the larger components.  The Procuring Authority may need to report on earned value to the Government or other providers of funding. Understanding the cost of principal items will facilitate such reporting.  If information is obtained on the cost of individual activities it should be possible to benchmark such costs both against international experience but, more importantly, against future bids. It would be even more useful to benchmark planned cost against actual costs in order to be able to cost better future work to develop the HSR. Such information could go a long way to mitigating against cost creep or at least allowing the Procuring Authority to set aside adequate contingencies.

112 15 February 2011

 For a variety of reasons, not necessarily owing to the failure of the contractor, it may be necessary to take over, step into or re-negotiate a contract. Such actions would be greatly facilitated if there was adequate information surrounding the cost of each major component of a contract and a mechanism for determining how much of the relevant work had been completed.  Understanding the cost of individual components may help the Procuring Authority to better manage future procurements.  Understanding the cost of individual components may help the procuring authority to design appropriate incentive regimes to encourage contractors to be more efficient and deliver better value for money.

6.13.2 Options

A range of options could be adopted surrounding the provision by bidders of information on costs. These can be characterised as follows:  Contract price: seek no information other than a contract price for the deliverable.  Benchmark: require a level of detail consistent with what could be compared to industry benchmarks. This will allow some checking of a bidder’s proposals but will also provide better information for the future costing of sections of the HSR. By gathering this information across several bids for different routes it will also help the procuring authority to understand different positions being taken by different bidders.  Detail: require detail to allow an independent verification of all of the proposed costs.

In practice, large infrastructure projects have tailored the specific information requirements of bidders to take account of:  The key risks identified for the project and the scope for information contained in bids to enable those risks to be better managed. For example, claims for cost escalation are easier to manage when it is clear what costs had been provided for in a contractor’s bid.  The possibility that works will be repeated elsewhere on the project and therefore the opportunity to benchmark bids and adapt such benchmarks using practical experience in order to scope and cost future work. For example, it may be possible to develop benchmarks for tunnelling costs and timescales in the different conditions faced by HSR.  Balancing the time and cost associated with developing, presenting and monitoring detailed information with its potential to add value in the future.

113 15 February 2011

6.14 Procurement plan

6.14.1Introduction

A Procurement Plan will address questions such as:  What is to be procured? Why? In what form? What are the packages?  What experience, capabilities and resources (pre-qualification criteria) do bidders need to demonstrate in order to be awarded a contract?  Which type of procurement process?  In what order should contracts be let?  How many rounds of bidding and how/ when to short list/ select?  What information is to be made available at each stage?  How to evaluate bids?  How to create and maintain competitive tension?  How to protect the procuring authority’s position in negotiations in order to achieve its desired outcome?  Governance and decision making processes (including confidentiality arrangements).

A Procurement Plan will be delivered by the organisation structure surrounding the Procuring Authority. This structure is discussed in chapter 9 and will need to address a range of issues required to enable the successful delivery of the Procurement Plan such as:  Clarity of objectives  Realism of timetable, reflecting requirements of bidders and market capacity  Experienced leadership  A well defined decision making structure which also addresses the timeliness of decisions  Adequate resourcing – numbers and skills

6.14.2 Benefits of detailed planning of procurement

The procurement of major infrastructure projects needs to be carefully planned in order to:  encourage competition;  minimise transaction costs for both sides;  be timely and yet allow bidders sufficient time to bring their experience and expertise to bear;

114 15 February 2011

 be clear about, and allow time to prepare, information that will be required by bidders to enable them to submit properly completed bids (for example it will be very difficult to get a price for a section of track if the route or the specification is still being determined);  ensure that bids are clear and that all required information is provided in a form that is easy to evaluate;  limit the scope for a preferred bidder to negotiate extensively and move away significantly from the position bid and the basis of selection; and  ensure the effective engagement and commitment of financiers where the bidder is expected to finance part of the project.

Achieving these objectives will be critical to delivering value for money through the execution of an effective competition. However, some of these requirements involve trade-offs and therefore the Procurement Plan chosen needs to offer the best compromise. This also means that the Procurement Plan could be different for different projects or different routes or components because the priorities of each project to deliver HSR may be distinctly different.

Since responding to procurement notices is usually very costly for bidders it is important that the Procurement Plan is backed by a strong commitment from all political parties to see the procurement through to operation. This will help to give potential bidders confidence that it is worth incurring upfront costs to win work. It will also encourage them to spend money to make their bids more complete – critical for evaluating bids and finalising contracts in a timely manner. This issue has been stressed on a number of occasions during the market soundings.

Whatever the Procurement Plan that is implemented, it is important that it is designed and executed to give bidders confidence that:  it is fair i.e. all bidders are treated equally and there is no favoured bidder from the outset;  the process is transparent; and  evaluation criteria and requirements of bidders are clear.

6.14.3 Types of procurement processes

There are a number of procurement processes which are typically used. They tend to vary with the complexity of what is being procured, the size of the contract and the number of

115 15 February 2011 potential suppliers. The approach adopted will also need to be compliant with EU Procurement Rules and Norwegian Law (as detailed in section 6.4.2):  Price list: This is effectively the ‘open procedure’ approach permitted under Norwegian Public Contracts Regulations. Under this option bidders provide a price list and the Procuring Authority would make the decision to buy based on price alone. This approach could work well for specific components, equipment or pieces of work but only provided they were easy to specify and there was no complexity around the procurement arrangements e.g. there was no need to evaluate quality.  Auction (also an ‘open procedure’): under this option the required component, equipment or work is clearly specified, bidders are invited to propose a price and the cheapest price is the winner.  Restricted procedure: this is a variation on an auction except that there would likely be a prequalification stage and selection of the winning bidder would also take into account the quality of what is being offered.  Negotiated procedure: under this option there would be a number of rounds of bidding e.g. prequalification, main bid, best and final offer, leading to the selection of the winning contractor. Each round of bidding might be used to reduce the number of bidders such that the remaining bidders were prepared to invest more time and effort to deliver more detail in the next bid round as their chances of winning were increasing. Once a preferred bidder has been selected there will be a limited period of negotiation to arrive at the final contractual arrangements.  Competitive dialogue: under this option there would be a number of rounds of bidding as for the negotiated procedure. However, the Procuring Authority would also use the bidding rounds to inform its specification and the contractual arrangements such that Best and Final Offers (“BAFO”) would be submitted with little or no scope for negotiation around each bidder’s response.  Preferred supplier or Framework: under this option the Procuring Authority would prequalify specific suppliers, based on quality and/ or relevant expertise, to provide specific assets or undertake specific work. When such services need to be provided the Procuring Authority would choose a preferred supplier or tender the work amongst suppliers on the framework with relevant skills. This approach might be used to procure design skills where a number of designers could be on the framework and the Procuring Authority could go to one or several of the designers depending on what needed to be designed and their relevant expertise. In the first instance, such a contract would probably be procured under the Negotiated Procedure.

116 15 February 2011

In practice, given the likely complexity of the procurements of HSR infrastructure, it can be expected that most major procurements will be done by Negotiated Procedure or Competitive Dialogue. All matters related to procurement routes require detailed legal advice which is not within the scope of this study. Procurement is an increasingly litigious process with significant risk of legal challenge by unsuccessful bidders.

6.14.4 Advantages and disadvantages

The principal advantages and disadvantages of the different approaches can be summarised as follows:

Price List Advantages Disadvantages  Relatively simple to implement  Only works for very simple procurements  Terms and conditions can be agreed at the where the specification of an item and the same time as the price list to avoid terms and conditions under which it can be negotiations each time an order is placed supplied can be agreed in advance  Quick  Approach does not enable innovation  Price list can escalate or decline over time  Approach does not enable or encourage using agreed formula and therefore remain suppliers to pass on cost savings unless there valid for years is a process to update price lists  To avoid complacency by one supplier, the  Suppliers may resist the Procuring Authority’s Procuring Authority would have price lists right to choose a supplier at its discretion from other suppliers and would agree with the  Potentially limits the number of suppliers the suppliers that it has absolute discretion of Procuring Authority can turn to which supplier to use

Auction Advantages Disadvantages  Relatively simple to implement  Will only work well where the procurement  Quick contract can be simply specified so there is  Any relevant supplier can participate in the certainty that all bidders are signing up to the Auction same terms and conditions  Maximises competition and obtains the most  Will only work where there is certainty that up to date price several bidder’s solutions can deliver the  Depending on the specification provided, this specification approach can enable some innovation  Allows bidders to enter into commercial arrangements with other suppliers in order to supply exactly what is needed

117 15 February 2011

Restricted procedure Advantages Disadvantages Broadly the same as for auction Same as for auction  Allows Procuring Authority to take into account quality

Negotiated procedure Advantages Disadvantages  Can be designed and managed to maximise  Can be very costly for bidders and the competition and deliver the best price Procuring Authority but cost tends to vary  Allows for innovation and the use of expertise with the complexity of what is being procured  Allows the development of a tailored solution and the terms on which it will be delivered that works for all parties  With several rounds of bidding, the procedure  Allows consortia or joint ventures to be can take a long time formed to provide a range of skills and  Extensive negotiations with the preferred services bidder can undermine the Procuring Authority’s position and value for money  Owing to the negotiations with the preferred bidder, other bidders may be concerned about the transparency of the process which can lead to challenge or a decision not to bid

Competitive dialogue Advantages Disadvantages  Any relevant supplier can participate  Can be very costly for bidders and the  Can be designed and managed to maximise Procuring Authority but cost tends to vary competition and deliver best value for money with the complexity of what is being procured  Allows for innovation and the use of expertise and the terms on which it will be delivered  Allows the development of a tailored solution  With several rounds of bidding and the need that works for all parties to agree the final specification and contract  Allows consortia or joint ventures to be arrangements with all remaining bidders formed to provide a range of skills and before BAFO, the procedure can take a long services time  Process may be challenged if the situation changes and the Procuring Authority ultimately buys something different to its BAFO specification

118 15 February 2011

Preferred supplier or framework Advantages Disadvantages  Simple  Limited or no competition after pre-  More flexible than the Price List approach qualification of the suppliers which could because it is not necessary to have an agreed adversely impact value for money (although specification up front there could be competition between suppliers  May reflect reality i.e. there is only one on a framework) credible supplier  Probably not adaptable to situations where  May reflect reality i.e. the Procuring Authority work is complex or requires innovative is happy with a supplier and believes that solutions as such situations might necessitate continuity and leveraging know how choosing from as wide a population of outweighs any other potential value for money suppliers as possible considerations  Not being a preferred supplier or on the  Terms and conditions and prices could be framework may put other suppliers off agreed upfront to limit negotiations to scope bidding for work procured outside the of work only framework – fear of inside knowledge etc

119 15 February 2011

7 Commercial – Funding and financing HSR in Norway

7.1 Introduction

The HSR infrastructure will likely be very costly to build and, based on experience of other high speed rail projects, it is likely that funding will have to be sought from both the public and private sectors. This chapter therefore considers:  Issues surrounding accessing private finance, specifically potential sources of finance and funding  How to engage with providers of private finance  Issues surrounding funding HSR through appropriations from the Norwegian Budget  Potential for the self-funding of HSR infrastructure using net revenues from operations

7.2 Accessing private finance

7.2.1 Introduction

A discussion of funding and financing needs to distinguish the roles and uses of these two sources of money. This is because the different characteristics have important implications for the way that they can be employed to deliver infrastructure investment. Funding relates to how the procurement of an asset is ultimately paid for, financing refers to how the project is paid for in the short term. As a result financing ultimately has to be repaid from a source of funding.

7.2.2 Sources of funding

There are two main traditional sources of funding:  Customer revenues or net revenues from operations: The level of customer revenue will be affected by decisions about the trade-off between the competing policy objectives of socio-economic welfare optimisation and revenue maximisation. Prioritisation of socio-economic welfare might result in fares being set by Government at a level that optimises the socio-economic benefits to users by maximising ridership. In contrast, a private sector determined fares strategy would seek to maximise total revenue generated net of variable costs, with no regard to the overall social benefit. Whatever the approach to revenue generation, such revenues

120 15 February 2011

are unlikely to cover the project costs given the scale of the costs of building and maintaining HSR infrastructure. Operating revenues may include secondary revenue such as advertising or retail rents on stations.  Public sector funding: In light of the likely revenue shortfall described above, it can be assumed that some form of public sector funding will be needed to support the development of the HSR programme. There are few, if any, examples of HSR projects being self funding from net operating revenue– a number that were projected to be (Taiwan and CTRL in the UK) have subsequently required public support as build cost have exceeded original estimates and ridership has not met projected levels. Consideration is therefore required as to how the public sector might support both the construction of the infrastructure and the subsequent operation of HSR services. Possible sources of public sector funding include:  Capital grants or annual subsidies or service payments provided directly to the company(s) responsible for delivering the project. Such grants would typically come from the Ministry of Finance principally generated from taxes or borrowings. These are discussed in more detail in section 7.4.  Grants from the Government Pension Fund – Global (“GPFG”).

However, the beneficiaries of HSR extend well beyond the HSR users themselves and include road users and freight on the existing network. Therefore, a variety of other funding sources could be available to fund HSR. These other sources might include:  Hypothecated charges on road or aviation users, additional levies on local taxes, business rates or environmental charges.  Capital grants from strategic beneficiaries such as privately owned business parks or major companies. This might extend to airports where the HSR provides improved access to the airport.  Local funding from cities or regions which will benefit from HSR. For example, up to 80% of the funding for the East TGV came from local authorities. However the availability of this option depends partly on the degree of centralisation of public finances and the size of the local tax base. In Norway the allocation of about 20% of the total tax base is determined at municipal level so this would likely provide limited scope for local funding.  Planning levies or development gain taxes on developers or land owners who will benefit from HSR.

There is likely to be some scope to realise major property value uplifts in the vicinity of HSR stations and these could be used to defray some of the capital costs. The extent to which property gains will materialise is largely dependent on the availability of development land at station locations and who owns it as well as the general economic

121 15 February 2011 performance of the property sector. To facilitate accessing this source of funding it might be feasible to allow the infrastructure provider to buy up land adjacent to stations to be able to capitalize on such gains in value. In Japan, several lines have been part funded by retail developers to encourage travel to their shopping centres.

Historically it has proven difficult to capture development gains to fund a particular project due to their dispersed and varied nature, and the difficulty of calculating how much gain is due to the boost to property values given by a particular project. Nevertheless, in the UK:

 The UK’s CTRL from Folkestone to St Pancras was part-funded by development profits.  The Borders rail link in Scotland is being partly funded by a levy on planning consents in the area which will benefit from the investment.  Crossrail is to be partly funded by a Supplementary Business Rate on London businesses as well as contributions from BAA (the Airport operator), Canary Wharf Group (owners of a major property on the route) and the City of London Corporation (a local authority which exists to promote the interests of the City of London as a financial centre).

7.2.3 Sources of finance

Most project costs are incurred in advance of passenger and other revenues being received, and public funding (such as capital grants or subsidies) may not be matched with the timing of expenditure. Private finance in the form of debt and equity may be a means to bridge this gap. There are a number of possible ways of raising private finance. These include:

 Government backing of borrowings: where finance is raised in this way the company responsible for delivering a project raises its own debt with which to pay for infrastructure and/ or rolling stock. Such debt would be backed by Government guarantees of the borrowing instrument to give lenders confidence that the debt would be repaid. For example, a significant amount of finance for the delivery of Crossrail in the UK will come from bonds issued by Transport for London whose credit rating benefits from various forms of implicit or explicit credit support. The EIB has committed to buy £1 billion of these bonds. The construction of the Oresund Bridge between Denmark and Sweden was largely financed by debt raised by the special purpose company that was backed by Government guarantees.

122 15 February 2011

Finance raised in this way, rather than being provided as grants, should promote robust financial management of the project as the board of the borrowing entity would have clear responsibility for balancing the sources and use of funds. It is also more transparent to stakeholders and offers a more flexible structure should the Government later decide to sell the infrastructure.  Guarantee of the borrower: the Government could provide financial guarantees to a private sector project delivery company to enable it to raise finance, with lenders able to rely on the sovereign credit rating of the Government (rather than that of the private sector borrower). This would likely enable a greater amount of finance to be raised at a lower nominal cost than if left to the private sector. This approach was used on CTRL when its finances were restructured. Various forms of Government support are also used to underpin the funding of Network Rail in the UK.  Contracting to ensure that the infrastructure provider receives defined amounts of income on a regular basis: this provides the infrastructure owner with a secure revenue stream against which it can borrow to finance the project. Revenues can come from the Government or from a third party (e.g. a private sector operator paying access charges) but would be backed by a Government guarantee (e.g. against shortfalls, risk of non-payment). This is broadly the approach adopted for concessions and PPPs.  Short term finance by Government or the private sector during the construction period, partly repaid out of the proceeds of a sale of the completed infrastructure as either a regulated utility or a concession. Sale can be by flotation (IPO) or trade sale. Currently such a sale would be of great interest to infrastructure funds, as demonstrated by the sale of HS1. Proceeds of such a sale could potentially be recycled into construction of a later piece of infrastructure.

The overall financing package may contain a combination of the mechanisms outlined above. Critically the project needs to be structured so that future revenue flows from subsidy or customer revenue are (a) secure; and (b) sufficient to service any external finance raised with a margin to cover risk, profit and uncertainties.

123 15 February 2011

Using long term private finance is consistent with the concept of payment for services as they are received (e.g. paying for rolling stock availability rather than delivery of a particular train technical specification) reflected in concessions and PPPs. In defining a level of service required, and paying for it when it is delivered, the public sector is able to transfer risk of delivery to the private sector. This entails private financing of the construction of the asset over a number of years. Non-performance of the asset leaves financiers at risk of not being repaid.

Where risk is being transferred to the private sector in this way, the involvement of private finance plays a key role as risk gives the private sector partner an incentive to ensure that the project is properly specified and planned from the beginning, and has the financial capacity to absorb downsides. Efficient allocation of risk to the party best able to manage or bear it is an important component in ensuring that projects are completed on time, take into account whole life costs and perform at the level required over the long term. The benefit of this risk transfer can make the overall risk adjusted cost of a project cheaper and therefore potentially better value for money than a project financed purely by Government. One of the disadvantages is reduced flexibility as contract specifications must be largely fixed for a long enough period to repay finance. However, this constraint is to a large extent a function of the nature of the infrastructure, irrespective of the source of finance.

