CONTENTS PAGE. 1 Executive Summary 1. 2 Overview 19. Part A. 3 Introduction Background Public Private Partnerships 27

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2 CONTENTS PAGE 1 Executive Summary 1 2 Overview 19 Part A 3 Introduction 22 4 Background 23 5 Public Private Partnerships 27 6 Policy Objectives/Issues 34 7 Legislative Environment Ireland 36 8 Legislative Environment European Union 46 9 Regulatory Environment 56 Part B 10 Introduction Project Appraisal and Development Project Planning Procurement and Contractual Risk Management Commercial and Financial Considerations Performance Standards and Output Specifications Contract Management 228

3 APPENDICES A B C D Glossary of Terms List of Legislation Reviewed List of Other Materials Consulted Relevant Extracts from Previous PPP Studies E Summary of the Transport (Railway Infrastructure) Act, 2001 F G H I J K L M N O P Q R S T U Summary of the Railway Safety Bill Railway Order Process Statutory Issues at Project Appraisal/Detailed Project Development Stage Railway Order and the Procurement Process Sample Appraisal Summary Financial Model Project Appraisal Techniques Value for Money Comparator Key Contractual Issues Sample Risk Register Risk assessment techniques Risk matrix RPA s Performance Objectives RPA s Performance Requirements Matrix RPA s Monitoring Objectives Procurement Requirements Matrix

4 LIST OF FIGURES PAGE 1.1 A structured approach to planning and design of rail schemes Risk Management Methodology Document Structure Rail element of the DTO Strategy Risk transfer vs Control given to private partner Contractual Framework for design and build Contractual Framework for Operating Concession Contractual Framework for DBO(M) Contractual Framework for DBFO PPP Procurement Process Project Appraisal and Approval Process Option Analysis Value for Money Comparator Illustration of a Value for Money Comparator Value for Money and Risk Transfer Bid Analysis Model Relationships PPP Procurement Process Project Planning and Design process Railway Order and Procurement Process PPP Procurement Process Risk Management Methodology Procurement Process 165

5 LIST OF FIGURES (continued) PAGE 15.1 Vertical and Horizontal Integration Horizontal Infrastructure Contractual Framework for Operating Concession Contractual Framework for DBO Contractual Framework for DBFO Possible options for the management of network extensions Ownership of risks Funding requirement vs relative time to for revenues to build up Traditional vs PPP Procurement Main characteristics of payment mechanisms PPP Procurement Process Effects of detail in specifications Sub-systems of a rail transport system PPP Procurement Process Process for specifying performance levels and their translation.and procured assets Key activities to monitor operational performance PPP Procurement Process 240

6 LIST OF TABLES PAGE 1.1 Risk Allocation Matrix Objectives appropriate to the three types of rail transport forming part of the planned network Appraisal Tools Objectives for Project Planning and Design Responsibility for delivering Project Planning & Design Objectives Advantages and disadvantages of private sector involvement of each option Planning & Design in the Procurement Cycle Risk Ownership Matrix Structuring Options Primary issues of risk for RPA Performance Summary Implications for measurement in value for money and partner-type relationship Preconditions for good PPP Negotiations Scoping performance measurement in contracts Overall objectives appropriate to light rail and metro transport Nature of involvement required of RPA for different types of PPP contracts 234

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8 EXECUTIVE SUMMARY 1 INTRODUCTION 1.1 The Government believes PPPs to be an important option for public sector bodies to consider when planning the delivery of large scale complex projects. This Framework has been prepared to provide guidance to organisations (such as RPA) likely to be involved in the procurement of light railway/metro projects and will assist potential private partners when bidding for these projects. 1.2 The Framework is structured in two parts: Part A deals with the context in which light railway/metro projects will be procured; and Part B provides technical guidance on the key activities, techniques and tools which should be applied at each stage of the PPP procurement process. PART A Background 1.3 Public transport has an important role to play in supporting economic growth and social progress. The level of congestion experienced as a result of high growth in recent years must be addressed through provision of additional infrastructure and demand management measures designed to make the use of public transport more attractive than the private car. 1.4 The National Development Plan sets out proposals for investment of more than 2.8bn. in public transport. 2.0bn. was designated for the Greater Dublin Area of which a minimum of 300m. was expected to be funded through PPPs in the rail sector. Since publication of that plan, additional rail projects have been identified in the Dublin Transportation Office s Strategy document, A Platform for Change. They include light rail and metro projects with an estimated capital cost of more than 9bn. 1.5 Beyond the scope of the NDP, proposals for the expansion of the rail network in a number of areas outside the GDA will be looked at in the context of the forthcoming national Strategic Rail Review. Public Private Partnerships 1.6 PPPs have been successfully adopted in many jurisdictions to help address deficiencies in public transport. Fundamental to their success in Ireland will be the adoption of a collaborative culture with both the public and private sectors working together to achieve shared objectives. 1.7 The key characteristics 1 of a PPP will include: Shared responsibility for the provision of the infrastructure and/or services with a significant level of risk being taken by the private sector; Long term commitment by the public sector to the provision of quality public services through arrangements with private sector operators; and Better value for money for the Exchequer and optimal allocation of risk. 1 Framework for Public Private Partnerships Public Private Informal Advisory Group, November 2001 Complete Document3.doc Page 1 of 245

9 EXECUTIVE SUMMARY continued 1.8 PPP transactions can take a number of forms to reflect the roles and responsibilities of the various parties and the contractual relationships between them. These structures have evolved to ensure that the agreed allocation of risks is enshrined in the agreements executed by the parties. In the rail sector they are likely to fall into the following categories: Operate Agreements. These require private partners to provide services for the dayto-day operation of the trains and infrastructure e.g. signalling, and (in addition to any actual operation of the train service) may include maintenance services; Design, Build & Operate. These structures will be appropriate where private partners contract to design and construct new infrastructure, which is then operated by them. Financing is provided from Exchequer resources; Design, Build, Finance & Maintain. Such structures will be adopted where separation of responsibility for provision of infrastructure and operation of trains is appropriate. Maintenance responsibilities in respect of the infrastructure may be included. This approach will facilitate separate Operate agreements as the network is rolled out; Design, Build, Finance & Operate. Under these arrangements full responsibility is allocated to the private partner to deliver the infrastructure and operate the trains over an agreed period. 1.9 The choice of procurement approach whether conventional or PPP will be influenced by the likelihood of securing accelerated delivery of services and better value for money for the Exchequer. These decisions will be taken on a project by project basis and at an early stage in the planning process. Policy Objectives 1.10 The Department of Public Enterprise has adopted the primary strategic objective of securing an integrated public transport system for the Greater Dublin Area and, ultimately, at national level. The consultation paper - A New Institutional and Regulatory Framework for Public Transport expresses the overall objectives of public transport policy as being: to ensure the provision of a well functioning, integrated public transport system which enhances competitiveness, sustains economic progress and contributes to social cohesion; to ensure the provision of a defined standard of public transport, at reasonable cost to the customer and the taxpayer; and to ensure the timely and cost effective delivery of the accelerated investment in infrastructure and facilities necessary to ensure improved public transport provision Adoption of PPPs is expected to facilitate achievement of these objectives. The assessment of the value likely to derive from PPPs will be tested against specific objectives including value for money for the Exchequer, accelerated delivery of rail capacity, whole life approach to asset management, innovation, compliance with safety requirements, improved quality of service, transfer of risk, and contribution to integration of the overall system. Page 2 of 245

