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PRG-REP-Rolling Stock Revised Business Case - Affordability Review 2015-09-22 Version: 2.0

Appendix 1 MERSEYTRAVEL REPORT An analysis of the Business Case presented for the replacement of Rolling Stock on the Merseyrail Network. Consideration of Affordability and Risk and the impact on Merseytravel’s Financial Strategy.

Prepared by Merseytravel Finance Division

September 2015


Executive Summary

A detailed business case has been prepared by Merseytravel in consideration of options to replace or extend the life of rolling stock on the Merseyrail network. The business case, which has taken over two years to conclude, presents a compelling economic case to replace our rolling stock by the early 2020s. This will require proceeding to market in the autumn of 2015 for a potential contract award in 2016/7. This report is intended as a summary of the detailed business case. In particular, this report seeks to identify how Merseytravel is protected from undue exposure to financial risk from this project. Merseytravel is the body which lets the concession for the Merseyrail Network. As such, one of our prime responsibilities is to ensure that the rolling stock in use on the network is safe, reliable and fit for purpose. The Merseyrail fleet is one of the oldest fleets in operation in the UK. A fundamental and expensive engineering overhaul would be necessary to see the fleet through a further fifteen years of operation; however such an investment would carry great risk and result in very limited benefit to customers and the wider City Region economy. By the mid-2020’s, lack of capacity will start to have a significant impact on economic growth, and this would be exacerbated should capacity not be expanded in readiness for HS2. Retaining the current fleet would mean that the benefits of HS2 would be jeopardised by a lack of capacity in the local network for onward journeys. According to an independent economic assessment carried out by the Centre for Economic Business Research, a new fleet would lead to the creation of 1,000 jobs in the regional economy and provide a boost to the local economy of £70 million per annum. This would be as a result of improved connectivity through improved capacity, journey times and reliability, making Merseyside a more attractive location for investment. While Merseytravel would be assuming the overall financing risk for the project, these risks can be mitigated without local taxpayers being exposed through the transport levy i.e. there will be no additional cost for the local taxpayer. Merseytravel is considering various sources from which money can be borrowed to finance the programme, and it is possible that it will come from a combination of sources. the current Merseyrail concession is structured in such a way that the additional cost of a new fleet can be offset by operational efficiencies and from revenue generated by additional demand. In particular, a ‘benefit sharing’ agreement that sits within the concession offers significant insulation against financial risk and provides a mechanism for Merseytravel to enjoy the future financial benefits of new rolling stock once operational.


Infrastructure works, are a further risk, as the project will be reliant on Network Rail to deliver quite extensive works on time and within budget. We are securing a Memorandum of Understanding with Network Rail to ensure their commitment to delivery of this key element of the project. Merseytravel’s financial strategy has considered rolling stock replacement to be a priority for a number of years, and a strong reserve position has been maintained accordingly. The painstaking and detailed work of the project team, with our professional advisors means that we are confident that the financial assumptions made within the business case are robust.


Rolling Stock Procurement

Summary of the Business Case 1. Purpose of Report

1.1 This report summarises the Business Case that underpins the proposed replacement of rolling stock for the Merseyrail Fleet. In particular, this report is intended to provide assurance that the project is affordable and that the operational and commercial risks associated with the project are understood and can be managed.

1.2 There is a very detailed business case and financial model that

underpins the proposals for rolling stock on the Merseyrail network. The Business Case considers the financial and economic benefits of new rolling stock over the life of the assets, but by its nature, also includes information regarding the operational costs of Merseyrail.

1.3 This report deals with this issue from the perspective of Merseytravel

and its risks and liabilities, and in particular, is focussed on short term to medium term cash flows and investment requirements.

2. Understanding the Merseyrail Network

2.1 Overview

2.1.1 Merseytravel controls the concession for the Merseyrail Network. This is an unusual situation in England, where the DfT more normally act as the franchise holder. This function was devolved to Merseytravel in 2002 and has proved to be a successful model for the network; however it does mean that Merseytravel has responsibility to ensure the adequacy of rolling stock provision on the network.

2.1.2 There are a number of physical and commercial constraints

within the Merseyrail Network that each have an impact on rolling stock requirements and underlie the proposed method of acquiring – and financing – the new fleet.

2.1.3 This section of the report provides an overview of the Merseyrail

network. It considers the geographical and engineering aspects of the network and how these are reflected in the requirements for the new fleet. It also summarises the commercial relationships and governance structure within which this project sits.


2.2 The Merseyrail Network 2.2.1 The Merseyrail Network is 75 miles long and runs under and out

of Liverpool City Centre to Southport, Ormskirk and Kirkby in the north, Hunts Cross through South Liverpool and under the river to the Wirral.

Merseyrail Network

2.2.2 The Wirral Network is extensive, running to New Brighton, West Kirkby and Ellsemere Port as well as extending as far as the City of Chester.


2.2.3 The Merseyrail network operates using ‘third rail’ technology dependent upon a ‘DC’ electrical supply that is fed from the power generator to the rolling stock via a live third rail. This means that the Merseyrail Network is functionally separated from surrounding rail network which typically draws electricity through overhead cables.

2.2.4 This separation means that the Merseyrail network is essentially

a closed system and as such, Merseyrail does not compete for line capacity with other operators or with freight. Although this limits direct connectivity with the rest of the national rail network, it provides much greater flexibility to manage the timetable than is available to other train operators and is a feature that is particularly valuable in managing events such as the Grand National.

2.2.5 There are 66 stations on the network, which means there are

frequent stops which provide connectivity to many communities. In this way the network is similar in places to a metro-style commuter network, however in terms of rolling stock; light rail options are unsuitable to the physical constraints of the network.

