Staying on track How the right funding model can drive skills and technology in the rail industry

February 2017 Staying on track | How the right funding model can drive skills and technology in the rail industry 3 About

Balfour Beatty is a leading international infrastructure group. Our expertise owes a significant amount to our decades of With 15,000 employees across the UK, Balfour Beatty finances, experience in the industry and to our continued commitment to develops, delivers and maintains the increasingly complex investing and innovating. For example, our track construction infrastructure that underpins the UK’s daily life. Delivering projects machine, which is unique to Balfour Beatty, lays rails 50% quicker across transportation, power and utility systems, social and than conventional methods and automates the whole process. commercial buildings, from Crossrail and the Channel Tunnel Rail To see it in action, please visit http://bit.ly/2kpKUDI link, Heathrow T2b to the M25, M60, M3 and M4/M5, Sellafield and soon Hinkley C nuclear facilities, to the Olympic Aquatics Centre and Olympic Stadium Transformation. Our rail business is one of the leading rail infrastructure suppliers in the UK. From feasibility studies, planning and design through to implementation and asset management, we provide multi- disciplinary rail infrastructure services across the lifecycle of rail assets. Our expertise covers electrification, track, power, civils, specialist rail plant, railway systems and technologies. Staying on track | How the right funding model can drive skills and technology in the rail industry 5 Executive Summary

1. Delivery of the Government’s commitment to 5. Continuity of project flow is also essential to improve UK railways is critically dependent on retention of existing skills (e.g. the preservation the industry having the right skills and technology, of the successful electrification both immediately and over the medium term. team). It is critical to future delivery to prevent high calibre engineers drifting into other, more 2. For the rail industry, the need to create certainty stable industries in the 2018-2020 “gap”, when of a project pipeline is pressing. The current the industry needs to be building capability funding (debt) restrictions on are for such programmes as the Digital Railway, driving unintended consequences (exemplified by Brighton Mainline upgrade, and HS2. the delay of CP5 projects into CP6). The resulting stop-go pattern of rail contracts exacerbates 6. The pausing/un-pausing of large schemes not only the haemorrhage of skilled engineers to discourages contractors from recruiting and other industries but also destroys the investment training new workers (apprentices, graduate case for suppliers contemplating R&D, critical engineers). This stream of new talent not equipment and training programmes. only takes time to come on stream, but needs the invaluable handover interface with 3. Given the central position of infrastructure experienced workers. in the Government’s industrial strategy, this requirement for continuity of funding represents 7. Retirements are forecast to peak during CP6 and an opportunity. Against a backdrop of low-cost should be addressed proactively by deferment borrowing and the (private) finance community’s schemes, which in turn require continuity of appetite for infrastructure assets, the proven project flow to justify. immediate take-up on successful projects – 8. The current significant reliance on non-British passenger and freight – demonstrates the EU skilled workers and recruits must be assured demand drivers which underpin the investment over the short to medium-term by Government proposition for funding. commitment to an efficient and effective VISA 4. Where Network Rail has used a supplier- scheme or equivalent. partnership model with clear accountabilities 9. In competing for both investors and talent, the for overall project delivery (/ rail industry urgently needs to tackle its image West ; Maidenhead electrification are problems head-on in terms of poor perception of examples where Balfour Beatty have been performance, diversity and career development involved) the resulting delivery on time and to within cutting-edge disciplines e.g. asset agreed budget delivery demonstrate a route management using the latest digital technology, to greater efficiencies which will reassure improved design productivity through the potential investors. development of new software and the latest BIM techniques across the asset lifecycle. Staying on track | How the right funding model can drive skills and technology in the rail industry 7 Introduction