10 EXECUTIVE SUMMARY continued Legislative Environment - Ireland 1.12 The Government has decided that significant reform of the legislative and regulatory environment of public transport is necessary to realise private involvement in new rail projects. The Transport (Railway Infrastructure) Act, 2001 provides for the establishment of the Railway Procurement Agency (RPA) with responsibility for procurement of light rail and metro projects. RPA has been given specific powers under the Act, which provide the basis for the procurement of light railways, metro and rail infrastructure in Ireland, by PPP In the course of the preparation of this Framework a review was undertaken of existing Irish legislation and other documentation which has led to the conclusion that: although there is a large body of legislation governing railways and related matters in Ireland, the primary source of the Irish legislative position in relation to the approval and implementation of future light railway/metro PPP projects is the Transport (Railway Infrastructure) Act itself (rather than other legislation); the procedures and processes of the Transport (Railway Infrastructure) Act should not present any unreasonable constraint for future light railway/metro PPP projects, if the railway order application process (and consultation carried out in relation to a project with stakeholders particularly Government decision makers and also key public interest groups) is well managed: including (1) formulating a railway order approval strategy and commencing consultations with stakeholders as early as possible, and (2) involving the private sector as early as practicable (to gain the benefit of relevant experience in other projects, and to provide technical input to responses to issues raised, by stakeholders, and in the preparation of documents such as the EIS which are required to accompany the railway order application); apart from the Transport (Railway Infrastructure) Act, none of the other Irish railways or general transport statutes reviewed should pose any material constraint for future light railway/metro PPP projects. It is important to note however that the Transport (Railway Infrastructure) Act does not purport to establish a one stop shop for approvals for railway projects. Major railway projects will generally require a number of other statutory approvals (e.g. railway safety case and environmental approvals as an integrated pollution control licence required in connection with project construction works). The need for and timing of such approvals should be a key component of the project strategy for every project, and responsibility for such approvals apportioned between RPA and the PPP contractor according to the project risk framework; and RPA is sufficiently empowered by the Transport (Railway Infrastructure) Act to carry out its desired functions and achieve the Department of Public Enterprise s current PPP objectives for light railways/metro Despite the above, it must be stressed that PPP transactions are often complex, involving a number of project specific issues. Assessment of project specific circumstances and the implications of applicable legislation should remain an integral part of the PPP assessment which takes place before formal commencement of the procurement process for a project. A pertinent example of project-specific circumstances would arise in the event that it is proposed to restore and commence operation of a new service on one of the number of disused railway lines throughout Ireland. Many of these routes were constructed in the 19 th century pursuant to project-specific enabling legislation, much of which remains in force today. Accordingly, if any of these disused lines are proposed to be restored and reused, it is recommended that the relevant project-specific legislation be reviewed, to ensure that it does not present any issue for the project. Page 3 of 245

11 EXECUTIVE SUMMARY continued Legislative Environment European Union 1.15 European Union legislation may affect future light railway/metro PPP projects in Ireland in several areas: railway operations (the railway package of Directives, comprising Directives 91/440/EEC, 95/18/EC and 95/19/EC); the regulation of State aids ; and public procurement The review of existing EU legislation for the purpose of preparing this section has led to the conclusion that: the railway package of Directives should not adversely impact on the procurement or implementation of light railway or metro PPP projects, given that such projects should be invariably for the provision of urban or suburban services ; provisions regulating the provision of State aid to these projects should not unreasonably restrict or constrain the successful development of such projects which, in the widest possible sense, could only be described as city or town-based suburban passenger (light) rail transport systems, without any possible effect on trade with any other Member States (and therefore outside the scope of the State aid test); procurement of light railway/metro PPPs should be governed by the Utilities Directive (unless the project concerned falls within the scope of a concession, in which case the application of the other Public Procurement Directives and in particular the Works Directive should be considered). There are definite benefits under the Utilities Directive, most relevantly the flexibility to choose between the open, restricted and negotiated procedures (this flexibility is not generally available under the other Public Procurement Directives); it is recommended that such projects be procured on the basis that they fall into the category of priority services in the relevant Annex to the Utilities Directive (unless conclusive evidence exists that a project does not fall within this service category); on the basis of previous experience, and the likely size and complexity of future light railway/metro PPPs in Ireland, it is recommended that the negotiated procedure would be the most appropriate tendering procedure; and procuring such projects by means of the full negotiated procedure under the Utilities Directive should avoid any potential difficulties associated with the proposed regulation COM(2000) 7 Final, unless the Directive does not provide for mandatory competitive tendering in the relevant case. Regulatory Environment 1.17 The process of regulatory change is well underway as evidenced by the publication of two key consultation documents: In August 2000, the Department of Public Enterprise published a consultation document A New Institutional and Regulatory Framework for Public Transport. This document outlines the context within which future investment in public transport is to be delivered; and Page 4 of 245

12 EXECUTIVE SUMMARY continued In March 2001, a further consultation document New Institutional Arrangements for Land Use and Transport in the Greater Dublin Area was published. This document outlines the proposed reform package which is to include the establishment of a Strategic Body (DSLTB) which will be set up with responsibility for strategic planning in the Greater Dublin Area in terms of land use and transport This new DSLTB is expected to have the following functions: prepare and review long term strategies, medium-term implementation programmes and short term action plans for transport in the Greater Dublin Area. Public transport providers will be required to operate services in accordance with these strategies, and a network and service blueprint set down by the DSLTB; set detailed service requirements and standards for all modes of public transport (bus, light railway, metro and Dublin suburban railway, but not mainline railway); monitor implementation and use its enforcement powers to ensure that implementing agencies implement the strategy and deliver according to targets; manage (directly or through a third party) the integrated fares and ticketing system and passenger information; regulate fares; ensure competition and a level playing field where the public transport market is open to competition; call-in projects itself where considered appropriate and carry them out itself; allocate finance to implementing agencies from an Exchequer block grant; and embrace the functions of the Dublin Transportation Office The new DSLTB will also prepare and regularly update a land use strategy for the Greater Dublin Area and will monitor and enforce compliance by local planning authorities. The relevant powers available to the Minister for the Environment and Local Government under the Planning and Development Act, 2000 will be transferred to the new body. Additionally, it will also act as independent regulator of all Dublin public transport Until a regulatory entity is formally established pursuant to the legislation contemplated by the consultation paper, a regulatory function will be performed by the Minister for Public Enterprise. This will be exercised: pursuant to bye-laws, given that under section 66 of the Transport (Railway Infrastructure) Act the Minister for Public Enterprise, RPA and a railway undertaking (with consent of RPA) are each vested with broad powers to make byelaws for the management, control, operation and the regulation of a railway that has been built pursuant to a railway order, including the regulation of timetables and fixing of fares; or contractually, through the provisions of the Project Agreement governing a particular PPP project Should a light railway/metro PPP project reach legal and financial close before the establishment of the DSLTB (or an equivalent independent transport regulator), any adverse impacts on the implementation and operation of that PPP project arising from changes to the regulatory environment, subsequently imposed by the DSLTB, could be dealt with through the terms of the Project Agreement. A possible approach would be for the PPP contractor to become entitled to compensation in circumstances where the regulatory changes are considered by the parties to unreasonably impact on the PPP contractor s position (for example, as a consequence of a discriminatory change of law ). Page 5 of 245