2.2.6 Merseytravel’s Long Term Rail Strategy clearly identified the

potential for the new fleet to operate on a substantially expanded network, thereby needing to inter-operate with many other classes of mainline rolling stock. This means that the Merseyrail rolling stock itself needs to be fully compliant with mainline standards.

2.2.7 The Merseyrail network has experienced sustained growth in

passenger numbers for over a decade, which is anticipated to continue at a rate of around 2.5% per annum. The current fleet has limited passenger carrying capacity and will increasingly become a constraint in this growth if an action is taken.

2.3 Merseyrail Electrics Limited

2.3.1 Merseyrail Electrics Limited (MEL) operate the franchise for

Merseyrail and will do so until 2028. MEL is owned jointly by Serco and Abellio, who also currently hold the Northern Rail franchise. The length of the franchise period is a further distinguishing feature of the Merseyrail concession, as other franchises are let for a period more typically of 7 years.

2.3.2 Merseytravel receives a grant from DfT (Special Rail Grant) that

we pass through to MEL. This is around £87m per year. 2.3.3 In addition to the Special Rail Grant, MEL retains all the revenue

from the concession, but is also at risk for any commercial losses. The Special Rail Grant recognises that the network


could not operate in the manner it does on a purely commercial basis.

2.3.4 The Merseyrail concession is commercially very successful.

Merseyrail’s margin is the highest in the industry as passenger revenue has increased significantly since the concession was awarded.

2.3.5 Merseytravel benefit from the financial performance of

Merseyrail through a benefit share agreement. The value of the benefits share has grown significantly in recent years and currently contributes £5m per year to Merseytravel.

2.3.6 A concession agreement forms the basis of Merseytravel’s

relationship with MEL and specifies each party’s contractual responsibilities. Any significant changes to the way the network is operated would require a change to the concession.

2.3.7 Under its terms, the impact of any changes to the concession

have to be neutral in respect of MEL’s financial position. This is captured under the principle of ‘No Net Loss / No Net Gain’ and is of paramount importance in determining the commercial implications of new rolling stock for the Merseyrail concession.

2.4 Network Rail

2.4.1 Network Rail is fundamental to the operation of the railway, as

they remain the owners of the rail infrastructure, including track, stations, signals and crossings. Network Rail is responsible for maintaining and investing on the rail infrastructure. They recover the cost of this through various track access charges that are paid by MEL as the train operator.

2.4.2 The proposed replacement of the fleet is conditional on a

number of significant changes to the rail infrastructure and as such, Network Rail will be a key partner in delivering this project.

2.4.3 Electricity supply is also fundamental to the operation of the

network and is supplied by Scottish Power though their contractual relationship is with Network Rail.

2.5 Current Rolling Stock Fleet Arrangements

2.5.1 MEL operate rolling stock that is leased by Merseytravel from

Angel Trains. Angel Trains are one of three large rolling stock leasing companies (ROSCO’s) that own and lease back to operators the overwhelming majority of rolling stock in operation on the UK rail network.


2.5.2 The existing fleet of rolling stock is leased from Angel Trains and Merseytravel then sub-let the vehicles to MEL on a cost-recovery basis.

2.5.3 The fleet of rolling stock performs well and is relatively

inexpensive, however it was constructed in the 1970’s and is reaching the end of its useful lifespan.

Age of Rolling Stock by UK Rail Franchise (2014)

2.5.4 In order to maintain reliability and performance with such an aging fleet, maintenance costs are high, and over-capacity has been built into the timetable and fleet. Merseyrail’s fleet size is comprised of 59 three-unit sets, of which only 50 are required to fulfil its regular daily timetable.

2.5.5 Merseyrail operates two depots, one on each side of the river at

Kirkdale and Birkenhead North. These facilities are similarly ageing and will need fundamental improvement to cope with the requirements of a new fleet.

2.5.6 As the train owners, Angel Trains are responsible for the heavy

maintenance of the fleet, however operationally this is undertaken by MEL through a separate contract with Angel Trains.

2.5.7 In common with vehicles of a similar age, the existing fleet

requires the presence of a guard on all trains to operate the doors and to dispatch the train.

2.5.8 The lease charge associated with a new fleet will be more than

that for the current fleet, however it is anticipated that a modern fleet specification would lead to operational efficiencies by reducing many operational and maintenance costs.


3. The Case for New Rolling Stock

3.1 Overview

3.1.1 As stated above, the current fleet is one of the oldest operational fleets in England. Our detailed options appraisal considered a range of options that included ‘doing nothing’ and maintaining the existing fleet for an extended period up to 2028.

3.1.2 2028 is the date when the current Merseyrail franchise expires

and – other things being equal – would be a logical point at which to introduce new rolling stock arrangements as a fundamental change in the concession.

3.1.3 It is clear, however that either doing nothing, or prolonging the

life of the existing fleet in any substantial way, though technically possible, would be extremely expensive. A full mechanical overhaul of each vehicle would be necessary at an estimated cost of £150m.

3.1.4 The benefits of such an investment would be modest as

essentially the investment would only provide limited improvement to the network and capacity. In order to deliver these limited benefits a similar investment programme in the infrastructure would be required to that which is needed for the new fleet. Critically, it would only have a limited impact on the longevity of the existing fleet and would only be deferring inevitable replacement.

3.1.5 As well as engineering risks, maintaining the existing fleet also

has a wider economic impact. The assumptions contained within our long-term rail strategy imply continued and significant growth of patronage on the network well into the next decade.

3.1.6 These assumptions of growth are such that the capacity of the

existing fleet would be unable to cope with peak demand by the early to mid-2020’s, at which point the existing fleet’s limitation would begin to damage regional economic performance.

3.1.7 The economic and engineering risks of maintaining the existing

fleet coincide between 2022 and 2025 to determine a date whereby a new fleet needs to be in operation across the network.