Rail travel in the UK is at historically high levels, with over twice key component of the Government’s strategy to rebuild and as linesmen, signalling designers, and test and commissioning We employ around 700 more young people on graduate and as many passenger kilometres being travelled today as in 19951 rebalance the economy, with unprecedented levels of public engineers, for example, is predicted to lead to wage inflation over part-time higher education / degree schemes. and forecasts showing that growth will continue at similar if not money going into new projects such as HS2. the next five years of between 25% – 40%4. Failure to effectively Balfour Beatty is also a long standing member of The 5% Club, greater rates. address the skills shortage could leave rail employers facing However, as rail projects become ever larger and more complex, an employer led organisation set up by our Chief Executive, estimated costs of £316 million5 a year by the end of CP6, while To ensure the UK has the infrastructure required to deal with this the demand for highly skilled workers continues to increase. Leo Quinn, three years ago, aiming to address the skills gap by costs to government are estimated to be £381 million6 per year by surge in passenger journeys, the Government is undertaking the This is in addition to an existing skills shortage in the rail industry, getting more young people into earn and learn opportunities, the end of 2024. As the costs of government funded construction most ambitious modernisation of the railways for over a century. which is a result of the continued increase in passenger journeys encouraging businesses to take the lead on training and projects increase, taxpayers will carry the burden and pressure Over £38bn is being spent in Control Period (CP) 5 (2014-19) to and freight. This shortage has reached critical levels, particularly promoting apprenticeships as a positive career decision. will build to demonstrate value for money. maintain and improve the network. This investment will continue in areas such as signalling and electrification3. For signalling and Leo Quinn also leads the skills work stream of the Government’s in CP6 (2019-2024), including more lines being electrified, an telecommunications, the National Skills Academy for Railway Balfour Beatty welcomes moves such as the publication of the Construction Leadership Council (CLC) which is setting targets east-west link between the and Leeds arms of High Engineering (NSARE) forecasts a need for between 1,600 and Transport Infrastructure Skills Strategy 7, which sets stretching and recommendations for the construction industry to build Speed 2 (HS2) as well as Crossrail 2. Balfour Beatty welcomes 2,000 new people in the next five years, with over 30 per cent targets to attract and retain a more diverse workforce. It also sets momentum and commitment in tackling the skills shortage. the Government’s commitment to improving the nation’s railways. of these people being at technician level or above. And the out how the Government aims to create 30,000 apprenticeships In addition to these moves, we have identified a particular As a key player in the supply of rail infrastructure, we look National Infrastructure Plan for Skills projects that the number in the road and rail sectors by 2020 as well as how it will attract skills issue relating to the beginning of CP6, which exemplifies forward to continuing to play our part in this work. of engineering and technical workers will need to grow by 7,200 more women and people from diverse backgrounds. As a British the urgency and magnitude of the issue, and which this by 2020, while in conventional rail the number of engineering company with a hundred year legacy in the UK, Balfour Beatty It is well documented that infrastructure is crucial to strong, paper addresses. and technical workers will need to grow by 900 by 2020. is homegrown. We believe it is important that industry steps up sustainable, long-term economic growth2. In recent decades, to the plate and plays its role. Balfour Beatty employs over 150 governments around the world have recognised that by investing The skills shortage is important for a number of reasons, not least apprentices each year in the UK in addition to the 320 currently public money in infrastructure, they can better underpin and because a shortage of skilled labour can cause major delay and under training in a diverse range of roles across the business. drive regeneration. In the UK, investment in infrastructure is a cost overruns to projects. The shortage of critical resources such

1 Parliament Research Briefing 2660 4 Ibid 2 Égert et al, Infrastructure and Growth: Empirical Evidence, OECD, 2009 5 The National Skills Academy Rail, 2016 3 A report from The Office of Rail and Road found a major skills shortage in 6 Ibid a number of different areas, particularly signalling and electrification 7 Transport Infrastructure Skills Strategy, , 2016 Staying on track | How the right funding model can drive skills and technology in the rail industry 9 The rail skills landscape

