KEEPING A GRIP ON COSTS
Over seeing annual spending of more than £6 billion, Infrastructure Projects Finance Director Anit Chandarana is well placed to understand the scale of the business and the challenges it faces in delivering value for money.
Everybody knows that upgrading Britain’s railways is an expensive business, but few people are better placed to understand that than Anit Chandarana. As Infrastructure Projects’ Finance Director, he is responsible for developing and leading IP’s overall financial management and its internal and external reporting, which means accounting for annual construction activities worth in excess of £6 billion.
A key element of his role has been to spearhead IP’s drive to better understand the cost and delivery challenges associated with project completion, as it was tasked to do following Sir Peter Hendy’s review into NR’s investment programme published in November 2015.
This objective is now being realised, says Chandarana, following an intensive period of structural and behavioural change that has brought a new commercial attitude.
He explains: “When we’re out there spending billions of pounds every year, we absolutely have to ask ourselves are we getting the books right? That might sound simple, but it’s quite a large responsibility from both a taxpayers’ and a value for money perspective.
“At the time of the Hendy review we weren’t properly on top of it, and we know that there were some problems. In a capital world, it’s easy in the short term to underplay problems and overplay successes. For example, an underspend could be a good thing, or it might just mean you’re behind schedule. It’s normally more clear-cut in an operating world.
“We understand things like that far more fully now and have some key metrics in place which add real value to the way we measure capital projects. For example, our monitoring of the overall portfolio position has been received so well by the Department for Transport, they’re now asking other agencies to replicate it.”
Effective Delivery
Those metrics explicitly relate to the effective delivery of passenger benefits in the way they have been promised.
Measured in terms of IP’s schedule and budgetary adherence, the results speak for themselves. IP is delivering its current portfolio within 2.7% of budget.
What lies behind these impressive statistics is a comprehensive and carefully targeted plan to improve planning and drive down costs, which is now coming to fruition.
These improvements include successfully mitigating the significant levels of optimism bias that academic research has shown were traditionally applied in all sectors of the construction industry including large-scale infrastructure projects.
This was identified in research commissioned by the DfT and conducted independently by University College London which analysed projects started since 2014 and in the first half of Control Period 5 (2014-2019).
Published in January 2017, the subsequent report recommended that IP overestimated project costs by 66% at GRIP Stage 1, 40% at GRIP 2 and then 17% at GRIP 3, to account for uncertainties arising from potential optimism bias.
Separately, IP also launched an Enhancement Improvement Programme in October 2015. This programme included seven individual workstreams to drive many other improvements in the performance of IP’s enhancements management and delivery.
It included the introduction of a new portfolio reporting system and the insertion of final decision points at key stages of the project cycle, so that commitments cannot be given until project development is complete.
The plan also highlighted opportunities for the increased accountability of decision-making via the wider use of independent project sponsors and higher levels of peer reviewing.
Much greater clarity has also arisen from IP’s repositioning within NR as a matrix delivery organisation, and its alignment to its internal
“Having tight er control on project cost and duration not only benefits IP’ sin te rn al route-based customers and its bottom line, but also everyone of its external stakeholders including train operators and passengers .”
“What is NR here to do ?... It isn’ t here to run projects, it’s to transport goods and people, so there is a real drive to reduce the amount of time we have access to the railway.”
customers - namely NR’s eight route businesses.
“There have been many improvements since 2015 in how we cost projects, and we have now agreed with the DfT to allow for optimism bias,” adds Chandarana. “This will resolve any issues for programmes moving forward, but we still have some legacy schemes where it hasn’t been applied, such as the Great Western Route Modernisation, where firmer estimates have had to be retrospectively applied.
Stay Optimistic
“There is really strong empirical evidence that people are far too optimistic about project risks, always coming in on the upside and never the downside. We need to accommodate these in future because history says, if you don’t allow for that level of uncertainty, you will come to regret it. “Part of the reason we employ our project managers is for their optimism; we want them to believe they can overcome the obstacles that will continually present themselves, and we want them to keep that. But we have to allow for the fact that we encounter some really unusual and challenging things and, therefore, model these into our estimates.”