3.1.8 Our long term rail strategy predicts increased patronage of 2.5%

per annum on the rail network over the next decade and beyond. New rolling stock is necessary to accommodate that growth. A new fleet will facilitate an improved timetable, faster services and a better experience for passengers which will further increase demand by an estimated 8%.


3.2 Impact of new Rolling Stock on Passenger Demand and the Long Term Rail Strategy

3.2.1 Economic indicators for the City Region show the regional economy to be growing at a faster rate than the UK average as the region begins to emerge from recession. An effective rail network is fundamental to the process of recovery and to the creation of employment opportunities.

3.2.2 The Long Term Rail Strategy was approved by the Combined Authority within this context. The following insert compares forecast peak demand with existing seating across the wider City Region rail network, with the Merseyrail Network shown clearly to have the largest potential capacity issues without intervention.

3.2.3 New rolling stock is a key part of this strategy. The new fleet will

be faster than the existing fleet, improving journey times and allowing smaller fleet to deliver a revised timetable to meet the forecast growth in passengers. The table below shows the benefit in journey times anticipated by the project.


Route Current Proposed Benefit

Chester - Liverpool Central 00:45 00:39 00:06

West Kirby - Liverpool Central 00:34 00:29 00:05

Ellesmere Port - Liverpool Central 00:40 00:34 00:06

New Brighton - Liverpool Central 00:27 00:22 00:05

Ormskirk - Liverpool Central 00:30 00:26 00:04

Kirkby - Liverpool Central 00:18 00:16 00:02

Southport – Liverpool Central 00:46 00:40 00:06

Hunts Cross – Liverpool Central 00:18 00:15 00:03

3.2.4 The new fleet may have air conditioning in each vehicle as well

as better seating and greater area for standing passengers. 3.2.5 The business case calculates that a new fleet will increase

passenger revenue by an initial £4.7 m per year, which will rise over time to over £5m. This additional revenue is achieved by the generation of additional journeys and does not include any additional revenue from changing fare structures

3.3 Impact of New Rolling Stock on Merseyrail Operating Costs

3.3.1 The capital charges in respect of a new fleet and associated

other works are anticipated to increase the direct cost of the current fleet by around £12m per year.

3.3.2 These costs will be borne directly by Merseytravel and passed

on to Merseyrail Electrics Limited (and any subsequent franchise holder) through a leasing arrangement. This additional cost will not be offset by increased revenue alone and operational efficiencies will have to be made.

3.3.3 The new fleet will lead to direct savings in maintenance and in

power consumption, and will also allow further changes to be made across Merseyrail’s operations.


3.3.4 The introduction of the new fleet will also mean that MEL will no longer directly undertake the maintenance function, as is currently the case. Maintenance will continue to be undertaken locally under a subcontract to MEL.

3.3.5 It is anticipated that maintaining a new fleet would result in

annual savings against current costs, however these savings become significantly greater when considered against the future maintenance costs of the existing fleet should they be retained into the next decade.

3.3.6 The new fleet would also be more energy efficient and use

contemporary technology such as regenerative braking and on board energy storage to reduce the energy requirement. Savings of around £2m per year are anticipated.

3.4 Depot Facilities

3.4.1 Network Rail own two depots on the Merseyrail Network with a main facility at Kirkdale to the north of Liverpool City Centre and a smaller facility in Birkenhead. MEL lease these depots from Network Rail for the purposes of maintaining the fleet.

3.4.2 Both facilities are old and lacking in investment and neither

would be suitable for maintaining a modern fleet of trains in their current condition. As such, the cost of new depot facilities at these locations has been included in the business case for the replacement fleet.

3.5 Infrastructure Works

3.5.1 There will be infrastructure improvements required in order to gain the full benefits of the new fleet. These have been estimated at £73 million. The most immediate requirement is to upgrade the electricity supply to the network – particularly at its extremities. Network Rail will need to work with Scottish Power to secure these improvements.

3.5.2 Further infrastructure improvements are also required in respect

of a number of platforms that do not conform to Network Rail’s standards in respect of the height and distance between the platform and the track. This leads to variability across the network in the gap between the train and the platform. Improving the “platform train interface” is a major safety improvement and addresses one of passengers’ concerns with the current system.

3.5.3 Network Rail consider infrastructure investment in five-year

Control Periods. 2015/16 is the first year of Control Period 5 (CP5). Infrastructure works of the type required for new rolling


stock are not included within Network Rail’s plans for CP5 but are an essential part of the overall project.

3.5.4 Merseytravel will need to make a financial contribution to the

cost of infrastructure work. This will be subject to detailed negotiation with Network Rail and a Memorandum of Understanding is being concluded that provides us with assurance from Network Rail that they can schedule the infrastructure works within the project timetable both in terms of cost and delivery.

3.5.5 The current assumption within the business case is that

Merseytravel will finance 100% of the cost of the infrastructure improvement, however we are working with Network Rail and other parties to identify alternative financial and delivery models.

3.5.6 It should be acknowledged that the infrastructure elements of

this project are a key project risk. This is considered in some detail within section 7 below.

3.5.7 Merseytravel is currently implementing a Programme

Management Office which will regularise the manner in which

programmes and projects are developed and delivered across

the organisation and for future Combined Authority programmes.

Adoption of this style of working will be beneficial to the

successful delivery of the programme and many of the

characteristics of this approach have already been adopted.

The programme has been structured into seven interlinking

projects in anticipation of this initiative, which are summarised in

the table below.