13 EXECUTIVE SUMMARY continued 1.22 In addition to the above, legislation is being brought forward to establish an independent railway safety regulatory body and to update the railway safety regulatory framework. The Railway Safety Bill, 2001 will put in place a new regulatory framework for railway safety which will apply to all railways to which the public have access, including the Iarnród Éireann network, light rail, Metro and heritage railways This means that despite having a railway PPP project approved by way of a railway order it will still be necessary for the PPP contractor to separately procure a safety approval, and maintain compliance with a safety regime, under the auspices of the new Railway Safety Authority. PART B Project Appraisal and Development 1.24 Securing value for money for the Exchequer is a fundamental objective of the PPP process. This will be seriously compromised if unaffordable projects are allowed to progress to an advanced stage before RPA s capacity to meet its projected obligations are assessed. To minimise the risk of such projects being developed, a formal structured approach to the process of project scoping, economic and financial appraisal and detailed project development should be adopted by RPA. Additionally, the outputs from these activities should be regularly subjected to rigorous review at key milestones with formal approvals being recorded by the Board of RPA and relevant Ministers where required A valuable tool in assessing the potential of PPPs to deliver value for money is the use of a relevant Value for Money Comparator which represents a benchmark against which bids from private partners can be assessed. An important component of the Value for Money Comparator is the value attributed to retained and transferred risks, as these must be carefully quantified if comparison on a like for like basis is to be achieved The Value for Money Comparator should be based on a reference project i.e. the most likely and efficient form of conventional procurement which could be applied to deliver the services described in the output specification Private bidders will be involved in substantial expenditure in the preparation of tenders and the existence of a credible evaluation and approvals process will enhance market confidence in the capacity of RPA to bring forward well researched, bankable projects. Project Planning 1.28 Project planning drives the overall development process for new rail schemes, by determining the overall objectives for the project. Government transport policy, strategic land use plans, changes in economic activity and environmental objectives will identify the need for the development of a new public transport service. The planned new DSLTB will be responsible for the strategic evaluation of transport options to assess which of the available options best meet the identified needs. Following a determination that a light rail or metro project is to be developed, RPA will be tasked with making arrangements for the generation of plans and designs necessary to develop, construct and operate the railway. In PPP transactions, these activities must be carried out against the background of developing a scheme that is bankable and attractive to the private sector, while ensuring the original planning objectives and value for money for the Exchequer are achieved. Page 6 of 245

14 EXECUTIVE SUMMARY continued 1.29 For any new transport system, the planning environment requires that a wide range of issues be considered and assessed before a system design can be agreed and implemented. The key elements of project planning in such an environment comprise: initial planning and establishment of scheme-specific objectives taking account of national and local transport policies and public policy on land use, environment, etc.; consultation with the public and with key stakeholders in the projects; specification of scheme characteristics particularly the route selection, alignment and choice of technology (metro, light rail, etc.); demand and revenue assessment to establish the required scope of the scheme and to feed into the detailed project development and cost-benefit analyses; operational and safety planning specification of required capacity, frequency of operation, development of operational and safety plans; design from initial project scoping, through initial design to detailed design; cost estimation based on the scheme design and operational plans; environmental impact assessment identifying and quantifying where possible all potential environmental effects, leading to the inclusion of environmental mitigating measures in scheme design; project appraisal CBA and other tools, to provide justification for public sector support for the scheme; railway order and planning approvals process acquiring the necessary powers to implement the scheme and any planning consents that may be required; and overall feasibility assessing the buildability, safety and environmental impact of construction A structured approach to planning and design of rail schemes is required under any procurement strategy. The key steps are shown in Figure 1.1 overleaf. Demand and revenue assessment Operational planning Set objectives Scheme specification Outline design / feasibility Cost estimation Project appraisal Planning approval Detailed design Environmental assessment Consultation Figure 1.1: A structured approach to planning and design of rail schemes Page 7 of 245

15 EXECUTIVE SUMMARY continued 1.31 The planning and design process will go through a number of iterations during the project development cycle. Under a PPP framework, all the stages from Set Objectives to Project Appraisal will need to be carried out before ITN. It should be noted that, under the Railway Order Process (under the Transport (Railway Infrastructure) Act), there is no outline planning stage therefore RPA may need to undertake the activities necessary to deliver sufficient information on the preferred route. The output from this work should be sufficient to provide an envelope within which bids can be prepared without unduly constraining the potential for innovation. Procurement and Contractual Position 1.32 Various PPP structures should be considered for the procurement of light railway/metro railways and infrastructure by PPP. They are outlined in Part A of this Framework. In general, the contractual framework would provide for: the input into the project through subcontracts let by the PPP contractor (SPV) of management resources, technical expertise and general labour, which will facilitate the provision of the project infrastructure; the provision of funding for the project in question, where the project incorporates a financing element; and minimization of any impact on project income stream caused by events outside the PPP Contractor (SPV) by means of an appropriate insurance package At present there is no Project Agreement template for rail PPP projects in Ireland. As at the date of this Framework it is not considered worthwhile to immediately commence detailed work to develop a non-project specific template for light railway/metro PPP s given that: rail PPPs are expected to be more limited in number, but on a larger scale (and potentially more complex) than many of the PPP projects in other sectors in Ireland; to date the use of PPP as a procurement method in the Irish rail sector has been limited to the proposed appointment of an operator for the Luas so there is not a wide range of local precedent documentation to use as a starting point. The contractual documentation for the Luas operating concession was not reviewed in preparing this Framework; while it may contain some useful provisions in the wider light railway/metro PPP context, the lack of a design and build element in this contract means that it would not of itself be a suitable basis for a light railway/metro PPP (DBFO) template agreement; and experience overseas has shown that the contractual structure of large scale railway PPPs is often heavily influenced by sector-specific and project-specific issues (i.e. standard form documentation is likely to be of less use in dealing with complex railway projects than in other sectors) Having regard to these factors, and the time and resources which would be required to prepare and settle a template agreement, it is considered that the preparation and application of a uniform contractual template (or at least some standardised clauses) is best left to a point in time when: the results of the pilot PPP projects in various sectors in Ireland can be assessed and lessons learnt from all PPP pilots available; and there is a clear demonstrated need for template contractual documentation. A practical alternative to producing a standardised document on its own would be to use the documentation from the first Irish light railway/metro PPP particularly if it Page 8 of 245

16 EXECUTIVE SUMMARY continued incorporates all of the design, build, operate, finance and maintain components as a basis for subsequent projects (assuming that the PPP model adopted is the same or similar) With regard to the procurement process, this Framework outlines the major stages involved in procuring light railway/metro projects (which as outlined previously should generally take place under the Utilities Directive using the negotiated procedure). Key stages have been identified as follows: Project Definition. At this early stage much of the activity relates to project definition, scoping and outline appraisal as described in the Project Appraisal and Development section. Detailed Project Development. By this stage the case for the chosen project must be made and assessment of procurement options undertaken while the outline business case should include: - an indicative outline of the proposed contractual terms (e.g. by way of a term sheet), reflecting the risks intended to be transferred to the private sector, as well as liabilities being assumed by or remaining with RPA; - an outline summary of the key outputs required (including a clear definition of the service delivery being sought and to be achieved, yet allowing the greatest scope for innovation and flexibility from the private sector in providing the service). This material will form the basis of the output specification; - an identification of key statutory approvals required to establish and operate the project; and - an indicative outline of possible procurement strategies, including the strategy and possible timetable for obtaining key statutory approvals (most notably the railway order). The outcome of the detailed project development process should result in the identification of one preferred PPP option as well as the reference project against which the proposed PPP solution s it is developed can continue to be assessed for affordability. Expression of Interest and Pre-Qualification. This stage will generally include a number of discrete tasks: - carrying out further market soundings (if not completed in the detailed project development phase); - issuing an OJEC notice to invite expressions of interest; - preparing and making available the project information memorandum; - pre-qualification of parties who submitted an expression of interest; - selection of shortlisted bidders from those who pre-qualified; and - discussions and further assessment following shortlisting. In addition RPA and its advisors will commence detailed development of: - a draft invitation to negotiate (ITN), which will ultimately be sent to shortlisted bidders. This work will draw upon the procurement strategy formulated as part of the outline business case; and - a draft Project Agreement, using as a basis the heads of terms and the risk profile for the project which formed part of the approved outline business case of key contractual terms. Page 9 of 245