It is well documented that the demand for engineers in the UK 2. Competition with other industries: There is also an increase 3. Increasing use of technology: The shortage of engineers In addition to these issues, the pausing and un-pausing of large exceeds supply. This directly impacts on the rail infrastructure in demand for engineers in other UK sectors such as telecoms, is made worse by the fact that rail transport is becoming schemes in CP5, for example the Network Rail Midland Mainline industry, where the existing skills shortage is further exacerbated manufacturing, power and nuclear, which are all competing increasingly reliant on technology. Emerging technologies, and Trans-Pennine projects, increase the difficulties that the rail by a number of key issues, including: with the rail industry for the same skilled workers. The rail such as digital communications and signalling and GPS sector faces in recruiting and investing in skills, as workers drift infrastructure industry’s image, which is of largely manual are becoming the norm, as is ultrasonic technology, used off to other industries with more predictable or regular work. 1. An ageing workforce: A large number of higher level roles in laying track and so on, is not helping here: competition to detect defects in tracks that could cause derailments; Indeed, larger projects and smaller projects are symbiotic in qualified and experienced people will retire in the coming from other industries, particularly the energy sector, is ethernet technologies used in signalling and communications; more ways than one: to ensure we have the skilled workers for decade and will need to be replaced: indicatively, the therefore hampering its ability to attract the engineers it multimedia equipment in trains; and propulsion systems. mega projects such as HS2, infrastructure companies like Balfour average age of a registered engineer in the UK is 568. needs. The reality, which must be better communicated, is Beatty use more modest-sized schemes to recruit and train skilled 4. A broader geographical spread: As a result of Crossrail, Engineers working in the rail industry represent a wide that a career in rail can take any number of different forms, workers in the short term. This keeps skilled workers up to date engineering jobs within rail infrastructure have been largely range of engineering disciplines, including civil, electronic, with roles spanning a variety of different disciplines including with the latest techniques in between working on larger projects, based around London in recent years. This is likely to change electrical, mechanical, industrial and production engineering. those requiring cutting-edge skills such as use of CAD design, ensuring the expertise is available for mega projects tomorrow. with projects such as electrification of the Great Western The nature of the specialised work in the rail sector means programming and hi-tech manufacturing. With insufficient people entering the industry, it is imperative that Main Line and lines in the Midlands and North of and that engineers often need to develop skillsets combining we retain the skilled workers we have. Taking a ‘capability holiday’, . Rail engineers will therefore be needed across several of these disciplines, making retiring staff particularly on the other hand, puts further pressure on the skills situation the whole country, which may make recruitment difficult. difficult to replace. This means that further skills shortages and undermines efforts on apprenticeships and attracting people will occur during CP6, when retirements are likely to peak. 5. Concurrent infrastructure projects: Many of the major new onto degree courses. The critical skills need to be maintained. infrastructure and upgrade programmes in the pipeline are Of course, some point to the Apprenticeship Levy as a way to likely to overlap each other. This will place a further burden resolve the skills shortage. Balfour Beatty is fully supportive on the supply of skilled workers in the industry. of the Government’s commitment to apprenticeships, however 6. Brexit: Uncertainty around the free movement of labour in developing the skills we need to build tomorrow’s infrastructure the EU could increase the industry’s recruitment and staffing takes time. It can take a decade from starting an apprenticeship difficulties as it may no longer be able to handpick highly or training for someone to gain all the skills they need in skilled engineers from other EU countries as is currently specialist areas. With various large infrastructure projects in the case. In November 2016, more than 10% of the Balfour the pipeline, including mega projects such as HS2, our progress Beatty workforce held non-British EU passports and around in addressing the skills gap needs to accelerate. If we do not 11% of new recruits in 2016 held non-British EU passports. do so, the result will be an increase in construction cost. This Around 100 of our 2016 recruits came to us via a pro-active will be counter-productive and in itself will inhibit delivery. campaign targeting Greece and Portugal with a further 40-50 Balfour Beatty believes that the UK’s pipeline of rail projects expected in 2017. In our supply chain and the people who represents a once in a lifetime opportunity to change the face actually build tomorrow’s infrastructure, the proportion of of the infrastructure workforce. These projects will create non-British EU workers is even higher. Only 0.2% of our 2016 opportunities across a range of sectors to train, upskill and recruits come from outside the EU due to the complexity, cost, inspire a generation, providing existing workers and younger administrative burden and time delays required in managing people with the technical skills and employment opportunities the current points based sponsor licence system. There is to create fulfilling careers for those of all backgrounds. These also currently a global shortage of engineers9. projects have the potential to drive change in the infrastructure industry, bringing in the diversity currently lacking and ensuring that the infrastructure workforce better reflects the makeup of the country. That means more women, more minorities and more young people.

8 The Study of Engineers’ Data, The Royal Academy of Engineering 9 Manpower, Global Talent Shortage Survey, 2014 Staying on track | How the right funding model can drive skills and technology in the rail industry 11 Maintaining a steady course Conclusion