Project Scope Features Delivery Model

Rolling Stock New fleet of 50+ 60m long electric multiple units

Full scale driving cab simulator

Spare parts

Special tools

Documentation

Increased passenger carrying capacity

Improved performance

Improved facilities for passengers

Reduced operating costs

Capable of conversion to dual voltage

Specific vehicle gauge to improve platform train interface

Improved energy efficiency

Procured by Merseytravel

Fixed price bespoke contract

Depots Modernisation of both depot locations

Required to benefit from cost effective

Procured by Merseytravel



rolling stock maintenance

New maintenance workshop

New washplant

Works to be completed prior to new train introduction

from rolling stock supplier

Detailed scope to be developed through procurement

NEC3 fixed price contract

Infrastructure Reinforcement of power supply

Regularisation of relationship between track and platform

Gauging works

Other upgrades as required

Enables improved timetable

Improved platform train interface providing safety benefit

Works to be completed prior to new train introduction

Improved H&S

Delivered by Network Rail

Memorandum of Understanding being negotiated with Network Rail

Funding models to be explored

Operations New improved timetable

Greater capacity

Modernisation of operational arrangements

Increased revenue

Reduced operating costs

Comprehensive retraining

Delivered by Merseyrail

Changes to the Concession Agreement reflecting the new fleet’s technical characteristics

Maintenance Maintenance of existing fleet through to handback

Maintenance of new fleet on an availability, reliability and presentation basis

Transfer of maintenance to new train provider

Modernisation of maintenance practices

Reduced maintenance costs

Revised depot lease

Procured by Merseytravel from rolling stock supplier

Let as two subcontracts from Merseyrail Existing

fleet New fleet

Asset Ownership

Merseytravel undertaking role as fleet owner

Adoption of industry best practice in rolling stock ownership

In house activity with specialist support

Train Connectivity

Application of wireless connectivity between the train and the infrastructure

Real time communications with the control room

Improved passenger help points

Remote diagnostics

Wi-fi capability for

Train-bourne equipment provided with rolling stock

Infrastructure delivery method to be determined



passengers

4. The Financial Model 4.1 Total Project Costs

4.1.1 There is a detailed commercial underpinning to the business

case for new rolling stock that is based on robust forecasts of growth and a thorough understanding of the rolling stock market. The values generated by this work remain commercially sensitive at present, but can be summarised in this section of the report.

4.1.2 The total project costs are forecast to be around £430 million,

including the rolling stock, upgrades to depots and associated infrastructure works. This cost also includes the cost of the project team and certain transitional costs such as driver training.

4.1.3 The procurement exercise will test these assumptions and a

detailed financial analysis of the whole of life cost of any new fleet will be undertaken as part of the tender evaluation stage prior to any contract award.

4.2 Project Financing

4.2.1 In preparing the business case and testing its affordability,

certain financing assumptions have been made. These assumptions do not commit Merseytravel to a particular balance of financing options at this stage. Actual financing will be determined at the point of contract award, and beyond, based on price, the structure of any contract, prevailing interest rates and other corporate priorities.

4.2.2 The project will be financed from prudential borrowing, however

the exact balance between internal and external borrowing and those institutions we engage with will be subject to further, and more detailed, consideration as the project progresses.

4.2.3 In 2012/13 Merseytravel determined a reserve strategy in

recognition of the risks around the aging fleet and their responsibility as franchisor for the Merseyrail Network.

4.2.4 Merseytravel’s financial strategy has generated significant

savings in operating costs in recent years. A significant element of these savings has been passed back to districts through direct grant and levy reductions; however a significant balance has been retained and earmarked for the replacement fleet, allowing significant scope for internal financing.


4.2.5 This strategy has generated a reserve of £65m that is available to contribute to the rolling stock project and to assist in managing cash flows through the implementation stage of the project.

4.2.6 This contribution from internal borrowing will be supplemented

by further prudential borrowing. It is currently anticipated that borrowing will take the form of 35 year loans from PWLB and the European Investment Bank (EIB). The guaranteed income stream associated with these assets gives Merseytravel the assurance necessary to engage in prudential borrowing of this nature and scale.

4.2.7 Based on this financing model, our annualised capital financing

cost would be around £24m per year. We have compared this to indicative costs of using the more traditional ROSCO / Leasing model and found this approach to be significantly favourable.

4.3 Project Cost Recovery

4.3.1 It is the intention that the project costs incurred by Merseytravel

are passed on to the rail concession over the life of these assets. The business case is clear that new rolling stock will generate a significant economic benefit over a 35 year lifespan; however it is vital that annual costs are affordable to all parties in any given year.

4.3.2 It is the intention to recover the capital financing costs of this

programme through a leasing charge to the Merseyrail franchise holder.

4.3.3 The current franchise holder is MEL, however the current

concession expires in 2028. Any new rolling stock will have a useful life until the mid-2050’s and this should be recognised in the structure of the leasing charge.

4.3.4 The calculations used by Merseytravel and by MEL in

understanding the annual financial impact of this project assume total cost recovery (including our reserves) spread over a 35 year ‘straight line’ calculation.

4.3.5 In reality, the leasing charge adopted will be a much more

sophisticated model and will depend on the final procurement cost, the structure of the maintenance element of the contract and on the way in which infrastructure works are financed.

4.3.6 The current franchise holder is protected by contractual

provisions related to No Net Loss / No Net Gain; however a new concession from 2028 would allow a complete restatement of


the financial relationship with the concession holder, giving much greater scope to recover the benefits of the new rolling stock than is currently the case.

4.3.7 Consideration of leasing options would recognise that there is a

‘benefit share’ agreement within the current concession whereby Merseytravel benefits significantly from the financial performance of MEL.

4.4 Procurement Strategy and Local Economic Benefit

4.4.1 We are conscious that a procurement of this nature and scale

should, where possible, benefit the local economy and local supply chain.

4.4.2 Rolling stock manufacturing is, however, a highly specialised

industry concentrated on a small number of large global providers, with no direct local or regional presence. Rolling stock manufacturing has a significant UK presence and we are also anticipating interest from Japanese, Spanish, German and potentially Swiss bidders.

