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Delivery Considerations – a report for HS2

18 December 2009
Ian Jordan 18 December 2009
High Speed Two IA/MG/AB/GF
55 Victoria Street
London Direct Line: 0207 951 0742
SW1H 0EU e-mail: mgupta@uk.ey.com

Dear Ian

Delivery Considerations – A report for HS2

I am pleased to provide you with this report setting out the delivery and financing considerations
relating to the options for a potential High Speed Rail link from London to the West Midlands. This
report provides a summary of the process undertaken in reviewing the options available to HS2 and
our recommendations on the delivery and financing options to be adopted in the delivery of the rail
link building on the conclusions of our phase I report dated 29 July 2009.
This report has been prepared in accordance with the terms and conditions of our existing contract
with High Speed Two in respect of the Provision of Financial Advice under the ‘Buying Solutions Multi-
Disciplinary Consultancy Framework Agreement Code: RM353’ (the ‘Contract’).
Our report may not have considered issues relevant to any third parties. Any use such third parties
may choose to make of our report is entirely at their own risk and we shall have no responsibility
whatsoever in relation to any such use.
Our work in connection with this assignment is of a different nature to that of an audit. Our paper to
you is based on publicly available information and on discussions with you and your other advisers. We
have not sought to verify the accuracy of the data or the information and explanations provided. Our
work has been limited in scope and time and we stress that a more detailed review may reveal
additional considerations that this review has not.
Should you have any questions please do not hesitate to contact me on 0207 951 1702.

Yours sincerely

Manish Gupta

Partner

The UK firm Ernst & Young LLP is a limited liability partnership


registered in England and Wales with registered number OC300001
and is a member firm of Ernst & Young Global Limited. A list of
members’ names is available for inspection at 1 More London Place,
London SE1 2AF, the firm’s principal place of business
Ernst and
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registered office.
High Speed Two – Delivery Report

Contents

1. Executive Summary.............................................................................................. 1
1.1 Background ....................................................................................................................................1
1.2 Analytical parameters .....................................................................................................................1
1.4 Strategic issues ..............................................................................................................................2
1.5 Delivery considerations...................................................................................................................4
1.6 Procurement ...................................................................................................................................5
1.7 Governance.....................................................................................................................................5
1.8 Financing ........................................................................................................................................6
1.9 Future proofing ...............................................................................................................................7
1.10 Summary ........................................................................................................................................7

2. Introduction & Background.................................................................................. 10


2.1 Phase I ..........................................................................................................................................10
2.2 Phase II .........................................................................................................................................10
2.3 Report Structure ..........................................................................................................................10

3. Project Issues .................................................................................................... 12


3.1 Context .........................................................................................................................................12
3.2 Analytical parameters ...................................................................................................................12
3.3 Findings from other High Speed Rail projects ................................................................................13
3.4 Strategic issues ............................................................................................................................14

4. Our Approach .................................................................................................... 20


4.1 Phase I ..........................................................................................................................................20
4.2 Phase II .........................................................................................................................................21

5. Delivery ............................................................................................................ 23
5.1 Delivery Considerations ................................................................................................................23

6. Procurement ..................................................................................................... 31
6.1 Procurement considerations .........................................................................................................31

7. Governance ....................................................................................................... 43
7.1 Roles and responsibilities .............................................................................................................43

8. Financing .......................................................................................................... 50
8.1 Introduction ..................................................................................................................................50
8.2 Requirement for significant Government support ..........................................................................50
8.3 Leveraging the value of Government support ................................................................................51
8.4 Considerations from other projects ...............................................................................................52

9. Future Proofing .................................................................................................. 53


9.1 Regulatory controlled structure ....................................................................................................53

10. Summary .......................................................................................................... 56

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1. Executive Summary
1.1 Background
In January 2009, the Government created a new company, High Speed Two Limited (HS2), to
comprise a non-executive Chairman, Sir David Rowlands, and a small number of full-time staff
(mostly seconded from the Department for Transport (DfT) and Network Rail) led by a Chief
Executive, Alison Munro. Lord Adonis, the Secretary of State for Transport, asked HS2 to
consider and provide advice on options for an entirely new High Speed Rail (HSR) line
between London and the West Midlands by the end of 2009.

In May 2009, HS2 commissioned Ernst & Young to provide support and advice on the delivery
and funding considerations when developing a new HSR line. Our Phase I report of July 2009
summarised the lessons learnt from selected international HSR projects. The objective of this
report was to discuss the Delivery options available for a new HSR line by considering the:

„ Different operating and governance structures which may be used;


„ Contractual and delivery models available;
„ Financing issues that will need to be addressed; and
„ Considerations on how to ‘future proof’ the project.

1.2 Analytical parameters


In undertaking a review of this nature, it is necessary to consider the parameters against
which the project will be assessed. In considering the options for HS2, we have been mindful
of the need to gain an appropriate balance between the following key areas:

„ Affordability – the delivery option should be assessed and be able to be paid for in term
of cash flows and resource costs
„ Future Proofing – the delivery option should be sustainable and allow not only the
delivery of an HSR line between London and the West Midlands, but also not preclude
the potential development of a wider network
„ Value for Money – with newly built assets, consideration should be given to the wider
aspects of the asset and not just its cost of construction; it is therefore necessary to
consider the design, whole life costs (i.e. operating and maintenance as well as
construction), fitness for purpose and operational efficiency

Furthermore, the risk transfer needs to be assessed carefully since the nature of large scale
and complex major rail projects means Government often ends up bearing major risks even
though it has paid to transfer them.

1.3 Findings from other High Speed Rail projects


Globally, there has been a variety of HSR projects undertaken with varying degrees of
success. In reviewing these projects, a common set of lessons emerge, including:

„ The overall objective should be to deliver a functioning railway system not a


construction project;

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„ Full risk transfer is expensive and often illusory since the Government will in most cases
end up bearing catastrophic risks or taking the role of operator of last resort;
„ Developing a HSR network requires a strong, long term vision with sustained political
support across all parties;
„ Direct and indirect Government support is crucial to HSR projects;
„ Traditional PPP approaches are not easily applicable to major railway projects — bespoke
structures are needed;
„ It is critical to have a strong project organisation set up to manage the design,
development, procurement, delivery and funding of the project;
„ Despite notable successes, infrastructure projects of this size and complexity will face a
variety of challenges throughout their lifecycle, including:
„ Varying degrees of political and stakeholder support;
„ Difficulties in revenue and traffic forecasting due to network effects;
„ Ability to complete the construction on time and on budget;
„ Limited appetite of the private sector to retain commercial as well as full
delivery and project risks; and
„ Meeting the affordability challenge whilst demonstrating value for money.

1.4 Strategic issues


The following strategic issues should be considered when developing a delivery structure for
the project.

1.4.1 Delivery structure focus

It is imperative that the project is developed whilst considering the long-term operational
priorities and complexities associated with what will ultimately become a perpetual
operational asset, rather than allowing short term funding or affordability considerations to
drive the structure.

For the same reasons, financing priorities should not drive the delivery structure choice.
Financing issues are important and the ability to finance the project in a sustainable manner is
a crucial consideration in determining the most appropriate delivery structure. However, the
financial structure should only be considered once the operational and construction
characteristics are properly understood and developed. This approach is a key foundation of
our analysis.

1.4.2 Profiling finances vs. risk transfer

The size and complexity of the project makes it very difficult to transfer significant risks to
the private sector through, for example, a PPP arrangement. This is made more difficult by
the fact that, having a single entity responsible for the availability and maintenance of the
network is the most appropriate method of mitigating and managing interface risk during the
operational period. Therefore, creating a number of smaller PPPs to deliver the different
components of the HSR line, as has been the case in some of the HSR projects across Europe,
is not practical because of the increased interface risk during the operational phase that this
approach would create. Whilst profiling the cash flows to spread the Government’s

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contribution over time is an aspiration, the practical implications and potential consequences
of this approach would make such an objective difficult to deliver in practice.

1.4.3 Government support

It is widely accepted that rail projects are typically not commercially viable without
Government support. In some cases, rail revenues may be sufficient to cover the cost of
operating the service, however, they are rarely sufficient to service the capital cost required
to construct the asset. This factor remains true for HSR services and our Phase I report
highlights that the majority of projects benchmarked benefitted from significant Government
support. Therefore, it is likely that a large proportion of the capital cost and potentially the
operating budget required for HS2 will need to be funded directly or indirectly by the
Government.

1.4.4 Single InfraCo

As is the case for both high speed and conventional rail networks in many European
countries, it is crucial that a single infrastructure company (InfraCo) is appointed to carry out
the operation and maintenance of all elements of the completed HSR line infrastructure
between London and Birmingham. This reduces interface risk during operations, which is
crucial to optimising performance and delivering the passenger growth required.

It is important to note that the single InfraCo need not be the same across both the HS2
infrastructure and the conventional network. Rather, we believe it important to ensure that
the responsibility for operations and maintenance of a specific route is not separated.

1.4.5 Timing considerations

There is a large amount of upfront work necessary in terms of planning, development, design
and engineering before construction can be started. It will be imperative to understand fully
these factors and the wider political priorities before construction begins. It is important to be
clear as to how HS2 fits into the longer-term strategy for a rail network. Furthermore, the
length of time and cost associated with proper planning and preparation should not be
underestimated.

1.4.6 Strong client function

There is a need to establish a strong public sector client organisation. This should be
independent, with sufficient skills and experience to deliver the project and with a budget
sufficient to operate through to the completion of HS2. Recent major infrastructure projects
such as the delivery of the Olympics and Crossrail have established the necessary skills and
experience through the appointment of a delivery partner. If a network is preferred, and a
long-term development cycle is expected, then better value for money will be achieved if this
professionalism is developed in-house rather than sourced from a private sector delivery
partner.

1.4.7 Commercial considerations

When considering the roles and responsibilities of the parties relevant to the various
contracts it is important to consider the commercial and contractual implications the
relationships between the respective parties can have on the project. Issues that should be

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considered when finalising the operating structure include the approach to demand risk and
the performance regime to be adopted.

1.5 Delivery considerations


1.5.1 Bundling

International experience has shown that the level of unbundling of the sub-components of a
new HSR line during the procurement and delivery phase can maximise market appeal. Whilst
on the one hand a higher degree of unbundling may increase interface risks, on the other it
reduces the size of the contracts and allows the private sector to better assess the risks
associated with the specific components. It is important to recognise that the level of
unbundling will have an impact on both the procurement method and the approach to
financing. Within this section, we focus on the impact on procurement.

Recent projects that have ring fenced the delivery of specific assets include the GSM-R in
France and HSR signalling and telecommunications in Portugal, with the operations being
concessioned or managed directly by the public sector. Additional unbundling could also be
possible by separating out the rolling stock, as is the case for HS1 and Crossrail.

Unbundling of the construction has advantages from both a financing and a procurement
perspective. It has the advantage of avoiding the formation of large mixed consortia,
facilitating increased market interest and, hence, competition whilst making the financing of
the separate contracts more manageable.

The degree of unbundling of the project in its constituent elements will therefore determine:

„ The number of contractors, or consortia, that have the capacity required to undertake
the design and delivery of contract packages;
„ The level of cost, construction, interface and integration risk that can be transferred to
the private sector.

The review of international case studies and the analysis conducted suggests that the project
could be procured and delivered by unbundling the asset in the following elements:

„ Civils and Structures, potentially further split into civils and structures and in
geographical segments;
„ Rail Systems, as one contract, to avoid interface risks between different systems;
„ Control systems as a single contract but ensuring compatibility between the railway
systems and rolling stock;
„ Stations, potentially split into the individual stations because of the wider technical and
operational complexities at Euston compared to Fazeley Street;
„ Rolling Stock and Depots, potentially split between the dedicated off-the-shelf HSR fleet
and the bespoke fleet designed to run on both HS2 and the conventional rail network.
Depot procurement could be separated from the rolling stock procurement.

The size of the project without unbundling the assets is likely to be too large to both attract
significant market interest, limiting the level of competition, and access sufficient finance.
However, whilst unbundling should facilitate market participation, the need to manage and
mitigate the increased interface and integration risk will be crucial.

