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CHAPTER SEVEN: SUBCONTRACTING IN INFRASTRUCTURE AND OPERATIONS
Introduction
7.1. European law requires the separation of infrastructure and operations, for the reasons set out in Chapter 2 and with the effects set out in Chapter 6. We discussed in Chapter 4 the findings of the Railimplement and emerging Servrail studies regarding the access of operators to services which are in monopoly supply, normally, but not always, by the infrastructure manager. There remain some difficulties in obtaining access to these services, but these are generally small in Scotland, Sweden and Denmark and the situation elsewhere is generally expected to improve.
7.2. European law does not dictate either whether infrastructure managers and operators carry out activities in house or through subcontracting or the structure of these subcontracting supply markets. In practice they subcontract a wide range of services where suitable supply markets exist. Network Rail's subcontracting of infrastructure maintenance and renewal has led to well-publicised problems, but in the Railimplement and Servrail studies we found that supply markets are emerging across Europe, that infrastructure managers and operators often have the option to subcontract services, and that the choice of whether or not to do so depends on a number of factors, with no overwhelming preference for any particular approach.
7.3. In this section we deal in turn with our illustrative findings on:
- Subcontracting by infrastructure managers
- Subcontracting by train operators
Subcontracting by infrastructure managers
7.4. Infrastructure managers' roles vary, but their core functions normally include specialist railway skills such as real-time control of signals and timetable preparation. Much of the work they require, however, is routinely supplied by contractors in other industries including facilities management and civil and structural engineering.
Scotland
7.5. As the restructuring of British Rail was designed and developed from 1991 to around 1996, it was envisaged that all services which were not natural monopolies, and hence potentially requiring regulation, should be obtained by competitive supply. In the case of infrastructure, this led to the conclusion that the monopoly infrastructure manager should provide and procure its core " OMR" (operations, maintenance and renewal) functions as follows:
- Operation of the network by signallers and controllers, a natural monopoly activity, should be carried out in house
- Maintenance should be contracted to an engineering supply market
- Renewal should be separately contracted to an engineering supply market
7.6. This approach to subcontracting made a number of assumptions, including that it was possible to distinguish maintenance and renewal of existing infrastructure, let alone enhancement to increase its functionality of expansion to extend the network. For example, installing a new crossover between two lines might inherently entail enhancing the existing signalling system to control train movements, renewal of the track where the crossover was inserted, and carrying out maintenance which would not otherwise have been carried out until later.
7.7. In the event, subcontracting of infrastructure maintenance and renewal proved unsatisfactory. Two main reasons have been identified:
- Loss of information: with subcontractors carrying out maintenance, Network Rail no longer had reliable knowledge of the condition of its infrastructure assets, limiting its ability to manage, budget and plan effectively
- Perverse incentives: with maintenance contractors generally on fixed price contracts, but renewals contractors on time and materials contracts, both had incentives to renew infrastructure rather than to maintain it to extend its life
7.8 .Network Rail announced in October 2003 that it would bring infrastructure maintenance back in house, and this process was completed by July 2004, with claimed savings of £100 million in the first year. However, Network Rail continues to subcontract a wide range of services including infrastructure renewal, feasibility studies, engineering design and new construction.
New Zealand
7.9. ONTRACK subcontracts the provision of engineering trains to the incumbent operator, tenders infrastructure enhancement and renewals and also uses consultants to assist with track and structure design. It recently carried out a competitive tender for the provision of a range of infrastructure maintenance services but concluded that the prices offered were not attractive and decided to continue the work in house.
Ireland and Northern Ireland
7.10. Ireland's IÉ remains the most integrated of the railway businesses and continues to carry out infrastructure maintenance and renewal in house. It would, however, probably need to bring in external resources for large renewal and expansion projects, particularly for specialist skills such as tunnelling. Northern Ireland Railways outsources major infrastructure renewal work.
Hamburg/Schleswig-Holstein
7.11. DB Netz has recently been outsourcing more and more work including tendering of infrastructure construction and maintenance. However, it is responsible for network safety and must remain in control of all work. The costs of its work had recently been criticised by a number of regional transport authorities ( SPNV-Aufgabenträger) and a recent study by the BAG- SPNV, the national working group of bodies responsible for local rail services) argues that there is still potential for cost reduction and lower access charges.
Denmark
7.12. Banedanmark works to technical norms and standards which are approved by Trafikstyrelsen. Subject to these norms and standards, it subcontracts not only the engineering design and construction of infrastructure enhancements but also track renewals and at least some types of infrastructure maintenance. We were told that these arrangements worked well and that the key issue was the ability of the infrastructure manager to chose whatever approach was appropriate.
7.13. The Øresund link company and some of the local authority networks subcontract work on their networks to Banedanmark. We were told that modern high speed track recording equipment makes it easier for an infrastructure manager to examine and monitor the condition of infrastructure which has been worked on by other parties.
Sweden
7.14. Banverket contracts for a wide range of enhancement and renewal activities and also subcontracts some maintenance to trusted suppliers, particularly for specialised equipment such as electrified overhead line equipment ( OHLE). Banverket also acts as a subcontractor to other railways and both it and Vägverket, the road infrastructure manager, compete on the market to provide engineering work to other parties.