As noted in the Office of Rail and Road’s (ORR) Periodic Review The three main consequences of these delays are that: The ambitious upgrade and enlargement of the UK’s rail as a matter of urgency. This will require the examination of better 2018 (PR18) consultation document which considers Network Rail’s infrastructure has the potential to drive economic expansion partnership ways of working, which are already proving more 1. Network Rail will be in a worse position financially at the outputs and funding for CP6, the fiscal environment is likely to be and provide employment opportunities for thousands of people efficient, as well as potentially more innovative sources of funding. start of the next control period than expected, increasing constrained during the next control period, for a number of reasons. for years to come. the financial pressure on CP6. Otherwise, skilled engineers – be they about to retire, much in In September 2014, Network Rail was reclassified as a public However, the future success of the rail industry is inextricable demand by other industries, aspiring recruits or foreign workers – 2. There will be a negative impact on investment in new sector organisation and taken under direct government control. from the continuity of funding – and thus project flow – provided will be lost to sectors with more reliable, steady pipelines of work. equipment and resources and on research and development. This saw the redesignation of its debts onto the Government’s principally by Network Rail. This is because the investments The same forces will also restrict investment in new innovation While Network Rail encourages suppliers to invest in balance sheet, debts which are predicted to reach £51 billion by required of its supply chain partners in existing and future skills, and productivity. equipment, temporary works innovation and material the end of CP5. Furthermore, Network Rail now has to borrow as well as in R&D and critical strategic equipment, cannot be technology, in reality, suppliers are less likely to invest if Such loss would intensify the already serious constraints facing directly from the UK government and is subject to strict borrowing justified without greater demand visibility and certainty. there is uncertainty around the pipeline of work. For example, the rail industry and put in question the efficient delivery of the limits. It can no longer raise additional debt to manage the risk of Balfour Beatty’s High Output Electrification The projected stop-go pattern of the project pipeline – a Government’s intended infrastructure enhancements, with all any possible overspend, for example, in response to increasing Wiring Train, which provides a safer, more efficient method function of Network Rail’s funding model and, in a way, its their benefits. project costs or requests to change the scope of schemes. for installing overhead lines, has no activity scheduled perceived performance – must be addressed and resolved Already as a direct result, two major electrification projects on following the completion of the Crossrail outer works. the Trans-Pennine and Midland Main Lines were delayed, while However, to ensure that we can continue to be able to the whole CP5 programme was reconfigured to keep the £38bn operate the train in the future, the teams trained to operate CP5 spending programme in budget. Many of the electrification it will need to be kept together, trained and occupied. The costs of both schemes will now fall within CP6. infrastructure industry needs to take a long-term view in In addition, it has been well-documented that Network Rail’s wider order to plan its investments in equipment and R&D. programme of renewals and enhancements is also running behind 3. As CP5 draws to a close with many of its schemes pushed schedule and over budget. In June 2015, the ORR reported that back to CP6, there is likely to be a hiatus in activity for skilled renewals cost 19% more than expected in 2014-15, and that costs workers in the rail infrastructure industry. In contrast, the have increased significantly on a number of rail enhancement beginning of CP6 and the release of new funding will then see projects compared with Network Rail’s initial estimates, although a significant spike in activity on schemes, which contractors the ORR acknowledges that this is largely due to: and the rest of the industry will need to ensure that they and “…supply chain issues, delays in programmes, contractor their staff are ready for. performance, more work than expected to keep its assets in an The impact to the supply chain of such a downturn in activity appropriate condition, in some areas lower volumes of work than followed by a projected increase at the beginning of CP6, is 10 expected so higher unit rates, and the effect of severe weather.” significant. It makes it difficult for contractors to effectively At the same time, it is important to note that Network Rail has retain skilled staff and ensure that they are in place when successfully delivered a number of critical projects over the same needed. There is a risk that people will drop out of the period, including the and Crossrail programmes, the industry at a time when it should be building rail skills and re-opening of the Dawlish line, the new Reading station and the capability in advance of major schemes such as High Speed 2 modernisation of New Street station, as well as and Crossrail 2. improvements in the safety and the reliability of railway assets. Many of these schemes have been delivered by Balfour Beatty Balfour Beatty believes that significant efforts must be made to in conjunction with Network Rail. ensure that this does not happen. The risks to the success of key schemes are too significant. We therefore believe that funding However, the overspend caused Sir Peter Hendy to announce in should be brought forward – or otherwise supplemented through his report11 on the CP5 programme that, while all of the schemes additional sources of investment – to ensure that the pipeline of would go ahead, many of them would be delayed until CP6, investment is maintained at a steady level to ensure that core most with additional costs. skills in the rail infrastructure industry are preserved.

10 ORR: Annual efficiency & finance assessment of Network Rail 2015-16 11 The Hendy Report, DfT, November 2015 Veena Hudson Head of Public Affairs | Balfour Beatty [email protected] +44 (0)20 7963 4235 | +44 (0)7790 340 693 www.balfourbeatty.com