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1.6 Procurement
Following on from the review of the bundling approach during construction, we have
considered how these individual contracts could be procured. In considering the procurement
options available for the project, we have identified three potentially different approaches:

„ Civils and Structures, Railways Systems and Control Systems – these elements could be
separately procured adopting a Design, Build and Transfer approach where HS2 would
remain responsible for elements of the design in order to minimise interface risk whilst
allowing the contractor scope to refine the design and introduce some innovation. The
key characteristic of this approach is that HS2 maintains the responsibility of managing
the interface and integration risk during construction before transferring the asset to
an InfraCo, possibly through a sale process once the asset becomes operational. It is
important to recognise that the size of these contracts will likely necessitate the
identification of a number of smaller more manageable contracts;
„ Rolling Stock and Depots – different approaches could be adopted to the procurement
of the dedicated HSR fleet to that of the bespoke stock that will be required to run on
the conventional rail network. Specifically, it is unlikely that it will be best value for
money to finance the bespoke trains through a conventional rolling stock leasing
model. Whilst a direct purchase could have negative implications from a Government
affordability perspective it may be possible to address this issue by adopting an
approach similar to that proposed for the recent Diesel Trains procurement, whereby
Government was considering the creation of a new rolling stock company that it would
subsequently sell once the initial procurement and construction risks had been
mitigated; and
„ Stations – a different approach could be adopted to the procurement of major stations
and smaller stations: the delivery of the London terminus, an extension of Euston
Station, includes complex interfaces with the operational railway and should involve a
very strong organisation with single accountability for the delivery. Fazeley Street
potentially offers more opportunities for private sector involvement. Significant
benefits could also be achieved through redevelopment and regeneration around the
stations.

1.7 Governance
Early consideration should be given to the roles and responsibilities that will apply to the
parties to the project during the construction and the operational phases. Section 7.1
highlights the roles and responsibilities for the key parties to the project. It is important to
note that these will require further consideration should the project progress.

The vision for HS2, whether as a single line from London to the West Midlands or as an HSR
network, must be translated into a long-term governance and operational structure that fits
the long-term strategy not only of the HSR line but also of the conventional rail network. The
preferred solution must take an informed view of risk transfer and the appropriate roles and
responsibilities. We have considered these options in more detail below based upon the role
envisaged for each organisation, during both the construction and during the operational
phase.

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1.8 Financing
Given its scale, HS2 represents a funding challenge for both the public and the private sector.
Whilst commercial income from passenger services may cover the cost of operations and an
element of infrastructure maintenance, it is extremely unlikely to cover the upfront costs of
construction, even before any financing costs are considered. The project is, therefore, only
viable if Government makes a sizeable contribution to the cost of construction.

It may be possible to profile this support over the operating period of the asset, but in the
first instance, it is necessary for Government to acknowledge that railway projects are not
self-funding. All European HSR projects currently under construction are underpinned by
significant direct or indirect Government support.

The separation of construction from operations and the transfer to the private sector once
operational has received a positive response in market consultations held as part of the
evaluation process. How the transferred infrastructure would be regulated or controlled still
needs to be refined, but options include adopting a regulatory mechanism similar to that
applied to the conventional network. The alternative concession model allows a contractual
mechanism to regulate and enforce the required outputs. The key differences to these
approaches relate to the method of enforcement and the ability to respond to changes in the
market.

1.8.1 Considerations from other projects

Our review of international HSR projects has indicated that Government support has been
provided either directly through grants or indirectly through minimum revenue guarantees.

The market feedback included comments that, if its strategy is to sell it in the future, the
Government must be active in the early stages with the objective of offering the asset to the
broadest pool of capital with some appetite for revenue risk. Other considerations include:

„ The UK has a good record of funding utilities, and a regulated approach is well
understood, tested and proven;
„ Alternatively, the continental concession model has been used to finance roads and is
the approach that has been adopted for HS1;
„ The value of cash paid for the concession or sale will be a function of the user charges,
and Government would be able to increase the value of this by increasing the value of
revenues the InfraCo receives, either through guarantees or grants;
„ A regulated approach represents a flexible, yet long-term solution for attracting private
capital as, once operational, it is relatively stable and well understood. Conversely,
concessions are more rigid and relatively short term alternatives that can be
complicated and not well suited to withstand major changes in strategy or industry wide
shocks;
„ Regulatory risk may be seen, by some, as excessive, however, considering the fact that
the regulatory regime allows a response to significant shocks to the industry the
allowed returns are relatively well protected.

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1.9 Future proofing


We have highlighted the need for Government to consider whether or not this project will
require the development and delivery of a single HSR line or whether a longer-term strategic
view is taken around the development of a network.

We recommend that Government considers this option so that, if appropriate, a structure can
be developed that facilitates the delivery of future enhancements and ultimately an HSR
network. Failure to consider this at an early stage may result in a structure that is not
amenable to further line extensions in due course. Some of the primary considerations in this
regard include:

„ The potential to deliver significant future infrastructure programmes. It may be


possible to create a financial structure that facilitates the delivery and financing of
subsequent HSR line extensions which reduces the need for additional Government
support;
„ The concept of the creation of a Regulated Asset Base (RAB) is an established and well
understood mechanism of enabling access to significant funding for the delivery of
capacity enhancements, but will require the creation of a clearly defined payment and
cost allocation mechanism that supports the workings of a regulated utility;
„ It is important to consider and develop a sensible approach to managing the InfraCo
during the operational phase. With a suitable and flexible operating structure,
subsequent extensions to the network could benefit the Government by being able to
capture economies of scale and other operational efficiencies. Creating an inflexible
contract may, should subsequent extensions be delivered, lead to inefficiencies and
increased network costs which ultimately destroy value to Government and/or reduce
the commercial rationale of the open access arrangements;
„ Seeking to create an operating structure that allows future expansion should not be
considered to the detriment of the wider delivery considerations included in this report.

Across the UK, a utility-based regulatory structure is well established and understood and has
facilitated significant investment in infrastructure assets. This mechanism may enable the
delivery of an HSR network.

1.10 Summary
In summary, based upon the elements discussed in sections 5, 6 and 7 the emerging
conclusions include:

„ The infrastructure should be managed by a single InfraCo. This limits interface risk
during the operations phase and transfers it to the private sector;
„ The preference for a single InfraCo responsible for the operation and maintenance of
the infrastructure whilst having a number of separate construction contracts drives the
decision to separate construction from operations;
„ Consideration should be given to the relationship between the Train Operating
Company (TOC), HS2 and InfraCo, in particular, who takes revenue risk and the
commercial implications for the structure;
„ The payment mechanism to be adopted in light of the interface between the HSR and
the conventional rail network and the differing operators will need to be clearly defined;

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„ Unbundling is likely to offer better value for money since it is likely to generate a good
level of competition without overly increasing interface risk;
„ The level of unbundling should create multiple construction contracts, which then
transfer to a single InfraCo for maintenance. There is a question as to where the asset
acceptance and interface risk sits but, when considering that the Government will
remain as funder of last resort and will be unlikely to transfer catastrophic and latent
defect risk to the private sector, we have assumed that this will remain with
Government;
„ Rolling Stock and Depots should be procured as part of a single contract unless the
value for money assessment undertaken during the procurement phase indicates
otherwise; and
„ Further work is required to finalise the preferred approach and structure of the delivery
of the new stations. In particular, the approach to the expanded station at Euston is
highly complex and faces significant risks and issues. The interface with Network Rail
and the impact on the West Coast mainline will require a single point of responsibility
during the delivery period.

Having undertaken the review of bundling, procurement, governance and financing, we have
been able to develop an emerging delivery solution. We have sought to present this structure
in the diagram below, which summarises the link between the construction and operations
phase. The structure below presents interface and asset acceptance risk being retained by
the public sector.

Construction Operations

HMG
Construct Co 1
Civils & Structures
(Multiple contracts)

HS2 High Speed Rail Authority

Construct Co 2
Stations
(Multiple Contracts)
Single InfraCo
Delivery Partner
Maintains whole asset

Construct Co 3
Railway Systems
(Single Contract)

Rolling Stock
TOC runs services
procurement

Figure 1: Example of construction contractual split and link to operations.

The procurement option depicted is that the Government undertakes the major features of
the design whilst allowing the private sector contract to contribute to specific elements. Upon
completion of the construction, the asset will transfer to a single InfraCo responsible for the

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maintenance and availability of the completed asset. The diagram highlights that there is the
option for multiple construction contracts. These will need to be carefully managed and
controlled. With Government retaining asset acceptance and interface risk, the need for
support from a delivery partner is crucial to the management of risk and the successful
delivery of the completed asset.

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2. Introduction & Background


In January 2009, the Government created a new company, HS2 Limited, to comprise a non-
executive Chairman, Sir David Rowlands, and a small number of full-time staff (mostly
seconded from the Department for Transport (DfT) and Network Rail) led by a Chief
Executive, Alison Munro.

Lord Adonis, the Secretary of State for Transport, asked HS2 to consider and provide advice
on options for an entirely new HSR line between London and the West Midlands by the end of
2009.

HS2 has commissioned Ernst & Young to provide support and advice on the delivery and
funding of a new HSR line. Development of HS2 to date has focused on the overall London to
Scotland HSR line feasibility and the development of whole life capital and operating cost
estimates for a number of route and structural options for the London to Birmingham route.

Ernst & Young was appointed to assist in evaluating the funding and delivery options
associated with the project. The evaluation was undertaken through two distinct phases:

2.1 Phase I
The objective of this phase was to enable HS2 to benefit from the experience of other
international HSR projects. This entailed:

„ Conducting research on international HSR projects and comparable UK infrastructure


projects, including an analysis of the projects’ delivery structures and sources of
funding adopted;
„ Assessing how the lessons learned from these projects’ contractual delivery structures,
risk allocation and sources of funding may be applicable to a new HSR line in the UK.

The Phase 1 report titled “International case studies on delivery and financing – a report for
HS2” is included as Annex 1.

2.2 Phase II
The objective of this phase was to evaluate the financing and delivery considerations for a
potential new HSR line. This entailed:

„ Assessing the different operating and governance structures for a new HSR line;
„ Evaluating the contractual and delivery options for a new HSR line; and
„ Considering the financing issues that must be addressed in the delivery of a new HSR
line.
2.3 Report Structure
The remainder of this report summarises our work for Phase II and is structured as follows:

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Section 3 Sections 4-6 Sections 7 & 8 Section 9

Analysis context Our approach Financial Analysis Recommendations

Our findings Future proofing

Financing

Analysis parameters Delivery, financing & Further considerations Conclusions


procurement options

Figure 2: Our report structure

Section 3 indentifies the key issues associated with the delivery of a new HSR line and sets
out the parameters against which the project will be assessed. Sections 4 to 6 detail our
approach to addressing issues indentified in section 3 and summarises the key findings of our
work. Sections 7 and 8 highlight the other important factors that need to be considered
alongside the detailed assessment undertaken, whilst section 9 provides our overall
recommendations for delivery and funding.

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3. Project Issues
3.1 Context
A number of studies looking into the feasibility of a new HSR network in Britain have been
recently prepared or are underway. Network Rail has recently published its Strategic Business
Case for its New Lines Programme, reviewing the main corridors across the country to assess
a whole range of options to meet future demands for additional rail capacity from passengers
and freight users. Greengauge21 has also recently published its proposal for an HSR network.

The work undertaken by HS2 and Ernst & Young is cognisant of these studies. HS2 believes
that these network studies have been a useful contribution to the much more detailed work
that it is carrying out on route and station options to the West Midlands, including Heathrow,
and on corridor options beyond, going north to Scotland, together with a comprehensive
business case covering all the costs and benefits associated with the project.

In this context, HS2 required support in considering and providing advice on the delivery and
funding of a new HSR line, in order to develop a business case for the project suitable for
public consultation.

3.2 Analytical parameters


In undertaking a review of this nature, it is necessary to consider the parameters against
which the project will be assessed. In considering the options for HS2, we have been mindful
of the need to gain an appropriate balance between the following key areas:

„ Affordability – the delivery option should be assessed and be able to be paid for in term
of cash flows and resource costs;
„ Future Proofing – the delivery option should be sustainable and allow not only the
delivery of an HSR line between London and the West Midlands, but also not preclude
the potential development of a wider network;
„ Value for Money – With newly built assets, consideration should be given to the wider
aspects of the asset and not just its cost of construction. It is therefore necessary to
consider the design, whole life costs (i.e. operating and maintenance as well as
construction), fitness for purpose, and operational efficiency.

Furthermore, risk transfer needs to be assessed carefully since the nature of large scale and
complex major rail projects means Government often ends up bearing major risks even
though it has paid for them to be transferred.

In undertaking the review of the delivery and financing options available for the project and in
seeking to address the issues highlighted above, we have considered:

„ The approach to bundling the components of the HSR line during the construction
period;
„ How these components could be procured;
„ The operating structure once the project is completed and in revenue service;
„ The roles and responsibilities of the organisation involved in the management of the
HSR line during operation;

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„ The issues associated with the financing of the project;


„ The impact on finance of the various procurement and funding options; and
„ The key recommendations for the project.