4.4.3 We have examined the local supply chain in order to identify

direct links with the rolling stock manufacturing industry and found such links are limited. While we will seek to encourage bidders to take advantage where possible, of local suppliers, we have to acknowledge that the new fleet will be manufactured outside the City Region, possibly outside the UK and potentially outside Europe.

4.4.4 The contractual obligations we are placing on bidders to engage

in long-term, locally based maintenance does, however offer much greater scope to provide economic and social benefit to the region. This function will require highly-skilled engineering staff and we will seek to evaluate how bidders intend to fulfil this function and, in particular, encourage apprenticeships and other appropriate opportunities.

4.4.5 The procurement itself will be subject to EU Directives and will

be undertaken within a strong governance framework and in accordance with Merseytravel’s Contract Procedure Rules.

4.4.6 The process of contract award will be exhaustive and

comprehensive.


5. Risk and Sensitivity 5.1 Overview

5.1.1 A risk management methodology has been adopted across the

programme and within each project which is consistent with

Merseytravel’s risk management process and builds on best

project management practice. Both qualitative and quantitative

analysis is employed and Monte Carlo analysis is undertaken to

derive statistically meaningful assessment of the anticipated

outturn of each risk register, thereby informing the analysis of

project contingencies.

5.1.2 The scale of this project and the implications for the local and regional economy dictate that any decision to progress with the scheme needs to be made in full consideration of the attendant risks.

5.1.3 The Project Management team have put in place a robust risk

assurance framework that sits within Merseytravel’s own risk management arrangements. This risk methodology is translated into the business case through the calculation of a value for risk.

5.1.4 This risk management approach has also been evident in the

work of the project team to date. A project director was appointed in September 2012 following an initial business case that highlighted the potential economic benefits of new rolling stock to the region.

5.1.5 Since appointment, the Rolling Stock Programme Director has

managed a small team who have worked with professional advisors to test each aspect of the original economic business case.

5.1.6 In particular, the commercial and engineering aspects of the

project were not fully considered in the original economic business case and much more work has been undertaken in the preparation of an outline specification for the replacement fleet.

5.1.7 There has been a significant investment in time and resources

to reach the stage where the project is ready to enter a procurement phase. This has mitigated the risk of going to market without a full appreciation of our requirements for a new fleet, of the necessary infrastructure investments and from that the financial implications for all parties.


5.1.8 The proposal to progress to the procurement phase has been subject to robust risk assessment and significant actions have already been taken to manage many of the project risks. That said, there are a number of specific risks that need to be appreciated and these are highlighted below.

5.2 Procurement Risk 5.2.1 The business case anticipates that with a project of this size and

scale, even a small divergence between assumptions at this stage and ultimate contract price will have significant financial implications.

5.2.2 As stated above, the assumptions used for rolling stock are

based on a detailed and comprehensive understanding of the features and nature of replacement rolling stock. This work includes:

Detailed engineering requirements of a new fleet;

The implications of the long term rail strategy on any new fleet;

Customer expectations, including passenger information, air conditioning and the balance of seated and standing accommodation;

Timetable requirements;

Aesthetic and other considerations; and

Industry benchmarking

5.2.3 By undertaking this work at this stage, we have a very good understanding on the likely cost of the rolling stock that will be necessary to meet these requirements. By monitoring recent rolling stock procurement activity across the global market, we are also able to test these assumptions against current market prices.

5.2.4 Less certainty exists in providing estimated costs for depots, as

this will be highly dependent on the requirements of each of the bidders. We have, however, worked with engineering consultants to construct what we believe to be a realistic estimate of the cost of upgrading the existing facilities to an appropriate standard.

5.2.5 The Network Rail infrastructure works are a further source of

financial risk, however we have based our assumptions on financial estimates provided by Network Rail and their power supplier, Scottish Power. It remains an area of some risk, however and this is considered in the section below.


5.2.6 A complete suite of quantified risk registers have been developed for all components of the project. These have been used to inform the risk factors which have been applied to financial model within the business case.

5.2.7 The application of this risk factor means that we are confident

that the business case assumptions on a fixed price basis are realistic.

5.3 Network Rail Infrastructure Risk

5.3.1 The necessary improvements to the railway infrastructure

required of a new fleet remain the biggest project risk. Our current assumption, based on common working practice in the industry, is that Network Rail would project manage these works, but that Merseytravel would fund them.

5.3.2 This would involve handing over control over a fundamental

element of the project and could only be undertaken within a robust assurance framework that ensured delivery and protected Merseytravel from increases in cost. In particular, while the project assumes that we will fully fund, we are also looking at alternative financing models, with the potential involvement of third parties.

5.3.3 Delivery that is over budget and/or delayed would have a

significant operational and delivery risk – new rolling stock that can’t operate would mean we were paying for two fleets of trains without any of the benefits and savings associated with the new fleet.

5.3.4 As a result of these dependencies and risks, we are securing a

MOU with Network Rail whereby they have provided us with assurance that the necessary works can be completed on time and within budget.

5.4 Commercial Risk within the Merseyrail Concession

5.4.1 It is acknowledged by both parties that the Merseyrail

Concession will need to change to accommodate changes of the materiality that new rolling stock will entail.

5.4.2 It is also clear that the provisions of No Net Loss / No Net Gain

(NNLNNG) will apply and will offer a degree of commercial protection to both parties.

5.4.3 That said, there will need to be detailed commercial negotiation

with Merseyrail to ensure an appropriate balance of risk exists between MEL’s shareholders and the Combined Authority.


5.4.4 A risk is that the new fleet does not generate the operational savings assumed within the financial model. This may be for operational reasons related to maintenance, reliability and other factors and we would ensure that adequate contractual provision exists to enable appropriate redress from the successful bidder or potentially from Network Rail.