17 EXECUTIVE SUMMARY continued Invitation to Negotiate. This stage may be quite lengthy for complex projects encapsulating the settling of and issuing the ITN document, sessions with bidders (e.g. site visits), preparation, and finally, submission of tenders. The ITN package should include the draft Output Specification, Project Agreement and an Enquiry Document which sets out bid conditions, evaluation criteria, procedures and general information. Shortlisting. Following receipt of bids, evaluation of bids by RPA for the purposes of further shortlisting, will proceed based on a detailed evaluation of the bidders proposals. RPA should put in place a timetable for meetings and discussions with the bidders. These discussions should be confidential to each bidder, except where they result in any modification to the definition of the service or output requirements. If this is the case such changes must be notified to all bidders. As a general rule, it is acceptable for RPA to change output/performance requirements as a consequence of clarification discussions whilst all bidders remain in the competition, however, when shortlisting of two bidders has occurred, no further change should be contemplated. Best and Final Offers. At the end of the period of parallel negotiations with the remaining two bidders it may be desirable at this time to invite BAFOs from the bidders against an agreed contractual framework. If RPA decides to proceed with a BAFO stage, a further round of evaluation should be carried out following the receipt of BAFO bids. The same principles apply as for evaluation of offers in response to the ITN. It is advisable to make the best use of competition and to negotiate and agree (as much as possible) the commercial and contractual terms while there is more than one bidder. Attempts should be made to include each bidder s lenders at key meetings and (as far as practicable) to confirm their acceptance to the terms. Negotiations. Having evaluated the shortlisted bidders BAFOs, RPA will proceed to appoint a preferred bidder. The preferred bidder stage carries with it certain difficulties. The first is that, after the preferred bidder is appointed, the only source of competition is the public sector comparator rather than a real private sector bidder. One option to avoid a re-negotiation of the terms is to keep an unsuccessful bidder in reserve in case any problem occurs in negotiations with the preferred bidder ; and Secondly, the bidder s lenders should be asked to sign up by way of a formal written acknowledgement that the principal commercial terms are acceptable to avoid them rewriting the deal subsequently. The final negotiations should be limited to agreeing the final detail of the transaction documentation. Financial Close. Before financial close can occur, the following steps will need to have occurred: - all sub-contracts must be in place and approved; - all financing documentation must be approved by RPA and be in place; - all insurance arrangements should be agreed and in place; - all securities (i.e. parent company guarantees and performance bonds) signed; and - all assignment of any applicable agreements by RPA to the PPP contractor (for example utility diversion contracts with utilities companies). Page 10 of 245

18 EXECUTIVE SUMMARY continued Depending on the circumstances of the project, there may be a variety of other matters which will need to be dealt with at this point. If the land required for the project is owned at this stage by RPA or another Government entity, a lease or some other interest in this land might be granted to the project company. In addition, other internal and external approvals may be required (these are discussed in the paragraphs below). Given that the railway order is essential for the project to proceed, it is likely that the preferred bidder and its lenders would resist proceedings to financial close until a railway order has been made. An alternative approach would be to proceed to contract award and financial close without the railway order in place, but subject to the provision of sufficient contractual protection to: - allow the PPP contractor and its lenders to be compensated or, to withdraw from the deal without penalty in the event that the outcome of the railway order process is unsatisfactory to them; and - govern any variations to project scope which arise as a consequence of the railway order being made in terms different to those sought. In such circumstances, in addition to this contractual protection, it would be expected that the lenders would (in any case) make the provision of their funding conditional upon the making of the railway order. The approach to this particular issue has the potential to become a significant point for both RPA and the private sector. It is therefore recommended that RPA seek views from the market before a firm position is adopted. In progressing the project contractual documentation towards financial close and contract award, RPA will need to accommodate within its completion timetable any requirements for approval of the documentation both internally and also possibly from all other Government stakeholders before it can proceed to award the contract. Unsuccessful bidders should be debriefed as soon as possible after Contract award. In this respect, Article 41 of the Utilities Directive provides: - that RPA must, promptly after the date on which a written request is received, inform (1) any eliminated bidder of the reasons for rejection of his application or tender and (2) any bidder who has made an admissible tender of the characteristics and relative advantage of the tender selected as well as the name of the successful bidder; but - RPA may decide that certain information on the contract award be withheld where release of such information would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises, or might prejudice fair competition between suppliers, contractors or service providers. Finally, an award notice must be published in the OJEC confirming the contract has been awarded and giving details of the contract award. Construction and Operation. Following legal and financial close, the implementation of the project will commence. The initial priorities for the PPP contractor (and subcontractors) will generally be: - completing all design work required for the construction phase; - if not already in place, ensuring the railway order is secured in a form acceptable to both RPA and the PPP contractor (and its lenders); - procuring other necessary statutory approvals; and - commencing construction work. Page 11 of 245

19 EXECUTIVE SUMMARY continued Risk Management 1.36 PPP s will generally involve long term commitment under an agreement with a private partner. In order to be satisfied that long term value for money for the Exchequer is being achieved it is necessary to make predictions which may cover 25 to 30 years into the future. Such a process is subject to significant uncertainty with actual events and their impacts probably varying materially from original expectations. Understanding and managing risk aims to minimise the negative impacts of such variations The allocation of risk between the parties to a PPP transaction is also fundamental to making sure that only bankable projects are brought to the market if private investment is to be secured. Prior to introduction to the market it is important that RPA has established a clear position on its proposed allocations. It should be stressed that every project will need to be subjected to rigorous risk assessments and it is unlikely that any two projects will be characterised by the same risk profile. This initial position has been developed against a background of significant change in the regulatory environment for public transport in Ireland and may need to be amended to reflect any changes from the proposals outlined in Section 9 of this Framework This section of the Framework is concerned with: describing an initial position on risk allocation which RPA can adopt ; providing an understanding of the risk management process; and providing guidance on the type of activities and analyses which are relevant at key points in the procurement process The methodology proposed below will establish a systematic, structured approach to the risk management process. The purpose of this approach is to ensure that no risks are overlooked, and that all identified risks are monitored and managed in order to minimise potential adverse impacts. Monitor and Review Process Establish Objectives and Risk Appetite Risk Identification, Classification & Allocation Assessment, Impact and Quantification Identify Mitigation Procedures Prepare or Update Risk Register Figure 1.2: Risk Management Methodology 1.40 Identification of risk will be a continuous activity throughout the development of PPP projects. A useful starting point is to establish the broad categories within which risks will be analysed. These high level categories have been used to develop an initial preferred position on risk allocation which were exposed to the market during the consultation process and the allocations outlined in Table 1.1 reflect some of the issues raised by potential parties to future PPP arrangements. Page 12 of 245

20 EXECUTIVE SUMMARY continued 1.41 Risk transfer is one of the key means of securing value for money for the Exchequer in PPP projects. The objective is to ensure that risks reside with the party best able to control and manage them, by minimising the crystallisation of risks, at a lower cost than might otherwise be achievable. Consequently, it is important to resist the natural temptation to enforce maximum risk transfer in favour of securing an appropriate allocation of relevant risks between RPA and private partners, reflecting each party s capacity to control and manage that risk at a cost which is more attractive than other available options. Table 1.1: Risk Allocation Matrix RISK CATEGORY RPA PRIVATE Land Acquisition Planning/Railway Order Utilities Design, Construction and Supply Commissioning, Operating and Maintenance Demand RISK ALLOCATION MATRIX PARTNERS SHARED COMMENTS Shared with regard to Compensation to 3 rd Parties and priority at junctions Shared with regard to Compensation to 3 rd Parties and priority at junctions Residual Value State to receive Assets in good order for nil consideration at end of concession Technology and Obsolescence Regulatory and Legislative Environment Financial Safety Exception: project specific discriminatory changes While the risk allocation outlined above is recommended to RPA, it must be stressed that arriving at final allocations is an iterative process through which initial positions will change as a result of actual experience and interaction with private partners throughout the tendering and/or negotiating processes on specific projects. Commercial and Financial Considerations 1.43 The structuring of light rail and metro PPP transactions will be heavily influenced by models which have been adopted for large scale project financing transactions. This type of financing structure has developed where the level of borrowing necessary to build the asset is usually too significant for the corporate balance sheet. A special purpose vehicle (SPV) is generally created in which the sponsors pool their interests and this company is then used to raise the debt finance required. Page 13 of 245

