1. Public Conference 16th December 2010
High Speed Rail Norway Commercial, Contractual and Organizational issues
Public Conference 16th December 2010

2. Work stream: Commercial and Contractual Strategies and Organizational aspects
Outline of tasks
Approach
Interconnectivity between the work streams
Preliminary considerations
Commercial
Contractual
Organizational
Purpose of the presentation:
Inform the public domain about what the work stream covers (provide comfort about the end result and progress)
Take the edge of potential prejudice about particular types of organization and funding
Manage the clients’ expectations
Argue important elements of Phase III
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

3. Outline of tasks Commercial Strategy
How the procuring Authority might limit and manage the cost of building and operating HSR in Norway ?
How to get best value for money from the procurement?
Contractual Strategy
The key issues to be addressed in delivering successfully HSR in Norway including the allocation of responsibilities and risk
Organizational issues
How to structure the organization in order to implement the commercial and contractual strategies and achieve a successful delivery of HSR
In the Interdependency section we aim to explain how the commercial and contractual strategies and the way you structure the organization is interconnected. The bullets listed under each of the issues are meant to give an indication of what are important aspects for each of them. What we consider important is to explain that how you allocate risks and how you structure incentives are important considerations for which contract strategy you wish to use, either if one contract is awarded for example signals, where as for tunnelling you award different contracts for different tunnels and how you price and package all this. This should again reflect how you build your organization.
Definitions
Commercial: this is principally about how the Norwegian Authorities might limit and manage the costs of building and operating HSR in Norway. There are two key aspects to this (i) to what extent can the successful operation of services contribute to the cost of building the railway; and (ii) how to get contractors to offer and honour solutions that represent good value for money.
Contractual: this is about the contractual issues that need to be addressed in delivering HSR in Norway. Such issues will range from what activities are contracted together through the allocation of risk between the public sector and contractors to how contracts are priced.
Organisation: this is about defining the advantages and disadvantages of different structures that might be used to develop and procure HSR in Norway.
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

4. Approach Key drivers of approach
Consider all realistic alternatives at a generic level
Describe the pros and cons of options, no recommendations in this phase of work
Key activities
Review of previously prepared material
Leverage experience
Develop lessons from case studies
Preliminary market sounding
Understanding key risks
Recognise dependencies on other workstreams
Phase 2 limitations
We are to describe the advantages/disadvantages of all possible alternatives, and not recommend any. This means that we are not going down to every little detail in the alternatives at this stage.
Generic descriptions of the different sub elements for each subject with applicability and key considerations
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

5. Interconnectivity between the workstreams
Market
The Commercial, contractual and organizational solutions chosen should deliver the key requirements defined by the other workstreams.
The tailored solutions will impact the business case for each project
Technical
Rail planning
Economic
Environmental
The commercial work stream feeds back to Economic, since our work stream considers how costs of building and operating HSR could be limited and managed by NRA. There are two key aspects to this (i) to what extent can the successful operation of services contribute to the cost of building the railway; and (ii) how to get contractors to offer and honour solutions that represent good value for money.
Commercial, contractual and organizational
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

6. Commercial Strategy – preliminary considerations
Life Cycle Cost considerations
How to avoid a cheap build that requires extensive maintenance?
How to encourage contractors to look at cost implications for the whole system of their solution? (TransPennine Express)
Risk identification and allocation
What are the key risks? (Planning, land purchase, tunnelling conditions)
How much risk could be allocated to contractor? (Size of project, risk premia, risk of no bid)
How to deal with interface issues? (Rail-wheel, tunnelling with civils)
Achieving cost certainty (West Coast Mainline, Gardermobanen)
Potential for funding through operating profit (Taiwan experience of increasing State support)
Conventional wisdom is that if one does not evaluate whole life costs this incentivises bidders to bid the cheapest infrastructure cost possible regardless of the maintenance consequences. If this happens it can result in the costs of building and maintaining such infrastructure being higher than infrastructure with a higher build cost but lower maintenance cost. Consequently it is desirable to create a situation where bidders are incentivised to optimise overall costs.
A second issue is that if a bidder is not going to be required to maintain the infrastructure he builds he may underestimate the maintenance costs in order to put in a winning bid.
Risk allocation
It is important in any procurement in order to deliver good value for money to allocate risk to the party best able to manage that risk.
In the case of high speed rail infrastructure the party best able to manage the risk may not be able to bear the cost of managing the risk. As a result issues such as capping will need to be addressed
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

7. Contractual Strategy – preliminary considerations
Packaging - criteria and considerations
Reducing interface risk whilst being able to procure the “best” for each activity (Signalling systems may constrain choice of rolling stock)
Interfaces
With the existing network (Specification, access to build and maintain, timetables)
Outside the HSR programme organization (Roads Authority, City Authorities, Power)
Nature of contracts
Traditional approach has been one of input specification (Minimises interface risk)
More recent trend is towards output (what the asset/service should deliver) or outcomes (the impact of those outputs)
Charging
What revenues will the infrastructure generate? How determined/ controlled? (Setting of fares and access charges)
Pricing
This is really about whether we want prices for each element of construction of complete solutions eg: do you get prices for P-way, signalling, track and structures between A and B or do you just get a price for an operating railway between A and B. This may or may not be linked to whether you are adopting a package approach.
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

8. Organisational – preliminary considerations (1)
Roles to be fulfilled for project delivery:
Who should be the Procuring Authority ? (Independent Authority has overseen successful introduction of HSR in Spain)
How much of the work should the Procuring Authority do? (CrossRail engaging delivery organisations)
How much interface risk should the Procuring Authority allow and manage? (Japanese approach – all work together to resolve)
Government
Set policy
Procuring Authority Define specification
Government Delivery Co Manage delivery
Contractor/ Consortium Build/operate infrastructure
Train Operator Operate services
Rolling stock contractor Build/Maintain stock
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

9. Organisation – preliminary considerations (2)
Example organization structure
Government
Procuring Authority DeliveryCo (Govt owned)
Regulator
Passengers
Customer revenue
Build contract (including milestone payments)
Maintenance and operations contract
Operating contract
Transfer of assets and liabilities at construction completion
Debt Finance
Equity
InfraBuildCo
InfraCo
HSR Operator
Track access charges
Possibly PPP-type contract (including milestone payments
Construction subcontract
Construction subcontract
Maintenance subcontract
Signalling and Operation subcontract
VehicleCo Rolling stock (manufacturer and maintenance
Example from GrennGauge 21- Funding report
Generic example of a project to illustrate the considerations regarding the different work streams and cash flows
Procuring entity – large or small depending on structure of the procurement, government agency or dedicated project organisation depending on need for coordination, flexibility etc.
Project Delivery Co – central/local, limited company/govermental entity, big/small, private/public,
Infrastructure development
Infrastructure maintenance
Rolling stock provider
Rolling stock maintainer
HSR operator
How will this vary with the different Scenarios:
Scenario D – separate, fewer interfaces, larger potential for efficiency in whole system, whole life planning – larger packages
Scenario C – smaller and more diversified elements of construction , more need for flexibility and coordination.
Contractual and payment arrangement
Financing cashflow
Shareholding
Debt Finance Equity
High Speed Rail Norway Commercial, Contractual and organizational issues
16 December 2010

10. Thank you
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