5.4.5 Failure to achieve anticipated revenue targets is a further

significant risk. The targets are based on professional research and guidance, which we have interpreted conservatively and with consideration of risk within the business case. As such, they are not considered to be overly optimistic or unrealistic.

5.4.6 That said, failure to realise targets levels of income is a risk. In

mitigation, it should be noted that the income targets do not provide for fare increases over and above the current formula we apply (RPI only).

5.4.7 As stated in section 6.3, there is also scope within our cost

recovery model to vary leasing charges over time in consideration of the impact of capital financing costs on Merseytravel’s income through the benefit share.

5.5 Asset Management Risks

5.5.1 In assuming direct ownership of a new fleet of rolling stock,

Merseytravel would need to ensure that it can provide adequate and appropriate asset management arrangements.

5.5.2 These arrangements relate to the safe stewardship of the

assets, and health and safety and performance of the rolling stock would become significant corporate risks.

5.5.3 In the current arrangement, these risks and liabilities are

managed by Angel Trains as the asset owners.

5.5.4 Appointment of a suitable commercial partner to support the undertaking of this function is a possibility, but would be subject to a separate procurement once we progress to contract award for the rolling stock; however there is a mature market for these services.

5.6 Risks to Financial Standing

5.6.1 A procurement exercise of this scale carries significant risks to the corporate financial health of Merseytravel, and by extension, the Liverpool City Region Combined Authority.

5.6.2 The project’s overall risk management framework, and the

specific risks and mitigation identified above should provide


assurance that the organisation’s financial standing will not be put at risk as a result of this project and, in particular, that the procurement of new rolling stock will not have an adverse impact on the transport levy.

5.6.3 This section deals with how Merseytravel would protect the

financial standing of the CA in the event that mitigations fail and financial risks materialise as a result of this project.

5.6.4 Merseytravel is in sound financial health, and has adequately

provided for new rolling stock within its reserve strategy. Should these reserves not prove adequate, there are a number of mechanisms available to ensure that taxpayers are protected.

5.6.5 In the first instance, the benefit share payment we receive from

MEL would act as a buffer against any costs of rolling stock that cannot be recovered from MEL. In effect, this would extend the arrangements for financing the transitional costs of implementation beyond the anticipated implementation phase where it necessary to do so.

5.6.6 The benefits share payments are currently around £5m per year,

and this should provide adequate comfort that Merseytravel’s mainstream revenue spending on its other services is adequately protected.

5.6.7 It should also be noted that any unforeseen negative financial

consequences of new rolling stock would only arise until the start of the next concession in 2028. The Merseyrail franchise is one of the most financially successful in the country, and would be extremely attractive to bidders.

5.6.8 Merseytravel also has the ability to change the provisions within

the concession within the current term, and will need to do so as a result of this project. This gives Merseytravel the ability to change specified service levels in order to reduce costs, and reduce the subsidy paid to the concession holder accordingly.

5.7 Special Rail Grant

5.7.1 All the assumptions within the business case assume that the amount received from DfT in respect of the Merseyrail Concession remains broadly consistent over the remaining period of the concession.

5.7.2 We are seeking assurances around the long-term stability of

SRG and are seeking to assure government that their objectives in respect of the Merseyrail Network cannot be met without investment in new fleet.


5.7.3 Should SRG reduce at a level that is outside our current sensitivity analysis then as concession holders, Merseytravel would have the ability to vary the concession accordingly.

5.7.4 The benefits of a new fleet in terms of revenue and customer

facilities may make the network better able to respond to a reduction in Special Rail Grant than is currently in place. Better rolling stock and associated improvements in the customer offer should create an environment where changes to customer facing facilities would have less impact on demand than would currently be the case.

6. Governance Arrangements

6.1 Overview

6.1.1 Good governance and management arrangements are essential

to the successful delivery of complex projects. To ensure that the rolling stock procurement programme is governed effectively, it is vital that roles and responsibilities are clearly defined, and that effective internal reporting procedures are put in place so that decisions about the programme are made with a full understanding of the key issues and associated risks.

6.1.2 The Project has a many aspects and will pass through a number

of phases. Managing this complex matrix within an appropriate governance framework is a critical element of the project.

6.1.3 While the overarching governance framework will remain

constant, there will be a different emphasis and different governance requirements for each phase.

6.1.4 These phases are:

The Commissioning Phase

The Procurement Phase

The Implementation Phase

The Post Implementation Phase 6.1.5 The Commissioning Phase is now complete. The next stage will

be the Procurement Phase which will need to observe strict commercial boundaries regarding the level of involvement of commercial partners and Members in the decision-making structure.

6.1.6 Merseyrail are not a potential bidder, however and as such the

proposed governance framework does include appropriate engagement with Merseyrail.


6.1.7 Similarly, while Members will be kept fully informed and consulted at each critical stage of the procurement, formal Member engagement in the tender evaluation stage will be prescribed by appropriate governance standards and the Member Code of Conduct, as ultimately it will be Members that will approve the awarding of the contract.

6.2 Role of the Combined Authority and the Merseytravel Committee

6.2.1 The Combined Authority will ultimately have responsibility for

asset ownership and as such, the Combined Authority will be the decision making body at the point of contract award.

6.2.2 Members of the Combined Authority and the Merseytravel

Committee will be kept aware at appropriate stages throughout the procurement process and subsequently through the delivery phase as key milestones are achieved through formal and regular project progress reporting.

6.2.3 Furthermore, Member approval will be required for any

significant variance in scope, timescale or cost, as defined in the Programme Scheme of Delegation.

6.2.4 It is anticipated that this role will be fulfilled on the Combined

Authority’s behalf by the Merseytravel Committee of the Combined Authority, although at various key stages (particularly contract award), a formal decision will be sought from the full Combined Authority.

6.2.5 Formal reporting will also be supplemented by regular briefings

to Members of the Merseytravel Committee.