Affordability
Government vs private sector funding

Future Proofing Value for Money


Long term vs short term solutions Risk transfer vs Cost

Figure 3: The competing considerations for Government

3.3 Findings from other High Speed Rail projects


Globally a large variety of HSR projects have been undertaken with varying degrees of
success. There is a common set of lessons that can be drawn from the HSR projects reviewed
during Phase 1. These lessons include:

„ The overall objective should be to deliver a functioning railway system not a


construction project;
„ Full risk transfer is expensive and often illusory since the Government will in most cases
end up bearing catastrophic risks or taking the role of operator of last resort;
„ Developing a HSR network requires a strong, long term vision and a strong champion
willing to invest into this vision and able to obtain cross party political support;
„ Direct and indirect Government support is crucial to HSR projects;
„ Traditional PPP approaches are not easily applicable to major railway projects — bespoke
structures are needed;
„ It is critical to have a strong project organisation set up to manage the design,
development, procurement, delivery and funding of the project;

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„ Despite notable successes, infrastructure projects of this size and complexity will face a
variety of challenges throughout their lifecycle, including:
„ Varying degrees of political and stakeholder support;
„ Difficulties in revenue and traffic forecasting due to network effects;
„ Ability to complete the construction on time and on budget;
„ Limited appetite of private sector for commercial risks as well as full delivery and
project risks; and
„ Meeting the affordability challenge whilst demonstrating value for money.

The above lessons have been confirmed in market consultations held as part of the evaluation
process.

3.4 Strategic issues


Within the backdrop of the analytical parameters set out above, we have undertaken our work
on delivery and financing options with the following key strategic issues in mind for HS2.

3.4.1 Delivery structure focus

It is imperative that the project is developed whilst considering the long-term operational
priorities and complexities associated with what will ultimately become a perpetual
operational asset, rather than allowing short term funding or affordability considerations to
drive the structure.

Large scale greenfield projects such as the construction of a new HSR line have a lengthy
construction period followed by a long period of operation. The risks and issues, which need
to be managed during the period of construction, are very different to those encountered
during operations. The capital structure, its sustainability and its viability will be heavily
influenced by HS2’s operating structure and the link to construction. How the implementation
and operating phases are procured and linked will significantly influence the funding structure
required. As an example, the HS1 model allows capital costs to be separated from operations,
thus enabling an element of investment recovery over a long period while keeping
infrastructure user charges competitive.

This is one method of making the investment attractive to the private sector whilst capturing
some return for Government. An effective delivery structure would seek to manage both sets
of risks, however, there is a balance to be obtained between whether managing construction
or operational issues should be the primary focus.

Our recommendation is to ensure that the operating structure drives the end solution whilst
ensuring that the construction period is properly planned, developed and executed. This
approach has been strongly and consistently affirmed whilst engaging with the market. Our
analysis is therefore based on the operations being the focus for the delivery structure. The
argument in support of this approach is because the HSR line will be developed as a long-term
asset and therefore the structure must enable long-term delivery and performance.

Furthermore, focusing primarily on issues such as affordability and financing has led to many
projects failing or facing significant delays or subsequent implementation problems. The

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challenges that have faced HS1 and Crossrail in their initial stages, before the current
delivery structures were finalised, are examples of this.

For the same reasons, financing priorities should not drive the delivery structure choice.
Financing issues are important and the ability to finance the project in a sustainable manner is
a crucial consideration in determining the most appropriate delivery structure. However,
financial structure should only be considered once the operational and construction
characteristics are properly understood and developed. This approach is a key foundation of
our analysis.

3.4.2 Profiling finances vs. risk transfer

In developing a delivery strategy for this project, the Government’s affordability threshold has
been considered as one element of the analysis. Ultimately, from an affordability perspective
it would be preferable to develop a solution that spreads the cost to Government over the
longer term and maximises the leverage of the Government contribution. However, profiling
and affordability preferences should not take priority over other practical delivery
considerations.

The size and complexity of the project, with a Civils and Structures budget in excess of
£15bn, makes it very difficult to transfer significant risks to the private sector by, for
example, a PPP arrangement. This is made more difficult as, once operational, we believe it
most appropriate to have a single entity responsible for the availability and maintenance of
the network. Therefore, creating a number of smaller PPPs to create more manageable sized
contracts, as has been the case in some of the HSR projects across Europe, is not practical
because of the increased interface risk during the operational phase that this approach would
create. The European examples work because the separate PPPs are created for individual
lines/routes rather than the splitting up of a single route into separate contracts. Whilst
profiling is an aspiration, the practical implications and potential consequences of this
approach would make such an objective difficult to deliver in practice.

It may, however, be possible to profile the spend associated with the delivery of the stations
and rolling stock and these options are discussed later in this report.

3.4.3 Government support

It is widely accepted that rail projects are typically not commercially viable without
Government support. In some cases, rail revenues may be sufficient to cover the cost of
operating the service; however, they are rarely sufficient to service the capital cost, which
was incurred to deliver the asset. This factor remains true for HSR services and our Phase I
report highlighted that the majority of the projects benchmarked benefited from significant
Government support. For example, the Spanish and French Governments have provided more
than 80% of the total funding on several existing HSR lines with the balance covered by EU
grants from:

„ Trans-European Transport Network (TEN-T) funding


„ Cohesion funds
„ European Regional Development Funds (ERDF)

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Recent French HSR lines have also tapped into regional funding in return for the significant
benefits that these lines bring to them. TGV Est, East Rhine-Rhone and Britanny-Loire HSR
lines have all benefited from local funding covering between 25% and 35% of total funding
requirements.

It therefore likely that a large proportion of the capital cost and potentially the operating
budget required for HS2 will need to be funded directly or indirectly by the Government. This
is a critical issue for the Government to consider and the quantum and timing is heavily
influenced by a number of factors including the payment mechanism, approach to risk, and
delivery structure adopted. Different approaches to each of these issues will influence
Government support.

3.4.4 Single InfraCo

Once built, the HSR line will serve the UK over the long term and, as a perpetual asset, it is
important to plan for its stewardship. Depending on the delivery model selected, the
operation and maintenance of the different components of the asset might be assigned to
different organisations. However, as in the case of the HSR and conventional rail networks in
many European countries, where a single infrastructure manager is responsible for the
operation and maintenance of the railway infrastructure, we recommend that a single
infrastructure company (InfraCo) be selected to carry out the operation and maintenance of
the completed HSR line infrastructure. This will reduce interface risk during operations,
thereby optimising performance and delivering the passenger growth forecast.

It is important to note that the single InfraCo need not be the same across both the HS2
infrastructure and the conventional network. Rather, we believe it important to ensure that
the responsibility for operations and maintenance of a specific route is not separated.

In order to be able to transfer all of the completed assets to a single InfraCo it will be
necessary for Government to take a view as to the method of transfer and hence the
approach to asset acceptance and latent defect risk. We discuss these issues later in this
report. The single InfraCo may choose to sub-contract certain elements, but will remain
ultimately responsible for the availability of the infrastructure.

3.4.5 Early decision making

There are a number of alternative solutions that could be adopted and that will need to be
considered as part of the development of the project. However, many of these issues are best
considered in advance by Government, including whether the structure developed is designed
for a single line or a network approach and who owns the finished asset. Ownership could
include Government, Network Rail or the private sector, either bundled or in an unbundled
manner, and potentially more than one party at different times of the development cycle.

One option could be to create a specialised HSR Authority with the sole objective of
developing and managing the HSR network in the UK. Similar structures are being used in the
delivery of HSR in Portugal (RAVE) and in the development of the highway network in Austria
(Asfinag). This solution would be more relevant should a network approach be adopted for the
delivery of this project, however, we recognise that this is currently outside of the remit of
HS2.

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Our recommendation is that these types of structural issues are considered by Government
early in the process.

3.4.6 Timing considerations

There is a considerable amount of upfront work necessary in terms of planning, development,


design and engineering before construction can be started. Crossrail, for example, required
several years and significant upfront investment. It will be imperative to allow for this
investment and understand the wider political priorities before construction begins. It is also
important to be clear as to how HS2 fits into the longer-term strategy for a rail network.
Furthermore, the length of time and cost associated with proper planning and preparation
should not be underestimated.

Early commitment to provide development funding and the allowance of sufficient time to
enable the proper planning and preparation at the outset is crucial to minimise risk and
ensure the successful delivery of this project and the engagement and support of the private
sector.

3.4.7 Strong client function

There is a need to establish a strong public sector client organisation. This should be
independent, with sufficient skills and experience to deliver the project and with a budget
sufficient to operate through to the completion of HS2. Recent major infrastructure projects
such as the delivery of the Olympics and Crossrail have established the necessary skills and
experience through the appointment of a delivery partner. If a network is preferred, and a
long-term development cycle is expected, then better value for money will be achieved if this
professionalism is developed in-house rather than sourced from a private sector delivery
partner.

3.4.8 Commercial considerations

When considering the roles and responsibilities of the parties relevant to the various
contracts it is important to consider the commercial and contractual implications the
relationships between the respective parties can have on the project. Issues that should be
considered when finalising the operating structure include the approach to demand risk and
the performance regime to be adopted.

The project structures shown in Figure 4 and Figure 5 provide an example of how small
changes in the project structure and contractual interfaces between HS2, the TOC and the
InfraCo can have a large impact on the risk transfer and, consequently, on the market appeal
of the HSR project.

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HMG

Track Access Agreement


Regulation (or High Speed Rail
TOC
equivalent) Authority
Track Access Charges

Infrastructure
Availability

Provision
Payment
Interface
Agreement

Network Rail Infraco


Finance

Track Access / Interface / Performance Agreements

Figure 4: Option for Operational Structure for completed HSR line

Figure 4 shows one structure that could be developed for the operational phase of the
project. In this structure, the link at the interface between the TOC and the InfraCo – also
referred to as ‘wheel’ and ‘rail’ – is split and is coordinated through a HSR Authority. Demand
risk for the operation of the scheme would sit with the Authority.

Conversely, the relationship between the TOC and the InfraCo could be more direct, as shown
in the project structure in Figure 5. This structure is consistent with the approach adopted
across the conventional railway.

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HMG

Regulation (or
HS2
equivalent)

Infrastructure
Availability

Provision
Payment
Interface
Agreement
Track Access Agreement

Network Rail Infraco TOC


Finance
Track Access Charges

Track Access / Interface / Performance Agreements

Figure 5: Conventional approach to the commercial relationships

The main difference between the two options relates to the commercial relationship between
the infrastructure provider and the TOC, and has implications for where demand risk resides.

The rationale for choosing to move away from the approach adopted across the conventional
network (in Figure 4) could be to insulate the InfraCo from demand risk. Evidence across
other infrastructure projects is that the private sector and its funders in particular do not
have an appetite for this risk on greenfield projects such as HS2. Passing demand risk onto
the InfraCo may result in Government receiving best value from the project.

However, the structure in Figure 4 removes the direct relationship between the InfraCo and
the TOCs that will utilise its asset. The Office of Rail Regulation (ORR) has stated in the past
that a contractual relationship between these two parties is crucial to create an environment
that stimulates working towards mutually beneficial goals.

Separately, but equally important, the performance regime to be adopted must also be
considered, particularly in light of the likely interfaces with the conventional network and
train services and the potential for delays arising from or being imposed on TOCs across the
conventional network.

It will be important to address these issues as the project is taken forward and developed into
a full major scheme business case compliant with Treasury and DfT guidance documents.
Whichever structure is adopted, it will be important to ensure there is flexibility to change the
commercial relationship in due course once patronage and demand levels have been better
understood and established.

In the remainder of this report we highlight the approach we have adopted to address the
above issues together with our key findings and recommendations for the project.

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4. Our Approach
Section 3 detailed the aims and objectives of the work undertaken by Ernst & Young. Our
work was split into two phases, with Phase I comprising of benchmarking relevant overseas
projects and Phase II developing the delivery and financing options.

Though the process we have followed reflects the principles of the HM Treasury Green Book
approach to project development, the precise steps and processes of our analysis reflect the
specific challenges and issues of this project. In overview, our process entailed evaluating
shortlisted project options (including delivery structures and funding options) against a set of
strategic evaluation criteria, which were developed and agreed with HS2.

The overall approach to Phase I and Phase II is summarised below:

Phase I Phase II

Benchmarking Financing and Delivery

1. Operations –
understand how the
asset will operate

Prioritise Objectives 5. Further 2. Governance -


considerations - assess roles,
Agree Benchmarks sustainability , market responsibilities and risk
Phase I reporting testing transfer Phase II
Undertake Review
reporting
High level funding options 4. Financing – assess 3. Contracting –
review potential financing evaluate potential
sources ‘bundling’ options

Modelling Interface

Financial analysis

Figure 6: Our approach

4.1 Phase I
Given that the objective of Phase I was to enable HS2 to benefit from experiences from
international HSR and large-scale UK infrastructure projects, it was important to first identify
an appropriate group of projects for HS2 to benchmark against.