7.15. We also spoke to Arlanda Express which, as a vertically-integrated business, needs to carry out OMR activities on its infrastructure from the Banverket network to Arlanda airport. Much of this maintenance was outsourced in 1999, as soon as the infrastructure was complete, to a main partner, Finland-based Fortum, which further subcontracts some work including the maintenance of overhead line equipment ( OHLE), and platform and cleaning work, to Dalkia, a specialist provider of facilities management and energy management services. These arrangements work well and present no particular difficulties.
7.16. Outside Stockholm, the local rail networks are owned and maintained by Banverket, but SL owns the track of its small networks such as the Roslagsbanan. It generally contracts their maintenance, mainly by competitive tender, rather than retain resources in-house, and reported no difficulty with this arrangement.
Subcontracting by train operators
7.17. As discussed in Chapter 4, train operators often subcontract the provision of rolling stock and in some cases its maintenance. Subcontracting between train operators is also widespread where two or more operators share the same station, and extends to the provision of stations, ticket machines, booking offices and the supporting information, sales and marketing systems. However, operators also reported subcontracting a range of other activities.
Scotland
7.18. Most Scottish stations are operated by ScotRail, but Network Rail operates Edinburgh Waverley and Glasgow Central on behalf of all the operators. GNER operates major stations on the East Coast Main line including Berwick-upon-Tweed and Newcastle stations and Virgin West Coast operates major stations on the West Coast Main Line.
New Zealand
7.19. We understand that a range of rolling stock maintenance in New Zealand is subcontracted to Toll and United Group. In Auckland, locomotive traction is also subcontracted by Veolia to Toll.
Ireland and Northern Ireland
7.20. Ireland's IÉ carries out most of its activities in house and has only recently begun to subcontract. It is currently in the process of outsourcing catering activities and may extend this to advertising, security and train cleaning.
7.21. Catering is also outsourced on the Enterprise service operated jointly with Translink, which also employs agency cleaning staff. Translink's new rolling stock will be maintained for 15 years through a performance-based contract with the manufacturer, CAF.
Hamburg/Schleswig-Holstein
7.22. Schleswig-Holstein's Nord-Ostsee-Bahn ( NOB) reported a wide range of subcontracting including train maintenance and cleaning and the use of alternative retail outlets such as travel agents for ticket sales. We were also told that few small operators or franchisees can afford to build their own depots or workshops and that these are often subcontracted.
Denmark
7.23. Denmark's operators, like Scotland's, share responsibility for managing stations, with ticket sales carried out by the operators managing individual stations.
7.24. DSB commented that there are generally no difficulties in subcontracting work which is not safety-critical, although operators generally carry out at least light maintenance of the trains they operate. Arriva subcontracts heavier maintenance work to DSB, which also provides maintenance services to some of the Norwegian, Swedish and German operators. Train cleaning services are typically tendered to private sector cleaners. However, DSB also noted that services were taken back in house when that presented better value for money.
7.25. When asked, the interviewees generally reported that subcontracting, where it was used, worked effectively, and did not report any specific problems or difficulties.
Sweden
7.26. Sweden has taken steps to create a supply industry for train operators, and at the end of 2000 its incumbent operator, SJ, was restructured to create Green Cargo, the freight operating company, SJAB, the passenger operating company, and a number of suppliers:
- TraffiCare, providing train cleaning and other services
- EuroMaint, a systems and maintenance company
- Unigrid, providing IT services
- Jernhusen, which maintains and manages property including stations
7.27. All of these suppliers are free to provide services not only to SJ but also to the PTA networks and new entrant operators.
7.28. We spoke to Arlanda Express which is, like many of the PTA networks, a small business which relies heavily on subcontracting activities for which it does not have in-house resources. It is also a vertically-integrated business which needs to carry out OMR activities on its infrastructure and also its trains and stations. It operated its own train maintenance depot until 2005 when, after a technical study, it put its management out to competitive tender. Three bids were obtained and the depot is now operated by EuroMaint, the SJ subsidiary described above. Other outsourced activities include train cleaning and IT.
7.29. Interviewees identified three factors to be considered in outsourcing:
- Infrequent or peaky workload: outsourcing is likely to be cost-effective when the volume of work in particular technical areas is variable. For example, EuroMaint will be able to bring in the additional resources needed when the Arlanda Express fleet undergoes a major overhaul.
- Staff retention: even if workload is stable, it can be hard to keep specialist staff in small technical areas. Skilled senior staff working alone or in small groups may be reluctant to carry out less-skilled work in their technical area and may find it hard to keep up-to-date, and their leave, sickness or resignation can be disruptive, particularly where support must be available at all times.
- Local staff availability: it may be easier to retain staff in-house in areas where the skills required are in ready supply.
Summary
7.30. The extent of subcontracting among Scotland and the comparators varies, but neither the Railimplement and Servrail studies suggested that it raises major problems if governments regulate safety-critical work, encourage the creation of a supply industry, and ensure competitive behaviour.
7.31. The relative merits of subcontracting and carrying out work in house vary with factors including the opportunity or need to cooperate, the existence and competitiveness of a supply market, the volume of work, the peakiness of the workload and the need to retain and motivate staff. None of our interviewees expressed a strong view that subcontracting was consistently either desirable or to be avoided. The choice is probably best left to the infrastructure managers and operators, who are best able to decide how to configure their activities.
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