6.3 Role of the Merseytravel Executive

6.3.1 The Merseytravel Executive will be responsible for ensuring the Programme is delivered as specified in the Authority’s approval. They will oversee the management of the programme, ensuring that resources are sufficient to deliver the approved Programme and are being used effectively and efficiently.

6.3.2 The Merseytravel Executive will also be responsible for:

Acting as champions for the Programme

Being accountable for the delivery of the planned benefits from the Programme

Approving the Programme scope, implementation and milestones

Prioritising project goals

Communicating with external stakeholders and satisfying their concerns


Sponsoring the communication and stakeholder strategy, communicating the Programme’s goals

Raising awareness of the Programme at senior levels across Merseytravel and ensuring consistency and compatibility with other projects

Setting financial boundaries for the Programme

Ensuring the Programme Director has the necessary staff and resources to manage the Programme

Specifying what reports and/or information should be disseminated to the Merseytravel Committee and/or the Combined Authority

Creating a Strategic Programme Board to steer the Programme

Agreeing the Delegated Powers of the Operational Programme Board and the Programme Director (this will form part of the Rolling Stock Governance Structure approved by Merseytravel).

6.3.3 In discharging these responsibilities, the Merseytravel Executive

has determined a programme management structure that is considered in greater detail below.

6.4 Strategic Programme Board

6.4.1 A Strategic Programme Board (SPB) will be established and will

be chaired by the Chief Executive. This will be the principle body authorising the Key Decisions for the Programme at all stages. In particular, this body will:

Consider reports at the pre-qualification, invitation to negotiate, best and final offer and contract award phases of the procurement process and approve continuance as appropriate;

Manage the strategic relationship with Merseyrail, Network Rail and the Contractor;

Consider the implications of the procurement and implementation process on the nature of the Merseyrail concession and consider any changes to this arising as a result of the programme;

Ensure that the programme is progressing within the available resources and also ensure that the long term financial consequences of the project remain affordable; and

Ensure that the project is progressing with due consideration of risk and the principles of risk management.

Ensuring the Programme remains aligned with the organisation’s overall strategy and Long Term Rail Strategy


6.4.2 The Strategic Programme Board will meet at least quarterly and

at all key stages in the programme. To aid the Programme Board in its relationship with the Programme Team, a Senior Responsible Officer (SRO) will be appointed to report to the Strategic Board on all aspects of the programme through all phases.

6.4.3 The Strategic Programme Board will comprise of:

The Merseytravel Chief Executive Merseytravel Directors Programme Director (Rolling Stock) The Senior Responsible Officer (Director of Resources during the Procurement Phase) Representatives from Merseyrail Representatives of Network Rail

6.5 Operational Programme Board (OPB)

6.5.1 The Operational Programme Board will be chaired by the Senior

Responsible Officer (SRO) and will be the decision making body for the Programme with responsibility for:

Providing assurance to the Strategic Programme Board that the Programme is delivering the agreed objectives;

Providing assurance to the Strategic Programme Board that the programme is being delivered within appropriate standards of corporate governance, in particular in regard to financial management, risk management and value for money;

Approving the Programme Execution Plan (PEP) and associated Programme Strategies.

Ensuring the Procurement is efficient and effective and is undertaken in a lawful manner with regard to all appropriate European Procurement directives,

Agreeing the programme tolerances for time, quality and cost

Provide assurance that all risks are being managed appropriately

Provide assurance that the project is being delivered within timescale and within budget.

Agree evaluation criteria

Consider reports at each phase of the procurement process;

Approving progression through the Programmes gateways, (signing off the completion of each stage and giving formal approval to start the subsequent stage).


Ensuring the Programme remains aligned with the organisation’s overall strategy and Long Term Rail Strategy

Ensuring resolution of issues raised by the Programme Director

Considering Programme changes beyond the delegated authority of the Programme Director

Focussing on the realisation of benefits including ensuring a Post Programme Review is undertaken to ensure the Business Realisation Plan has met its targets.

Ensuring all interfaces are being appropriately identified and managed.

6.5.2 The Operational Programme Board will contain representatives

of those areas and disciplines that need to be involved, consulted with and, in the case of legal, financial and procurement representatives, complied with.

6.5.3 The Operational Programme Board will form a link between the

Programme itself and the Strategic Programme Board and will assist the latter be providing necessary levels of assurance throughout the programme’s duration.

6.5.4 A principle role of the Operational Programme Board is to

protect the interests of Merseytravel and to ensure that the project is delivered in compliance with Merseytravel’s overall governance framework. This recognises that Merseytravel are ultimately taking the financial risk on the project and will ultimately be the owners of these assets. The Operational Programme Board therefore has an assurance and a stewardship function as part of its remit in the delivery of the project.

6.5.5 The composition of the Operational Programme Board may

change depending on the phase of the programme, however through the procurement phase it will consist of:

Merseytravel Director of Resources: Senior Responsible Officer and Chair

Programme Director (Rolling Stock)

Merseytravel Deputy Chief Executive

Merseytravel Head of Legal Services (or representative thereof)

Merseytravel Head of Finance (or representative thereof)

Rolling Stock Programme Accountant

Merseytravel Head of Rail

Merseytravel Head of Asset Management

Merseytravel Head of Communications


6.6 Role of the Programme Director

6.6.1 Merseytravel appointed a Programme Director in September 2012 to oversee the transition to a new fleet of rolling stock. Thus far, the Programme Director has led through the commissioning phase of the project and has been instrumental in the preparation of the resultant business case.