Globally, there is a large variety of HSR projects that have been undertaken with varying
degrees of success. Some countries, notably Japan, France, Germany and, to a lesser extent,
Italy have had HSR for sufficiently long periods that the economic impacts of the HSR lines
and services on land use and economies has been more thoroughly studied.

A variety of contractual delivery structures, risk allocation and funding models have been
adopted in these projects. Whilst recognising that many of these structures and models are
context specific and, as such, may not be directly transferrable or applicable to the UK, a
review of the international experience would ensure that HS2 could, where possible, apply
these lessons to the structuring and implementation of the project.

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With the benchmark group of projects agreed, the key observations were recorded, including:

„ Project structures;
„ Degree of unbundling of the project;
„ Contracting strategy;
„ Funding sources;
„ Financing structures;
„ Private participation;
„ Time to delivery;
„ Level of Government support;
„ Social economic consequences; and
„ Risk allocation.

The data collected was used to undertake a comparative analysis and to draw conclusions on
key success factors for each project. The findings from this work are recorded separately in
the Phase I report “International case studies: lessons learned and recommendations for
HS2” in Annex 1.

4.2 Phase II
The process followed for Phase II was consistent with the HM Treasury Green Book approach
to project development in that it has assessed available options (including contract bundling,
procurement and financing options) taking into consideration parameters which were
developed and agreed with HS2.

The process we followed for Phase II is summarised below:

Operating considerations

Financial
modelling Governance issues

Bundling options

Financing considerations Procurements models Industry consultation

Delivery strategy

Figure 7: Our process for evaluation

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Our approach to addressing the strategic issues highlighted in section 3.3 was to first work
with HS2 to understand how the new HSR line would operate once complete. By focusing on
the operational vision for the new line at the outset, we have aligned the delivery and
procurement strategy towards developing an effective operating model rather than to suit a
particular financing strategy.

Once the framework for the operating structure was established, it was necessary to consider
the governance issues that would need to be addressed in order for the desired operating
structure to work. In particular, our assessment of the governance issues focused on the
respective roles and responsibilities of key stakeholders such as HS2, the Government,
Network Rail and other infrastructure owners. As part of the review of roles and
responsibilities, we also considered risk transfer and how that would influence the
responsibilities of the respective stakeholders.

With the operating structure options established and the governance issues understood, we
assessed the extent to which separate elements of the project could be grouped or ‘bundled’
together from a delivery and a financing perspective. For example, we assessed whether it
was more effective to procure Rolling Stock and Depots separately or whether it was more
practical to ‘bundle’ these two into a single procurement.

The next step was to assess which procurement model would best match the operating vision
and desired level of bundling for the project. Various procurement options were assessed and
the relative advantages and disadvantages of the different options were evaluated.

Finally, we considered the impact on the Government funding profile of the different
procurement options considered and developed a financial model that was used to assess the
potential cost of the project to the Government under the different scenarios.

In addition to the detailed work with HS2, throughout Phase II we consulted with industry
participants to ensure our work also reflected the views of the market.

Within the next section of the report, we discuss the approach to evaluation and present the
outcome of the analysis considering the construction and procurement options and the roles
and responsibilities of the key stakeholders. This then allows discussion of the financial
considerations and the options we have considered in order to evaluate the procurement and
delivery of HS2.

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5. Delivery
5.1 Delivery Considerations
We set out below the key findings of our analysis following the approach detailed in Section 4.
This analysis was based upon considering the preferred operating structure and ensuring that
it is this solution that drives the outcome rather than financing or affordability preferences.
As mentioned in section 3.4.4, the operational preference is for a single entity responsible for
the availability and maintenance of the completed asset. The desire is to minimise operational
interfaces post construction in order to create a structure that facilitates first class service
delivery.

5.1.1 Bundling options

International experience has shown that the level of unbundling of the sub-components of a
new HSR line during the procurement and delivery phase can maximise market appeal. Whilst
on the one hand a higher degree of unbundling may increase interface risks, on the other it
reduces the size of the contracts and allows the private sector to better assess the risks
associated with the specific components. It is important to recognise that the level of
unbundling will have an impact on both the procurement method and the approach to
financing. Within this section, we focus on the impact on procurement.

Recent projects that have ring fenced the delivery of specific assets include the GSM-R in
France and HSR signalling and telecommunications in Portugal, with the operations being
concessioned or managed directly by the public sector. Additional unbundling could also be
possible by separating out the rolling stock, as is the case for HS1 and Crossrail.

Unbundling of construction has advantages from both a financing and a procurement


perspective. It has the advantage of avoiding the formation of large mixed consortia, which
facilitates increased market interest and therefore competition, whilst making the financing of
the separate contracts more manageable.

The degree of unbundling of the project in its constituent elements will therefore determine:

„ The number of contractors, or consortia, that have the capacity required to undertake
the design and delivery of contract packages;
„ The level of cost, construction, interface and integration risk that can be transferred to
the private sector; and
„ The appetite and ability of the finance market.

The review of international case studies and the analysis conducted suggests that the project
could be procured and delivered by unbundling the asset in the following elements:

„ Civils and Structures, potentially further split into civils and structures and in
geographical segments;
„ Rail Systems, as one contract, to avoid interface risks between different systems;
„ Control systems as a single contract but ensuring compatibility between the railway
systems and rolling stock; and

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„ Stations, potentially split into the individual stations because of the wider technical and
operational complexities at Euston compared to Fazeley Street;
„ Rolling Stock and Depots, potentially split between the dedicated off-the-shelf HSR fleet
and the bespoke fleet designed to run on both HS2 and the conventional rail network.
Depot procurement could also be separated from the rolling stock procurement.

The size of the project without unbundling the asset in its constituent elements is likely to be
too large to both attract significant market interest and generate competition. However,
whilst unbundling should facilitate market participation, the need to manage and mitigate the
increased interface and integration risk will be crucial.

The degree of unbundling selected for the HSR project will therefore need to take into
consideration market specific issues associated with market capacity and dynamics at the
time of the construction, as well as the ability of HS2 to transfer key project risks to the
private sector.

5.1.2 Available bundling options assessment

Figure 8 below highlights a range of unbundling options that could be adopted to help deliver
the project. As part of our analysis, a wider set of options including different combinations of
project elements was discussed in a workshop with HS2. These options are compared
qualitatively in “Table 1: Bundling considerations” overleaf.

Affordability & Value for Money vs Operational complexity

Stations

Station Access Stations

Earthworks & £3.6bn


drainage

Substructure
Civils & Single contract
Other civil works Structures
£24.6bn
Tunnels £15.6bn
Bridges &
Viaducts

M&E Railway
Systems
Tracks
£1.0bn
Electrification
Control Systems
Rolling stock &
Depots
Depots
Rolling stock £4.3bn

Figure 8: The bundling options

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Options Advantages/ disadvantages

Several small ü Increased competition driven by a larger pool of contractors


separate able to bid
contracts ü Smaller contracts play to the strength of specialist contractors
û Increased interface and integration risk between contracts
means that these risks may not be adequately managed and
can jeopardise the successful delivery of the project
û Complex, time consuming and may be expensive to procure

Partial ü Allows the selection of the right size of contract for the specific
unbundling market and stimulates competition with benefits in value for
· Civils and money
structures ü Allows flexibility in procurement
· Rail ü Easier to finance as it allows better risk allocation
systems ü Favoured by rail systems suppliers who do not have to enter in
· Control consortia with civil contractors
Systems ü Several case studies support the split of rail system into one
· Stations contract (i.e. French GSMR, Portuguese signalling PPP, Dutch
· Rolling HSL)
Stock and ü Stations could prove attractive to real estate and commercial
Depots developers
ü Rolling Stock and Depots, bundled together or otherwise, are
often procured separately from the infrastructure
û Civils and Structures is too large for a single contract and
would need to be further split to more manageable contract
sizes. This can increase interface risk
û Interface and integration risk needs to be closely managed
û Some suppliers of rolling stock prefer to work with their own
rail systems

One single ü One organisation responsible for all interfaces


contract ü Lower integration and interface risk
û Decreased competition as accessible only to large consortia
that may carry internal governance and misaligned incentives
risks
û Limited competition would result in poor value for money
û Difficult to attract private financing given the size of the
contract
Table 1: Bundling considerations

The analysis in Table 1 above indicates that a partial unbundling strategy should optimise the
balance between maximising market appeal and generating competition and keeping interface
and integration risk to an acceptable level.

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During construction, in addition to the functional split of projects elements illustrated above,
HS2 will likely need to break down some of the elements into even smaller and more
manageable bundles. Given the size of the expenditure involved, without further unbundling,
contracts are likely to be too large to both finance and generate sufficient market
competition.

Whilst this approach should facilitate market participation, the need to manage interface and
integration risks will be crucial and should be the responsibility of HS2. We discuss later in this
report the importance of HS2 as an informed client potentially alongside a delivery partner.

We consider below each project component in more detail.

5.1.3 Civils and Structures

Civils and Structures have a useful life of 100+ years and include all civil works and line side
infrastructure such as tunnels, bridges and viaducts. Their risk adjusted capital cost is
estimated at £15 -16bn.

Given the size of the capital cost, it will be almost impossible that a single contract could be
let. It will therefore be necessary to further split up these contracts to more manageable
sizes. This could be done by splitting the contract into geographical segments. This will have
the added advantage of:

„ increasing market appeal and competition;


„ avoiding the participation of large consortia which often carry inherent governance
issues; and
„ Facilitating the achievement of a shorter construction programme.

The increased interface risk could be mitigated by transferring an element of design risk to
the contractors, whilst retaining an element to ensure a consistent approach to technology
and engineering solutions. Furthermore, since the interfaces between civil and structure
works are relatively simple, especially compared with railway systems, the increased interface
risk should be manageable.

In order to promote competition and achieve a tight construction programme, the Dutch
Government opted to split the civil and foundations works into six geographical packages.
Whilst this approach achieved its objective with the infrastructure being delivered on time by
six different Design & Build (D&B) contractors, poor programme management, the lack of a
strong delivery entity and delays in the delivery of the fleet of rolling stock resulted in a delay
in the opening of the system to revenue service.

5.1.4 Railway Systems

Railway Systems include Mechanical and Electrical (M&E) systems such as heating, lighting
and ventilation of tunnels. These components will attract the majority of the maintenance
budget of the operational HSR but, at a cost of circa £0.5bn, their capital cost is considerably
less than Civils and Structures.

Because of their characteristics and the preference for a single InfraCo to maintain the
completed asset, it would be easiest to deliver the railway systems as a single contract. This

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approach is in line with best practice adopted in France, Holland and Portugal. The main
reason for procuring and financing these assets as a single contract is in seeking to minimise
interface risk during operations. Examples from HSR projects across Europe (including HS1),
separating the delivery of Railway Systems into separate contracts can lead to different
systems across different parts of the line, which in turn creates interface issues and higher
maintenance costs, which may significantly impede operational performance.

5.1.5 Control Systems

Control Systems are a crucial element of the project and require specialist equipment and
expertise that can be obtained from only a limited number of suppliers. Owing to the specialist
nature of the asset, it is crucial that this asset is procured via a single contractor. With a
capital value in the region of £0.5bn, a single contract is felt to be achievable.

The other crucial elements of procuring this asset is ensuring that the interfaces between the
control systems, railway systems and rolling stock is properly managed to ensure no
operational difficulties upon transfer.

A further consideration is that we believe that because of the unique technical nature of these
systems it is likely that the body responsible for construction will need to remain responsible
for their maintenance. This will require the InfraCo to work with the control systems InfraCo
in potentially a sub contract or consortium basis. This is not wholly consistent with our
objective of having a single InfraCo but is manageable through appropriate subcontracting
arrangements.

Recent projects that have ring fenced the delivery of specific assets include the GSM-R
system for the HSR in France and HSR signalling and telecommunications in Portugal, which
are being procured as one single PPP contract at network level.

5.1.6 Rolling Stock and Depots

Rolling Stock and Depots could be procured as separate contracts or bundled together as one
contract. The combined capital cost of both of these elements is estimated at over £4.3bn.
The significant size of this prospective procurement makes procuring these assets as one
contract a significant challenge. The degree of unbundling will also depend by the market
capacity at the time of the transaction. However, there is market precedent for large rolling
stock procurement processes in the UK with the Intercity Express Programme (IEP) and
Thameslink ongoing, and Crossrail in the pipeline.

The fleet will comprise both a dedicated off-the-shelf HSR fleet and a bespoke fleet designed
to run on both HS2 and the conventional rail network. Given the large size of the fleets and
the associated capital cost, two different procurements, and possibly delivery strategies,
could be adopted for the two fleets.