Two cases illustrate this point: with Eurotunnel (a concession) a very significant cost overrun was borne by private sector financiers rather than the taxpayer. In contrast, on the London Underground Jubilee Line extension (which was a traditional directly procured construction contract) the taxpayer had to bear a significant cost overrun.

In practice high speed rail projects have generally been financed using a mixture of public and private finance. There are a number of reasons for this:  Use of private finance reduces the amount of money to be input from the public budget.  Use of private finance enables service payments to be made over time which might be capable of being funded from operations providing a permanent saving for the public budget.  Private finance can be used to underpin risk transfer by introducing some form of conditionality (typically that the asset must be available and performing to the required standard) around the revenue flows that will be used to make service payments.

124 15 February 2011

 Private finance tends to be limited and the amount of private finance available for an individual project is likely to be less than total requirements.  Private finance is generally more expensive than public finance before making allowance for the risk transfer that can be achieved by attracting private finance.

It is likely that a mixed financing structure will be appropriate for HSR in Norway, with private finance potentially being used strategically to limit the burden on the public finances and act as an agent for the transfer of risk in order to optimize value for money.

7.3 Engaging with providers of private finance

7.3.1 Introduction

For the purposes of this discussion Private Finance includes equity from specialist providers and loans from banks and the European Investment Bank as well as the involvement of Export Credit bodies and other quasi-governmental agencies that might support such projects on an arms-length, commercial basis.

At this stage of the study there is no presumption of an appropriate financing structure, however it is important to consider the issues to be addressed if Private Finance is to be attracted to the project.

7.3.2 Issue

There are two key issues to be addressed when seeking to attract Private Finance:

 Most potential providers are looking at a range of opportunities at any point in time. It is therefore important to recognise that there is competition and present the opportunity in a way which will encourage interest. By encouraging interest this should create a positive message amongst potential financiers, create competition amongst financiers and stimulate the provision of finance on terms that represent value for money.  The biggest concern for providers of finance is that their lending will not be serviced and, in the case of equity, they will not earn the expected level of equity return. They will therefore be focused on the security of the payment streams, which depends on the allocation of risk and availability of data with which to assess the risk, as well as the potential value of the assets they have financed.

125 15 February 2011

7.3.3 Engaging providers of Private Finance

The design of the contracting arrangements and the approach to the procurement of HSR in Norway needs to reflect the requirements of potential financiers where Private Finance is to be sought. The approach also needs to address the likelihood that new banks will need to be attracted to Norway to meet the financing requirements and they will need to get comfortable with Norwegian legislation, taxation and protection for lenders. Outlined below are the key issues on which potential providers of finance are likely to focus:  Experienced procurement team: having a procurement team that is experienced in engaging with providers of Private Finance will assist in the early identification of key issues which should ensure that they are properly resolved.  Clear procurement plan: most potential providers of finance are thinly resourced and hard stretched to manage all potential investment opportunities. They are also aware that the transaction costs associated with following up any opportunity are significant and will reduce their own returns. Such investors are therefore keenly looking for well planned procurements to be delivered over credible timescales whose financing requirements properly reflect market conditions and capability. This will give them the confidence that the procurement will reach financial close without undue delay or uncertainty. Failing to address properly these issues could well result in such private financiers focusing on other opportunities, thereby undermining capacity and competition for the project.  Delivery Risk: providers of Private Finance generally lend to a legal entity whose ability to service the finance depends on the successful delivery of the project – in the case of rail, the infrastructure or rolling stock. They will be sensitive to any risks they are exposed to which could ultimately result in the contracting entity not being able to repay loans/ pay equity returns on time. It is therefore extremely important to them that if risks are transferred to the contracting entity such risks are capable of being properly assessed, managed and mitigated by the contracting entity.  Security of income stream: For the reasons outlined above, providers of Private Finance will want to be satisfied that the source of revenue from which the contracting entity will make payments is predictable and largely secure. In the past, providers of Private Finance for transport projects were prepared for the source of repayments to be exposed to revenue risk. However, bad experience with unfulfilled revenue projections on several major projects such as the CTRL, Eurotunnel and a number of light rail schemes means providers of Private Finance are much more reluctant to take such risk.

126 15 February 2011

As a result of these problems, more recent transport projects involving Private Finance have tended to transfer availability risk (i.e. part of the payment is conditional on the asset being available and/ or performing to specified standards so the special purpose vehicle is held responsible for matters that are within its control) rather than full revenue risk, but even here financiers have sought to limit or cap their exposure to such risk.  Creditworthiness of the borrowing entity: providers of Private Finance will want to assess the creditworthiness of the borrower as part of their assessment of risk. This will largely be a function of the contractual obligations the contracting entity has to assume, together with the security of revenue streams, predictability of cost streams and extent of guarantees from, and financial strength of, the contracting entity’s parent(s)/ investors.  Payback period: prior to the recent financial markets crisis, lenders were prepared to lend for increasingly long terms, peaking at about 30 years after the construction period. This meant that the financing of projects needed to pay back over about 25 years in order to be able to accommodate any delays in repayment. More recently the maximum term of loans has fallen as money has been in relatively short supply and capital adequacy constraints have limited long term lending. Capital markets (e.g. bonds) offer longer term finance but recent market uncertainty has made it difficult to raise money for infrastructure projects on the capital markets and they are only now starting to become more liquid. It is therefore important that Procuring Authority is realistic about the term over which it is planned to repay Private Finance as this will affect the length of any PPP contract.  Adequacy of returns: providers of Private Finance will expect to earn a return on the money they provide reflecting a combination of the cost of money they have made available plus premia for all relevant risks identified plus a profit margin. Prior to seeking to raise finance the Procuring Authority should satisfy itself that financiers will be able to earn adequate returns based on the authority’s proposals.  Limited external dependencies: rail infrastructure projects, in particular HSR, can be broken into a number of key components all of which need to interface properly for the railway to work. Providers of Private Finance will be much keener on a project whose cash flows are exposed to limited dependencies than one where its cash flows are conditional on a range of actions to be taken by other parties. An example is provided by the HSL Zuid project where the infrastructure provider was guaranteed to be paid whether or not trains (which were the responsibility of another contractor) were operating in service. This proved crucial when the trains were delivered several months late.

127 15 February 2011

 Pipeline of opportunities: the HSR projects will likely be technical, complex, high value and therefore high cost to bid. Contractors and providers of Private Finance are more likely to be attracted to opportunities where there is a pipeline of projects and techniques used and lessons learnt from one bid can be applied to several other bids. This will allow such bidders to spread bidding costs as well as increasing the chance of being successful. Whilst a pipeline of Norwegian rail projects (for example introducing HSR to Corridors in sequence rather than in parallel) would be of greatest interest to bidders, a pipeline of Norwegian infrastructure projects generally or international HSR projects would likely encourage contractors to join the sector and encourage interest generally.

All of the considerations outlined above are good disciplines to follow even where Private Finance is not being sought – for example many of the issues raised will help to encourage competition for work amongst potential contractors.

7.4 Appropriations from the budget

7.4.1 Issues with public funding

The National Budget presents the Government's program for the implementation of economic policy and projections for the Norwegian economy.

The most common approach to financing infrastructure projects in Norway is through budget appropriations from the National Budget which are commonly only committed a year ahead. This is because the National Budget is cash based, which means that revenues and costs are recorded in the same year as they appear. The main reason for using the cash based system in the National Budget is to reflect fiscal policy and a political desire to precisely steer the total level of activities in the economy.

Although it is formally possible to budget for several years ahead,49 normal policy in Norway is to budget one year at a time and define the size of projects accordingly. This is because the annual budgeting procedure in the Storting (Norwegian Parliament) provides a low degree of predictability for financing of major infrastructure projects as there is no certainty that further appropriations will be approved in subsequent years in order to complete a major infrastructure project. This creates a major challenge for achieving the cost efficient execution of larger investment projects.

49 Guide to National Budgeting (Ministry of Finance, March 2006), Chapter 2.5.2.1 http://www.regjeringen.no/upload/FIN/Vedlegg/okstyring/Veileder_i_statlig_budsjettarbeid.pdf

128 15 February 2011

Careful consideration needs to be given to how the Norwegian Government can commit finance and funding for the construction of the HSR as the work will likely take several years and even decades to deliver. Multi-annual budget commitments could be a practical policy instrument to increase the efficiency of delivery of such infrastructure projects50. Such an approach should also contribute to an improved use of public resources.

More importantly, the commitment of funding from the Norwegian Budget will be critical to building the confidence of private financiers and attracting Private Finance.

7.4.2 Options – capital grant or ongoing support

Where the public sector has determined to fund part or all of a project consideration needs to be given to whether it provides funding by way of one off grant (typically during the construction phase) or whether it provides support over time (typically by way of annual payment as a subsidy to operations or payment for availability of infrastructure). The support payments could be to the infrastructure provider to cover operating and maintenance costs and possibly the service cost of private finance or to the passenger service operator to cover the cost operations including paying usage charges for the infrastructure.

The advantages of grant payments are principally:  This may fit best with the approach in Norway to appropriating the National Budget  Grant payments can be profiled to the timing of construction costs and therefore minimise the financing costs of the contractors  Relatively simple to implement since provided over a short period of time and conditions, if any, are likely to be limited

The advantages of support payments are:  Spreads the burden on the budget because payments are made over time  Payments only made when the service is being provided  Payments can be linked to performance e.g. support payments for infrastructure would only be made provided the infrastructure was available. Support payments to an operator (or a part of such payments) might be conditional on the performance of that operator  The extent of conditionality would need to consider whether the support payment was being used to service private finance

50 Norwegian Official Report “What does it cost?”

129 15 February 2011

 Facilitates commercial decision making because costs to be recovered are not artificially reduced as they would be through grants  Scope to negotiate support payments such that if the project is a big success and the user of the infrastructure does well and can afford to pay more, or requires less support itself, adjustments can be made to the payments  Scope to revise payments over time to introduce appropriate commercial incentives e.g. set the level of support just below break-even to encourage the recipients of support to strive to be more efficient

In practice, decisions surrounding the levels of grant and support will have to be tailored to the environment in Norway and the circumstances of individual HSR projects.

7.5 Potential for self-funding

This work stream was asked to consider the potential for self funding of HSR (i.e. funding HSR from the net revenues of operating rail services on the HSR) as part of Phase 2. In practice, the outputs from the other work streams in Phase 2 do not provide detailed capital costing and net operating revenues for potential solutions in any of the Corridors, so it is not possible to assess the potential for self funding at this stage. However, it is possible and relevant to review the extent to which other major high speed rail projects have been self-funding.

Summarised below is how a range of recent high speed rail projects have been funded:

Project Description (All figures in €, converted at Jan 2011 exchange rates) 51 CTRL/HS1, UK  Total cost £6,200 million52  Initially to be privately financed  Subject of two financial restructurings as a result of concerns over revenue projections (construction was delivered on time and to budget)  Government provided guarantees on £3.75 billion of publicly raised debt to enable financing  In 2004 raised £1.25 billion from loan notes securitised on future access charge earnings  Thirty year concession recently sold by Government for around €2.5 billion predicated on growth of usage and future access charge earnings

51 Most of the information is taken from a National Audit office report “Progress on the Channel Tunnel Rail Link” 52 This is outturn cost in 2008 prices taken from a report by consultancy firm Colin Buchanan on the Economic Impact of High Speed 1

130 15 February 2011

53 AVE, Spain For the projects undertaken to date:  Total construction cost €18 – 20 billion  65-75% of requirements have been met by EU funding (cohesion funds, FEDER and EIB loans)  The public sector and financial institutions have provided the balance with small amounts of self funding 54 TAV, Italy  Around 30% of these projects are directly funded by the State  Around 45% of finance comes from state guaranteed debt (the Government guaranteed the usage payments used to repay this debt), the balance being provided by the issue of loan notes RAVE, Portugal55 For the Lisbon-Madrid, Porto-Vigo and Lisbon-Porto lines the intention is:  Total cost €7.5 billion  Operating revenues will contribute around 35% of funding requirement (varies by route)  EU funding accounts for about 20% of requirements  Public sector will provide about 18% of funding during construction and 25% during the operating phase on the same lines 56 Shinkansen, Japan  Historic funding has been around 66% State loans and 33% local government  Lines built post privatisation have had less state support, estimated to be only around 30%. The operating companies have used their own resources, support from local government (c 30% of the requirement), and loans from a fund set up with the proceeds of privatisation of the railways to finance the construction of infrastructure with earnings from operations (existing and new) being used to repay the loans HSL Zuid57  Total costs were estimated at over €7.2 billion  Of this it estimated that the public sector funded 85% and the private sector is expected to fund 15% largely from passenger revenues  Main source of private sector finance is Infraspeed a PPP backed by a commercial bank funding consortium which includes EIB. The PPP has raised about €1 billion of finance TGV, France58 In respect of the Bretagne – Pays de la Loire line:  Cost €3.1 billion  Funded in roughly equal thirds by Central Government, Local Government and the national infrastructure company (RFF) i.e. no direct funding by operations or the private sector.  With established track record, some lines recently procured have been procured on a PPP basis usually with availability risk transfer North-South HSR,  Construction cost of €18 billion Taiwan59

53 Information is sourced from PwC in Spain and their review of commentaries in the local press 54 Information sourced from commentaries in the Italian press 55 Source: Fast Forward – Funding Report Delivery of High Speed Rail in Britain by PwC 56 Information sourced from commentaries in the Japanese press and JRTT’s web site 57 Sources: Fast Forward – Funding Report Delivery of High Speed Rail in Britain by PwC and local press comment, HSL Zuid website and article by Bob Prieto of Fluor 58 Information sourced from articles in rasilwaygazette.com and by PwC’s local office review of press articles 59 Information sourced from article in Taipei Times 3 February 2000 and by PwC’s local office and from comments in the local press

131 15 February 2011

 Originally intended that around 80% of costs be privately financed (backed by Government guarantees) and funded from earnings from operations  The operating company had incurred substantial losses by early 2009 and its finances were restructured in early 2010 with the state playing a much greater role in the funding of this line

The experience outlined above suggests that:  Early HSR developments have required substantial public sector funding support owing to the risks of developing new HSR networks and the unpredictability of revenues.  Where private finance has been made available it has often been underpinned by government guarantees.  Given the size of HSR projects and the current state of the financial markets there may be a limit to the amount of private finance that can be raised even with Government support.

In the absence of financial analysis of the likely solutions by Corridor and based on experience of other recent high speed rail projects it is extremely unlikely that HSR in Norway can be self-funding. However, it is highly possible that parts of HSR can be structured to attract private finance which might be funded from operations.

132 15 February 2011

8Structure of the industry including a high speed railway

8.1 Introduction

One of the key issues that the Government will need to consider is the future structure of the rail industry in Norway following the introduction of HSR. It will be extremely important for bidders for infrastructure works or operating contracts to understand the structure and who is responsible for managing which risk. This will enable them to minimise risk in their bids and determine which delivery solution offers best value for money.

The future structure of the rail industry is important because it could have major cost or risk implications. For example:  In any big procurement it is important to establish good personal relationships. This requires certainty of roles. Continuity of staff between pre and post delivery activities is also desirable.  If any risk is to be transferred to the contractor, in particular any payments are to be made contingent on the performance of the railway, then bidders will need basic information about how the industry is to be structured post introduction of new high speed infrastructure and how their contracts will be managed in order to evaluate this risk for bidding purposes.  Another area of concern that will need to be addressed pre-tendering contracts relates to who will be responsible for establishing safety systems and operating standards as such requirements could have major design and cost implications.

A number of specific issues need to be considered in the context of the structure of the new railway industry:  Who should own the HSR infrastructure and rolling stock (“HSR Infrastructure Assets”)?  Who should be responsible for the management of the HSR infrastructure and operation of HSR services?  Will there be a single provider of passenger services or multiple providers?  How key matters such as service quality and fares will be determined and regulated for HSR services?  Determination of safety rules, operating standards;

133 15 February 2011

 Whether existing rolling stock should be allowed to use the new HSR infrastructure?  Approach to capacity allocation and access charging

Whilst the Mandate requires that this study only addresses the procurement and operation of HSR infrastructure, this chapter also considers rolling stock and the provision of passenger services for HSR. This is because all of these activities need to be delivered properly and co-ordinated in order to deliver an effective high speed rail service to customers.

8.2 Ownership of the HSR infrastructure assets

8.2.1 Introduction

This section considers who might be the ultimate owners of the HSR infrastructure assets which include both the HSR infrastructure and any dedicated HSR rolling stock (“Infrastructure Assets”).

8.2.2 Issues with ownership of the assets

The choice of ownership structure affects how commercial mechanisms are allowed to work, the flexibility of the organisation and how risk is allocated. The importance of establishing a proper ownership structure with clear rights, responsibilities and incentives will be critical to the successful implementation of HSR.

The choice of owner is to a large extent a question of what are the objectives set for the entity. In Norway, there are several objectives that potentially are of importance where the Government owns a business/ assets60:  maximising the value of the company  ensuring that the business delivers what is required of it  contributing to the sound, long term development of the company  retaining head office and research activities in Norway  ensuring the development of skills and building competencies  controlling national resources and revenues that can be used for the good of society as a whole  delivering political objectives relating to, for example, regional policy, transport policy, cultural policy and health policy

60 Eierskapsmeldingen

134 15 February 2011

These objectives are to a varying degree relevant to HSR but, in particular, political objectives and control can be expected to have a strong impact on decisions surrounding the ownership of HSR. The fulfilment of political objectives needs to be traded against other, and potentially conflicting, objectives like cost efficiency, timeliness of delivery, autonomy and flexibility to deliver innovation or changes, and making use of market mechanisms.