6.6.2 Throughout the remaining phases of the programme, the

Programme Director will be the individual with responsibility and accountability for overall delivery of the programme. The role will include:

Creating the PEP and associated documents and ensuring they are updated

Managing the strategic aspects of the programme

All aspects of Programme Delivery

Championing the Programme

Being the Public Face of the Programme

Ensuring the identification, analysis and mitigation of the risks to programme delivery

Establishing the most appropriate structure and governance model, given the size and complexity of the change and the relative risk profile within the organization

Implementing organizational and industry best practice

Appointing the Programme Project Managers, agreeing their remit and level of delegated authority

Communicating information about the Programme to the organisation and stakeholder groups as necessary

Providing leadership to the team and overseeing the activities of the senior team members, including mentoring and coaching of senior team members

Establishing work plans and staffing for each phase, and arranging for recruitment or assignment of personnel

Reviewing plans to determine time frames, funding limitations, staffing requirements and allotment of available resources to various phases

Monitoring financials and resources on an ongoing basis - keeping forecasts up to date and reviewing performance of key staff, dealing with performance or communication issues, actively managing resources on and off the Programme

Managing contractors

Lead negotiations with suppliers and other parties

Reporting the Programme’s progress and financial position

6.6.3 In the discharge of these functions, the Programme Director will

coordinate and be responsible for a Programme Delivery Group,


which will form the main delivery vehicle for all aspects of the programme.

6.7 Programme Delivery Group (PDG)

6.7.1 This group is responsible for overseeing the progress of the

Programme according to the predefined Programme plan and anticipating any operational and strategic problems. The PDG is also responsible for overseeing the co-ordination of the seven distinct projects that form the Rolling Stock Programme together with the supporting disciplines. In addition they will be responsible for:

Establishing the content of each Project

Ensuring the establishment of an effective risk management strategy and ensuring its deployment

Reviewing high-level deliverables, risks and issues across the Programme on an ongoing basis. Identifying and addressing significant issues as they arise, ensuring escalation as required

Managing the risk(s) associated with the Programme

Confirming the establishment of effective quality assurance arrangements and ensuring their implementation

Ensuring a robust approach to Health and Safety

Engaging with senior stakeholders to ensure they are kept appraised of important risks and issues

Managing the interface with Merseyrail and Network Rail at a working level.

Review regular status reports, containing details as per the Periodic Report template (Section 10 Reporting and Review Process), from each Project Manager and addressing issues as appropriate.

Test the robustness and accuracy of the Project Managers reports

Ensure bottleneck situations and limited resource issues are managed

Ensure project control processes are effective

Verify that the interfaces between the Projects are being successfully managed

Review Project Change requests.

Identify issues requiring review by the Operational Programme Board


6.8 Scheme of Delegation 6.8.1 The programme will be delivered within Merseytravel’s existing

scheme of delegation. The Programme Director has certain delegated authorities with respect to the programme and the exercise of this authority will be captured using the delegated electronic decisions database as appropriate.

6.8.2 Any decisions that materially impact on the cost of the project or

on timescales will need to be reported through the Strategic Programme Board. Similarly, and decisions that have a material impact on the cost or nature of the Merseyrail Concession will also need to be reported through the Strategic Programme Board.

6.8.3 Formal authority to proceed will need to be sought through

Merseytravel Executive or the LCR Combined Authority (including the Merseytravel Committee) in accordance with the constitution of both the CA and of Merseytravel.

Governance Framework

Key Decisions

Four Weekly Periodic Reports

Fortnightly Meeting

Fortnightly Meeting

Four Weekly Reporting

Merseytravel Committee

Business Case and Funding

Governanceand

Approvals

Infrastructure MaintenanceRollingStock

Depots ConcessionDevelopment& Operations

Communications and Stakeholder

Management

Finance &Commercial

Group

Merseytravel

Project Control

Risk Management

Programme Stakeholder

Forum

AssetOwnership

Programme Delivery Group (PDG)

Chair: Programme Director

CombinedAuthority

Connectivity and Information

Systems

Engineeringoverarching discipline

Operational Programme Board

Chair: SRO

Strategic

Programme Board(KEY DECISIONS)

Chair: CEO

MEL

Network Rail

Contractor (post contract award)


7. Conclusion 7.1 Procuring a new fleet of rolling stock is necessary. The basis of

financial, engineering, economic and performance risk, strongly indicates that a new fleet would need to be in place and operational in the early part of the next decade.

7.2 Procurement of the new fleet will generate benefits to the City Region,

increasing capacity on the Merseyrail network and providing a stimulus for economic growth. The current project timetable should allow those benefits to start to be realised before the end of this decade.

7.3 The business case indicates that there is significant economic benefit

to procuring rolling stock, and to commencing the procurement exercise in 2015/16. Analysis of the affordability of the project, and detailed consideration of risk would support that view.

7.4 A new fleet will have higher annual costs than the current leasing

arrangement; however there is adequate scope to reduce the annual operating costs of the current concession to accommodate these additional costs.

7.5 In addition, it is anticipated that a new fleet of trains providing faster

journey times, an improved timetable and customer improvements will generate significant additional revenue which will also offset the additional costs of the new fleet in early years, and thereafter provide a significant financial benefit to Merseytravel as the franchise holder.

7.6 The business case is robust, and project management arrangements

are in place and operating within a sound risk management framework. The impact of changes to the detailed commercial relationship between MEL and Merseytravel as a result of a new fleet cannot be determined at this stage, however both parties are confident that the project can be delivered and financed in a way that protects each party.

7.7 These commercial negotiations will need to be concluded prior to

contract award, however there is adequate assurance at this stage to proceed to the Procurement Phase.

7.8 The reliance on Network Rail to undertake improvements to the

infrastructure within the project timescales and budget remains an outstanding risk. This will be a clear priority for Merseytravel but can be undertaken alongside, and informed by, any procurement exercise.

7.9 In conclusion, the proposed actions and timescales within the business

case can be supported.

appendix 1 merseytravel report an analysis of …moderngov.merseytravel.uk.net/documents/s16116/app...

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