The depot strategy is an important consideration to make the rolling stock procurement
attractive to the market and achieve value for money. Options include:

„ A bundled depot and rolling stock strategy (such as in IEP in the UK and in the New
South Wales Rolling Stock PPP in Australia);
„ An HS2 procured third party depot.

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Additional unbundling could also be possible by separating out the rolling stock, as is the case
for HS1/Crossrail, again potentially reducing or deferring the level of public funding support
needed.

It is important to note that some rail suppliers prefer the provision of a combined rolling stock
and control system solution. Although this option may reduce integration risk, international
case studies show that this risk can be managed without bundling.

5.1.7 Stations

Stations, with an estimated capital cost of over £3.6bn, are an obvious element that can be
unbundled from the rest of the project because of their separate functional, technical and
commercial nature. Several examples exist of railways where stations are split from the rest
of the system and developed commercially by the private sector. Stations could be further
split out into single stations because of the different degree of technical and operational
complexities at Euston station compared to, for example, Fazeley Street.

Existing stations, especially major ones and termini, will carry a high degree of interface with
Network Rail. In these cases it will be very important that a single entity is given overall
responsibility for developing the station and managing the interface risk. This could be either
Network Rail or a private sector company; the main issue will be ensuring that adequate
communication and interfacing with Network Rail is enabled to minimize the disruption to the
conventional network whilst maximizing the benefit of its experience.

Greenfield stations do not necessarily require Network Rail’s involvement. However, they
could provide strategic and operational insight in their development either through HS2 or as
an organisation.

Local authorities’ involvement, especially with regards to station access, should be assessed
with opportunities at each location to be separately identified.

5.1.8 Property development

A consideration as part of the Station development aspects of the project, and particularly
relevant at Euston, will be the potential to leverage value from property development and/ or
regeneration of the surrounding area. This has been a highly successful element of the HS1/
St. Pancras redevelopment which has enabled significant regeneration improvements in the
surrounding area. The key issues to consider are ensuring that appropriate stakeholder
support and buy in is achieved early in the process, and that the right partnering
arrangements are crucial in order to capture the benefits from the various aspects of the
project including the railway enhancement, property development, capturing regeneration
and value gain, and obtaining the appropriate approvals and consents.

There has been suggestion that the St. Pancras station development had too much
interference on the operational railway. The potential for disruption at Euston may impact
more widely on the conventional network and should be properly understood and planned in
advance to avoid such potential risks materialising.

As an operating railway station, the ORR could have a duty to monitor the interface for the
Euston station development, and that would include the need to ensure that each party is

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conscious of this issue and it can be properly managed. From a franchise disruption
perspective, it may be sensible for Government to consider specifying the level of disruption
(or, at least, a mechanism for dealing with it) in the franchises in advance, in order to
minimise compensation costs for the Government.

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6. Procurement
6.1 Procurement considerations
Following on from the review of the bundling approach during construction where we have
recommended a partial bundling strategy, we now consider how these bundled contracts
could be procured. In considering the procurement options available for the project, we have
separated the assets into three potentially different approaches. These include:

„ Civils and Structures, Railways Systems & Control Systems


„ we have already highlighted the need to procure these elements separately and the
possibility that Civils and Structures will need to be further split from a contracting and
financing perspective. However, for the purposes of procurement we believe that the
same approach for each should be adopted to allow the interface and design issues for
each to be considered properly. Therefore, whilst we may have a standard approach to
procurement of the asset categories above, we anticipate these will be delivered
through a number of separate contracts;
„ Rolling Stock and Depots; and
„ Stations.

In the following sections, we discuss the procurement options available for each of the above
groupings.

Case studies of HSR and other models are useful to illustrate how different combinations of
the above elements have been adopted across countries and projects, including:

„ Traditional Design, Construction and Maintenance (DCM) type


„ Traditional Design, Build, Finance, Maintain (DBFM) + Operation – DLR, UK
„ Design, Build, Finance, Transfer (DBFT) – Project Evergreen, UK
„ Availability based PPP – HSL Zuid, Holland
„ Demand risk PPP – Channel Tunnel Rail Link, UK
6.1.1 Civils and Structures and Railway Systems

The generic models identified for delivering the HS2 railway infrastructure elements, either as
stand-alone or in combination with an HSR network, are outlined below.

Partial Design Full Design Build Transfer Maintain

Option 1 ü ü

Option 2 ü ü ü

Option 3 ü ü ü

Option 4 ü ü ü
Figure 9: Procurement options

Note: The models above are a shortlist of those discussed and agreed with HS2. Other models
were considered and dismissed as not suitable to the project.

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Each of the models is relatively well understood in the market place and has been used in the
past to deliver large-scale railway projects in the UK or abroad. A summary of the models for
each contract package and suitability for HS2 and potential HSR network is provided below.

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Option 1 - Build & Transfer

Key characteristics

· This model would require HS2 to develop the design of the work and then to engage contractors to
build the elements of it
· Payment for the construction is generally made on a fixed lump sum or milestone basis with
appropriate incentive regimes to ensure delivery to time and budget built into the contract
· The contractor responsible for the construction is separate from the InfraCo
· An InfraCo is contracted to maintain the asset and paid through either track access charges or an
availability based payment mechanism or a combination of both
· HS2 takes responsibility for the design and retains interface, latent defect and asset acceptance risk
· HS2 would require a delivery partner (or equivalent) to help it manage asset acceptance and
interface risk

Advantages / disadvantages

ü Provides a simple model where operation and maintenance interfaces can be adequately managed
by HS2
ü The transfer of construction, commissioning and interface risk in large rail projects is expensive and
often illusory; this model recognises this and may represent better value for money than PPP
ü HS2 can control the detailed design and make changes prior to award of construction that is the
competitively priced
ü Well understood model widely adopted nationally and internationally
ü Target cost contracting has been successfully used on CTRL in the UK
ü Opportunity for HS2 in managing the design to ensure that whole life cost is considered
ü Allows potential future sale of the project following construction and achievement of steady state
operation
ü The Government/ HS2 bear construction, commissioning and interface risk and then sell the asset
once these risks are nil, or much reduced, therefore obtaining better value for money
û HS2 needs to develop substantial technical, design and programme management capability (the
latter could be outsourced)
û Design innovation: limited incentive for the designer to bring innovation, although, to a degree,
design innovation is limited by EU interoperability standards
û Design risk remains with HS2, which limits bidder design innovation
û Allocation of technical risk is unclear: the design and contractor will blame each other for design
errors or omissions

Suitability for HS2

· A Build & Transfer contract will enable the public sector to retain control over design and help
manage interface risk and whole life cost minimisation
· However, it restricts the private sector’s ability to identify and capture elements of design
innovation and potentially cost savings

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· Retaining full design risk may create increased interface and asset acceptance risks during
operations

Option 2 – Partial Design, Build & Transfer

Key characteristics

· HS2 would remain responsible for elements of the design in order to minimise interface risk
· Allows the private sector to have some input to design in order to enable bidder innovation whilst
protecting the final asset
· This model would require HS2 to engage a contractor to partially design and construct the project
· Payment is generally made on a fixed lump sum basis but incentives such as milestone payments or
gain/ pain share associated to a target cost be built into the contract
· The D&B contractor is separate from the future operator and maintainer
· An InfraCo is contracted to maintain the asset and paid through either track access charges or an
availability based payment mechanism or a combination of both
· HS2 takes responsibility for the elements of design and retains interface, latent defect and asset
acceptance risk
· HS2 would require a delivery partner (or equivalent) to help it manage asset acceptance and
interface risk
· HS2 maintains responsibility for managing the interfaces between D&B and Operating &
Maintenance (O&M) contracts

Advantages / disadvantages

ü Provides a simple model where operation and maintenance interfaces can be adequately managed
by HS2
ü The transfer of construction, commissioning and interface risk in large rail projects is expensive and
often illusory; this model recognises this and may represent better value for money
ü Well understood model widely adopted nationally and internationally
ü Allows potential future sale of the project following construction and achievement of steady state
operation
ü Target cost contracting has been successfully used on CTRL in the UK
ü Opportunity for HS2 in managing the design to ensure that whole life cost is considered
ü The Government/ HS2 bear construction, commissioning and interface risk and then sell the asset
once these risks are nil, or much reduced, therefore obtaining better value for money
û Design innovation: limited incentive for the designer to bring innovation, although, to a degree,
design innovation is limited by EU interoperability standards
û Whole life cost: incentive for designer to minimise future O&M costs will need to be carefully
considered
û HS2 needs to develop substantial technical, design and programme management capability (the
latter could be outsourced)

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û Design risk remains with HS2


û Allocation of technical risk is unclear: the design and contractor will blame each other for design
errors or omissions

Suitability for HS2

· A Partial Design, Build & Transfer contract will enable the private sector to identify and capture
elements of design innovation and potentially cost savings – more importantly, it allows an element
of design risk to be transferred to the private sector and does not restrict operational choices
· However, these opportunities are mitigated by the need to comply with EU Interoperability
standards
· Retaining an element of control over the overarching design allows interface risk to be better
managed which can avoid interface or operational and maintenance issues post construction

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Option 3 – Full Design, Build & Transfer

Key characteristics

· This model would require HS2 to engage a contractor to fully design and construct the project or
elements of it
· Payment is generally made on a fixed lump sum basis but incentives such as milestone payments or
gain/ pain share associated to a target cost can be built into the contract
· The D&B contractor is separate from the future operator and maintainer
· An InfraCo is contracted to maintain the asset and paid through either track access charges or an
availability based payment mechanism or a combination of the two
· HS2 takes responsibility to specify the services and allocate capacity
· HS2 maintains responsibility for managing the interfaces between D&B and O&M contracts

Advantages / disadvantages

ü Provides a simple model where operation and maintenance interfaces can be adequately managed
by HS2
ü The transfer of construction, commissioning and interface risk in large rail projects is expensive and
often illusory; this model recognises this and may represent better value for money
ü Well understood model widely adopted nationally and internationally
ü Allows potential future sale of the project following construction and achievement of steady state
operation
ü Target cost contracting has been successfully used on CTRL in the UK
ü Does not require HS2 to develop substantial technical capability, although programme management
still fundamental.
ü Opportunity for designer to bring innovation to the project
ü The Government/ HS2 bear construction, commissioning and interface risk and then sell the asset
once these risks are nil, or much reduced, therefore obtaining better value for money
û Design innovation is limited by EU interoperability standards
û Whole life cost: incentive for designer to minimise future O&M costs will need to be carefully
considered
û HS2 needs to develop substantial technical, design and programme management capability (the
latter could be outsourced)
û Increased interface risk with multiple different designers across different elements of the project
û Allocation of technical risk is unclear: the design and contractor will blame each other for design
errors or omissions

Suitability for HS2

· Whilst a Full Design, Build & Transfer contract will enable the identification and capture of design
innovation and potentially cost savings, these opportunities are mitigated by the need to comply
with EU interoperability standards, and relinquishing central control over the overarching design
increases interface risk which can lead to interface or operational and maintenance issues post

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construction

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Option 4 – Full Design, Build & Maintain

Key characteristics

· Typically involves engaging a contracted entity to design, construct, maintain the project
· Construction costs could be funded via Government grant or through availability based PPP
· Maintenance and operation are usually for a fixed term after construction and paid for through
availability payments funded through subsidy from Government to HS2 and track access charges
from TOCs to HS2

Advantages / disadvantages

ü Transfer construction risk and long term operational performance to a third party
ü Encourage whole life cost management and a high degree of integration
ü Provides strong incentives for completion of time through early capturing of revenue steams
ü In theory, the principal only pays when the service is delivered to the specified standard
ü Can be off balance sheet
û Size and complexity of the project means that the private sector is not necessarily the best party to
hold construction and commercial risk
û The Government will ultimately have to explicitly underwrite major risks including interface,
acceptance and a substantial part of commercial
û The size of the Civils and Structures contract means that this element will need to be funded
through Government grant
û The lead time between end of construction of Civils and Structures and start of operation means
that there is a long lead time in which the contracted entity does not receive any revenue
û PPPs have a poor record of delivering value for money for major rail projects
û The size of the contract would be too big for a single PPP which creates increased interface risk
during operations as well as construction

Suitability for HS2

· Whilst a Full Design, Build & Maintain contract will enable the identification and capture of design
innovation and potentially cost savings, these opportunities are mitigated by the need to comply
with EU interoperability standards
· Furthermore, relinquishing central control over the overarching design increases interface risk
which can lead to interface or operational and maintenance issues post construction
· Multiple PPP contracts across the operating network are not preferred and /or standard across
European railway projects – it creates increased operational interface risk which may ultimately
impact on long term operational performance
· Multiple InfraCos are not consistent with our preferred operating structure

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6.1.2 Rolling Stock and Depots

The relationship between rolling stock and the depots used to house and maintain it means
that the Rolling Stock and Depots may be procured separately or combined into one single
procurement. Our discussions with HS2 highlighted that, for new build HSR vehicles, it has
become increasingly common to procure maintenance services and depot provision as part of
the new build contract. The increasingly common approach to rolling stock procurement is to
procure Rolling Stock and Depots together. However, for HS2, two different types of rolling
stock are going to be procured and it is possible that these will be procured under separate
contracts. Therefore, bundling depots within these contracts may not represent best value
and may create complexities that are best managed separately. This should be reviewed with
rolling stock providers at the time of procurement to ensure that the preferred approach
reflects best practice at the time and best value for money for the project.