In assessing who should own the Infrastructure Assets a number of other issues need to be taken into account including:  Whether the Infrastructure Assets should be owned by the existing organisations such as NSB and/or NRA. This is about whether the owner has sufficient resources and competence to act as owner for such an undertaking, It also reflects control and accountability issues - policy objectives are easier to achieve and accountability is more clear the more direct are the lines of responsibility to the ultimate owner.  Whether the ownership of the HSR should be Government, a mix of Government and private, or merely private. Public sector ownership of railways is well established in Norway. However, public sector ownership can introduce limitations on a company’s ability to put in place strong incentive mechanisms for efficient behaviour by the organisation and individuals. Furthermore, there is a broad range of potential private owners who can bring valuable knowledge and experience that could benefit the long term delivery of highly available, reliable Infrastructure Assets.  The extent to which the Infrastructure Assets are integrated with the existing infrastructure assets.  The size (volume and value) of the Infrastructure Assets compared to the existing infrastructure assets. If the Infrastructure Assets are dwarfed by the existing infrastructure then they may not get sufficient focus if merged with the existing infrastructure assets. However, if they are too small it may not be effective to have them owned on a standalone basis.  Whether the skills and resources to own infrastructure as opposed to rolling stock are so different as to require separate ownership. This argument is equally applicable if the skills required to operate Infrastructure Assets are so different from those required to operate the existing infrastructure.  Whether private finance is required as financiers will require some form of security or other ownership rights over the assets they are financing. However, it is acceptable for the freehold of relevant land to remain with the public sector.

135 15 February 2011

 Organisation form – there is a question of whether the HSR project should be organised as a project under a Ministry, a public governmental entity like NRA and NSB, a governmental company61 like Statnett, or a public company like Flytoget AS. The main issues regarding organisation form are the flexibility and autonomy of the organisation and the ability to finance the project privately. As a public company the owner representation is through the board and the general assembly, and management is accountable for the long term viability of the business. Furthermore, a public company can be given the opportunity to finance itself in the private market within the limits the owners have set. Other organisational forms are to a large extent dependent on continuous approvals and financing by the public sector owner.

8.2.3 Current organisation of the rail industry in Norway.

In Norway there has been a long tradition that the railway has been primarily owned by the State. The chart below outlines the structure of the industry and key responsibilities.

Allocation of responsibility in the Norwegian rail sector

Ministry of transport and communications r e r y o u t b r a

l c e i u l n g b w e u P O R

Norwegian State Railways Norwegian Rail Administration Norwegian Railway (NSB) (Jernbaneverket) Inspectorate Passenger and freight transport Planning, development, operation Control- and regulatory through the subsidiaries NSB AS, and maintenance of lines and signals, authority for the rail sector NSB Gjøvikbanen AS, Nettbuss AS traffic steering and information to in Norway and CargoNet AS travellers on the stations

Other companies with line access Freight Passenger • Cargo Link AS • HectorRail AB • Flytoget AS • Green Cargo AB • MalmtrafikkAS • SJAB (Swedish Railways) • Railcare Tåg AB • PetersonRail AB • Togåkeriet iBergslagenAB • Veolia Transport Bane AS Source: NSB konsernbrosjyre 2010

Figure 15 Responsibilities in the Norwegian rail sector62

Norwegian State Railways (NSB) is wholly owned by the MTC. The company is allowed to operate on its own, through subsidiary companies or through other companies with whom NSB has a shareholding or has a cooperation agreement.

61 Statlig Foretak – SF 62 NSB Konsernbrosjyre 2010

136 15 February 2011

NSB provides passenger transport by train or bus as well as operating freight traffic on railways. NSB undertakes passenger rail services for the State. The agreement regulating these services involves specific train services which are not commercially viable, but that the State considers to be of social importance. Purchases of rail services by the State from NSB amounted to NOK1.66 billion in 2009 and Nok1.74 billion in 2010. The support from the State accounted for about 21% of NSB’s operating revenue in 2009.

The Government has set out several reasons for owning NSB63:  Ensures a strong position for rail transport in competition with other means of transport, particularly because NSB is at present the only real provider of passenger transport services on the whole Norwegian rail network.  The network needs an owner with a long-term perspective on the development of the enterprise because of the relatively high financial risks, due to the high fixed costs.  The State can make decisions and provide funding to optimise value creation in the company over time.  The State can take advantage of the synergies that can be achieved through exploiting the fact that NSB is a broadly-based transport group.  Ensures that transport services offered to the public are both safe and meet the public’s requirements.  Developing a modern and efficient goods transport service contributes to strengthening Norwegian businesses and industries and improving the efficiency of the Norwegian economy.

The NRA is a subordinate agency under the MTC and was established in 1996. NRA is responsible for the operation and maintenance of, and investment in, railway infrastructure on behalf of the MTC. Through public funding and with a socio-economic perspective NRA’s objective is to operate, maintain and develop the national railway network. It is also responsible for the control of rail traffic, allocation of track capacity and collection of track access charges.

NRA is funded by access charges and appropriations from the National Budget. Access charges are currently only paid by freight operators at Ofotbanen and by Flytoget and amounted to about NOK26 million in 201064. In 2010 NRA received support of NOK 8.4 billion from the National Budget.

63 St.meld. nr. 13 (2006-2007) – Et aktivt og langt eierskap (Eierskapsmeldingen) 64 National Budget 2011, MTC-section page 143

137 15 February 2011

In connection with St.prp. nr. 29 (2003-2004), the MTC established BaneService AS. This company is the former construction part of NRA. BaneService AS is the largest supplier of railway infrastructure contractor services in Norway. The company was separated from NRA with effect from 2005 and is fully owned by the Norwegian government through the MTC.

Today NRA owns the following assets:  Railway tracks  Platforms and waiting areas  Stations built after 1996 – stations built prior to 1996 are ultimately owned by NSB  Electrical installations  Signals and security installations  Installations for traffic management  Telecommunications

NRA is currently organized under three main divisions – Track Division, Traffic Division and Development Division, in addition to administrative functions.

NSB Gardermobanen AS, the project company for development of the airport express train from Oslo to Gardermoen, was established as a public company owned by the Government through NSB. A separate company was set up for this purpose, as opposed to doing the project within the NRA which is the procedure for other rail infrastructure improvements and developments, for several reasons:  This model still allowed Government ownership, which was important in order to ensure the delivery of transport policy objectives.  The company was a new entity established to construct the double track rail to Gardermoen. Being a new company it was able to recruit relevant expertise and skills.  As a result of having a single purpose, the administration and individuals in the company were more clearly accountable for the results than they would have been in an organisation with multiple objectives where success on some would hide under- performance in others.

Gardermobanen AS was for a short period responsible for the operation of the rolling stock and the infrastructure. In 2001 the infrastructure was transferred to NRA and the name of the company was changed to Flytoget AS – primarily a rail operating company. In 2003/ 04, ownership of Flytoget AS was transferred from NSB to the Ministry for

138 15 February 2011

Trade and Industry which is usually the owner of the Government’s shareholdings in commercial enterprises.

NSB Gjøvikbanen AS is a subsidiary of NSB. In 2001 the MTC announced that the Government would make all subsidized passenger train services in the country subject to a public service obligation (“PSO”). This had previously been done in several other European countries, such as Sweden and Germany.65 The initial plans, launched in 2002, called for three routes to be subject to PSO: the Gjøvik Line, the Bratsberg Line and the Bergen Commuter Rail.

The Gjøvik Line was the first line on the Norwegian railway system which was contracted out as a PSO. NSB Gjøvikbanen AS was created in 2004 as NSB Anbud AS. The company was established to compete for a ten-year PSO contract on the Gjøvik Line. NSB Anbud AS beat seven other bidders to win the tender with a bid that required a NOK 70 million annual subsidy to deliver the services.66 NSB Anbud AS leases locomotives, carriages and multiple units from NSB, and NSB also sells tickets for them at railway stations. After the tender, approximately 80 employees were transferred to the company. The rolling stock used by NSB Anbud AS is owned by NSB, but rented by the subsidiary. Operations commenced on 11 June 2005.

Following the General Election in September 2005, as a result of a political decision, all further PSO offerings for railway operations were halted, and the company was left with one service. NSB Anbud AS subsequently changed its name to reflect the single route.

In November 2010 the TØI-report “On the track to competition - Preliminary results of competitive tendering of Norwegian railways”, commissioned by the MTC, reviewed the experience of using competitive tendering in the Norwegian railways generally and, in particular, competitive tendering on the Gjøvik line. The report concluded that many of the objectives of the tendering process were achieved. Competitive tendering had resulted in lower costs, better services, increasing patronage and improved opportunities for public management. The gains had been achieved without the employees’ working conditions deteriorating.

65 Regjeringen.no 2004 66 Regjeringen.no 2005

139 15 February 2011

8.2.4 Options

There is a range of options for who might own the HSR infrastructure and rolling stock. In reviewing the options, it is assumed that an operating company will determine the services to be provided and will engage with the infrastructure owner(s) to obtain access to the infrastructure and rolling stock. In most cases, there could be separate companies for the infrastructure and rolling stock. The options may be summarised as follows:  NRA and NSB: NRA owns the new infrastructure and NSB owns the new rolling stock. As owners NRA and NSB will be responsible for the maintenance of the respective assets and for obtaining relevant financing and funding.  New public sector owned company: A new company is set up which owns infrastructure and rolling stock. The new company is owned 100 % by the public sector, probably MTC or NRA, and is responsible for the operation and maintenance and finance and funding of the assets.  A not for dividend company: this is a private company whose ability to pay dividends is restricted through its constitution. Profits are therefore retained to be invested in the business. This company would be responsible for the build (or acquisition), maintenance, financing and funding of the assets. The public sector could own a stake in the company(s). This is the status of Network Rail, the infrastructure owner in Great Britain and has also been applied to some other infrastructure owners in other industries.  A private, regulated utility: this is a private company set up to build (or acquire once built), own, operate and maintain the assets. The company would also be responsible for the financing and funding of the assets. It would have its charges regulated by an independent regulator. The public sector could own a stake in the company(s).  A PPP company: this is a private company set up to build, own, operate and maintain assets for a defined period of time under contract to the public sector. The company would also be responsible for the financing and funding of the assets. It is less likely the public sector could, or would want to, own a stake in the company(s).  A concession: this would involve a private company taking responsibility for operating and maintaining the infrastructure for a defined period of time after it was built and commissioned and generally managing the assets as if the owner.

The choice of ownership option in the private sector is largely a function of the type of financing structure as discussed in section 7.

140 15 February 2011

8.2.5 Advantages and disadvantages

The principal advantages and disadvantages of these different ownership structures are outlined in the tables below:

NRA owns infrastructure and NSB rolling stock Advantages Disadvantages  NRA and NSB are experienced owners of  The existing organisations have a lot of other these assets responsibilities that will require attention and  Having NRA and NSB own the new assets resources and there is a risk that the new should facilitate their integration with the project will not get sufficient attention or existing assets focus  Infrastructure and rolling stock are different  It may be a challenge to recruit the necessary assets with different requirements. Separating competence and expertise into an existing their ownership will allow a proper focus on organisation with a consolidated and well the needs of the assets and their users established company culture and a large  The State as an owner is committed to long- number of existing tasks as opposed to term value creation and industrial growth recruiting into a new organisation with one  Public ownership will better enable the specific objective which is easy to relate to promotion of social and economic initiatives  More difficult for a State owned entity to pay and provide control to be able to deliver market rates and offer incentive packages. regional policy, transport policy etc This could impact recruitment and the way  Consistent with existing structure that the assets are made available to develop services  It is difficult for the government to maintain clear dividing lines between its various roles. For example, addressing policy-type issues might conflict with running the company efficiently, maximising value and/ or responding to customer needs

141 15 February 2011

New public sector owned company Advantages Disadvantages  A new company with the sole purpose of  May be difficult to recruit relevant skills developing the HSR will possibly be more  May be difficult to coordinate work and focused on the task responses to issues between the new company  A company separated from NRA and NSB and NRA and NSB with a degree of autonomy is likely to be more  It is difficult for the government to maintain flexible and agile and could therefore respond clear dividing lines between its various roles. better and faster to challenges For example, addressing policy-type issues  The advantages related to achieving policy might conflict with running the company objectives are the same as for the NRA and efficiently, maximising value and/ or NSB option responding to customer needs  Having NRA and NSB as part owners could contribute to ensuring access to rail knowledge and good coordination with NRA and NSB

Not for dividend company Advantages Disadvantages  Profits are retained for investment in the  Limitations on paying dividends make it very sector difficult to raise equity and this may impact  Private sector involvement may facilitate a the ability of the company to borrow more commercially orientated, customer  Corporate structure and obligations may focused approach and assist with raising conflict with less commercial, more policy finance from the private sector related decisions that public sector may want  May be easier to recruit individuals with the to pursue. relevant skills from other sectors as not bound by any public sector pay structures or grades

A private, regulated utility Advantages Disadvantages  Same as for a not for dividend company plus:  Regulation arguably introduces uncertainty  Regulation will provide greater certainty of relating to regulatory decisions income enabling the company to take a more  The regulatory process can be costly and it can long term view and plan ahead be a distraction  More certain income streams may make it easier to raise finance  Effective regulation should drive out efficiencies

The advantages and disadvantages of PPPs and concessions have already been covered in sections 6.5.1.7 and (with regard to financing) in section 7.

142 15 February 2011

It is possible for the public sector to take a stake in all of the companies outlined above. The challenges with doing so are that:  A public sector shareholder may have very different objectives and priorities as compared to private sector shareholders.  A public sector shareholder would need to be prepared to put equity at risk.  There may be much more efficient and direct ways for the Government to achieve its objectives e.g. regulation, legislation, conditions surrounding funding support.

8.3 Management of the HSR infrastructure and operation of HSR services on the infrastructure

8.3.1 Issue

Traditionally railways have been vertically integrated with providers of infrastructure also being responsible for the operation of services. This reflects the need for an effective interface between rolling stock and the track and signalling systems. More recently Directive 2001/14/EC has challenged this approach. Specifically the EU’s philosophy has been to stimulate railways to be more competitive with other modes by encouraging on- rail competition. Crucial to achieving this is the separation of infrastructure development, ownership and maintenance from the provision of passenger and freight services in order that the relationship is arms length and anyone can credibly apply to provide services and be treated in a transparent and fair manner.

8.3.2 Options

The principal options relating to the provision of an HSR in Norway are:  Vertical integration: whoever owns the infrastructure is also responsible for its maintenance and the operation of all services on that infrastructure.  Vertical separation: ownership and maintenance of the infrastructure is kept separate from the provision of passenger and freight services on that infrastructure. This option would also better encourage multiple operators on the infrastructure (if desired) provided there is adequate regulation to ensure ‘fair’ allocation of capacity and determination of access charges.  Mixed: the ownership and maintenance of the infrastructure is undertaken by the same company that provides passenger rail services but freight services are provided separately (or vice versa). An independent regulator may be desirable in this structure

143 15 February 2011

in order to regulate access to the new HSR infrastructure and the pricing of that access.

8.3.3 Advantages and disadvantages – operation of infrastructure and services

The tables below summarise the principal advantages and disadvantages of the different approaches to owning and operating the HSR railway:

Vertical integration Advantages Disadvantages  Facilitates effective management of the  May restricts competition for the provision of wheel–rail interface (i.e. that rolling stock is services compatible with the infrastructure and issues  Difficult to tender to private sector on this such as track wear are properly addressed) basis – infrastructure and maintenance skills  Infrastructure provider gains a better are quite different from skills relating to understanding of the needs of customers providing services  Competition can be facilitated through  May not comply with EU rules – there may be regulation an exemption to enable financing of new  Minimises interface risks through whole infrastructure but it is not clear how this system approach to management applies to high speed rail in Norway  Maybe better cost control and greater scope to realise synergies

Vertical separation Advantages Disadvantages  Reflects the existing structure in Norway and  More difficult to coordinate the infrastructure is compliant with EU rules - operation interface which can have a  Allows on rail competition (assuming parties detrimental impact on the quality of service to want to compete and market is big enough) customers and on cost control  Opportunity to choose the best infrastructure  Need to regulate a complex system to ensure providers and the best providers of services the fairness of access charges to all users without them needing to be in the same consortium  Can be implemented whilst retaining both infrastructure and operations in common ownership (as is the case with Deutsche Bahn)

144 15 February 2011

Mixed Advantages Disadvantages  There may be good arguments for integrating  Potentially complex and confusing infrastructure and passenger operations but  May not comply with EU rules – there may be the effective development of freight services an exemption to enable financing of new may require a different operator – less of an infrastructure but it is not clear how this issue if freight services not to be provided on applies to high speed rail in Norway the HSR infrastructure  Effective regulation would facilitate the use of the infrastructure by other service providers

8.4 Single provider of passenger rail services on HSR or multiple?

8.4.1 Issue

Different countries have chosen different solutions relating to who should operate their high speed services. In the UK, whilst there is only one high speed line there is an international operator of passenger services and a separate operator of domestic high speed services. As a result of open access provisions, a second provider of international services is about to commence operations. In Spain there is a separate entity operating all high speed services but this company is a subsidiary of the operator of domestic services. In France it is the same operator for all domestic and high speed services.

NSB and private freight operators have access to the existing infrastructure. This is consistent with Directive 2001/14/EC and consideration of any change to this is outside our scope of work.

If Norway introduces a high speed railway it will need to decide whether NSB is to be the operator or whether to introduce a new, dedicated primary operator. This decision will likely need to be made early in the planning of the network because it will help to have operator input in finalising the designs of rolling stock and stations. Also there will be implications for the scope and drafting of supply contracts, for example there may be some infrastructure related tasks to be performed by the operator such as snow clearing or operation of trains for maintenance purposes.

Article 16 of EU Directive 2001/14/EC requires that any safety-approved operator may apply for access to a country’s rail network and that access should be granted provided there is available capacity and the applicant can pay the relevant access charges. The

145 15 February 2011 rationale for this approach is to use competition to stimulate improvements in service provision. However this has applied to varying degrees in different member state and in practice there is very little or no open access operation of passenger services in the majority of member states. Even in the UK, possibly the most liberal market, the vast majority of services are under Government concessions (franchises). Consideration therefore needs to be given to whether open access is to be granted to the HSR infrastructure. Such considerations will likely need to address how giving access might impact the ability of the high speed operator to run high speed services and whether there are any implications for the returns that might be expected and therefore the ability to generate funds from operations.

