The supply of signalling services to Network Rail market study
Study of the National Audit Offices' report on the modernisation of the West Coast mainline, 2006.
In November 2006 the National Audit Office ('NAO') published a report on the modernisation of the West Coast mainline. As part of this report the NAO gave consideration to how the requirement to deliver the project within a tight schedule added to the costs of the project. The report specified that in three instances tenders for signalling contracts were let at around 20% above Network Rail's cost estimates. This prompted us to look at this market under our responsibilities to keep markets under review.
The study used information and data already available to ORR either because it existed in the public domain or had been received as part of our normal regulatory exchanges with the industry. During the course of our review, we also met with the NAO in order to discuss its findings.
We looked at the circumstances of a number of tenders from the project and looked for reasons why contracts had been let in excess of Network Rail's cost estimates, a key finding in the NAO report. We identified the following factors as contributory:
- generally high volume of construction work at the time of the contracts as compared to historic averages;
- some contractors had already committed their resources to other projects that clashed with those in question; and,
- the spot replacement basis of Network Rail's procurement had not provided stability for suppliers and this had resulted in higher costs.
We also, however, identified various developments including some positive action by Network Rail to change its contracting policy which could change the situation for the future. These developments included:
- Network Rail had introduced framework agreements which provide contractors with a committed order book for a period of 5 years;
- there was an increasing number of non-UK companies seeking to provide signalling services to Network Rail. We observed examples of Network Rail acting to encourage this development; and,
- ERTMS would provide increased homogeneity of UK/European signalling systems, thus making it more likely that an increased number of non-UK firms would be able to tender for future contracts.
We noted that a relevant consideration during the period covered by the NAO's report was the generally higher volume of work on the network as a whole compared to historic averages. This resulted in inevitable pressure on the supply market and may explain the ensuing upward pressure on prices. A further consideration was likely to have been the previous nature of Network Rail's procurement and the effect that this had on the ability of signalling companies to react in an efficient manner to peaks of work.
Also possibly relevant (as noted in the NAO report) was the high level of demand for construction work between 2002 and 2006, which saw the Construction Price Index rising at a rate twice that of the Retail Price Index. It is possible that prices for signalling supply were following a more general trend.
It was possible, therefore, that for the tenders specified by the NAO, pressures had been put on the supply market which resulted in a less than efficient outcome.
We considered whether such an outcome could reoccur in the future and/or be replicated on other signalling tenders on the network. Important to this consideration was the introduction of framework contracts by Network Rail and other developments in the market (noted above) which could potentially increase the sources of supply, which in turn could lead to a downward pressure on prices.
We believe that the efficiencies and benefits which might flow from both changes to the way that Network Rail procures contract services and increased competitiveness in the supply market are likely to take time to be realised. It would not, therefore, be of value for ORR to devote any further resource to this subject, at this time.
We continue to keep the situation under review, however, and would consider re-opening this subject area either in the light of complaints made to us or should we be provided with evidence which would lead us to re-consider our findings. We do not rule out looking at the supply of signalling services at some future date, in order to assess whether the efficiencies and benefits which we ancitipated in 2007 have arisen in practice.