Concerning the procurement of rolling stock, there are two different procurement models
that can be considered:

„ Rolling Stock Company (ROSCO) leasing model, the standard approach to procuring
rolling stock in the current franchise market; and
„ Direct purchase by HS2 or the Government, as considered by Government on recent
projects such as the procurement of a fleet of Diesel Multiple Units (DMUs).

However, before considering the procurement approach to adopt we need to consider the
level of unbundling for rolling stock, as discussed in section 5.1.1. Owing to the size of the
capital cost of the project, we believe it will be necessary to unbundle the procurement of the
rolling stock into standard and hybrid HSR vehicles.

Under the leasing model, the rolling stock would be procured and owned (and in most cases
maintained) by a third party leasing company (ROSCO). The ROSCO would then lease its
rolling stock to the HSR TOC for an agreed period of time in return for an annual lease or
‘rental’ charge, which would be set to enable the ROSCO to recover the capital cost of the
trains and earn a profit. This is the model by which almost all the passenger rolling stock for
conventional railways is currently procured in the UK. However, the capital cost and the
bespoke nature of a large proportion of the fleet may make this option impossible.

The alternative approach is for either HS2 or the Government to directly procure and own the
rolling stock. In this case, HS2 or the Government would own the rolling stock for their entire
useful life and the ‘rental’ charge would need to be sufficient to cover the capital and
operating cost of the trains.

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The relative advantage and disadvantages of these two procurement options are considered
below:

Options Advantages / disadvantages

ROSCO leasing ü Procurement and asset specific risks are transferred to the private sector
model ü Potential value for money gain through pricing benefit of capital allowances
ü Capital cost is spread over the life of the asset
ü Established and well understood approach to procuring rolling stock
ü Competitive market for initial procurement of international HSR rolling stock
û Bespoke nature of the rolling stock may be difficult, and expensive to lease,
due to the pricing of stranding risk
û Conventional risks transferred to the private sector may not be accepted
due to bespoke design
û It is unlikely that asset specific and residual value risk (i.e. unrecovered
capital investment) will be accepted by the private sector
û Size of procurement may not be financeable
û Limited ability to influence the pricing of rolling stock rentals

Direct Purchase ü Most competitive form of borrowing


ü Greater control and flexibility over pricing and use of rolling stock
ü May speed up the procurement process as external finance would not be
required
ü The size of the procurement, backed by Government may facilitate the
creation of a new entrant in the market which ultimately leads to savings
across other projects
û Large up front cost
û Asset specific and residual value risk (i.e. unrecovered capital investment)
will be retained by Government or TOC
û Government or TOC affordability considerations given the size of the
procurement
û Potential impact on the Government balance sheet

On the balance of advantages and disadvantages and considering the bespoke nature of the
rolling stock and the capital cost estimate, it is unlikely that it will be best value for money to
finance the hybrid trains through the conventional rolling stock leasing model. Whilst a direct
purchase has implications from a Government affordability perspective it may be possible to
address this issue by adopting an approach similar to that proposed for the recent DMU
procurement, whereby Government creates a new rolling stock company that it subsequently
sells once the initial risks have been managed.

It will be necessary to undertake significant further work to make a value for money
justification for the preferred solution before a final decision can be made.

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6.1.3 Stations

Traditionally, railway stations have been procured as part of the Civils and Structures
contract as they form part of the core railway infrastructure. For HS2, we have considered
whether the procurement of stations should follow this traditional approach or whether there
is scope and benefits to procuring the railway stations in London and/ or Birmingham
separately from the core infrastructure contract.

The development issues, risks and operational issues at the Birmingham terminus are very
different to those at the London terminus. Given this, different procurement options could be
considered for these two stations.

The Birmingham terminus will be a completely new station separated from the existing
conventional network and, therefore, there will be comparatively little interface risk and
issues. This allows greater flexibility around design and how the infrastructure is developed.
Given this degree of flexibility and the limited interface with the conventional network there
are more options around how the Fazeley Street station may be procured. For example, the
station could be procured as part of a private sector partnership, where the private sector
would design, build, finance and operate the station, in return for an annual payment by HS2
or the franchisee. The precise payment mechanism and level of risk that can be transferred to
the private sector will be driven by the station design and the commercial opportunities it
represents (i.e. property development, retail space, etc). We understand that in the area
adjacent to the station the may be opportunities for property development that may raise the
interest of the private sector. A number of examples exist of private partners contributing to
the development potential of major stations. For example, Grandi Stazioni, a spin off of the
Italian railways, now partially privatised, has a successful track record of developing railways
stations with private sector involvement in Italy and abroad.

The London terminus would not be a new station, but instead it would form part of an
extension and significant redesign to the existing Euston station. Given that the London
terminus will form part of the existing railway station, with operational interfaces with the
West Coast mainline, the engineering solution will be far more complex than at Birmingham.
This interface will be further complicated by the need to work closely with the existing station
owner, Network Rail, and work within the confines of the existing operating services. This
added complexity and the associated risks limit the scope of credible options and makes it less
likely that a structure where the private sector takes on development or operation of the
station can be successfully implemented.

It is important that a single party is given ultimate responsibility for the development and
operation of the station during this time and significant further work is required to ascertain
the identity of this party.

From our discussions with the HS2 team and our understanding of the commercial
opportunities at the Birmingham terminus, we believe there may be scope for the private
sector to play a role in the development of the station. In the case of Euston, there is a much
weaker case for a private sector delivery solution due to the level of interface risk. At this
stage we recommend that for both stations, HS2 remain flexible about the potential delivery
solutions. The extent to which they may be viable for the private sector to deliver and operate

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will depend on the specific design and the commercial opportunities at the stations, which will
be better known once the detailed work on station development has been carried out.

The London station issues are further complicated by the opportunity to consider
regeneration and property development gain. In this respect, lessons can be learned from the
recent redevelopment of St. Pancras, which has managed to deliver considerable
regeneration improvements and development potential to the surrounding area.

Therefore, in considering the preferred approach to station development, we believe that HS2
should have due regard for the following:

„ The potential private sector partners that could collaborate in the development of both
sites;
„ Whether a partnership or sub contract structure is appropriate (St. Pancras adopted a
partnership structure);
„ The interface with the operational network and the risks and issues that it can create
and the consequent need for a single point of responsibility;
„ Who should take on responsibility for the delivery of the Euston upgrade;
„ The role of Network Rail and of the ORR;
„ Whether the capital size will influence the preferred delivery structure; and
„ If an expanded property development of the station generates value for money.

It should also be noted that the core costs included in the analysis do not include any aspect
of property development. It is assumed that in developing the project in due course that
including this aspect will in itself improve the financial case for the project, however, this has
not yet been confirmed for this project.

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7. Governance
We have previously recommended that the long term operating structure should drive the
preferred delivery solution rather than allowing procurement and/ or financing preferences to
dictate the outcome. Early consideration should be given to the roles and responsibilities that
will apply to the parties relevant to the project during both the construction and the
operational phases. Section 7.1 below highlights the roles and responsibilities for the key
parties to the project. It is important to note that these will require further consideration if
the project is to progress.

The vision for HS2, whether as a single line from London to the West Midlands or as an HSR
network, must be translated into a long-term governance and operational structure that fits
the long-term strategy not only of the HSR line but also of the conventional rail network. The
preferred solution must take an informed view of risk transfer and the appropriate roles and
responsibilities. We have considered these options in more detail below based upon the role
envisaged for each organisation, during both the construction and during the operational
phase.

7.1 Roles and responsibilities


7.1.1 Government

Lessons learned from other HSR projects indicate that Government support is crucial to
delivering HSR projects. As already highlighted, the initial cost to bring the project from
concept to the delivery should not be underestimated and without Government support
during this phase the project will likely fail to get significant support from the private sector.

Due to the nature of rail schemes and based on evidence from other projects both in the UK
and overseas, the construction, regardless of the delivery model selected, is likely to require
significant direct Government funding together with a number of implicit or explicit
guarantees in order to be deliverable. Whilst it may be possible to profile this support over
many years, it is important to recognise at the outset that Government funding will still be
required.

It is also important for the Government to form a view as to whether it intends to make plans
for a single additional HSR line or whether it should create a structure that facilitates the
development of a HSR network in due course. This decision will likely impact on the exact
structure to be adopted, the implications of which are discussed later in this report.

During the development of this report we have assumed that the Government will remain at
arm’s length from the day-to-day decision-making. We have assumed that Government will
require HS2 or an alternative sponsor body to take on responsibility for the following:

„ Setting out the long-term strategy for the delivery of HS2;


„ Specifying the requirements, budget and timetable for the HS2 project delivery body,
and controlling any changes to these;
„ Monitoring the performance of the delivery body for HS2 during construction;
„ Balancing considerations such as value for money, affordability, whole life costs, and
the impact on the classic rail network;

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„ Acting as a single point of accountability for the delivery of the project; and
„ Possibly, monitoring the performance of the HS2 operator and maintainer and/or
managing the relationship with the long-term infrastructure owner during operations.
7.1.2 Project Delivery Organisations

HS2’s remit is currently to consider the case for new HSR services between London and
Scotland, with a focus on the route between London and the West Midlands, where capacity is
most constrained. In order to take any option forward, a Project Delivery Organisation will
need to be appointed. For the purpose of this report we have assumed that HS2 will take on
this responsibility either with the help of a delivery partner (as is the case for the Olympic
Delivery Authority (ODA) in delivering the Olympics) or by recruiting sufficient relevant skills
and experience to enable it to take on the role itself. The secondary option is only likely in the
event that a network approach is preferred.

In terms of its remit, the role of HS2 (or equivalent Project Delivery Organisation) will vary
depending on whether the project remains a single line connecting London to Birmingham and
the North West or whether it will expand to become the enabler of a UK wide network. Since
the development of a network is likely to be conducted sequentially, one line after another,
for the purpose of this report we have assumed that the HS2 delivery organisation is set up
with a single line remit.

Lessons learned from UK and international case studies clearly highlight the importance of a
strong project organisation set up with the objective of managing the development,
procurement, delivery and funding of the project. Particularly important will be the role of
HS2 in:

„ Inputting to the project’s specifications which could include both design and outputs;
„ Reviewing progress and acting as “project manager”, a role that could be supported by
engaging an independent entity;
„ Making prompt decisions on project issues and, where appropriate, challenging and
directing activities of contractors;
„ Ensuring integration of different elements of the HSR;
„ Managing interfaces with external parties;
„ Managing the exposure to risk.

A number of successful examples support the importance of a strong Project Delivery


Organisation:

„ The HS1’s experience post restructuring;


„ RAVE, the Portuguese HSR’s project organisation (which is still delivering the project);
„ The ODA;
„ Asfinag, Austria; and
„ A number of other infrastructure projects such as the delivery of Heathrow Terminal 5
and the development of Crossrail.

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7.1.3 High Speed Rail Authority

Once the construction is finished, it will be important for the Government to create a body
responsible for managing the relationship with the InfraCo and developing the longer-term
strategy for the line. In the UK in the past, this role has been held by the Strategic Rail
Authority and more recently a team within the DfT. Elsewhere, different types of Government
agency have been given this responsibility, for example, Transport Scotland on behalf of
Scottish Government. Whilst there are a number of alternative structures that could be
implemented to undertake this role, for the purposes of this analysis we have assumed that
the longer term responsibility for specifying the strategy for the network will be undertaken
by a newly formed High Speed Rail Authority.

One argument for passing this responsibility to a High Speed Rail Authority is to ensure that
the knowledge and expertise developed in the delivery of this project is not lost for future
projects and that lessons learned are captured and built upon in subsequent projects.

Such a body, during operations, might have a remit of:

„ Developing and specifying the strategy and long term aspirations for the network;
„ Managing the contract and monitoring the performance of the project should this be
handed over to a separate infrastructure manager; and
„ Providing capacity allocation and railway traffic, should these activities not be in the
remit of the infrastructure manager.