8.4.2 Options

There are five main options surrounding the provision of passenger services:  Single operator: this involves there being one national operator (currently NSB) on the vast majority of routes as now.  Existing operators on classic network plus a new high speed service operator: this involves retaining the existing operators of passenger services on the existing infrastructure and introducing a separate operator of high speed services (recognising that there can also be open access applications from other operators to operate international services).  Existing operators on classic network plus separate tendered or negotiated PSO/concession operators for each HSR Corridor: under this option the operators of services on the existing infrastructure would be retained and there would be different HSR operators on each Corridor (recognising that there can also be open access applications to operate international services).  Competition on the HSR between two or more operators: this might involve the Procuring Authority tendering two separate concessions or possibly negotiating a PSO contract with NSB for some services and tendering a concession for others. There is little relevant precedent for this so it is not clear how services would be divided or how competition would work in practice. Most competitive situations on rail have arisen where a new entrant has challenged a dominant operator, rather than being designed from the beginning.  Open access for passengers: under this option any operator can have access to the HSR infrastructure in competition with a primary (PSO) provider, provided they meet certain requirements as described in section 6.3.3. In addition there will likely need to be an agreed system for allocating the capacity i.e. there needs to be a mechanism for

146 15 February 2011

coordinating usage to make best use of the capacity – a slow freight or commuter train just ahead of a high speed passenger service could severely limit end to end journey times. Open access might be combined with one of the above options to give a guaranteed base service combined with the benefits of competition.

It is quite possible that due to the size of the market and operating constraints, there will be only two credible operators of passenger services on the HSR – NSB and a new dedicated operator of HSR services (assuming they are kept separate). However, it is possible to envisage a scenario where, if high speed rail is a substitute for domestic air services, certain of the airlines may want to be involved in providing rail services on the HSR. There might also be other niche operators of passenger services e.g. tours. There are already a number of private sector providers of freight services.

Under all of these options it is assumed that open access freight operations continue on the existing infrastructure and would have access to the HSR infrastructure if they could meet the necessary approvals, though in practice the attractiveness of HSR for freight will depend on the access charges and the cost of investing in appropriate rolling stock.

The key determinants of the best approach to operating passenger rail services will be the number of Corridors that ultimately operate high speed rail, the size of those businesses and the availability of skills to operate passenger services as well as whether competition within the market is seen as desirable or practical. Recent developments across Northern Europe and in the UK in particular mean that there is a range of well qualified operators for passenger rail services. There is also the possibility of a joint venture, say between a private operator and NSB as well as the possibility of the current Norwegian and Swedish operators forming a joint venture.

It should also be noted that EU Rules require open access for cross-border passenger service operations with rights to cabotage (i.e. carry domestic passengers). So, for example, a prospective operator of services between, say Bergen, via Oslo and Stockholm and/ or Gothenburg must be given access to the rail infrastructure in Norway, subject to availability of capacity and other requirements.

8.4.3 Advantages and disadvantages

The tables below summarise the principal advantages and disadvantages of the different options for operating passenger rail services:

147 15 February 2011

Single operator Advantages Disadvantages  Simple, largely reflecting current  NSB may lack the skills to develop the new arrangements business and may not be able to give HSR the  Easy to coordinate services, for example attention it requires timetabling, ticket pricing, marketing  Any reputational problems relating to existing  Familiarity with operating passenger services services could tarnish the HSR services in Norway  Passengers may not be convinced that they  Ease of prioritising services e.g. where there will receive an airline standard of service on competing requirements for train paths and high speed services – important if high levels platforms of switching between modes are to be  No complexity over revenue allocation encouraged  No international expertise introduced

Existing operators plus separate operator of high speed services Advantages Disadvantages  Single, focused operator of each type of  Need to co-ordinate activities between service operators who may feel they are competing  No cross-subsidy of loss making services with each other  More innovation from dedicated operator  May need to determine how to allocate  Co-ordination of timetables and access to the revenue between operators e.g. from through existing infrastructure limited to two parties tickets or national rail passes only  Need arrangements to preserve network  HSR operator able to establish own reputation benefits e.g. ability to buy a ticket from and standards for service provision anywhere to anywhere irrespective of operator  HSR operator able to make independent decisions on how to invest and develop the service  Could bring in international expertise  Potentially more funds for investment  New corporate culture  HSR operator could be a JV including NSB

148 15 February 2011

Existing operators plus separate operators for each HSR Corridor Advantages Disadvantages As above, plus:  Fragmented approach may create cost and  Single, focused operator of each type of coordination issues service.  Each of the HSR businesses may not be big  Market more attractive to international enough to attract appropriate management bidders (if tendered) and other staff and justify investment –  Each HSR operator able to establish own diseconomies of scale reputation and standards for service provision  Competition for key, skilled resources could (but see disadvantages) drive up costs  HSR operator able to able to make independent decisions on how to invest and develop the service  Might offer opportunity for benchmarking

Competition on HSR between two operators Advantages Disadvantages Some of the above advantages, depending on how  May be too complex to justify benefits of done (but see disadvantages), plus: competition (and few precedents)  Compliant with Directive 2001/14/EC  May inhibit co-ordination of services  This approach may increase revenue from the  Will likely increase operating costs new infrastructure and help contribute to the  May not satisfy passengers if they have to cost of maintaining the infrastructure return with the same company they travelled  Competition between operators may improve out with, thus reducing flexibility (though this the service for customers (may be better for problem can be avoided with interavailable open access to provide competition at the fares) margin than arbitrarily splitting the market per the previous option)

Open access for passenger operations (high speed or domestic) Advantages Disadvantages  Compliant with Directive 2001/14/EC  Domestic service providers will have to  This approach may increase revenue from the upgrade rolling stock to be able to run on the new infrastructure and help contribute to the HSR infrastructure without compromising cost of maintaining the infrastructure high speed operations  Provision of extra services on the HSR routes may free up capacity on the existing infrastructure allowing local services to be improved  Competition between operators may improve the service for customers

149 15 February 2011

8.4.4 Term of operating contracts

Within these options there is also a question of whether operators are given rights to provide passenger services in perpetuity, or at least for a very long period (say 15-20 years), or whether operating contracts should be tendered every, say, 5 – 7 years. The rationale for the latter approach in the UK is that, owing to capacity constraints, there is unlikely to be any credible on-rail “competition in the market” and therefore “competition for the market” is relied upon to encourage operators to grow, develop and improve the service they provide. However this policy is now under review and current intention is to let longer franchises in order to encourage investment.

8.5 Regulation of service quality and fares for HSR services

8.5.1 Issue

Consideration will need to be given to whether issues such as service quality and the pricing of tickets are specifically regulated for HSR services or whether they are left to the discretion of the relevant operator. The reason for having to address this issue is that the operator is likely to be a monopoly provider of rail services and therefore the ability of customers to constrain the operator’s ability to abuse his position by choosing to use alternative services or modes of transport may be limited unless air or road transport are seen as genuine competition. Even where such competition does not exist it may not be necessary to introduce controls but instead to rely on Norwegian consumer protection legislation and the Norwegian competition authorities.

Issues surrounding the regulation of safety and operating standards are considered in section 8.6.

8.5.2 Options

There are a number of ways that the provision of HSR services could be controlled following construction of a high speed railway:  No contractual controls: Under this option the operator would be relied upon to make his own decisions surrounding quality of service and fares and customers would be protected by Norwegian consumer protection rules, the threat of competition and the ability to use alternatives. For example, HSR customers could choose to fly if services were not to the required standard or fares were too high.

150 15 February 2011

 Competed contracts: Under this option operators could be contracted to provide services under contract as a result of a competitive tender. The contract would simply record the requirements to be met by the operator (quality commitments, agreed fares increases) including any conditions surrounding the provision of any financial support by the State i.e. the support would be conditional on compliance.  Negotiated PSO contract: The negotiated PSO contract could include detailed specifications regarding services to be offered and fares to be charged.  Regulation: This option refers to a situation where quality standards and fares increases are not addressed in a contract with the operator(s). Regulation would cover fares as well as the quality of services delivered to customers – there is limited point in regulating fares if an operator can make compromises that adversely affect customers in order to deliver a fares target. This approach can be extended so that, for example, fare increases might only be permitted provided defined performance measures (train performance and customer satisfaction were being met) i.e. reward to the operator for delivering improved standards for customers.

At present MTC negotiates a contract annually with NSB covering services to be operated and fares.

8.5.3 Advantages and disadvantages

The tables below summarise the principal advantages and disadvantages of the different approaches to providing control over fares, quality etc:

No contractual controls Advantages Disadvantages  Simple to administer and cheap  If competition is not real, operator may  Provided there is genuine choice or alternative choose to, and may be able to, abuse a modes this approach should still drive monopoly position appropriate behaviours by the operator

151 15 February 2011

Competed Contracts Advantages Disadvantages  Competition should obtain best value for  Competing contracts can be costly both for money solutions around service quality and procuring authority and bidders, depending fares increases. This can then be contracted on the level of detail that is contracted.  Forces procuring authority to clarify  Need to be able to define and measure the requirements, in particular surrounding standards to be delivered standards, and how they will be measured  Because the requirements are contracted, it  Facilitates appropriate discussions and may be difficult to agree changes over time – negotiations around the level of costs required although contracts might be let for relatively to deliver to the required standards – it is easy short periods to facilitate this to set quality standards without recognising the cost implications.

Negotiated PSO Advantages Disadvantages  The Procuring Authority can specify its  Need to be able to define and measure the requirements in the contracts to b e competed standards to be delivered  Requirements may be expressed as absolutes  If PSO contracts are for long periods they not (x% increase per annum) or formula based flex adequately to reflect changing mechanisms (linked to a national inflation circumstances and priorities measure)  Mechanism could allow for passengers to express their view (e.g. use of passenger surveys)

Regulation Advantages Disadvantages  Relatively flexible approach whereby  Can be costly and time consuming to Regulator can undertake reviews, request administer evidence and require submissions in order to  May be over complicated given the size of the assess and determine standards high speed railway and the existence of  Accountability of Regulator means it may competition from other modes focus attention on what customers say they  Uncertainty over how Regulation will work in want rather than its own interpretation practice can inhibit actions and investment  Requirements can be flexed over time

152 15 February 2011

8.6 Determination of safety rules and operating standards

8.6.1 Issue

HSR infrastructure and services are likely to require bespoke operating standards and safety rules. Whilst such rules can be based on EU Regulations, consideration needs to be given to who will actually set the detailed rules and check compliance.

8.6.2 Options

In theory, there are a number of ways that the rule setting and compliance checking could be organised post completion of HSR. However, in practice the focus should be on developing a single Authority that is fit for purpose.

The rationale for there being a single Authority is:  There is a significant risk that having two Authorities, one for the existing network and one for HSR, could result in inconsistencies or even contradictions between the rules and standards established by each Authority. Critical to establishing and maintaining a safe railway will be the certainty that all parties – service operators and infrastructure operators and maintainers alike – are fully aware of the rules and standards they should be operating to.  The extent of integration of the new high speed railway with the existing railway is likely to be high meaning that new high speed trains will likely have to comply with the standards and rules for the existing railway. There is little value in introducing different standards and rules unless they are absolutely necessary.  The skills required to address these issues for the existing railway will largely be the same as those required for the HSR. Setting up two Authorities would be more costly than a single Authority and would likely result in a dilution of expertise.

An Authority that is fit for purpose will require:  A good understanding of EU rules, standards and guidance in the areas of safety and operations.  An ability to adapt EU rules and standards to the Norwegian environment.  A practical knowledge of the Norwegian operating environment and an ability to identify specific issues that might more frequently arise in that environment.  The respect of infrastructure and service operators such that they accept recommendations and make changes as required rather than challenging them.

153 15 February 2011

On this basis it is likely to be most economic and make the best use of the existing regulatory team’s (the Norwegian Railway Authority) expertise for the regulation of the new railway (existing and new HSR services) to be based on the Norwegian Railway Authority. New skills and additional resources could be introduced as necessary to address HSR related issues.

8.7 Allowing other operators to use HSR infrastructure with existing rolling stock

In the discussion above it has been assumed that the infrastructure manager will define the characteristics of rolling stock and services that can use the high speed rail network. This will have the advantage of minimising conflicts between operations (slow trains running on high speed lines) and adding to infrastructure requirements (infrastructure built to enable freight services may need longer passing loops and introduce greater limitations on gradients). However, this Phase 2 study is required to consider all potential users of the HSR network. Allowing domestic services and freight operators to use the HSR network using existing rolling stock could have the following advantages and disadvantages:

Allowing domestic services and freight operators to use the HSR Advantages Disadvantages  This approach is likely to maximise revenue  Freight services (slower trains) and domestic from the new infrastructure and help services (slower trains and greater stopping contribute to the cost of maintaining the frequency) may compromise the speed of high infrastructure speed services  Provision of extra services on the HSR routes  Enabling freight and passenger service should free up capacity on the existing operators to use the high speed routes with infrastructure existing rolling stock may lead to  Consistent with encouraging modal shift to compromises in design (gradients, curves etc) rail  The weight of freight trains may increase the rate that the high speed infrastructure wears out resulting in more costly infrastructure or higher maintenance costs

In the UK, a franchised commuter operator uses the CTRL/HS1 infrastructure but has had to procure trains which are capable of running both on the existing domestic infrastructure and achieving the rolling stock requirements of the CTRL/HS1 infrastructure.

154 15 February 2011

8.7.1 Closed network or integrated with classic network?

A recurring debate amongst developers of high speed services in other countries is whether the trains providing high speed services should only be able/ allowed to use the dedicated high speed network or whether they should also operate on the existing domestic network. In France, high speed trains can run on both networks and in the UK (as explained above) the new domestic high speed high speed trains introduced in Kent have been designed to run on the existing and the high speed network. In both cases this gives flexibility over the end to end journeys that can be offered, for example allowing access to existing central stations and branches where the cost of HSR construction would not be justified. For example, the HSR network runs as far as the French Riviera but then the trains switch to the classic network in order to serve a large number of resorts, thereby encouraging holiday makers not to drive.

In Spain, the high speed network is of a different gauge to the domestic network and there is no possibility for a train to use both networks. In France there is currently a debate about whether services should be redesigned on a hub and spoke system and high speed trains then being limited to run only on the high speed network.

Technical, timetabling and demand experts should advise on the best solution for Norway.

8.8 Approach to capacity allocation and access charging

8.8.1 Introduction

In developing and contracting the commercial arrangements surrounding the HSR infrastructure, consideration will need to be given to:  Where several parties want to use the HSR infrastructure, how the access should be allocated amongst users?  Whether users should pay for the use of the infrastructure?  If users are to pay, the design of the charging regime.

8.8.2 Allocation of access to the infrastructure

Assuming that there is more than one operator, it is possible that over time capacity will be fully utilised by services or at least there will be competition for the most attractive

155 15 February 2011 paths. At some point it will therefore be necessary to decide between competing requirements for access. Matters that will affect the decision making process include:  Time of day: depending on how services are used, passenger trains tend to be at their most loaded at the beginning and end of the working day, with volumes dipping during the day and tailing off at night reflecting commuting and business travel. However, the more successful long distance services attract a wider market including significant leisure travel and therefore do not experience such major fluctuations in ridership. Some such services can be more crowded at weekends than during the week. Restricting the access of passenger train operators to the infrastructure could adversely impact the Government’s efforts to encourage modal shift and operator’s efforts to develop comprehensive timetables.  Speed of train: depending on the availability of passing loops and double track, the introduction of slow trains (typically freight but possibly passenger trains that stop frequently) might impact the ability to run fast trains because a fast train can catch the slow train. Consequently careful thought needs to be given to the mix and timing of services in order that potential conflicts are properly addressed.  Economic contribution: given that any new infrastructure will require significant investment, it makes sense to maximise the economic benefits being realised by the infrastructure. This will necessitate evaluating the potential contribution that can be made by different operators. This is particularly relevant to decisions to allocate access between freight and passenger operators – the freight operators may make modest contributions to the cost of the infrastructure through access charges but could be critical to the economic prosperity of regions and may reduce the burden on the road network.  Alternative routes: constraining access to infrastructure does not mean that the service cannot be run because there may be alternative routes. The existence of alternative routes, which is likely to be the case in Norway where HSR will not introduce new destinations, will mean that the consequences of not allowing an operator to use the high speed network are not as great as they would be if traffic was forced to use other modes. However, the alternative routes will not be able to offer a high speed service.  Access for maintenance: when considering access to infrastructure it is important to take into account the need for access in order to be able to maintain the infrastructure.

156 15 February 2011

8.8.2.1Options

For the purposes of the review of these options it is assumed that there is scope for more than more than one user of the new HSR infrastructure.

There are a number of approaches to allocating capacity. These include:  Infrastructure operator allocates capacity - unrestricted: under this approach it is left to the absolute discretion of the infrastructure operator (NRA) to allocate capacity.  Infrastructure operator allocates capacity - regulated: under this option the infrastructure operator (NRA) is free to allocate capacity subject to specific rules (e.g. that access should be given to all operators who are approved to request access and can pay the access charges) and the possibility of appeals to a Regulator if an operator feels that the infrastructure operator has not properly followed the guidance provided. This is the approach currently adopted in Norway and widely in the EU.  Auction of capacity: under this option particular paths would be auctioned and awarded to the operator who offered the highest price for the path.  Pre-allocation of capacity: paths could be pre-allocated in perpetuity or for a fixed term with no scope for variation. Allocation would be made on the basis of pre- determined criteria reflecting policy objectives or anticipate economic benefits.  Independent Regulator: an independent third party could be made responsible for the allocation of paths on the basis of defined criteria. Decisions would be transparent and would be justified by reference to the criteria.

In practice any solution could combine the features of more than one of the scenarios described above.