21 EXECUTIVE SUMMARY continued 1.44 This approach combines high levels of debt and heavy dependence on the cash generated by the asset. Consequently, rigorous contractual principles, which involve clearly identifying and assigning responsibility for risk, have been developed and applied to PPPs, whether or not they include the provision of finance The primary commercial and financial objectives will relate to: PPP Structures The overriding objective is to have clear lines of responsibility for the ownership and management of risk; Funding - There should be no one preference as to the funding structure that is chosen as long as it is deliverable and provides value for money to the Exchequer. The exact nature of funding will depend on the specific project risks and it may prove better value for money for the Exchequer to provide an element of public funding. Revenue The relationship between funding requirements and potential sources of revenue is an important factor in determining ownership of risk under PPP. A primary objective is to transfer revenue risk where it is appropriate and provides value for money for the Exchequer. However, the collection and management of revenues should ideally be the responsibility of the private sector. Payment and Performance The payment mechanism and performance standards should complement each other. Risk RPA s preferred position on risk allocation is described in Table The appropriate project structure adopted for a PPP project will be critical to the success of the project in terms of achieving effective risk transfer and obtaining value for money for the Exchequer. It is therefore important that at the inception stage that sufficient resources are committed to establishing the project s parameters and the structure to be adopted. This is especially important for a rail PPP project which may require future network extension in the development of the network. A number of structures are possible including splitting infrastructure from operations and vertical/horizontal structuring options all of which have implications for the phasing of the planned light rail and metro projects. The Procurement assessment will evaluate these options in the light, not just of the project under consideration but also taking account of knock on effects for future projects or extensions and for the network as a whole With regard to sources of funding of rail PPP projects, the range of funding options will include Exchequer sources, EU sources, banks, capital markets and equity investment. Each of these have differing costs and risk profiles which will be blended in the financial structure depending on the exact nature and structure of the project risks that are being assumed by the private partners, the outcome of the Procurement assessment, affordability/bankability considerations and value for money for the Exchequer Commercial developments have contributed substantially towards the financing of infrastructure around the world. These typically relate to access and promotion of a commercial activity, for example, provision of shopping and office accommodation at key stations and terminals. The potential for such funding should be carefully considered to ensure that full value is realised for the benefit of the PPP and the Exchequer Section 49 of the Planning and Development Act, 2000 is a possible source of funding. This section permits local authorities, when granting planning permissions for development in their area of jurisdiction, to attach conditions to planning permissions requiring the payment by applicants of a contribution in relation to a "public infrastructure project or service" (which is defined in that Act to include "the provision of particular rail, light rail or other public transport infrastructure, including car parks and other ancillary development"). Section 49(4) allows local authorities to enter into agreements with any Page 14 of 245

22 EXECUTIVE SUMMARY continued persons in relation to the carrying out, or provision, of such public infrastructure projects or services. Whilst this section does represent a potential funding source, there are a number of issues which need to be taken into account in assessing whether it is viable for RPA to take full advantage of it Ticketing revenues from rail passengers will generally represent a significant source of operating revenue to the project. The ticketing revenue available through ticket charges may be regulated, depending on the regulatory arrangements ultimately put into effect. Revenue collection generally remains with the private partner under the PPP. Other operating revenues may be generated from advertising and communications/technology It is unlikely that revenues from the farebox will be sufficient to meet the annual funding requirement on rail projects where infrastructure and operations are combined. Consequently, additional payments may be required from RPA which should be performance related Availability Payments may form part of the revenue mix to supplement farebox revenues. These payments to the private partner would be made on the basis that the rail infrastructure is made available on a pre agreed basis with penalty deductions applying for poor performance Revenue risk represents one of the major risks in any rail infrastructure project. This risk is of much more concern where there is no proven track record on patronage levels, for example on new infrastructure. The final determination of whether this risk is retained by RPA or transferred to private partners will be a significant influence on the project structure and the funding structure of the SPV. Regardless of whether this risk is retained by RPA or transferred to the private sector both parties must undertake substantial due diligence to determine the sensitivities of the project in relation to variations in revenue, for example very detailed complex demand modelling will be required as a minimum. Performance Standards and Output Specifications 1.54 The conventional approach to procurement results in the risk associated with poor performance of an asset remaining with the client as the party owning the detailed specification. The PPP approach is used in situations where the client is essentially procuring not so much an asset as a service based around that asset. The PPP approach is to use output specifications. This requires the client to specify its service in terms of the output functions that it requires, e.g. services sufficiently frequent to move people between points in an environment conducive to daily use. The move away from asset provision towards service provision enables private sector to be flexible and innovative in the provision of services that they will have to provide. It also results in the transfer of detailed design, construction and operational risks associated with providing the service The evolution of performance specifications for PPP projects has moved on from the early attempts where the output was defined so broadly that the Public Sector lost control of some of the key aspects of the service delivery. It is now good practice to understand where the performance requirements need to be defined more prescriptively so that the service provision meets safety, regulatory or quality requirements of RPA but at the same time allows for innovation and appropriate risk transfer. The performance is linked backward to ownership of risk, and forward, through monitoring, to payment (or abatement), through an agreed formula The performance objectives (measures and targets) have to translate into the requirements of the sub-systems of the rail transport system. Objectives appropriate to the three types of rail transport forming part of the planned network are given in Table 1.2 overleaf. Page 15 of 245

23 EXECUTIVE SUMMARY continued 1.57 It is important when considering outputs to ensure they have the following attributes: non-prescriptive: more emphasis on outputs than inputs to encourage risk transfer; simplicity: the concept must be recognisable and easy to interpret; clarity: so designers, builders, operators, maintainers and others know what is expected of them; enforceability: for the approval of payment for services satisfactorily supplied; embodiment of risk: RPA and the contractor assume responsibility only for those risks that they agree upon, and the management of these risks continues after the assets have been built and installed, and the contractor is operating the service; interfaces with other service elements such as at inter-changes are known and fully described; information required to measure the performance being targeted is obtainable, at the right quality and in usable form; and measurability: the outputs must be capable of objective measurement This is an iterative process that requires some initial input from RPA to develop the output-specified performance objectives, and which may also require early input from potential bidders and/or others such as consultants. There is a strong relationship between establishing performance objectives, designing solutions, and achieving performance objectives in the solution. It needs to be balanced against RPA s desire to see a preferred solution, and the market s need for room to innovate. That is, RPA should maintain the discipline of concentrating only on output specification, throughout, while looking to the market for the detail of how they will achieve their proposed solution. Page 16 of 245