We recommend that Government form a view as to the best method of managing these
elements early in the process. Whilst Government may prefer another approach to managing
the operational asset, it is important to recognise that the responsibilities highlighted above
will need to be addressed by somebody. Another aspect that we recommend is considered
early in the process by Government is the approach to regulate or control the InfraCo and
operations elements of the service and how this regulatory body interacts with the High
Speed Rail Authority. The Office of Rail Regulation, or equivalent body set up to take on this
role, is well placed to be involved in an HSR network. This is discussed later in this section.

7.1.4 Delivery Partner

A Delivery Partner is a way of procuring external support to fulfil the day to day role of
managing and delivering a complex programme, which necessitates a broad range of project
and programme planning and delivery expertise. Evidence suggests use of a Delivery Partner
can be an efficient model for an organisation to obtain the skills and capacity required to
manage risk and expedite a programme efficiently, whilst also delivering innovative solutions
and value for money.

HS2 should have a clear rationale for adopting a Delivery Partner model to support its
delivery of a programme. This rationale should provide clarity over the required nature of the
model to be procured. In this vein, prior to procurement, the following issues should be
considered:

„ Roles, responsibilities and scope of services – what responsibilities must the client
retain and which responsibilities/ services will be more effectively provided by the
delivery partner?

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„ Is building client capability a requirement – if so, how will the client utilise this increase
in capability through the programme lifecycle and beyond?
„ What will be the delivery partner relationship with other programme stakeholders
including funding or sponsoring organisations?
„ What form of contract best meets the model required?
„ What procurement route is most appropriate?
„ How will the client’s affordability and value for money criteria be embraced within the
process?
„ What are the key financial and commercial features of the contract (e.g. payment
provisions, risk allocation, incentive framework, financial security)?
„ Is the client organisation resourced to procure and manage the contract going forward,
or is external technical, financial, commercial and legal support required? and
„ How will the client be ready to engage and manage a delivery partner from a people,
organisation, process and systems perspective?

Although the above is not an exhaustive list of all issues, it highlights the necessary
considerations to link the client’s needs with defining its requirements for a delivery partner
and how the client may effectively manage the procurement and operational phases of the
delivery partner contract.

7.1.5 Construction companies

We discuss in this report the preferred approach to construction of the asset and highlight the
importance that the role of the construction market will play in the delivery of this project. We
have also discussed the rationale for having multiple construction parties and contracts.
Furthermore, we have highlighted the importance of having a single InfraCo that takes on
responsibility for the availability and maintenance of the completed asset. It is, therefore,
important to consider the roles and responsibilities of the construction companies, their
relationship with Government and HS2 and the method of transferring the completed asset to
the InfraCo while managing the risk for the Government.

In delivering the asset to an InfraCo, we recommend the following roles for the construction
companies:

„ Partial design of the infrastructure;


„ Close working with the HS2 design team to ensure compatibility with the overarching
network design. This process will be required to address interface issues and to
minimise whole life costing;
„ Construction to time and budget. Whilst Government may retain catastrophic risk, we
anticipate that the private sector would retain standard time and budget delivery risks
and would be expected to contract for elements on a fixed or target price basis. This
approach will incentivise delivery and allow the public sector to capture the benefits
associated with working with the private sector whilst negotiating an element of price
certainty;
„ Working closely with Network Rail, where appropriate, to manage the interface with the
existing infrastructure; and

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„ Preparing the asset for transfer to the InfraCo. The exact process for transfer and
acceptance will require negotiation and support of the private sector, but considering
that Government will be unable to transfer latent defect risk and full asset acceptance
risk to the private sector, we believe it appropriate that Government take on this
responsibility. This will involve taking the asset back from the construction company
and then transferring it on to the private sector for maintenance.
7.1.6 Network Rail

As owner and operator of the traditional rail network, Network Rail’s role in the HS2 project
and, potentially, in the wider HSR network must be clearly defined, both in the long and short
term. During operation, Network Rail’s role and involvement in HS2 could vary from:

„ Interface – there will be interfaces along parts of the route and at stations where risks
will need to be managed. These interfaces should not be underestimated, for example,
at Euston station, the link to the West Coast Main Line and the signalling interfaces
when rejoining the West Coast Main Line around Birmingham;
„ Maintainer – as in the case of HS1, Network Rail could carry out the maintenance of
some or all of the elements of the HS2 project;
„ Owner and steward of the HSR line or of specific elements of it – although Network Rail
may not have a large involvement in the procurement and delivery of the project, it
could potentially be one of the long-term owners of the asset.

In considering Network Rail’s function, as is the case with the InfraCo, its capacity to take on a
major role in the delivery or management of the HSR line should be carefully considered in
light of the negative experience of Railtrack in the development of the West Coast Route
Modernisation. It will be important to ensure that, whilst it has technical and engineering
excellence, this should not be diverted to the HSR line to the detriment of the conventional
network.

During the procurement and delivery phase, Network Rail will have an important role in
sharing its experience with HS2 through secondments. Its role could be expanded to include:

„ The design and development of specific elements of the project, such as the London
stations;
„ Entering into asset protection agreements with the InfraCo contractors; and
„ Under the InfraCo structure, Network Rail could play a role in design or construction
approvals or in supporting HS2 as part of a larger delivery partner.
7.1.7 Infrastructure Company

We have already highlighted within this report the rationale for having a single InfraCo during
the operational phase. We see the role of the InfraCo as being:

„ to maintain and operate the asset;


„ to manage operational and interface risk; and
„ potentially to allocate capacity, although this responsibility could pass to HS2.

We envisage that the InfraCo will take on a number of responsibilities similar to those
undertaken by Network Rail for the conventional network. However, we believe that these
responsibilities should only include those that focus its efforts on ensuring that the

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infrastructure is available for operations. Its remit should not be clouded with responsibilities
that dilute this primary requirement – for example, should an extension to the HSR network
be agreed, it would be important to ensure that the operations and availability of the existing
line is not adversely affected in the delivery of the extended network.

7.1.8 The TOC

In our review, we have assumed that a train operating company (TOC), which pays track
access charges to the InfraCo will carry out the operation of passenger services.

During the operations phase, the HSR line will be subject to EU open access requirements.
Effectively, any operator, subject to meeting certain core criteria and capacity availability,
will be able to provide passenger services on the completed infrastructure in return for pre-
agreed infrastructure user charges. However, upon completion it will be necessary to ensure
that a core timetable of services is provided. It will therefore be necessary for Government or
HS2 to procure a train operator that will provide initial services on the new infrastructure.

Open access operators have recently entered the HSR market: Nuovi Treni Veloci (NTV) has
recently procured the rolling stock required to compete with Trenitalia on the Rome to Milan
route. We recommend that one consideration in creating these core services is how best can
open access competition be encouraged to facilitate cost and performance improvements
through market competition.

7.1.9 Regulatory Body

How the new infrastructure will be regulated will be crucial to delivery and obtaining both
financing and private sector participation. The regulatory regime will also heavily influence
the procurement and financial structuring options available. The options available could
include either RAB based independent regulation, or a concession based structure (e.g.
Portuguese or Dutch HSR lines).

The objectives and functions of the regulatory body will be different in the construction
phase, compared with the operational phase. During operation, the Office or Rail Regulation’s
(ORR’s) role will vary depending on whether the delivery model selected takes the form of a
concession contract or a more conventional regulated structure. In the former, the regulation
will predominantly be enforced through the contractual mechanism in place. However, the
ORR could still get involved in issues related to operations and open access, a role more
aligned to that undertaken by the PPP Arbiter for London Underground. In the latter, the ORR
could have a role as economic regulatory body and be responsible for providing regular
benchmarking and price setting, together with providing a value for money challenge – as is
the case with the conventional railway.

During construction, the ORR will have a duty to monitor the interfaces with Network Rail,
especially at large stations such as Euston, and to ensure that the parties involved are
conscious of the complexity of these interfaces and that they manage them properly.

It is also possible to construct the asset using a contractual approach with minimal regulatory
involvement and then transfer the completed asset, to be operated under a more traditional
regulatory regime. We consider this approach to be the most sensible for the following
reasons:

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„ The market is likely to be uncomfortable taking regulatory risk during construction and
is likely to prefer the certainty offered in a concession contract;
„ A balancing rather than an overriding duty on ORR regarding the construction of HS2
might enable it to deal with some conflicts between an HSR Authority and Network Rail;
„ The benefit of a regulatory regime is the flexibility, protections and responsiveness it
offers core stakeholders;
„ Under a regulatory regime, material changes in circumstances can be addressed which
are not often foreseen in contracts – this provides the private sector with an element of
protection whilst preventing the long term abstraction of super profits;
„ There remains a well understood and accepted process for addressing such issues
which has been developed and adopted across a number of other regulated industries;
„ A regulatory body provides Government with independent scrutiny and value for money
challenge to private sector proposals;
„ Having a common and well understood regulatory regime creates confidence in the
private sector, which would still allow differences to functions so a regime tailored for
the HSR line is possible, as is the case in HS1;
„ A regulatory regime allows the necessary flexibility should it eventually evolve into an
HSR network;
„ A regulatory regime allows the management of the capacity allocation and access
charging regimes to be managed together with the protection of the owners interests in
the infrastructure – these areas are critical; and
„ A regulatory regime enables cost efficiencies to be captured more readily.

The implications for the current network will also need to be fully understood and will require
the involvement of the ORR. Any new HSR line between London and the Midlands will directly
affect the traffic pattern on the existing West Coast Main Line, but could also potentially
release spare capacity, which could compete with HS2 in an open access scenario. The ORR is
likely to have a significant input to this process and the exercise must consider the strategic
and economic implications of this. The secondary issue of franchise disruption will also need
to be considered and could be avoided by aligning the renewal to HS2 delivery schedule.

Interfaces become much more important if the HSR network develops beyond Birmingham. In
addition, HSR trains will initially use Network Rail infrastructure to continue beyond
Birmingham and the payment and performance regime adopted will need to be consistent
with that. A further interface consideration will need to be the comparability of the regulatory
approach to HS2 compared to HS1. It may be sensible to create comparable regimes in order
to create a more attractive option to operators of HS1 services. This, however, should not
preclude the preferred approach for HS2 stimulating changes to the HS1 regulatory approach
in due course.

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8. Financing
8.1 Introduction
Within this report, we have so far discussed the:

„ Strategic criteria to consider in developing a solution to this project;


„ Level of unbundling necessary to generate sufficient market interest
„ Procurement approach to the respective elements of the project:
„ Railway Infrastructure
„ Rolling Stock and Depots
„ Stations & Property Development
„ Roles & responsibilities of the key stakeholders in the project
„ Commercial implications of the contractual relationships.

Within this section of the report, we move on to considering the financing issues that must be
addressed in the delivery of this project.

8.2 Requirement for significant Government support


Given its scale, HS2 represents a funding challenge for both the public and the private sector.
Whilst commercial income from passenger services may cover the cost of operations and an
element of infrastructure maintenance, it is extremely unlikely to cover the up-front costs of
construction, even before any financing costs are considered.

The project, is therefore, only viable if Government makes a sizeable contribution to the cost
of construction. It may be possible to profile this support over the operating period of the
asset, but in the first instance it is necessary for Government to acknowledge that railway
projects are not self-funding. All European HSR projects currently under construction are
underpinned by significant Government support.

PPPs have often been used to spread the cost of infrastructure projects over their economic
life but do not have a good record of achieving value for money in the funding of major rail
and significant infrastructure projects. As we have already highlighted, we believe there to be
a strong commercial, practical and value for money case for Government to fund the full
costs of construction up front and then transfer the asset to an InfraCo which would take
responsibility for the maintenance and renewal of the asset and ensuring it is available for the
provision of passenger services. This approach to delivery necessitates the funding of
construction via Government capital grant.

Risk transfer, one of the main arguments for selecting the PPP route, is often illusory in large-
scale rail projects. This is because Government is explicitly or implicitly the ultimate
underwriter of the major risks including construction, commissioning and commercial risk.
Attempting to transfer these risks to the private sector will be expensive from a financing
perspective and not value for money since the Government may be ending up paying for them
twice. Furthermore, we anticipate that HS2 will be constructed by the private sector under a
contract similar to the construction contract element of a PPP – therefore, to a large degree,

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the private sector efficiencies and risk transfer goals should still be achievable. What would be
different is the ability to transfer financing responsibility and risk to the private sector.

Whole-life cost optimisation, another argument often used to justify the same entity carrying
out design, construction and maintenance, can also be achieved through specifying a design
that is based upon a whole life cost optimisation approach.

8.3 Leveraging the value of Government support


Accepting that a PPP does not represent a value for money solution in the case of this project
and that Government will retain the majority of the risk, the only benefit of a PPP would be to
enable the spreading of cost over time. As we have already highlighted, the operational
priorities should be the primary influence on the solution adopted and the objective of
spreading cost over time should remain of secondary importance. What is of importance,
whatever the structure to be adopted, is to maximise the benefit that Government support
can provide.