8.8.2.2 Advantages and disadvantages – allocation of access to the HSR infrastructure

The principal advantages and disadvantages of the main options for allocating access to the HSR infrastructure are outlined in the tables below:

157 15 February 2011

Infrastructure operator allocates capacity – unrestricted Advantages Disadvantages  Simple  Infrastructure operator may not be best  Decisions should be made in a timely manner placed to assess the wider economic benefits of giving access to different operators  Infrastructure operator may prioritise his own access for maintenance purposes  Given historically close relationship between NRA and NSB there may be concerns of favouritism  Lack of transparency and uncertainty over access may put off other operators thereby constraining on-rail competition  This is not consistent with Directive 2001/14/EC Articles 13-29 which set out a clear basis for allocating capacity

Infrastructure operator allocates capacity – regulated Advantages Disadvantages  Relatively simple  Infrastructure operator may not be best  This complies with Directive 2001/14/EC, placed to assess the wider economic benefits Articles 13-29 provided the specific rules set of giving different operator access are consistent with the Directive  Effectiveness of this approach is highly  Decisions should be made in a timely manner dependent on the quality of guidance given to  Relatively transparent process with the infrastructure operator and the cost of an infrastructure operator having to justify appeal process decisions  Will still be a risk that infrastructure operator  Scope to appeal to a Regulator whose prioritises own access for maintenance decisions can be used to establish precedents purposes and, over time, limit the areas for dispute  Needs to be provision for guidance to be changed over time to reflect circumstances and changing priorities

158 15 February 2011

Auction of capacity Advantages Disadvantages  Capacity is allocated to the operator  Prioritisation of paths should take into generating the greatest benefit from the path account wider economic benefits and not just  Transparent process ability to pay  Relatively simple process to implement  Separate provision needs to be made for socially necessary services which would otherwise be reduced as a result of this approach  Could result in marginalisation of infrastructure operator’s access for maintenance purposes (or at least make maintenance very expensive)  Need to determine the periodicity of auctions – frequent auctions could undermine long term planning and create damaging uncertainty e.g. difficult for a freight operator to engage long term with a client if he is uncertain whether he will have paths in a year’s time and at what price

Pre-allocation of capacity Advantages Disadvantages  Transparent process  Need to decide who should be responsible for  Simple to implement pre-allocation and the basis for decision making  Approach is not adaptable to changing circumstances and priorities  Makes it difficult for new operators to access the popular paths  May result in costly and disruptive behaviours to get round this approach – e.g. new operators ‘buying’ capacity off operators who have been awarded paths. As a result the whole market could become increasingly opaque  Unlikely to comply with EU Directive 2001/14/EC

159 15 February 2011

Independent Regulator Advantages Disadvantages  Transparent process  As precedents are set the process could  Regulator can develop expertise and define become onerous, time consuming and costly (and refine) process for considering  The process introduces an element of competing proposals uncertainty which could inhibit long term  Regulator can tailor approach to planning circumstances – there may be little or no  Decision making divorced from knowledge of competition for access in the early years after infrastructure capability new infrastructure is introduced  Regulator can address key issues like for how long paths should be awarded  Likely to comply with EU Directive 2001/14/EC

The analysis of principal advantages and disadvantages above indicates that there is no one solution that reconciles all requirements. In practice the approach adopted needs to address adequately the likelihood that in the early years there is little or no competition (because the needs of all operators can be met) but over time the potential for competition may increase if the HSR network is successful. Even then, it is likely that there will only be pinch points between certain hours and over parts of Corridors rather than a need to address the allocation of every path on the network 24 hours per day, seven days per week.

8.8.3 Should users pay for access?

EU Directive 2001/14/EC states that users should have to pay for access to rail infrastructure. It focuses on ensuring that whatever access charges are levied, they are consistent between users and transparent such that individual operators cannot be favourably treated by the infrastructure provider.

Arguments in favour of levying access charges include:  Infrastructure is costly to build and it is right that this cost is recovered from users.  Operating a train over a piece of the network results in wear and tear to that network which should be paid for by the operator (and recovered from customers) in order to reflect the true cost of providing services.  On the basis that the winning bidder realises the greatest benefit from having access to infrastructure, access charges can be used to allocate capacity by auctioning that access.

160 15 February 2011

 Access charges are already levied in Norway albeit that only a limited number of users exceed a weight threshold that makes them eligible to pay.

8.8.4 Design of access charging regimes

8.8.4.1Introduction

This section provides a high level review of issues surrounding the development of access charges. It is beyond the scope of this report to suggest how access charges should be determined for the HSR infrastructure. However, it is important that early consideration is given to this issue as the recovery of cost through access charges affects risk allocation and funding and financing requirements and has a significant influence on behaviours during both the construction and operating phases.

8.8.4.2 EU Rules

If more than one operator is to be given access to a piece of infrastructure it is important to have a transparent and non-discriminatory approach to determining the allocation of and charge for that access, otherwise the infrastructure provider could abuse (or be accused of abusing) his monopoly supply position or one operator could receive an unfair advantage over its competitors.

EU Directive 2001/14/EC “The allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification” sets out the EU’s principles for access charging. In addition to underpinning transparency and non-discrimination, the Directive seeks to improve the allocation of capacity and service quality levels by ensuring that the infrastructure provider is adequately compensated. This is important because in many countries in Europe spending on infrastructure maintenance has been constrained for national budgetary reasons for several years with the result that there are significant maintenance backlogs.

The EU Directive sets out the following principles surrounding the determination of charges:  Charges should reflect the infrastructure manager’s understanding of his asset base and the costs he incurs/ expects to incur to operate and maintain that asset base.  The level of charges can take account of externalities – the costs of competing modes. This may be important where a Government wants to encourage a modal shift.

161 15 February 2011

 The access charge should reflect the costs directly incurred by the infrastructure manager as a result of allowing a train service to be operated.  The access charge itself can be broken down into four components:  Minimum access charge: this is a charge for those costs directly incurred by the infrastructure manager to enable the operator to run a service. This includes not only infrastructure costs but costs of handling requests, train control etc.  Track access to service facilities: this is a charge to reflect the use of facilities by the service operator. It therefore includes using stations, freight facilities, depots, storage sidings etc.  Additional services: this covers the provision of power or fuel and extra support such as shunting services and tailoring of contracts (e.g. for transport of dangerous goods).  Ancillary services: this deals with any cost incurred by the infrastructure manager that has not been picked up under the other three headings. Sources of cost might include use of telephones, technical inspections of rolling stock to get approval for use etc.

The Directive provides that since infrastructure managers are effectively monopolies it would be desirable to have a regulatory body that can arbitrate if disagreements over the granting of access and the cost of access charges arise.

In addition, the infrastructure manager is required to publish a Network Statement to support the transparency of the process. The Network Statement will set out:  conditions for access;  charging principles and tariffs; and  principles and criteria for capacity allocation including restrictions on the use of the infrastructure, for example because it is being maintained.

The Directive also provides that infrastructure charging regimes shall, through a performance scheme, encourage operators and infrastructure managers to minimise disruption and improve the performance of the railway network. This may include penalties for actions which disrupt the operation of the network, compensation for undertakings which suffer from disruption and bonuses that reward better than planned performance.

In order to develop an access charge regime it is necessary to consider:  what costs should be recovered?  how they should be apportioned between users? and  the access charge mechanism to be used to determine payments from users to infrastructure operator.

162 15 February 2011

8.8.4.3 What costs should be recovered?

Consistent with the EU rules outlined in the section above, it is generally accepted that it is appropriate to recover:  operating, maintenance and renewals costs (“OMRC”) relating to the infrastructure; and  construction costs.

OMRC may simply cover the management and operation of the infrastructure owner, maintenance and renewals of that infrastructure. It might also include the costs of other infrastructure e.g. stations and depots depending on how whether such cost are separately charged for.

8.8.4.4 How should the costs be apportioned?

From an economic perspective, the most appropriate way of apportioning costs is by identifying the long-run incremental operating, maintenance and renewals costs (“LRIC”) associated with the use of the infrastructure by different operators. This means assigning to each operator the costs that would not be incurred in the long run if they did not operate (“Incremental Costs”). Such costs will typically relate to pieces of infrastructure or activities which are required by one operator only. These costs would be recovered in full from the relevant operator.

The remaining costs (“Common Costs”) relate to costs incurred to keep the infrastructure open but which do not accrue to a specific operator. The main approaches that might be considered for apportioning common costs between users are:  Fully allocated cost (“FAC”) methods, where common costs are apportioned in line with a readily observable measure of output or resource use such as tonne km, train km, train journeys, or track occupancy (train minutes).  Equi-proportional mark up (“EPMU”), where common costs are apportioned between operators in line with the LRICs incurred in servicing these operators.  Ramsey pricing, where common costs are apportioned in such a way as to minimise the impact of recovering common costs on the demands of, and the volume of output supplied to, consumers (i.e. price sensitive users pay less, price insensitive users pay more).

163 15 February 2011

In the UK, Network Rail apportions Incremental Cost on the basis of equivalent million gross tonnes per annum and other costs are considered to be common and are apportioned on the basis of tonne/ km.

The access charge regime for Norway is summarised in section 6.3.4.1.

Regulatory Authorities tend to focus on whether the LRIC of each operator has been properly identified and apportioned, and whether the approach to apportioning common cost is justified from an economic perspective. Users are more likely to be concerned about transparency, fairness, ease of implementation and ultimately the actual level of charges.

8.8.4.5 The mechanism for charging

The charging mechanism needs to reconcile:  properly reflecting the user’s share of costs; with  predictability for business planning purposes; with  making bidders address whole systems cost of their operations.

Achieving objective 1 suggests a fixed (to cover LRIC) and variable (covering common costs) charging mechanism. Objective 2 would probably be better supported by a fixed access charge mechanism and Objective 3 would be met by a variable charge reflecting the incremental wear and tear on the infrastructure caused by the use of particular rolling stock. The higher the variable element of the charge, the more this could incentivise appropriate behaviour by the operators but the greater the uncertainty about whether the revenues for the infrastructure operator will be sufficient to cover costs.

The recently completed CTRL/HS1 access charging regime in the UK allocates Common Cost on the basis of train minutes usage of the infrastructure because there was a desire, given the nature of the infrastructure, to incentivise the use of fast trains. However, in order to avoid disincentivising the use of stations, time spent stopping in stations is excluded from the measure of train minutes and the Incremental Cost of using stations was set very low.

Choosing between the different methods is not straightforward and needs to be tailored to the specifics of a project and the behaviours to be encouraged or discouraged.

164 15 February 2011

9 Organisation of the procurement of HSR

9.1 Introduction

This chapter considers principally issues surrounding how the entity that is responsible for procuring High Speed Rail in Norway (the Procuring Authority) might be organised, what roles it needs to fulfil and the range of parties with which it might have to engage. The Procuring Authority is the entity that delivers the contractual and commercial strategies developed to deliver HSR in Norway. Its role and resource requirements are therefore shaped by these strategies rather than the other way around.

For the purposes of this study it has been assumed that even if there are small pieces of infrastructure work to be led by NRA they would still have to be procured formally because NRA does not have the in-house resource to undertake such work itself.

This chapter contains the following sections:  Roles to be fulfilled in project delivery  Role of Government  Role and organisation of the Procuring Authority  The Project Delivery Company  Organisation goals of the Procuring Authority  Organisation tasks (by delivery activity)  Addressing interface risk  Other interfaces outside the HSR programme organisation  Governance processes and controls

Chapter 8 describes a range of issues surrounding the future structure of the rail industry in Norway. These are issues that must also be resolved to facilitate the procurement of HSR in addition to the organization of the Procuring Authority.

9.2 Roles to be fulfilled in project delivery

165 15 February 2011 project meets its (the Government’s) strategic objectives. Given Norway’s approach to EU regulations, it is highly likely that the Government will also want to ensure that the HSR complies with EU interoperability requirements.

The private sector will likely have an important role to play in the delivery, operation and, possibly, financing of HSR. The Government will therefore need to put in place a structure that optimises the role of the private sector. The delivery structure for the procurement of HSR needs to have the following attributes:  Focus on key strategic objectives  Ability to mobilise appropriate levels of resource and expertise  Ability to secure funding and finance  Minimal bureaucracy and over head costs  Best practice in governance and reporting arrangements  No distraction from managing the existing network in a way that is safe and reliable  Independence of interests of minority stakeholders

A very simple outline of the key roles to be fulfilled in an HSR project delivery structure is as follows:

Figure 16 Key Roles in an HSR Project Delivery Structure

9.3 Role of Government Government has a key role to play in defining the objectives of HSR in Norway and the objectives of the Procuring Authority. Together these will give a framework against which the Procuring Authority can inform its decisions, progress the procurements and a means to measure success. For these reasons it is important that Government gives the appropriate guidance in the first place – a good Procuring Authority should not have to

166 15 February 2011 clarify or judge the appropriateness of instructions but merely implement them as effectively as possible.

Examples of Government objectives for HSR might include:  Delivering a safe, reliable railway without adversely impacting the existing railway  Ensuring specific journey time improvements  Specific geographic and socio-economic markets to be served  Achieving specific environmental objectives

Examples of Government objectives for the Procuring Authority could include:  Delivering value for money  Avoiding cost creep  Deadlines for delivery  Limitations on the levels of risk to be borne by the Government  Making the best use of Norwegian resource and expertise  Creating job opportunities in remote areas over a period of time  Utilising private finance

This means that there needs to be a close working relationship between the Procuring Authority and Government in order to inform the decisions that need to be made at the outset and then ensure ongoing political support for the project. To support this relationship the Government should be very clear which Ministry is responsible for setting objectives and making decisions and the process whereby people outside that Ministry can make their views known. This may require the establishment at Ministry level of a steering committee or some other form of senior group to represent the range of views that need to be brought together to deliver HSR.

9.4 Role and organisation of the Procuring Authority

9.4.1 Introduction

This section considers:  The organisation of the Procuring Authority: what is the form of the entity that takes responsibility for delivering the Procurement of HSR and by whom it is owned; and  Accountability: who the Procuring Authority has to report to and about what.

167 15 February 2011

9.4.2 Organisation of the Procuring Authority

9.4.2.1Issue

Critical to the success of a major infrastructure project such as the introduction of HSR to Norway is the body established to manage the procurement and the delivery of the project by specialist contractors. For the purposes of this study, this body is referred to as the Procuring Authority.

The Procuring Authority will need to deal with a range of issues either by managing them itself or by contracting out responsibilities and making sure that they are properly fulfilled. These issues include:  Developing the business case(s) and getting approval for the solution  Defining the route  Acquiring relevant land and access rights  Obtaining planning permission  Managing stakeholders including the MTC , the Ministry of Finance, city and regional authorities, NRA and NSB.  Defining what is to be procured  Determining in what order it is to be procured  Determining roles and responsibilities and appropriate levels of risk transfer  Defining the contract strategy and deciding on appropriate packaging of activities  Deciding how interface issues are to be managed  Agreeing appropriate funding and financing structures  Developing contracts  Letting the contracts including marketing the opportunities, running competitions, evaluating bids and negotiating with bidders  Project management of the procurements  Project management of the delivery phase

9.4.2.2 Options

There are a number of options surrounding how the role of the Procuring Authority might be fulfilled. These include:  Existing public sector entity: for example the MTC or NRA could establish the Procuring Authority within their existing organisation.  Specially established public sector entity: in this option a standalone publicly owned organisation might be established specifically to manage the procurement of HSR.

168 15 February 2011

 Either of the above but with the majority of the work contracted to a Project Delivery Company: this would involve using a private sector delivery organisation, either established for the purpose as a consortium of suppliers or a single supplier of programme management services. Even under this option the Procuring Authority would need to take the steps necessary to let a delivery contract to a private sector entity and ensure that the private sector entity was held accountable for completing the contract on time and within budget. This would be done as a Contract with Specialist Management as described in section 6.5.1.4. The Procuring Authority might also wish to retain some key functions in the planning phase in particular (such as negotiating compensation for land acquisition).

In practice there are many possible options between these structures but these structures help to illustrate the main points.

9.4.2.3 Advantages and disadvantages

The principal advantages and disadvantages of the options outlined above are described in the tables below:

Existing public sector entity Advantages Disadvantages  Relatively easy to establish  Likely to be a lack of relevant skills,  Re-enforces links with a key stakeholder experience and resources within the relevant  Easier for public sector to manage highly public sector body for a project the scale of political decisions – but more difficult to HSR distance itself  Being a public sector body may make it difficult to recruit the best people to do the job  Contractors may have concerns over the capability of such a public sector body which could reduce interest from bidders  Being owned by one public sector stakeholder may make it difficult to engage with other stakeholders and cut across governance and accountability requirements  Difficult to distance the organisation from normal working practices of the relevant Department – may be issues over lack of focus and commitment of individuals

169 15 February 2011

Specially established public sector entity Advantages Disadvantages  Opportunity to recruit and resource as  Establishing the new entity and reporting required lines could take a long time  Greater scope to align ownership structure  Being a public sector body related to a single with governance and accountability structure task may make it difficult to recruit the best  Greater scope to develop working practices/ people incentive structures/ internal reporting  Contractors may have concerns over the structures etc that are appropriate to the task capability of such a public sector body which could reduce interest from bidders  Being a publicly owned entity could still result in meddling in decision making

Work contracted to a Project Delivery Company Advantages Disadvantages  Likely to give good access to relevant skills  Public sector has less control over the and experience Procuring Authority – decision making  Private sector providers have a wealth of process needs to e formal and quite rigid. experience and well developed tools to draw  Because third party would be contracted to on undertake most of the work it would be  Likely to have incentive structures that drive extremely important to get this contract right appropriate behaviours in the first place  Should be able to offer resourcing flexibility –  A third party delivery organisation may make gearing up in peak workload with staff moving decisions which have adverse political to other projects as work declines implications

9.4.3 Accountability

9.4.3.1Issue

The Procuring Authority will be making decisions that will impact a range of stakeholders. It is therefore appropriate that stakeholders are consulted before key decisions are made. Accountability is about being clear about which stakeholders have to be consulted about which decisions and what rights each stakeholder has to influence the decision. In many cases a Procuring Authority will be accountable to more stakeholders than just its owners.

It is important that the Procuring Authority has clarity over these issues because a level of trust and understanding will need to be built up between the Procuring Authority and key stakeholders (e.g. the Ministry of Finance) to enable properly informed and timely decision making. For example, if the Procuring Authority wants to sign a contract committing the Ministry of Finance to make payments of millions of kroner over a number of years, it is likely that the Ministry will want to be satisfied that the Procuring

170 15 February 2011

Authority has taken relevant steps to ensure that the contract represents value for money. Rather than seeking such comfort at the point that a decision is to be made, it would be much better that procedures for governance and reporting are agreed in advance of starting the procurement so that the Ministry is properly informed when it comes time to make the decision.

