Maintenance risk

Heavy rail Heavy rail

Description (What is the Risk)

The risk of maintaining the asset to the appropriate standards and specifications for the life of the project.
Increased maintenance costs due to increased volumes.
Incorrect estimates and cost overruns.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Network Rail owns and is responsible for maintaining the UK heavy rail network. It has built up years of experience and expertise and is therefore best placed to manage this risk.

Some years ago, maintenance of the track was sub-contracted to private sector entities. This was not successful, as it resulted in increased costs and variable quality. Network Rail took responsibility for track maintenance back in-house.

Maintenance of the rolling stock is undertaken by the Manufacturer, under its contract with the Operator.

Mitigation Measures (What can be done to minimize the risk)

The risk of delays to passenger services caused by the infrastructure being in poor condition are allocated under the Track Access Contract. Compensation is payable in specified circumstances if the track is not available when expected.

In addition, Network Rail is required to hold a network licence granted by the Office of Rail and Road (ORR), the UK's independent rail regulator. This licensing regime requires Network Rail to comply with certain safety standards, to maintain the rail network and to seek to improve performance and efficiency. The ORR monitors Network Rail's performance on a continuous basis - against targets in the most recent access charges review, against obligations in its network licence and against forecasts in its own business plan. Where necessary, the ORR may enforce compliance with the network licence if Network Rail fails to fulfil its obligations, and the ORR may also impose monetary penalties.

The licence also rewards Network Rail for meeting and exceeding targets.

The volume of services operated on the infrastructure, and thus the wear and tear imposed on the infrastructure is limited to an extent by the control exercised by the Contracting Authority under each Franchise Agreement over the number of services that can be operated.

Government Support Arrangements (What other government measures may be needed to be taken)

There is no direct Government support, except insofar as the UK Government provides a direct grant to Network Rail, and subsidises the agreed works programme of Network Rail. The Government also has a statutory duty to ensure the provision of railway passenger services on the UK rail network.

Comparison with Emerging Market

Unique to the UK's heavy rail market.

Back to Heavy rail

Description (What is the Risk)

The risk of maintaining the asset to the appropriate standards and specifications for the life of the project.
Increased maintenance costs due to increased volumes.
Incorrect estimates and cost overruns.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will have principal responsibility for maintaining the system to the appropriate standards set out in the output specification defined by the Contracting Authority.

Note that on demand-risk projects, the Private Partner takes the primary risk that the system will be maintained to a sufficient level of quality and reliability to ensure that it can attract business. However where the system constitutes an essential public service or effective monopoly operation over that route, it would be sensible for the Contracting Authority to include appropriate KPIs to monitor the service levels and take effective enforcement action (e.g. through penalties or reduced tariff entitlements).

Where there is integration of the system into existing infrastructure, the Contracting Authority may need to retain the maintenance risk of some of the existing assets.

Mitigation Measures (What can be done to minimize the risk)

The Contracting Authority should take time to ensure that the output specification properly defines the maintenance obligations on the Private Partner to ensure that the system remains robust in the event of early termination or expiry of the agreement. If the Contracting Authority fails to get the output specification right then it effectively transfers risk back to itself.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may be required to guarantee and proactively manage the maintenance of the existing systems that integrate with the project.

Comparison with Developed Market

Some projects in emerging markets have been procured on a Rehabilitation-Operate-Transfer basis. In this case the Contracting Authority will need to ensure that it has sufficient warranties of the system components and rolling stock to allow it to manage any maintenance risk which transfers back to the Contracting Authority at the end of the concession.

Back to Heavy rail