This value could be maximised by seeking investment from the private sector once the
construction is complete and the project is operational. This has the benefit of reducing the
perceived risk of the project, as construction risks have been separately managed and the
demand for the operational services is better understood.

Removing or better understanding these two risks will enable a higher valuation for the
private sector that could be captured by Government. Therefore, the emerging structure for
the delivery of HS2 whilst maximising the value of the Government support is to construct the
asset and then separately transfer availability and maintenance responsibilities to the private
sector contractor either through a concession (“Concession Model”) or in an asset sale (“Build
for Sale”). The concession model is the approach being adopted for HS1. The sale model
would be more closely aligned to the approach to the privatisation of a number of utilities in
the UK in recent years including the power and water industries.

Under either scenario, it is envisaged that Government will fund the initial capital cost and
then recover an element of the cost through the price the private sector is willing to pay for
the prospect of maintaining, and making available, the infrastructure.

The value of the payment to Government will be dependent upon the operating premium the
InfraCo is able to forecast. This value will be heavily influenced by the approach to demand
risk and the contractual and regulatory mechanisms adopted during the operating phase.
Having a more certain view of passenger demand and the subsequent impact on track access
charge income or the value of availability payments under the contract will result in a lower
risk premium being applied by the private sector in its valuation of the infrastructure. This in
turn will lead to a maximisation of the return to Government.

Other factors that will likely impact on private sector appetite and valuation include:

„ The impact of traffic risk;


„ Integration and interoperability;
„ Contractors taking risk with a project of this size;
„ New technology;

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„ Construction and planning (particularly in respect of Euston); and


„ Political sustainability and support.

The separation of construction from operations and the transfer to the private sector once
operational has received a positive response in market consultations held as part of the
evaluation process. How the transferred infrastructure would be regulated or controlled still
needs to be refined, but options include adopting a regulatory mechanism similar to that
applied to the conventional network. The alternative concession model allows a contractual
mechanism to regulate and enforce the required outputs. The key differences to these
approaches relate to the method of enforcement and the ability to respond to changes to the
market.

8.4 Considerations from other projects


Our review of international HSR projects has indicated that Government support has been
provided either directly through grants or indirectly through minimum revenue guarantees.

The market feedback included comments that, if it is to sell it in the future, the Government
must be active in the early stages with the objective of offering the asset to the broadest pool
of capital with some appetite for revenue risk. Other considerations include:

„ The UK has a good record of funding utilities, and a regulated approach is well
understood, tested and proven;
„ Alternatively, the continental concession model has been used to finance roads and is
the approach that has been adopted for HS1;
„ The value of cash paid for the concession or sale will be a function of the user charges,
and Government would be able to increase the value of this by increasing the value of
revenues the InfraCo receives, either through guarantees or grants;
„ A regulated approach represents a flexible, yet long-term solution for attracting private
capital as, once operational, is relatively stable and well understood. Conversely,
concessions are more rigid, relatively short term alternatives that can be very
complicated and not well suited to withstand major changes in strategy or industry wide
shocks;
„ Regulatory risk may be seen, by some, as excessive, however, considering the fact that
the regulatory regime allows a response to significant shocks to the industry, the
allowed returns are relatively well protected.

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9. Future Proofing
We have highlighted the need for Government to consider whether or not this project will
require the development and delivery of a single HSR line or whether a longer-term strategic
view is taken around the development of a network.

We recommend that Government consider this option so that, if appropriate, a structure can
be developed that facilitates the delivery of future enhancements and ultimately an HSR
network. Failure to consider this at an early stage may result in a structure that is not
amenable to further line extensions in due course. Some of the primary considerations in this
regard include:

„ The potential to deliver significant future infrastructure programmes. It may be


possible to create a financial structure that facilitates the delivery and financing of
subsequent HSR line extensions which reduces the need for additional Government
support;
„ The concept of the creation of a Regulated Asset Base (RAB) is an established and well
understood mechanism of enabling access to significant funding for the delivery of
capacity enhancements and is discussed in more detail later in this section, but will
require the creation of a well understood and clearly defined payment and cost
allocation mechanism that supports the workings of a regulated utility;
„ It is important to consider and develop a sensible approach to managing the InfraCo
during the operational phase. With a suitable and flexible operating structure,
subsequent extensions to the network could benefit the Government by being able to
capture economies of scale and other operational efficiencies. Creating an inflexible
contract may, should subsequent extensions be delivered, lead to inefficiencies and
increased network costs which ultimately destroy value to Government and/ or reduce
the commercial rationale of the open access arrangements;
„ In seeking to create an operating structure that allows future flexibility and enables
future growth, it will be important to ensure that the delivery considerations discussed
in the report to this point are not affected.

Across the UK, a utility-based regulatory structure is well established and understood and has
facilitated significant investment in infrastructure assets. This mechanism may enable the
delivery of an HSR network. This option is discussed in more detail below.

9.1 Regulatory controlled structure


A regulatory controlled structure is a well-understood and well-established approach to the
delivery and maintenance of major infrastructure in the UK. The added advantages that a
regulatory approach, with the creation of a RAB include:

„ Acceptance by the market;


„ A dynamic, flexible mechanism that can be adapted to respond to major shocks and
unforeseen circumstances;
„ It sets forward looking expectations for behaviour and can avoid damage from anti-
competitive behaviour by anticipating and preventing it;

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„ It can provide certainty for market participants, by setting out clear rules in advance
(this requires good regulatory and institutional design that prevents Government or
regulator from changing the rules unpredictably);
„ It promotes transparency;
„ It eases dispute resolution, as the competition framework is already established;
„ Regulators and affected parties know in advance the types of information required for
regulatory proceedings, and can collect it accordingly; and
„ Competition laws specify in advance which forms of conduct are prohibited.

The adoption of a regulatory approach to controlling the operating entity could be used under
a long term concession, as has been adopted on HS1, or under the creation of a private sector
ownership structure, such as a not for profit entity responsible for maintaining the
infrastructure similar to Network Rail for the conventional railway. Both approaches could
deliver the operational aspirations of Government and could raise revenue to offset the cost
of construction, however, the wider governance considerations discussed in section 7.1 will
still need to be addressed.

In addition to consideration of the form of regulation to adopt for the HSR infrastructure, it is
important to consider the prospect of creating a RAB to enable future network expansion. The
single biggest benefit is that, with a complimentary and well-defined payment mechanism, a
regulatory structure enables significant additional finance to be raised. This finance could
facilitate the delivery of additional lines post completion of HS2.

The principle that underpins this structure is that financing becomes a primary element of the
payment mechanism. Under this structure, debt raised efficiently for the construction of
infrastructure assets is added to the value of the RAB. The InfraCo is allowed to receive a
return on the RAB, sufficient to enable the InfraCo to service the debt and retain a profit. The
amount of finance is limited to a proportion of RAB, therefore, ensuring that the value of
assets always exceed the value of debt. Creating a RAB structure could be used to deliver
additional network enhancements. The principles that HS2 will need to be mindful of when
considering the creation of a RAB include:

„ The sourcing of equity to be injected into the RAB;


„ In order to create a RAB, it is necessary to have an element of equity. The value
of the equity will directly influence the level of debt that can be raised to fund
future projects. A standard limit of gearing for a regulated utility is circa 80%.
Therefore, the level of debt that can be raised will be directly proportional to
the amount of equity included in the initial RAB;
„ If the Government is to fund the construction, it will have the option of
transferring this asset into a RAB and thereby creating the equity within the
RAB that is used to raise additional finance in due course;
„ An alternative method of raising equity would be through an IPO or equivalent,
similar to the approach to create the privatised Railtrack. Under this model,
equity is raised from the public and/ or private companies purchasing shares in
the asset. The value of the share sale is what is used to calculate the value of
the RAB;

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„ However, when creating a RAB, in order for the regulatory principles to work,
the Government must be aware that the RAB creates a commitment to provide
future income to service the RAB. This does not mean the requirement for a
Government guarantee, although one is provided to Network Rail, rather it
requires that track access charges will be sufficient to service the RAB. This
may require Government to act as funder of last resort in the event that track
access charges are not sufficient to cover the RAB costs.
„ Governance arrangements;
„ The structure and governance arrangements of the regulated utility should be
developed and agreed in advance, particularly in light of the requirement to
fund the construction of the asset at the outset;
„ A not for profit distribution model, similar to Network Rail, could be created
such that profits are reinvested in the network. An alternative could be a
Company Limited by Shares (CLS), which would allow the distribution of
dividends to shareholders who have injected the equity. There are many other
alternative options that will need careful consideration as part of the future
development of any scheme;
„ The quantum of the RAB will dictate how much additional debt can be raised;
„ It will be necessary that the size of the RAB created is commercially viable,
therefore, it should have due consideration for the potential value of track
access charges that the asset may generate. This, however, may limit the size
of the RAB to a level which is insufficient to raise sufficient finance for the
delivery of subsequent network expansions. It may therefore be an option for
Government to provide direct grant, as is the case with Network Rail, which
allows a larger RAB to be created and allows more finance to be raised for the
delivery of greater network expansion.

HS2 will need to consider carefully the implications and practicalities of creating a RAB in
more detail before a preferred structure is finalised. It may not be practical to consider
creating a capital intensive structure through a RAB as utilities with extensive enhancement
and renewals spend can be less robust than steady state entities. Examples from the water
and electricity distribution sector should be carefully considered and factored into any
decision on the best approach to HS2.

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10. Summary
Based upon the analysis included in section 7.1, it is possible to present the various roles and
the relationships between each party during construction in a single diagram. This is
presented in Figure 10 below.

Figure 10: Construction Interfaces

In summary, based upon the elements discussed in sections 5, 6 and 7 the emerging
conclusions include:

„ A single InfraCo should be set up to carry out the operation and maintenance of all
elements of the completed HSR line infrastructure. This should reduce interface risk
during operations thereby optimising performance and delivering the passenger growth
forecast. The infrastructure should be managed by a single InfraCo as it limits interface
risk during the operations phase and transfers it to the private sector. The interface
with the Control Systems contract will be a crucial element of this contract;
„ Separate contracts should be created for the delivery of the Civils and Structures,
Railway and Control Systems, Rolling Stock, Depots and Stations. Further geographical
and functional split is likely to maximise market appeal and ability to finance;
„ Construction should be separated from operations to ensure that the constituent
elements of the HSR line once delivered are transferred into a single InfraCo;
„ The interface between the Maintenance of the Railways Systems and Control Systems
should be carefully managed;
„ Consideration should be given to relationship between TOC, HS2 and InfraCo – who
takes revenue risk and the commercial implications for the structure;
„ The payment mechanism to be adopted in light of the interface between the HSR and
conventional network and operators needs to be clearly defined;
„ Partial unbundling is likely to offer better value for money since it is likely to generate a
good level of competition without overly increasing interface risk;

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„ The level of unbundling should create multiple construction contracts, which then
transfer to a single InfraCo for maintenance. There is a question as to where the asset
acceptance and interface risk sits but, when considering that the Government will
remain as funder of last resort and will be unlikely to transfer catastrophic and latent
defect risk to the private sector, we have assumed that this will remain with
Government;
„ Rolling Stock and Depots should be procured as part of a single contract unless the
value for money assessment undertaken during the procurement phase indicates
otherwise; and
„ Further work is required to finalise the preferred approach and structure of the delivery
of the new stations. In particular, the approach to the expanded station at Euston is
highly complex and faces significant risks and issues. The interface with Network Rail
and the impact on the West Coast mainline will require a single point of responsibility
during the delivery period.

Having undertaken the review of bundling, procurement and governance we have been able
to develop an emerging delivery solution. We have sought to present this structure in the
diagram below, which summarises the link between the construction and operations phase. In
the diagram the structure presents interface and asset acceptance risk being retained by the
public sector.

Construction Operations

HMG
Construct Co 1
Civils & Structures
(Multiple contracts)

HS2 High Speed Rail Authority

Construct Co 2
Stations
(Multiple Contracts)
Single InfraCo
Delivery Partner
Maintains whole asset

Construct Co 3
Railway Systems
(Single Contract)

Rolling Stock
TOC runs services
procurement

Figure 11: Example of construction contractual split and link to operations.

The procurement option depicted is for the major features of the design to be undertaken by
Government but to allow the private sector contract to input to specific elements. Upon
completion of the construction, the asset would transfer to a single InfraCo responsible for
the maintenance and availability of the completed asset. The diagram highlights that there is
the option for multiple construction contracts. These will need to be carefully managed and
controlled. With Government retaining asset acceptance and interface risk, the need for
support from a delivery partner is crucial to the management of risk and the successful
delivery of the completed asset.

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