It should be clear what authority each stakeholder has to influence decisions by the Procuring Authority. For example, it is appropriate that the Procuring Authority is responsible to the Ministry of Finance for value for money issues if the Ministry of Finance is paying but this is less clear if payments are to come from within the MTC’s own budget. In this case it would be more appropriate for the MTC to want to be satisfied that its spending represents value for money. Similarly, the Ministry of Finance should have no authority to require changes to the route – this should lie with environmental and planning bodies.

It is not practical to describe options surrounding accountability because accountabilities need to be tailored to the specific circumstances and legislative requirements of individual projects and are likely to change over the life of a project. However, some general lessons can be drawn from procurements of other major infrastructure projects:  Limit the number of parties who the Procuring Authority has to account to.  Ensure clarity over what the Procuring Authority is accountable for.  Where the Procuring Authority is accountable to more than one party for the same issue, consider how to address the possibility that the parties reach different decisions. It may not be best use of the Procuring Authority’s time to reconcile differences which should have been settled earlier, instead it may be more appropriate for the parties to work together to reach a common view.  Establish reporting lines, requirements and timescales such that all preparatory work can be done, and any issues raised can be addressed, in advance of a final decision.  Ensure that the party(s) to whom the Procuring Authority is accountable have dedicated sufficient resource to fulfil their role (in particular to be able to make decisions in a timely manner) and that there is continuity of that resource.  Consider how reporting timescales can be flexed to reflect the real priorities of projects – for example when negotiations are under way with suppliers, decisions cannot wait for monthly meeting cycles.  Limit the scope to re-open decisions.

171 15 February 2011

9.5 The Project Delivery Company

The Project Delivery Company could take on some of the responsibilities discussed further in this chapter around the delivery of HSR to specification, to the timescales required and to budget. It would also be responsible for the overall functionality of the project. It would act as a single point of contact for the Procuring Authority and might also run the tender process for some aspects of the project, procuring on behalf of the Procuring Authority. The Project Delivery Company might also own the infrastructure or transfer it to another long term owner.

The advantages and disadvantages of using a Project Delivery Company include:

Advantages Disadvantages  Possibility to engage a specialist organisation  Procuring Authority has to be able to clearly with expertise in managing the relevant issues specify requirements at an early stage in order  Such a specialist organisation is likely to be to be able to engage a Project Delivery able to flex resources and skills to tailor the organisation size of his team to the stage of the project  Difficult to make changes  Project Delivery Company can bring its  To protect its position the Project Delivery expertise to the negotiation of contracts and Company might negotiate contingencies into negotiate solutions that benefit the Procuring contracts or not always represent the best Authority interests of his client  Project Delivery Company will be highly  Potential for duplication of roles if the incentivised to bring the contracts in on time Procuring Authority believes it has to check and to budget everything done by the Project Delivery Company

The Project Delivery company role can be addressed in a number of ways in practice including:  The Procuring Authority may decide to fulfil the role itself  It might let a Specialist Management Contract to a consultancy or advisory firm so that they can fulfil that role  It might let a Concession and rely on the concession lead company to fulfil the role or engage a third party to undertake the role

It is noteworthy that the biggest rail procurement under way in the UK at the moment, Crossrail, has appointed a project delivery partner even though the Procuring Authority is long established and well resourced. The nature of this entity is explained in section 9.7.3.2.

172 15 February 2011

9.6 Organisation goals of the Procuring Authority

9.6.1 Introduction

At this stage of the development of HSR, it is not appropriate or possible to state the final goals of the organisation that will deliver HSR as much detail is still required to be developed on the case for HSR. This discussion will therefore focus on the nature of the goals that need to be established, examples of such goals, and their purpose and appropriateness. Goals regarding transport policy at the national level have been formulated through the NTP 2010-2019 and organisation goals need to be in alignment with and support such goals.

Goals can be established on several levels. The Norwegian Regime for external quality assurance (see section 6.3.9) suggests a number of different types of goals:  Policy goals represent the wider perspective at national level: such goals define the national purpose/ objective for developing HSR e.g. regional policy/development, support of rural areas, addressing wider socio-economic issues, meeting environmental targets, improving economic efficiency and competitiveness of national output, showcasing national skills (the development and delivery of high speed rail services in China has made the Chinese rail industry a credible builder of infrastructure and supplier of technology outside China), technological development or any combination thereof.  Effect goals reflect goals that need to be delivered in practice to support policy goals: these include specific measurable goals to support the policy goal(s) e.g. improvement of travel time for different groups of travellers between A and B (and C), reduction of overall emission of CO2 in Norway, reduction of lorry transport between A and B (and C).  Result goals are about what needs to be done, by when and for how much: an example is the delivery of an HSR service between A and B, meeting a particular technical specification or functional requirements, delivered on or under budget, and within the specified time frame of a certain number of months.

Result goals may be further subdivided for the different stages of the development of HSR. Possible goals in the different stages of the development of HSR could be:  Feasibility – provide sufficient documentation for the Government and Parliament to take informed decisions on whether to pursue the concept of HSR, at what level, and for which specific Corridors.

173 15 February 2011

 Planning – preparing necessary technical and market analysis to form a firm foundation for the procurement process – ensuring risk is allocated in an optimal way.  Procurement – time, functional requirements, budgets.  Construction – time, quality, budgets.  Operation – quality, budgets.

9.6.2 Why are the different goals important?

Identifying clearly the different goals and prioritising them is important because the choice of organisation structure and commercial approach can have a significant influence on the delivery of the goals. For example, if it is believed that speed of delivery is the sole goal this is likely to result in a different approach and different solutions compared to a goal around being innovative and making the best use of new technology. In practice it is likely that the organisation and commercial structure will need to deliver multiple goals, some of which may be contradictory, so the resultant approach is likely to be based on the best compromise rather than an optimised solution for a single goal.

9.6.3 How do the different goals affect the way the organisation needs to be structured?

As indicated above, the organisation and commercial structure need to be chosen and tailored to meet the goals of the project. A clear goal around speed of delivery is likely to result in a simple organisation structure which uses standardised contractual structures with little or no private finance and hands all responsibility for the delivery of the infrastructure to a single private sector contractor. This is likely to limit the Government’s ability to control costs or to influence the solutions for emerging issues. Whenever an unexpected issue emerges, the Government may simply have to pay to resolve it.

On the other hand, a single goal around delivering a best value for money solution is likely to result in more control from the public sector procuring organisation, tailored contracts in order to best manage risks and selective use of private finance to underpin risk transfer. There will also likely be a lengthy procurement process, supported by careful breaking of the procurement into discrete packages of work in order to maximise competition. This will require a larger, more complex Procuring Authority, covering a variety of specialist functions (unless they are contracted to a Project Delivery Company).

174 15 February 2011

Based on these examples, it can be seen that the role and influence (and therefore the structure and resourcing) of the procuring organisation can be very different depending on the goals of the project.

9.7 Organisation tasks (by delivery activity)

9.7.1 Introduction

The structure of the Procuring Authority needs to be designed to address properly the range of tasks that will have to be undertaken to deliver the project. In practice, the size and complexity of the Procuring Authority will reflect the range of tasks it will undertake itself, the alternative being to contract selected tasks to a Project Delivery Company or to contractors themselves (e.g. design and build, not just build).

There will be internal and external facing aspects to be addressed by the organisational structure of the Procuring Authority for delivering HSR. The external aspect will be concerned with how the Procuring Authority interacts with external stakeholders including community bodies, industry organisations and regulatory bodies. The internal aspect will be about how the organisation is formed and managed in order to deliver the HSR. Factors influencing the organisational structure include:  the extent of interfaces with other external organisations; and  the contract strategy adopted.

The section below outlines the range of tasks that will have to be addressed by the Procuring Authority. Three examples of procurement models are used in this section as follows:  Traditional individually let contracts - CTRL67 and Heathrow Terminal 5  Contracts with specialist management - Crossrail  Concession/PPP/PFI Contracts - Gautrain

Traditional, individually let contracts and concession structures are at the two extremes of size and function of the Procuring Authority. CrossRail is a current example in the UK of best practice in a major rail infrastructure procurement and sits between these two structures.

67 CTRL was originally a concession: this example refers to the procurement strategy adopted after it was restructured in 1998

175 15 February 2011

In the descriptions that follow, the tasks relating to each phase of the project are described as though they are carried out by the Procuring Authority sequentially. While that may be true for each section of the route, on a long term and large project, like delivering HSR, it is likely that work on each Corridor and individual sections will be staggered. Consequently, different phases of different sections may be undertaken at the same time and the organisation of the Procuring Authority will need to reflect this.

9.7.2 Tasks

Tasks typically carried out by the Procuring Authority during each phase of the delivery programme with individually procured sections are outlined below. Many of these tasks may be delegated or contracted to the Project Delivery Company (or sometimes contractors), depending on a variety of factors affecting the role of the two parties.

9.7.2.1 The planning and development phase

Work to be undertaken during this phase includes:  Carrying out site investigations to identify geophysical properties, obstructions and utilities  Providing sufficient information to enable the enactment of new legislation giving the power to construct the railway  Preparing master plans demonstrating how the network will fit into the existing environment and demography  Securing planning approvals and carrying out public enquiries  Planning and negotiating initial agreements on how the existing network will be accessed  Starting to negotiate with external stakeholders, such as NRA and NSB, utility service owners/operators, airports and the Municipalities on the level of their involvement  Securing agreements in principle with suppliers of long lead items e.g. tunnel boring machines  Preparing the safety cases (also known as cases for safety) to provide assurance to the safety regulator that safety critical issues have been considered  Carrying out feasibility studies and preparing concept designs

During this phase, the organisation will typically be relatively small and the types of skills required are lawyers, master planners, transport planners, design engineers, public relations experts, economists and procurement professionals.

176 15 February 2011

9.7.2.2Detailed design and procurement

During the detailed design and procurement stage the route and solutions for individual sections will be confirmed. This stage is all about:  Preparing information and technical specifications to enable the different components of the HSR to be manufactured, built and supplied  Deciding on packages and the appropriate procurement strategy more generally  Reaching appropriate agreements with external stakeholders e.g. to allow access, to enable utilities to be re-routed  Marketing the procurement and encouraging competition  Preparing bidder documentation (invitations, information documents etc)  Preparing draft contracts  Developing bidding instructions  Determining how bids will be evaluated  Evaluating bids  Negotiating with bidders  Managing carefully all of these activities through the project controls function

The design team, consisting of civil, tunnelling, signalling, electrical, mechanical and track engineers may be very large, depending on whether the Procuring Authority undertakes its own design, contracts for individual design packages or chooses to procure the work scope on a design and build basis.

The different design disciplines will resolve the details on how different assets and systems interact with one another e.g. platform/train, wheel/rail and civils/rail interfaces. An important function during this phase is the design assurance function which may sit within the technical or engineering departments. It will be tasked with ensuring that the design meets the standards, can be built and does not pose exceptional safety risks prior to that design being included in the tender documents.

The project controls function will grow considerably compared to the previous phase. The focus of the project controls function will be on risk management, value engineering, programming, and cost estimating to aid the procurement team in selecting appropriate work packages and to report on progress to senior management and in turn onto the funders and the ultimate client.

177 15 February 2011

On the CTRL/HS1 project, LCR was effectively the Procuring Authority. During the design phase the organisation was relatively small and was focused on design and planning related matters. At its maximum, the LCR team on this £5.9 billion, 109km, with 3 international stations, project was 150 people. During the design phase it was responsible for the setting the mandate for all design and planning. Within LCR there were two sub- organisations: London & Continental Stations & Property handling the acquisitions of rights of way and the land required for the railway; and Union Railways responsible for preparing the conceptual engineering, developing the specifications and permanent way alignments and managing the finances for the construction. Rail Link Engineering (“RLE”), a consortium of four private organisations was responsible for project management.

9.7.2.3Construction

The construction stage is where most risks manifest themselves and where the costs and the timescales are most likely to increase. Once a project is overrunning or behind the timeline it is very difficult to reverse the situation. Consequently, during the construction phase the Procuring Authority should be concerned with controlling risks and scope creep while ensuring that the work scope gets delivered in accordance with the design, the specification and the standards.

Such control requires up-to-date project information to be relayed to the management team in a timely fashion so that appropriate decisions can be made. Equally, it requires those decisions to be made at the lowest possible level to ensure that organisation is nimble enough to react to deviations from plan quickly and decisively.

During construction phase, the Procuring Authority will require skilled project managers, cost managers and project planners. It will require adequate reporting systems and processes. The assurance team will need to ensure that the work is compliant with the specifications while the design team should ensure it has the capacity to deal with technical queries. The procurement and legal departments should also be resourced to deal with unexpected queries such as the late discovery of uncharted utilities and services.

As different sections of a route may be at different stages of the plan, design, construction and commission cycle, the Procuring Authority will need to be adequately resourced to address the range of work required.

178 15 February 2011

9.7.2.4 Commissioning

The Procuring Authority will need to oversee commissioning i.e. proving that the new infrastructure works as expected. Commissioning of a new railway network is a complex and lengthy undertaking and it is often broken down into key stages. e.g.:  Factory acceptance tests – where components are produced to specification, tested, and when proven acceptable gain a factory acceptance certificate.  Static tests – manufactured components are then installed on site and tested, in situ, to ensure each one works as intended in a real environment.  Static Integration tests – where individual components are assembled into sub- systems, switched on and tested.  Dynamic integration tests – when all the sub-systems are assembled and incorporated into a single functioning railway system and tested. The tests may include energising the traction system (switching on the traction power), checking control trains, checking communication systems and the mechanical and electrical systems work satisfactorily whilst trains were running.  Operational readiness tests – which is running trains according to the service timetable, but without passengers in order to demonstrate that the system is ready for operation.

The objective is to put the various systems into operational readiness safely. The track, signalling, power, rolling stock, communications systems including passenger announcement systems will all need to be tested and brought into operational mode. The rolling stock will undergo several hours of trial running during the dynamic integration tests. Performance criteria such as journey time capability will need to be demonstrated. Training of operational staff is very important during commissioning because it will be important to ensure that they are able to operate every aspect of the railway and deal with incidents and failures by the time it is handed over for passenger services.

Although the organisation will still be large at this stage, the structure may be different from that at construction. Much would depend on the contract strategy and whether the Procuring Authority also becomes the organisation that operates the service, collects the ridership revenue and maintains the assets. The organisation will need to provide public information about the service. Time tabling constraints and clashes will need to be reconciled by agreement with other service providers.

179 15 February 2011

The types of skills required will include systems, signalling, mechanical and software engineers as well as qualified testers. Trainers and operational staff such as train drivers and control room operators will be sought and trained. Transport planners will be required for route and timetable planning purposes. Public relations professionals will be in high demand in order to liaise with external stakeholders and the public generally. Unless outsourced, the organisation will continue to grow its maintenance department which may include engineers, technicians and track workers. The depots will becoming fully operational and will require staffing in order to maintain the rolling stock, and provide equipment and resources for the out-of-service maintenance activities.

9.7.2.5Operations and maintenance

If the Procuring Authority has to take responsibility for operating and/ or maintaining part of the HSR network the tasks should become relatively routine. The maintenance effort will be governed by the effectiveness of the asset management regime. Whether it’s a bridge, the track, signalling loops, trains, station facilities or a station control room equipment, each asset will have a specific schedule of maintenance activities and a renewals or replacement plan.

The shape of the organisation will depend on whether the maintenance is provided by the Procuring Authority or outsourced to specialist contractors.

If the Procuring Authority goes on to become the train operator and revenue collector, organisational tasks will involve operating station facilities, operating trains according to agreed timetables, operating station systems such as customer information systems and passenger announcement systems. Staff skill in operating such systems would be required.

9.7.2.6 Project management office

For large organisations a project management office (“PMO”) is often seen as the most effective way of controlling time, costs, quality, and progress and managing issues. The size of a PMO would vary during the lifecycle of the project from feasibility through to handover but would be expected to remain constant during the operating phase. Project tasks typically undertaken by a PMO include:  Project planning support  Overall schedule maintenance  Project audit

180 15 February 2011

 Project control  Change management  Risk management  Contingency management  Maintenance of project management  Project reports  Communications plans and schedules  Quality plans  Safety

The PMO is also an extremely important element of the governance process. This is explained in section 9.8.4.

9.7.3 Example of structures used to address organisation tasks

9.7.3.1 Traditional individually let contracts - CTRL/HS1 and Terminal 5

Large infrastructure contracts are traditionally procured as a series of smaller work packages e.g. civil structures, track, stations and rolling stock. In the UK, during the 1990s, many large infrastructure projects were let as PPP/PFI style arrangements with work being packaged together. Recently there has been a return to procuring large infrastructure projects in individual contracts. Examples include CTRL, Terminal 5 and Crossrail.

The role played by the procuring authority in defining the contracts and packages and in integrating the different systems and built assets into a functioning HSR network, is fundamental to the success of such a procurement strategy. The charts below show the organisation structures of the chosen examples:

181 15 February 2011

Organisational Structure - CTRL Department for Transport

London & London & Eurostar UK Continental Continental Ltd Stations & Railways Property

Union Railways

RLE (ARUP, Bechtel, Halcrow, Systra)

Individual Individual Individual Individual Individual Contracts Contracts Contracts Contracts Contracts

Figure 17 CTRL/HS1 Organisational Structure

On CTRL1 the Department of Transport (“DfT”) was the overall client body overseeing the procurement of the concession. LCR was the procuring authority consisting of three main parts:  The main body of LCR handled the procurement of the works;  London & Continental Stations & Property provided the services for the acquisition of rights of way and the land required for the railway; and  Union Railways handled the conceptual engineering, developed the specifications and alignments, and managed the finances for the construction.

Rail Link Engineering (RLE), the Project Delivery Company, was a joint-venture consortium made up of Arup, Bechtel, Halcrow and Systra. Eurostar UK Limited was the train operator.