24 EXECUTIVE SUMMARY continued Table 1.2: Objectives appropriate to the three types of rail transport forming part of the planned network Performance Requirement Light Rail Metro Suburban Heavy Rail Capability Able to up to move up to 8,000* passengers per hour per line section. Seating-to-standing ratios appropriate to street-running rail services providing commensurate levels of comfort. Able to move up to 20,000* passengers per hour per line section. Seating-to-standing ratios appropriate to segregated rail services providing commensurate levels of comfort. Able to move more than 20,000* passengers per hour per line section. Seating-to-standing ratios appropriate to heavy rail services providing commensurate levels of comfort. Station Separation Stops at intervals that reflect demand on this and other public service routes, and the patterns of other traffic. Stations at intervals that reflect demand on this and other public service routes. Stations at intervals that reflect demand on this and other public service routes, but not more than 10 km apart. Safety Meets comparable industry and Regulatory requirements. Meets comparable industry and Regulatory requirements. Meets comparable industry and Regulatory requirements. Availability 100% available during service hours. 100% available during service hours. 100% available during service hours. Reliability 96% of 1-way trips daily and 98% of trips per period, or better. 96% of 1-way trips daily and 98% of trips per period, or better. 96% of 1-way trips daily and 98% of trips per period, or better. Comfort Dynamic characteristics to allow normal activities such as standing, and reading. Dynamic characteristics to allow normal activities such as standing, and reading. Dynamic characteristics to allow normal activities such as standing, and reading. Interchangeability Compatible with Metro and fit for street running. Intermodal journeys on a single ticket. Compatible with Light rail. Intermodal journeys on a single ticket. Compatible with existing heavy rail. Intermodal journeys on a single ticket. Access Full equality of access for people with disabilities. Full equality of access for people with disabilities. Full equality of access for people with disabilities. Environment (External) Meets industry standards on lighting, noise, cleanliness etc. Meet industry standards on lighting, noise, cleanliness etc. Meet industry standards on lighting, noise, cleanliness etc. Electro-magnetic compatibility Meets industry standards on interference with signalling, power supply and communications. Meet industry standards on interference with signalling, power supply and communications. Meet industry standards on interference with signalling, power supply and communications. Page 17 of 245

25 EXECUTIVE SUMMARY continued Contract Management 1.59 One of the key characteristics of PPP agreements is that they provide a means for managing risks by the party best suited to deal with them. This involves transferring risk from RPA to private sector partners. Effective contract management and monitoring is required to ensure that the risk remains with the responsible party and does not migrate back across the boundary towards the other partner, otherwise the benefits of PPP will be lost A key difference between PPP and conventional contracts is that they tend to rely on output-based rather than input-based specifications. In consequence, the longer term focus of contract management is the level and quality of the outputs of the agreement rather than the means by which the output standards have been achieved. This represents a major change of emphasis for organisations that are accustomed to conventional procurement Effective management and monitoring of contracts is the primary means by which RPA is able to verify that it obtains services at the quality, price and standards agreed with private partners The characteristics of PPP agreements are such that the focus and nature of contract management and monitoring activities are significantly different to those associated with conventional input-based contracts. For RPA to successfully procure a major rail infrastructure project under PPP arrangements, it must therefore understand and be prepared to embrace an approach that reflects these differences. Since PPP is also based on partnership, it follows that contract management and monitoring measures should be developed in collaboration with the private partners and in the spirit of partnering. It is preferable that this dialogue should begin as early in the procurement process as possible Performance measurement is carried out principally, though not exclusively, by the private partner according to methods and standards agreed between the parties during contract negotiation. This process is key to the success of PPP agreements since it reflects the premise that partnering arrangements are based on shared objectives and a collaborative approach. RPA monitors performance through the reports received (which may also come from sources other than the private partner) and through its own monitoring and auditing activities. The payment mechanism which is enshrined in the contracts provides an important linkage with these objectives to ensure that above expected performance is recorded while unsatisfactory performance is penalised appropriately. Page 18 of 245

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27 OVERVIEW 2 INTRODUCTION 2.1 This policy framework has been prepared to facilitate the adoption of Public Private Partnerships for rail projects in Ireland. 2.2 Many of the major urban areas in Ireland are adversely affected by heavy volumes of traffic, particularly in recent years, as a consequence of dramatic growth in vehicle numbers. It is expected that these traffic volumes will continue to grow for the foreseeable future. More effective and efficient rail services will contribute materially to the efforts being made to reduce congestion on the roads and encourage more of the travelling public to regard rail as an attractive means of travelling in and out of the major urban areas. Public Private Partnerships have an important role to play in helping deliver the additional rail infrastructure and services which are required to achieve the service levels necessary to establish a viable alternative to the private car. PURPOSE 2.3 The primary purposes of this framework are: to outline the context within which Public Private Partnerships are likely to be established in the rail sector in Ireland; to provide guidance to public sector bodies, such as the Railway Procurement Agency, involved in the procurement of such projects in the future; and to help potential bidders for PPP projects to understand the Government s policies and plans for the rail sector in Ireland. Complete Document3.doc Page 19 of 245

28 OVERVIEW continued Structure 2.4 The document structure is illustrated below and the paragraphs that follow outline the contents of each section. Executive Summary & Overview Part A Introduction Background PPPs Policy Objectives Legislation Ir Legislation EU Regulatory Environment Part B Appendices Proj. Appraisal & Development Project Planning Procurement & Contractual Commercial & Financial Risk Management Performance Standardss Contract Management Figure 2.1: Document Structure 2.5 PART A concentrates on the context and environment within which PPPs are expected to be delivered. The contractual structures of the PPP models expected to be most relevant to rail projects are explained and the legislative environment, both in Ireland and the European Union, is summarised. Additionally, the current state of progress on regulatory reform is outlined and an indicative future institutional framework is suggested. 2.6 PART B consists of technical guidance on the key characteristics of Rail PPPs and suggests methodologies, tools and techniques which can be applied to the development of rail projects. This part of the framework is organised around the key issues identified as requiring specific attention during the process of building and concluding contractual relationships with private partners on rail projects. This Part is likely to be of most interest to bodies such as the Railway Procurement Agency as they commence the task of implementing the rail component of the Government s strategy for public transport. 2.7 The Appendices contain additional explanatory information on particular issues and techniques. Page 20 of 245

29 OVERVIEW continued Department of Public Enterprise PPP Advisors 2.8 The Department of Public Enterprise appointed a team of PPP advisors, in September 2000 to assist in the preparation of this framework. The team is composed of the following firms: Ernst and Young, Financial Advisors, acting as lead advisor; Arthur Cox, Solicitors; Simmons & Simmons, Solicitors; W.S. Atkins, Engineers, Planners and Management Consultants; and Fitzpatrick Associates, Public Policy and Economic Advisors. 2.9 This team was tasked with the preparation of a policy framework to facilitate the adoption of PPPs for future rail projects. The framework embraces the following: Legal and Regulatory Environment; Project Appraisal and Development; Project Planning; Procurement and Contractual; Risk Management; Commercial and Financial Considerations; Performance Standards and Output Specifications; and Contract Management Finalisation of this framework reflects the conclusions drawn by Department of Public Enterprise and its advisors following extensive consultation with the market which was undertaken to ensure that the approach now being adopted is fully informed by the views of relevant industry experts and potential private partners. Page 21 of 245

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31 Part A CONTENTS PAGE Introduction 22 Background 23 Public Private Partnerships 27 Policy Objectives/Issues 34 Legislative Environment Ireland 36 Legislative Environment European Union 46 Regulatory Environment 56

32 INTRODUCTION This section of the Framework outlines the context within which rail PPPs are to be procured. 3.2 Section 4 describes the background to development of this Framework. The public transport elements of the National Development Plan are highlighted and the DTO s Strategy document A Platform for Change is summarised. 3.3 Section 5 introduces PPPs and compares conventional procurement approaches to the structures likely to be of most relevance to PPP procurement. 3.4 Section 6 outlines the major transport policy and PPP objectives which will be relevant to the procurement of light rail and metro PPPs. 3.5 Sections 7 and 8 provide guidance to the key elements of Irish and EU legislation expected to impact on the procurement and implementation of light rail and metro projects as PPPs. 3.6 Finally, Section 9 provides an update on the status of the key developments in the process of regulatory change in the public transport sector. Page 22 of 245