He adds: “This is about de-risking rail by developing projects properly, and being disciplined about where we declare price and scheme duration because it is very tempting to commit too early on those things. We’ve also got to hold ourselves open to challenge internally so that we can be really confident that the price we give the customer is one we can deliver.”
Having tighter control on project cost and duration not only benefits IP’s internal route-based customers and its bottom line, but also every one of its external stakeholders including train operators and passengers.
Some of the greatest strides towards operating like a commercial business have been made in this area, by giving greater recognition to the needs and expectations of the railway’s end users.
Chandarana, with his IP executive colleagues, have therefore placed a firm emphasis on reducing unscheduled project overruns, which feedback confirms is the greatest cause of passenger dissatisfaction. But this is a world where the overall amount of access in being reduced.
“What is NR here to do? It isn’t here to close the railway all the time and run projects, it’s to transport goods and people so there is a real drive to reduce the amount of time we have access to the railway, especially from over-runs.
“We’ve halved that delay from overruns from something like 100,000 minutes a year to 50,000 minutes, but that’s still a very large number. We can’t afford to be too selfcongratulatory about it and we must continue to drive to make it better.
“Capital projects will not always go to plan, and we’d be naïve to think otherwise, but the question is what do you do about it?
Passengers can be quite understanding about that sort of thing, but when we leave them in the lurch it’s a real issue and we can overcome that through better planning, and having more robust contingency plans agreed with industry.”
More work – less time
Reducing access has not come without its challenges, however, and IP must balance the desire to cause less disruption to passengers with the effective delivery of projects. It is a simple equation that to complete the same amount of work in a shorter timeframe requires greater resource. Meanwhile other efficiencies can be lost by the need to mobilise and demobilise that resource more frequently.
But Chandarana is optimistic this balance is being struck, and adds: “The flip side [of having less access] from a project delivery perspective is that it’s not always very efficient when projects have to take a bit longer than they used to.
“Sometimes we probably need to be a bit clearer about that trade off because people see access and efficiency of renewals and enhancements quite separately. We think we’ve made the right call for our customers, but our funders might not consider that balance as always representing the best value for money.”
Looking ahead, IP’s next challenge is a new era of contestability that is about to dawn. Surviving external competition has long been one of the truest hallmarks of a successful commercial enterprise. Chandarana welcomes the opportunity it will bring to inspire innovation, and to induce IP and its supply chain to reduce the cost of enhancements and renewals further.
Published on July 31, the Hansford Review considered ways that NR can be opened up to external competition, by enabling third parties to fund and deliver projects without compromising safety or passenger satisfaction.
Third Party Opportunities
Network Rail responded swiftly to the review by outlining its next steps, which include providing third parties with a single point of contact to liaise with NR’s internal departments, and regularly publishing a list of third party opportunities.
NR will also clarify how the commercial risk of operating on the railways can be best shared, with third parties potentially excluded from bearing certain risks entirely where NR is considered best placed to mitigate them.
Chandarana sees this increased level of contestability as a natural and welcome progression of existing programmes of work such as Digital Railway and East West Rail. Digital Railway will include a reward-sharing scheme where the cost savings delivered by innovative new digital technologies will be split between Network Rail and the third party, as a way to incentivise more innovation from the supply chain.
Meanwhile, East West Rail Chairman and NR non-executive director Rob Brighouse has written a report for the Secretary of State for Transport that is expected to pave the way for the construction of a new railway between Oxford and Cambridge. It is likely to be designed, built and then operated by the private sector, entirely independently of NR.
Chandarana concludes: “Although all the work we deliver undergoes a rigorous tender process, we haven’t had to compete for the work we do before, so it is quite difficult for us to compare ourselves to anyone. I believe we can compete and even if we can’t, it’s a win for the taxpayer because it will sharpen our focus. We can do all the benchmarking studies we like, but we’ve now got actual competition to prove it one way or the other.
“The key area now is risk. Most construction contractors’ net margins are around 2%, which is wafer thin, and if you look at the risk of handing back the railway late and the impact that could have on penalty payments to Train Operating Companies (TOCs), you’re talking about wiping out a large chunk of that annual profit.
“We need to think about what level of risk the market can take for us to properly encourage competition, but we’re beginning to see some green shoots such as Digital Railway and East West Rail. Commercial businesses are very good at understanding risk, so I’m very positive about that and finding the solutions we need.”