182 15 February 2011

Heathrow Terminal 5 Structure

Heathrow Airport BAA Chief Ltd (HAL) Executive Assurance

T5 External HALIntegration T5 Managing communications Director Director

Programme Client Build T5 Live office

Civils Roads& Tunnels Building System Baggage

Organisational Effectiveness •Earthworks •Heathrow •Main Terminal •Airfield Express extension building •Western •Piccadilly line •Energy Centre Perimeter extension •Satellite building corridor •Track transit •Heathrow Air •Landside campus system Traffic Control •Working with tower Highways Agency, Public relations Thameswater,BA and control authorities Figure 18 Heathrow Terminal 5 Organisational Structure

On the Terminal 5 project BAA appointed a T5 Managing Director (“MD”) to fulfil the Project Delivery Company role. He was responsible for the safe delivery of Terminal 5 to time, quality and budget. Under the MD were three further directors who were responsible for managing the client, the build and Terminal 5 going live. The MD was also required to keep in close communication and coordination with the Heathrow Airport Limited (“HAL”) Integration director. Based on the terminology adopted in this report, the Chief Executive of BAA assumed the role of client, the Terminal 5 MD acted as the Procuring Authority, the three directors took the role of the Delivery Company and HAL was the operating company.

9.7.3.2Contracts with a private sector Project Delivery Company

This type of organisation structure involves a significant role for the Procuring Authority but also the use of a specialist, contracted Project Delivery Company to take part of the workload and the risk. In effect this structure allows the Procuring Authority to leverage in third party expertise.

The Procuring Authority for Crossrail is Crossrail Limited which is now wholly owned by Transport for London, the body responsible for delivering transport services in London. Not only will Crossrail Limited act as the Procuring Authority but it will also own the completed infrastructure.

183 15 February 2011

The Procuring Authority has contracted the Project Delivery Company role to two entities:  Transcend (a private sector joint venture) is its Programme Partner. Transcend will be responsible for coordinating eight separate strands of work including links with the London underground network, utilities and over ground rail sections built by Network Rail. The value of this contract is around €140 million.  Bechtel, supported by Halcrow and Systra, is its Programme Delivery Partner. The Programme Delivery Partner is responsible for delivering the central London tunnel whose value is about €550 million. This includes contracting directly with contractors for the tunnel works.

These two entities jointly fulfil the role of Project Delivery Company as explained in section 9.4. Both are financially incentivized to help the Procuring Authority achieve its goals.

Crossrail supply chain structure

Transport for Department for London (TfL) Transport (DfT)

Transport Trading Limited (TTL)

Crossrail Ltd (CRL) Programme Directorate

Bechtel Ltd London Transcend Network Rail Tier1 Contractors Programme Underground Programme Partner Delivery Partner

Civil works - tunnels

Civil works - Stations Rolling Stock, depots etc

Logistics

Reports to Ownership Works with and manages to achieve project outcomes for Crossrail only.

Figure 19 Crossrail Supply Chain

184 15 February 2011

Crossrail programme directorate internal structure

Crossrail Ltd (CRL) Programme Directorate

Crossrail Central Programme Crossrail Surface Quality and Technical Railway Operations Implementation Management Delivery Assurance

Figure 20 Crossrail Programme Directorate Internal Structure

9.7.3.3Concession/PPP/PFI Contracts

Under a concession contract the activities to be carried out are exactly the same as in the case of the traditional, individually procured contacts. The difference is that most of the design, construction, budget and timeline overrun risks, interface and integration risks are transferred to the concessionaire.

A concession contract is one where the concession grantor (frequently but not always a government entity) grants the concessionaire a right to develop a piece of infrastructure and to hold and operate that facility for a defined period and in a specified manner so as to recoup the initial cost of the investment and make a profit. The facility is often constructed under a turnkey contract and the concession grantor takes over the facility at the end of the concession period. It should be noted that a concession contract is not primarily a construction contract, it is a service contract in which the concessionaire provides a service, such as operating the railway for a period of time.

The Procuring Authority’s team will mainly be assurance focused. If the Procuring Authority ensures adequate contractual provisions in relation to the specification, required performance, timeliness and detail of reporting, then the size of its teams should remain constant and relatively small.

An example of a Procuring Authority structure developed to procure a concession is the Gauteng Provincial Government (“GPG”) responsible for the procurement of Gautrain in South Africa. GPG contracted with Bombela via a concession agreement to Engineer, Procure, Construct, and Operate the railway. There are two subcontracts under the prime contract between Gauteng and Bombela; a turnkey contract for the engineering work and construction of the railway, and an Operations and Maintenance contract during the operations phase.

185 15 February 2011

Bombela Contractual Structure - Gautrain

M&R = Murray & Roberts Gauteng SPG = Strategic Partners Group RATP = Régie Autonome des Provincial Transports Parisiens. (Autonomous Government operator of Parisien transports)

Shareholders Shareholders Agreement Bombela Financing Agreement Bombardier 25% Bouygues25% Concession Lenders M&R 25% SPG 25% Company

& otatune contract O&M contractTurnkey

RATP Dev 51% Bombardier 25% Bombela Bombela SPG 25.1% Bouygues25% Co-operation Agreement M&R23.9% M&R 25% Turnkey Operating SPG 25% Contractor E&M maintenance Company E&M Civil contract contract contract Bombela Bombela Electrical Bombela Bus Operator Civils JV & Mechanical Works Maintainer

Bouygues45% Bombardier 90% M&R 45% SPG 10% SPG 10% Ownership

Figure 21 High level organisational structure for Gautrain

GPG is responsible for the initial planning of the route but detailed design was undertaken by Bombela. Land expropriation was retained by GPG. GPG also manages the interface between themselves and Bombela through a Province Representative Support Team. All work is independently certified by Arup.

The organisational structure of GPG is different and much smaller than the structure required in the T5 project. This is because GPG has effectively contracted out most of its co-ordinating and interface management role to Bombela. With independent assurance provided by Arup, there is only a limited requirement for technical supervision and contract management expertise. GPG’s organisational team structure is shown in the figure below.

186 15 February 2011

Gauteng Province’s Project Support Team (PST)

Gautrain Project Communication and Co0ordinator Marketing

Gautrain Deputy Project Co0ordinator Concession Development Manager

Project Admin Office Manager Manager Utilities Re-location SHEQ Manager+ Manager

Concession O&M Civil Construction Manager RiskManager Monitoring Manager

Commercial FCAC& Revenue Maintenance RAMS Manager* Manager

E&M Systems Train operations Asset and property Land Procurement Manager

Engineering F& D operations RAMS* Manager

SHEQ+

*Reliability, Availability, Maintainabilityand Safety + Safety, Health,Environment and Quality

Figure 22 Gautrain Project Structure

Gauteng Province’s Representative Support Team (PST) Concession Development Manager

Civil E&M Utilities Re- SHEQ Construction RAMS Engineering Land Commercial Risk Systems location Manager Monitoring Manager Manager Procurement Manager Manager Manager Manager Manager

Section Civil Commercial Rolling Stock Contracts Utilities Manager 1 Engineering PM Manager Engineer

Section Signalling & E&M Commercial Finance Manager 2 Telecoms Engineering PM Documents

Section Operations, Commercial OHTE Manager 3 F&D systems PM Insurance

Management Section Trackwork Systems Dispute Manager 4 Review Resolution

Systems Development Programme

Contracts Controller

Figure 23 Gautrain - GPG structure

187 15 February 2011

9.8 Addressing interface risk

9.8.1 Introduction

The Procuring Authority will need to give careful consideration as to how its procurement of HSR and the subsequent operation of high speed rail services address interface risk.

Interfaces with the existing system can affect the efficiency of train operations and potentially policy options when regulating, building or upgrading the railways. The extent of the interface issues will depend on several factors, including, but not limited to, the number of operators (freight and passenger) seeking access, the complexity of the network, and the level of traffic density.

Interface considerations that may affect the procurement strategy and subsequent operation of the HSR fall into three main categories:  Physical Interfaces: between different components in the HSR system  Interfaces between works stream and or project phases  Interfaces with the existing system

9.8.2 Physical interfaces

Physical interfaces are those interfaces between the different components of the HSR system. Examples include:  Structures/track interface. The main issue with this interface on a new high speed railroad is one of timing during the construction phase. Delivering HSR will be characterised by numerous structures, including tunnels, viaducts and bridges, along its length. If one of these structures is delayed, for whatever reason, that delay could be transferred onto the track construction resulting in significant additional cost. For example, on 12 November 2010 a 3-month delay to the completion date of Gautrain was announced due to the late delivery of a bridge in Pretoria.  Rail/wheel interface. Many problems arise at the rail wheel interface that can translate to significant costs and/or delay. The most common issue is gauge corner cracking as a result of rolling contact fatigue. This often occurs on bends or at sections where heavy braking occurs leading to excessive noise and vibration. If the rolling stock and the track design are procured from separate entities it is usually the Procuring Authority that is responsible for managing the resulting interface. This problem continues well into the operations phase where the whole life costs may be higher than expected due to more frequent maintenance and replacements as a result

188 15 February 2011

of degradation of the rail head and wheel. On HSR, climatic factors such as extreme temperatures in the winter and the summer may exacerbate this problem. Concession arrangements, in which the rolling stock supply and the track design and construction are sourced from a single entity, enable the Procuring Authority to pass on this interface risk to the concessionaire e.g. Gautrain and Tube Lines. On Gautrain, in order to mitigate against this interface risk, a wheel-rail interface study and rail grade selection was commissioned by the Gautrain and carried out by TATA.  Signalling/Rolling stock. The signalling/rolling stock interface reflects the integration of two different systems. Being safety critical systems, signalling and rolling stock systems undergo long testing and commissioning processes. If the two systems are procured under separate contracts there is an increased risk (e.g. tested serially as opposed to in parallel) that they will be subjected to an extended testing regime at the expense of the Procuring Authority.

9.8.3 Project Phase Interfaces

Work stream interfaces are those interfaces between the different stages of the delivery process.

9.8.3.1Design/construction.

Interface risk between design and construction can manifest in many ways including:  a lack of design information delaying construction;  inadequate design that requires amendments during construction leading to extended duration and additional costs; and  delivery of a facility that is not fit for purpose leading to additional costs and downtime in order to make improvements.

9.8.3.2 Construction/Commissioning

The interface between construction and commissioning is often not very well managed. The commissioning stage tends to carried out by a specialist and different team from the construction team. Typical issues that may arise include:  During planning, assumptions are made that works will be carried out in a linear order. In reality, works progress at different rates, and the process has to adapt.  Time allocated for commissioning may be eroded by late running construction work thereby forcing the commissioning process to be carried out hastily.

189 15 February 2011

 The commissioning plan may not reflect changes and variations incorporated during the construction. Different commissioning standard may apply in respect of the different pieces of infrastructure meaning that there may be an inconsistency.  Different sections e.g. signalling, trains etc operating to different commissioning programmes.

9.8.3.3 Construction/operation.

There are interfaces between construction and operation that will need to be managed in order to mitigate issues such as:  construction works delaying or affecting the efficient operation of the railway;  inadequate training or information given to operational staff at handover;  inadequate consideration given to the manner in which the facility will be operated or used during operation resulting in systemic failure which needs to be rectified; or  operational requirements not being properly fed into the business case for construction projects, resulting in those projects not delivering the user requirements.

9.8.4 Interfaces with existing network

The provider of services on the new lines/ routes will need to interface with the existing network. Some of these interfaces may be best managed by the Procuring Authority while others would be more suited to the Project Delivery Company and some of its suppliers. The principal interface issues will include:  Operating high speed trains on existing infrastructure: under any of the Scenarios, the HSR rolling stock may be required to be capable of running on the existing infrastructure. In some areas, in order to run the high speed trains at optimum speeds and capacity, the existing infrastructure may need to be reinforced in order to accommodate the rolling stock. The alternative is to impose speed restrictions which could potentially erode the benefits of a HSR system. Similarly there may be additional construction costs in areas, such as the vertical alignment, where the standard high speed specification may require amendment to accommodate trains from other operators.  Stations: irrespective of the Scenario, there could be numerous interfaces with existing stations where HSR connects with existing cities and towns. This may be during construction where the high speed network is being integrated where the stations must remain operational or it may also be during operations where station may be served by the high speed service operator and other rail operators.

190 15 February 2011

Consideration will need to be given to upgrading existing stations if purpose built stations are not appropriate or necessary e.g. longer platforms may be required or the curvature of a platform may not be suitable for the high speed train carriage lengths.  Timetabling: During operation, closely coordinated timetable planning may be required get the best capacity out of the high speed services and the services of other train operators.  Signalling and safety systems: If the high speed rolling stock runs on the same network as, for instance, the Intercity trains, then the signalling and safety systems of both operators will need to be compatible. The same is true for all other systems such as communications, power etc. Consideration may also need to be given to the future implementation of ERTMS especially if trains are to be run in Sweden which has started to adopt this signalling system  Maintenance regime: the maintenance regime of the existing infrastructure and may require rethinking in order to accommodate the HSR. The regime needs to deliver clarity of responsibility and efficient use of specialised equipment and technical resources but could also result in changes to the current approach of NRA to maintaining the existing infrastructure.

The options available to the Procuring Authority for dealing with interface risks are largely addressed by the way that activities are packaged together or not packaged. This issue is considered further in section 6.9.

9.9 Other interfaces outside the HSR programme organisation

9.9.1 Issue

In delivering and subsequently operating HSR in Norway the project will have to engage effectively with a range of parties outside of the rail industry. Such parties might include:  Local, regional and City authorities.  Planning bodies.  Environmental agencies  Public support groups and local residents  The Norwegian Public Roads Administration  Public utilities  Power production and distribution companies (e.g. for provision of power to operate HSR)

191 15 February 2011

 National Parks  Norwegian Water Resources and Energy Directorate  The Directorate for Cultural Heritage  Local businesses  Major companies

Failure to engage effectively with such parties could:  at best, lead to delays in the delivery programme arising from disputes or actions to get their point of view across; and  at worst, result in work having to be completed again (e.g. having to change certain design features during the build, change routes) and ultimately to the non-delivery of the project (refusal of planning permission).

Consideration therefore needs to be given to who should be responsible for scoping and delivering consultation and other engagement activities designed to garner support for HSR and the chosen routes and methods of delivery.

Consultation needs to be substantive and not just a public relations exercise. There will be real issues to deal with, such as disappointment over routes and stations to be served, However, there will also be opportunities to understand better customer requirements and use this knowledge to shape the design of new services and facilities to be provided on trains and at stations.

9.9.2 Approach

In order to deliver a successful procurement of HSR infrastructure the Procuring Authority will need to develop to develop a clear consultation and contracting plan which addresses a range of issues:  Timeliness: there is no point in undertaking consultation so late in the procurement that the results of the consultation cannot be taken into account in the final solution or the consultees do not believe in the process.  Proper planning: there is limited value in seeking to consult over or under-developed plans. It is important to be able to present to the consultees what is proposed, why it is proposed and possibly the alternatives that have been considered. This may help to get across the message that the proposed solution is the best compromise.  Who should be the consultees: careful consideration should be given to who needs to be consulted with and about what. This needs to reflect the ability of parties to

192 15 February 2011

frustrate the successful delivery of HSR with more attention being paid to those parties that have the greatest influence.  Nature of the meetings: successful consultation is likely to involve a range of one to one meetings, or meetings with a small number of attendees, with the more influential consultees. However, it may also be appropriate to hold open meetings which can be attended by anyone from major corporates to private individuals.  How to demonstrate value from the process: it is important that consultees are convinced that their views have been heard and have been considered and that the consultation process is not a sham i.e. will change nothing. This might be achieved by publishing issues raised at consultation meetings and how they have been addressed/ why they have been ignored or other techniques to provide feedback.

The Procuring Authority will also need to address how it wants its contractors to engage with stakeholders. This is because a number of stakeholders may be required to take actions in a timely manner in order for the project to be delivered. It will be important for the Procuring Authority to decide and ensure appropriate arrangements for:  What work needs to be undertaken by stakeholders and what can be undertaken by its own contractors? Work to be done by stakeholders may need to be contracted.  How to manage the risk that individual stakeholders could hold the project to ransom and demand excessive compensation for certain actions? Often this is a question of timing – the closer the required action of the stakeholder is to the critical path for the project, the stronger the stakeholder’s negotiating position.  How and when to negotiate arrangements with each of the stakeholders? For example, the Procuring Authority may have more negotiating power with a stakeholder than an individual contractor. However, it may not be possible to put in place an over-arching contract where contractors have to do the detailed design work before the requirements of the stakeholder can be specified. A solution may be for the Procuring Authority to put in place some form of protocol which individual contractors can use as the basis for subsequent negotiations with the stakeholder.  Whether to have standard form contracts to limit the need for negotiations and focus efforts on timely delivery?  Where the stakeholder is providing funding to the project, who should negotiate conditions surrounding the funding? Whether the funding should be flowed to the Procuring Authority or the relevant contractor(s)? Whether any commitments should be given in return for the funding (e.g. a commitment to stop a minimum number of services each day at that own)?

193 15 February 2011

The consultation and contracting plan is best managed by the Procuring Authority. However, in many cases responsibility for delivering actions contained in the plan may be delegated to contractors who need to build a relationship with the relevant consultees in order to deliver their work successfully.

194 15 February 2011

9.10Governance processes and controls

9.10.1 Introduction

A good project governance structure (i.e. processes and controls) is seen as essential for the successful delivery of large and complex capital projects. Project governance is defined as the area of overlap between corporate governance and programme/project management and controls as outlined in the diagram below. In other words, it is the area of programme management for which the board or the senior level of management bears responsibility.

Project Governance

Corporate Governance

Project Governance

Project Management

Figure 24 Project governance - Overlap between corporate governance and project management

The effective project governance of the HSR project is vital for its success and that would start with ensuring that a good project governance structure is in place.

The Association for Project Management publication “A Guide for the Governance of Project Management” (“the Guide”) is seen as best practice by organisations worldwide including:  The Project Management Institute in the USA;  The Office of Government commerce in the UK; and

195 15 February 2011

 The Treasury in the UK.

The Guide sets out four areas the board or senior management must concentrate on in order to establish a good governance structure to foster the delivery of successful projects:.  Portfolio direction;  Project sponsorship;  Project management effectiveness and efficiency; and  Disclosure and reporting.

9.10.2 Portfolio direction

Portfolio direction is concerned with ensuring that the project portfolio or programme of projects is aligned with the organisation’s objectives including profitability, customer service, reputation and sustainability. It is essentially about ensuring that decision making authority is delegated to the appropriate level. On a long term project, such as HSR, this means that delivering the project benefits continues to be the focus of effort from the highest political level right through to the lowest level of the supply chain.