33 DEPARTEMNT OF BACKGROUND 4 Introduction 4.1 In 1999 the Government signalled its support for the use of PPPs as a procurement option which should be considered by Contracting Authorities at the preliminary stages of the planning for major public infrastructure projects. Subsequently, the National Development Plan has called for significant investment in public transport and, since publication of that plan, a number of very significant additional projects have been identified in the rail sector. 4.2 As part of the process of bringing these projects to market the Government decided that significant reform of the legislative and regulatory environment of public transport would be necessary in order to secure investment in these projects. The major developments to date are summarised in Section 7 to 9. National Development Plan 4.3 The National Development Plan sets out proposals to address both regional public transport requirements and the needs of the Greater Dublin Area. Of the total public transport investment required (in excess of 2.8bn.), 2.0bn. was designated for the Greater Dublin Area of which a minimum of 300m. was expected to be funded through PPPs in the rail sector. The objectives of the public transport investment programme for the Greater Dublin Area were stated to be: to address the projected growth in traffic through a combination of investment in transport infrastructure and facilities and demand management measures; to reduce the relative attraction of commuting to work by private car thereby curtailing congestion and vehicular emissions; to increase accessibility for all, particularly people with disabilities; to better reflect evolving commuter travel patterns by providing for a spatial distribution of public transport which addresses the requirements of the Strategic Planning Guidelines; and to support sustainable development. Rail Development outside the Greater Dublin Area 4.4 The regional programme of the NDP will finance a major enhancement of the rail network. In total some 635 million will be spent in the period to This includes a sum of 444 million for the continuation of the Railway Safety Programme and a further 191 million for non-safety related investment such as the purchase of new rolling stock, the upgrading of railway stations and the renewal of railway plant and equipment. 4.5 Beyond the scope of the NDP, proposals for the expansion of the rail network in a number of areas outside the Greater Dublin Area will be looked at in the context of the forthcoming national Strategic Rail Review. DTO Strategy 4.6 The DTO was set up to co-ordinate the implementation, by relevant agencies, of an agreed integrated transport strategy for the Greater Dublin Area. This organisation is the responsibility of a Steering Committee which is appointed by the Minister for the Environment and Local Government. Page 23 of 245

34 BACKGROUND continued 4.7 The DTO strategy ( A Platform for Change ) was launched on 2 October It provides an assessment of the transportation requirements of the GDA over the period to 2016 and outlines an integrated strategy to meet these requirements. 4.8 Travel demand in the GDA, as measured by peak hour trip demand, is projected to grow by 72% over the period i.e. a.m. peak hour trips in 2016 are projected to reach 488,000 compared to 283,000 in This increase reflects the growth, in population, employment, economic activity and households, which is projected in the Strategic Planning Guidelines for the greater Dublin area. 4.9 The main elements of the transportation strategy proposed in response to these requirements are: a radical transformation in the quality and quantity of public transport services; strategic but limited improvements to the road network; improved traffic management and control measures; development of a demand management policy to reduce the growth in travel while maintaining economic progress and to encourage modal shifts in favour of public transport; and better integration of land use and transportation planning The Strategy also offers some preliminary advice, based on DTO experience since 1995, regarding future institutional arrangements for strategic land use and transportation planning and co-ordination in the GDA. A separate Consultation Paper on the Dublin Strategic Land & Transport Body and other regulatory issues has been issued (see Section 9) The public transport elements of the strategy aim to cater for approximately 300,000 trips (70,000 today) in the morning peak hour through an integrated public transport network comprising: a much expanded bus network, comprising an integrated mesh of radial and orbital services and a substantial increase in passenger carrying capacity; an improved DART/Suburban rail network, including improved passenger carrying capacity on the existing network and the development of more tracks on existing alignments and new rail lines including an underground interconnector linking Heuston Station with East Wall Junction via Pearse Street and Docklands; an extension of the on-street light rail network (Luas); the development of a higher capacity segregated light Metro; and a package of measures designed to improve the integration and attractiveness of the public transport network, including park and ride facilities, integrated fares and ticketing, quality interchange facilities and improved passenger information The roads element of the strategy comprises: completion and upgrading of the orbital motorway (M50, Dublin Port Tunnel and Eastern Bypass); upgrading the arterial routes (e.g. N1, N2, N3, N4, N7, N11, N81) outside the orbital motorway; upgrading of non-national roads necessary for access to M50, development needs in the metropolitan area and development centres and support of public transport The traffic management element of the strategy provides for improved traffic signal control on a regional basis, enhanced cycle network and facilities, improved pedestrian Page 24 of 245

35 BACKGROUND continued facilities, further traffic calming schemes and improved management of heavy goods vehicle traffic The strategy identifies traffic demand management as an essential complement to the infrastructure and service improvements proposed and provides for the early development of a demand management strategy addressing, inter alia, road user charging, workplace parking control, mobility management schemes, etc The DTO s initial (high level) estimates of the capital costs of the Strategy is 22billion (IR 17 bn.) which breaks down as follows: (At 2001 Prices) Total IR m. m. IR m. m. IR m. m. Metro 1,000 1,270 4,687 5,951 5,687 7,221 Luas 1,037 1, ,673 2,124 DART/Suburban Rail 1,817 2,307 2,579 3,275 4,396 5,582 Roads 3,256 4, ,234 4,228 5,368 Integration QBN/Bus Priority Traffic Management TOTAL 7,896 10,026 9,323 11,838 17,218 21,862 (DTO: A Platform for Change, Strategy ) 4.16 The rail element (illustrated overleaf) represents over 15bn. of which in excess of 9bn. relates to light rail and metro projects The Strategy provides an overall planning framework for the development of the transport system in the GDA. The major projects involved will also however have to be taken through a detailed planning process involving technical feasibility studies, economic and environmental evaluations, public consultation, statutory approval procedures and detailed design While a substantial proportion of the infrastructure investment involved (e.g. additional Luas lines, Metro, suburban rail interconnector, rail link to Navan, Eastern Bypass, etc.) has been identified as potentially suitable for delivery as PPP projects, the issue of an Exchequer contribution will be addressed on a case-by-case basis. The supply of a detailed value for money comparator will assist in this evaluation Implementation of the Strategy is expected (compared to non-implementation) to: result in a quality public transport service being available to most people within 10 minutes walking distance of where they live; increase the share of the market accounted for by public transport from 35% to 65%; reduce congestion; improve accessibility; and Page 25 of 245