On CTRL/HS1, political commitment by the then Deputy Prime Minister, John Prescott, combined with a belief by both major political parties that the project should go ahead, was required to ensure that it stayed the course through two major financial restructuring processes.

The procuring authority on CTRL/HS1, LCR, set up an independent governance structure. The board was not merely representative of the interest of the stakeholders, but was constituted more like a public company, with non-executive directors who would look after the interests of the project meaning that the client body was focused on project delivery rather than satisfying the needs of stakeholders.

This can be contrasted with Metronet which was the consortium that won two of three PPP contracts with London Underground Ltd in 2003 for the maintenance and upgrade of two thirds of the lines on the London Underground. Within three years of the 30-year project commencing the delivery of stations and the programme of track work were severely behind timetable. Part of the reason for the failure was attributed to a poor decision making structure driven by its five shareholders who often had different commercial drivers and were unable to agree decisions unanimously. As a result, the

196 15 February 2011 direction of each of the civils, track, rolling stock and signalling packages was not aligned to deliver the PPP project.

The UK’s National Audit Office (NAO) also identified that, in the case of Metronet, decision making authority was not delegated to an appropriate level within the organisation, with the supply chain being too powerful in decisions about scope. This led to some extensive delays in delivering the project.

9.10.3 Project sponsorship

Project sponsorship is the link between the senior executive body of the organisation and the management of the project. On a large public project, like HSR, this could be the communication (i.e. passing down objectives to the project team and passing up progress and issues to the senior executive body) between the Procuring Authority and the ultimate client e.g. network operator, regulators and funders. At its heart is leadership and decision making for the benefit of achieving the project objectives. Project sponsorship is the role most concerned with integration of the project objectives with the organisation’s strategy. It is the communication route through which project managers report progress and issues upwards to the board and obtain authority and decisions on issues affecting their project. The project sponsor owns the business case and is responsible for ensuring that the intended benefits become the project objectives and are delivered accordingly. Consequently, successful project sponsorship depends on the competence of the people employed to undertake the project sponsorship and management roles.

On the Metronet PPP, the shareholders forming the supply chain failed to keep the Metronet board informed adequately about progress and costs measured against delivery, rendering its project sponsorship and disclosure and reporting components of project governance environment ineffective. This meant Metronet itself was unable to monitor its costs and act accordingly until it was often too late to mitigate any extra costs that may have arisen.

9.10.4 Project management effectiveness and efficiency

Another important component of a good project governance structure is that concerned with the effectiveness and efficiency of project management. This is because project management effectiveness and efficiency relates to the project team and its ability to deliver the project objectives. Team capability is about the competence of the people involved at all levels, the resources they have available to perform their roles and the

197 15 February 2011 processes or management systems they are able to deploy in fulfilling their function. Project risks that could lead to failure in delivery are most effectively managed and mitigated in organisations where there are strong people competencies and effective management systems.

Strong Structure and Standardisation y Demographic and Risks mitigated t n c e n retention risks m e p t o l e

- High performing teams e p v

- Ad-hoc processes e m D

o d n C a

e g l n i p n i o a r e

Uncontrolled risk Inactivity risk T P

- Easily auditable processes (Prince2, APM) Weak - Weak/uncommitted teams

Weak Strong Management Systems Figure 25 Relationship between competence and systems in mitigating risk

Most project organisations see a PMO as the most efficient way to control cost, time, risks and, sometimes, quality and safety on their portfolio of projects. The PMO is essentially a collection of functions that serve the individual project managers in the performance of their duties by relieving them of routine and critical functions while establishing consistent and uniform practices in the functions performed. The structure of the PMO can be as simple as a few people preparing and maintaining schedules, to large teams performing planning, reporting, quality assurance, collecting performance information and functioning as the communications centre for several projects. This centralisation permits the organisation to gain consistency in practices as well as using common standards for items such as schedules and reports to senior management. The effectiveness of a project office is very much dependent on the functions, structure and resources assigned.

The PMO is not a decision making body that replaces either the project managers or the senior managers. It does, however, prepare information and reports that inform and support the decision making process of senior managers and project managers.

198 15 February 2011

Project management effectiveness and efficiency should ensure that the project team has the capability (i.e. competent people to undertake the work and processes and systems to enable them to do their work) to deliver the benefits envisaged by the procuring authority’s business case.

One of the causes of problems for the Metronet PPP identified by the PPP arbiter was ineffective project management arising from failings in the track works supply chain which had:  insufficient flexibility to adapt easily to changes i.e. ineffective systems; and  inadequate resources to deliver the required volumes of work i.e. resources generally.

In contrast, the CTRL/HS1 project reported that LCR, sitting between the government and the project, was able to make day-to-day decisions quickly and effectively which helped the efficiency and effectiveness of the whole organisation.

9.10.5 Disclosure and reporting

Effective disclosure and reporting on large projects is inextricably linked to strong project sponsorship and project management. This is because disclosure and reporting is the component most reliant on the culture of the organisation. A culture of open and honest disclosure is paramount for effective reporting. Such a culture must flow from the project organisation throughout the supply chain. What is reported needs to be reliable and timely in order to enable the right decisions to be made at the right time for the project organisation. Without such timeliness the project is likely to fail.

If disclosure and reporting is poor, performance also tends to be poor because middle and senior management need accurate and timely information to make decisions. Large multi-layered and multi-party projects tend to fail in this area. Performance or output specification contracts are particularly notorious for poor cost and programme information unless a detailed reporting specification is included in the contract. This is because tender estimates are often not broken down to the lowest levels of the work breakdown structure. In contrast, modern and less transactional contracts, such as the NEC3 target cost option and the bespoke T5 agreement, tend to be open book and more transparent.

The Governance structure for the HSR project needs to ensure that the detail and content of reporting and disclosure properly underpins the delivery of the project.

199 15 February 2011

10 Applicability to the Scenarios

10.1 Background

10.1.1Reminder of the Scenarios

The Mandate defines four relevant scenarios to be investigated. These are:  Scenario A - the reference project: provision of higher speed services based on the plans of the current railway according to what is set out in the NTP 2010-2019. The focus of the NTP 2010-2019 is to develop and strengthen InterCity services i.e. services within the InterCity Area.  Scenario B: More investment in existing rail infrastructure both within and outside the Intercity Area.  Scenario C: Provision of high speed services relying on the existing InterCity rail network and improvements or new infrastructure outside the Intercity Area.  Scenario D: Provision of high speed services operating largely on dedicated new high speed infrastructure.

10.1.2Introduction to the Corridors

The following Corridors have been identified as potential HSR routes:

I. Oslo – Trondheim II. Oslo – Bergen III. Oslo – Kristiansand – Stavanger IV. Oslo – Gøteborg V. Oslo – Stockholm VI. Bergen – Haugesund/Stavanger (in conjunction with routes II. and III.)

200 15 February 2011

Stockholm

Göteborg

Figure 1, Illustration of possible corridors for HSR 10.1.3Application of discussions to Scenarios

For the purposes of the feasibility study in Phase 3 a number of specific infrastructure solutions have been identified for investigation on each Corridor. These solutions are often for part of a route only and they could be combined in a number of ways to produce complete solutions for each Corridor. Commercial, contractual and organisational strategies will need to be developed for each solution.

This Phase 2 study explains the key, generic issues and considerations that will inform the development of bespoke commercial, contractual and organisational strategies for each solution. This section 10 explains how the issues described earlier in this study might apply to the implementation of infrastructure projects under Scenarios B to D. Since Scenario A is a reference scenario, consideration has not been given to appropriate strategies for this Scenario.

10.2 Scenario B

10.2.1Features

The key features of developments under Scenario B include:  New infrastructure and other assets will have to be closely integrated with the existing infrastructure and there will be many technical and organisational interfaces, all of which must work properly. This means that the design of any new infrastructure will

201 15 February 2011

likely be constrained by the specification of the existing infrastructure, and existing rules and regulations. Therefore there will be limited scope for innovation.  Successful delivery of the new infrastructure and improvements to the existing infrastructure should result in seamless railway with nothing to distinguish between the new and the refurbished infrastructure.  Access to undertake new build work is likely to be constrained by the day to day needs of the existing railway.  Maintenance of the new infrastructure may be constrained. Together with economies of scale and resources this means that maintenance of much of the new infrastructure by NRA (or any maintainer of the existing infrastructure) is likely to offer the best value for money.  The new infrastructure may best be operated by NRA (or any operator of the existing infrastructure) for reasons of efficiency, ensuring effective coordination of responses to the service operators and minimising interface issues. If the Scenario B works are substantial then NRA will have to grow its resources to accommodate the requirements of delivering the new infrastructure.  Consideration will need to be given to procuring extra rolling stock.  New timetables may have to be introduced.

10.2.2 Contracting strategy

Contract issues are addressed in section 6 with contracting strategy being discussed in section 6.5. Given the extent of overlap with the existing infrastructure, its operation and maintenance and the likelihood that projects under Scenario B could vary widely in value and complexity, the contracting strategy needs to be simple, proven and well understood. This suggests that a good starting point would be the way that NRA currently procures infrastructure works i.e. managing the procurement of necessary works and taking responsibility for interfaces but not actually undertaking construction work itself. However, the success of this approach should be carefully reviewed to see how it can be improved upon. On the other hand, if the pieces of new infrastructure are large enough then they could be treated in the same way as for Scenario D. For example, it would be possible to procure a specific bridge or discrete length of track through a PPP even if the rest of the new/ enhanced infrastructure was procured using NRA’s normal methods.

202 15 February 2011

10.2.3 Self funding

The scope for self funding of rail projects is discussed in section 7.5. As indicated above it is likely that it will not be practical to distinguish infrastructure delivered under Scenario B from the existing infrastructure. This will make it extremely difficult to define discrete revenue streams attributable to such assets. Also, given the extent of integration with the existing network, it will be very difficult to transfer risk effectively, in particular where NRA is the maintainer and operator of the new infrastructure.

For the reasons outlined above, and recognising that there is a finance cost associated with funding the new infrastructure from the revenues it generates, it is unlikely that the benefits that can be realised by introducing a structure that enables self funding will represent value for money.

10.2.4 Organisation – Procuring Authority

The organisation of any procurement is discussed in section 9. On the assumption that NRA’s role and responsibilities continue as currently, whoever undertakes the procurement of works under Scenario B needs to co-ordinate properly with NRA. This suggests that either NRA should be the Procuring Authority or very explicit steps should be taken to ensure effective coordination of an independent entity’s efforts with NRA. The Procuring Authority should also be responsible for working closely with NSB because it is likely that construction works will need to be adequately supported by NSB as they may impact the ongoing provision of passenger services.

Whatever the Procuring Authority, it will be important that it is adequately resourced, in terms of numbers and skills, in order to manage a wide range of projects in different stages of procurement.

10.2.5 Organisation – Industry arrangements

Issues surrounding industry arrangements are covered in section 8. Given the nature of investments under Scenario B it is unlikely that there will need to be changes to the industry structure to enable or accommodate such investments.

203 15 February 2011

10.3 Scenario C

10.3.1Features

The focus of activities under Scenario C is likely to encompass:  Delivering Intercity infrastructure within the InterCity Area which is likely to involve substantial works  Delivering new or substantially enhanced infrastructure outside the InterCity area to enable high speed services to be operated  Procuring new, high speed rolling stock

10.3.2 Contracting strategy

Contract issues are addressed in section 6 with contracting strategy being discussed in section 6.5. The contracting strategy for Scenario C will likely be the most complex of all of the scenarios. Within the InterCity area the works could be both substantial and closely integrated with the existing infrastructure. Therefore whilst it might be desirable to establish standalone Design and Build contracts for the works supported by performance incentives, in practice there may be a real need to work closely with NSB and NRA and to plan work so that it does not disrupt the existing railway. As a result it may be necessary to deploy highly prescriptive contracts with limited design input or risk transfer.

Where work outside the InterCity Area is on the existing network the same arguments as above will apply.

Where work outside the InterCity Area involves new, separate infrastructure then the approach to contracting will be the same as for Scenario D.

The contracting strategy for the rolling stock will be dependent on the size of the fleet to be procured – the smaller the fleet the less likely it is that an innovative procurement approach will represent value for money. The strategy will have to consider a number of issues:  Rolling stock is by its nature highly technical with manufacturers closely protecting their designs. For this reason design and build will have to be procured together.  Within the specification of the rolling stock there needs to be clarity as to the performance requirements, what measures will be used and whether there will be any conditionality of payment on performance.

204 15 February 2011

 Where rolling stock is of a new design (to the operator) it is likely to be best that the manufacturer has to maintain the rolling stock for a period. This will enable the maintainer to design out problems that might arise due to the original design, develop an effective maintenance regime and address whole life cost issues when coming up with the design.  The manufacturer should also be incentivised to address whole system cost issues – it may be poor value for money to procure heavy, reliable rolling stock which increases the wear and tear of the track.  Rolling stock has traditionally been procured under fixed price contracts in which case there needs to be adequate acceptance testing to ensure that the rolling stock achieves the required standards before it is paid for in full. A number of countries have looked at PPP-type structures in recent years with the manufacturer being engaged to maintain the rolling stock for the majority of the useful life of the stock. Service payments to the manufacturer/ maintainer are a combination of capital repayment and recovery of maintenance costs. This enables the operator to pay for the rolling stock as it uses it and generates passenger revenue. The existence of service payments also enables significant deductions to be made by the operator where the rolling stock does not perform to the required standard.

10.3.3 Self funding

The scope for self funding of rail projects is discussed in section 7.5. There will be value in looking at the possibility of self funding infrastructure delivered under Scenario C infrastructure but the need for close integration of the new and existing infrastructure across the network, the challenges in transferring risk and the difficulties in isolating revenues are likely to make this difficult and costly.

The traditional approach to funding rolling stock is that the Government enables its national operating company to pay for trains either by providing funding or leaving it with sufficient retained profits to do so.

As indicated above there is scope to look at self funding of rolling stock.

10.3.4 Organisation – Procuring Authority

The organisation of any procurement is discussed in section 9. The complexities of the procurement of the infrastructure required under Scenario C suggest that this will be a very large task that will need to be closely coordinated with NRA and NSB. Given the

205 15 February 2011 likely size of the task consideration needs to be given as to whether NRA has the resources and the ability to focus on the procurement without detriment to its responsibilities for the existing infrastructure. This suggests that either NRA will need to increase its resources or there might be a good case for establishing a separate Procuring Authority but with close links to NRA.

As operator of the rolling stock, NSB may be best placed to procure the rolling stock. It is also likely that it has the most relevant experience in Norway to undertake such a procurement. It is important that whoever is leading the procurement is able to access and commit appropriate resource to the procurement in order to effectively manage the procurement to deliver the best value for money.

10.3.5 Organisation – Industry arrangements

Issues surrounding industry arrangements are covered in section 8. It is difficult to assess whether industry arrangement might have to change without knowing the detail of the works required. Depending on the scale of change, the approach for Scenario B or D might be appropriate.

10.4Scenario D

10.4.1 Features

Scenario D envisages major new, discrete pieces of infrastructure which will necessitate a new, bespoke procurement approach. Specific features that will need to be accommodated include:  Need to obtain planning permission and approvals over a wide geographic area  Need to acquire land over the same area  Likely to be major construction challenges in terms of bridges and tunnels as well as an harsh climate in Norway and limited access to parts of the route  Requirement to interface with the existing network – it is unlikely that the HSR network will be completely independent of the existing network even if the only connection is at terminus stations  Project requirements will be complex, high value and take a long time to deliver

206 15 February 2011

10.4.2 Contracting strategy

All of the issues outlined in Chapter 6 will become relevant. In developing appropriate contracting strategies the following issues will need to be addressed in particular:  Appropriate allocation of risk and responsibilities  Clear definition of required works  Consideration of packaging options taking into account interface issues, the range of activities to be undertaken, timescales and the potential size of contracts  Range of possible solutions which may vary by corridor depending on the size and complexity of requirements. Key objectives should be to achieve:  Acceptable transfer of risk  Some degree of private financing of at least the construction phase, with conditional payments to improve due diligence and commitment of contractors to deliver on time and to budget  Control over end cost, but recognise that given the uncertainties some form of target cost approach may be more appropriate  Recognising that the business case is for a full line and not discrete sections of line, there may be benefits in setting up project alliances to encourage contractors to deliver a completed line and not just focus on their sections

What is clear is that solutions are likely to be bespoke i.e. it is likely that rolling stock will require a different contracting strategy to infrastructure but a careful balance needs to be achieved between adopting an approach that is highly innovative and using structures that contractors recognise and understand. Careful consideration should therefore be given to using industry standard form contracts where possible and only varying them for good reason.

10.4.3 Self funding

Issues surrounding the funding of major infrastructure projects are discussed in section 7. The size and complexity of the likely works under Scenario D suggest that there may be scope for self funding specific elements such as rolling stock. However, based on the experience of a range of high speed rail schemes and that high speed rail would be new in Norway, it is extremely unlikely that any high speed corridor could be completely self funding. Careful consideration should therefore be given to those circumstances where creating structures to enable self funding will offer best value for money – this is likely to be where such structures underpin the transfer of appropriate risk to contractors.

207 15 February 2011

10.4.4 Organisation – Procuring Authority

The organisation of the procurement of major infrastructure is discussed in section 9. Generally, under Scenario D, there is more likely to be strong case for a separate procurement body because there is relatively little dependence on NRA and there is a great need for focused, experienced resource. All of the factors set out in section 9 will need to be considered.

10.4.5 Organisation – Industry arrangements

Issues surrounding industry arrangements are covered in section 8 and, under Scenario D, certain aspects of the industry arrangements may need to be considered in order to best integrate the delivery, operation and maintenance of the HSR infrastructure into Norway’s rail industry. The starting point should be to fine tune existing structures where they work well and only to consider major changes where the existing structures are not fit for purpose or cannot be adapted. The analysis of industry issues set out in Chapter 8 suggests that there are not strong arguments for major changes to existing structures, although the institutional structure on the HSR network might be different from the rest of the industry.

www.pwc.com

© 2011 PwC. All rights reserved. "PwC" refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), PwC’s operations in Norway lies within the firms PricewaterhouseCoopers AS and Advokatfirmaet208 PricewaterhouseCoopers AS.