36 BACKGROUND continued result in significant environmental gains including reductions in energy use and emissions below what they otherwise would be One of the next significant tasks for the DTO will be the preparation of a demand management strategy to maximise the impact of the investment and to ensure a sustainable approach to transport in Dublin. Dundalk Drogheda Swords Terminus Main St Swords Laytown Mosney Newbridge Navan Dublin Rd. Forest Fields Dunshaughlin Dublin Airport Terminal Dunboyne Sillogue Kilcock Santry Demense Maynooth Clonee Leixlip Louisa Br. Balbutcher Confey Blanchardstown Bernadette s Cappagh Balymun Collins Mulhuddart Rd. Ave DCU Leixlip Ballycoolin Beaumont Ardlea Coolock Millbrook Lucan North N2 - M50 Whitehall Grace Skelly s Brendan s Grange Rd. Shelerin North Rd. Griffith Park Lane River Jamestown Rd. Tolka Richmond Rd. Clonsilla Coolmine Castleknock Road Ashtown Ashington Broombridge Liffey Jtn. Prospect Drumcrondra Harmonstown Carpenterstown Porterstown Cabra Rd Granby NCR Croke Pk Killester Broadstone Dorset Clontart Church St East Wall Junction Liffey Valley Centre Four Courts Rotunda Connolly Docklands Lucan The Point Depot Inchicore Kilmainham Museum Smithfield Jervis Abbey Busaras Sheriff Esker Lodge Quarryvale Heuston Nassau Tara St Cornmarket St James Watling Pearse Ballyowen Harelawn Blackditch Ballyfermot Stephens Street Fatima Patrick St Green Barrow St Erne St Coldcut Ballyfermot Baggot Neilstown Whitethorn Le Fanu Landsdowne Suir Road Rialto New St Cherry Orchard Harcourt Leeson Mount St Goldenbridge Charlemont Sandy Mount Rowlagh Canal Warrenmount Drimnagh Sydney Parade West Park Clanbrassil Grantham Blackhorse Kelly s Ranelagh Corner Beechwood Booterstown Bluebell Dolphin s Clogher Harold s Cross Cowper Barn Blackrock Milltown Leinster Seapoint Clondalkin Red Cow Dodder Mount Argus Willbrook Windy Arbour Place Mayfield Dundrum Salthill/Monkstown Sundrive Kishoge Balally Main St. Brighton Rathfarnham Poddle Terenure Churchtown Newlands Kingswood Kilmacud Dún Laoghaire South Lucan Stillorgan Kimmage Sandycove Belgard Gr. Belgard Sandyford Tallaght West Hazelhatch Manor Leopardstown Cookstown Glenageary Moneen Cottage Hospital Templeville Gallops Kilmartin Greenhills Kennington Ballyogan Dalkey Sallins Wellington Carrickmines Killiney Tallaght RTC Tymon Laughanstown Loughlinstown Shankhill Naul Cloghran Cherrywood Shankhill Village Malahide Portmarnock Baldoyle Bayside Howth Jtn. Kilbarrack Raheny Gormanstown Balbriggan Skerries Rush Donabate Shanganagh Bray Sutton Howth Greystones Kilcoole Dart Suburban rail LUAS Metro Wicklow Rathdrum Arklow Figure 4.1: Rail element of the DTO Strategy Page 26 of 245

37 DEPARTEMNT OF PUBLIC PRIVATE PARTNERSHIPS 5 Introduction 5.1 The concept of public private partnership for rail infrastructure is not new. Most of the early rail projects in the USA in the 19th century were provided on a concession basis and the early lines of the London Underground where built by entrepreneurs who were backed by private investors. 5.2 Recent developments in infrastructure PPPs have been based on project finance techniques developed in the power, oil & gas industry. The use of limited recourse financing techniques to facilitate a more structured approach to project risk management in public sector projects has been one of the main drivers of PPP. This, combined with the opportunity to develop innovative solutions providing value for money, has seen the adoption of the PPP approach by a number of Governments across the world. 5.3 For an effective PPP, output-oriented working is essential. The emphasis for the public sector lies in avoiding the temptation to lay down all the details of the project in advance and contracting with the private sector to deliver to a detailed specification. To make the best possible use of the knowledge, experience and creativity of the private sector, the public sector does not specify assets as such, but outlines their output specifications which are required for the client to deliver their objectives. Within this specification the public sector must then leave room for the private sector to determine how best to provide the required services. 5.4 Various structures have been developed for the procurement of projects. These are characterised by the degree of risk and control transferred from the Contracting Authority to the other party to the contract. The graph below illustrates five potential structures in terms of the quantum of risk transferred and the degree of control to be given to private partners. The varying levels of risk to be transferred will determine the complexity of the different structures to be adopted. Choice of structure will be driven by the nature of the project and the objectives to be achieved. These structures are discussed in more detail below. DBFO Risk Transfer DBO DBF DB O Contract length Figure 5.1: Risk transfer vs Control given to private partner Page 27 of 245

38 PUBLIC PRIVATE PARTNERSHIPS continued Procurement Options 5.5 Contracting Authorities, when considering the procurement of large scale projects have a number of options in terms of the procurement strategy which may be adopted to facilitate delivery of the required facilities and or services. These can be classified in two broad groupings: Conventional Public Procurement 1 - this option involves methods traditionally applied by public bodies under which the public sector contracts with the private sector for the construction of facilities to a predetermined public sector design. This may be regarded as encompassing both the separate commissioning of design and construction contracts as well as the commissioning of combined design and build contracts; and PPP Procurement these approaches tend to involve long term arrangements under which significant levels of risk are taken by the private sector and responsibilities for the provision of infrastructure and/or services is shared. 5.6 The paragraphs below highlight the major characteristics of the contractual structures generally associated with these approaches. They are examined further in Part B, Sections 13 and 15. Conventional Procurement Structures 5.7 The design and build (DB) model is, essentially, conventional procurement, and is not generally associated with PPP. It is, however, an approach which might be incorporated into PPP procurement, by way of an add on, or used in connection with some stages of a multi-phase project (for example, new railway infrastructure to be constructed in a number of stages, but with one operator appointed to operate trains over all parts of the system once the entire system is completed). 5.8 The following components will be used in a design and build-style transaction: the Project Agreement, to be made between the Contracting Authority and the Project Contractor; possibly, other agreements between the Contracting Authority and the Project Contractor, such as those governing access to land; subcontracts for project design and construction obligations between the Project Contractor and the Construction Company (where the Construction Company is not the Project Contractor); further contracts between the Construction Company and Subcontractors (for example, dealing with design issues and specialist matters); potentially, collateral warranties between the Contracting Authority and subcontractors; insurance arrangements; and in the event of a joint venture, shareholders agreement between Project Contractor and shareholders (if required). Further information on these components is contained in Section Framework for Public Private Partnerships, November 2001, Public Private Informal Advisory Group Page 28 of 245

39 PUBLIC PRIVATE PARTNERSHIPS continued 5.9 The following diagram contains an illustration of a design and build contractual framework, they demonstrate a possible structure where the design and build is on an output performance based specification: Contracting Authority Project Agreement Lease, licence or other agreement on land access Shareholders Shareholders Agreement PPP Contractor (SPV) Insurance Arrangements Insurers Collateral Warranties Collateral Warranties Subcontract Construction Company (Subcontracts design and construction elements) Sub-subcontract Collateral Warranties Subcontractors particularly dealing with design issues and specialist matters Figure 5.2: Contractual Framework for design and build PPP Structures 5.10 There are a number of PPP structures which may be appropriate to the development of light rail/metro networks. The models which are most likely to be considered for development of the light rail/metro networks are discussed in the following paragraphs. Operate 5.11 An operate only concession would involve the private sector providing services in relation to day-to-day operation of the railway, and (in addition to any actual operation of the train service) may include maintenance services and/or replacement of assets depending on the length of the operation This type of concession would typically be used where the rail infrastructure already exists, or is to be provided by another party pursuant to separate contractual arrangements A recent example is the operator concession described in the report entitled Competition for the Award of a Contract for the Operation of Light Rail Services in Dublin Phase One Report (Masons, Booz-Allen & Hamilton Ltd and Babtie Group Limited, December 2000). Page 29 of 245

40 PUBLIC PRIVATE PARTNERSHIPS continued 5.14 The following diagram contains an illustration of a operating concession: Contracting Authority Project Agreement Shareholders Agreement Shareholders PPP Contractor (SPV) Insurance Arrangements Insurers Subcontract Subcontractors (Responsible for particular aspects of operating concession) Collateral Warranty Figure 5.3: Contractual Framework for Operating Concession 5.15 The following components will typically be used: the Project Agreement, to be made between the Contracting Authority and the PPP contractor; possibly, other agreements between the Contracting Authority and the PPP contractor, such as those governing access to land; subcontracts for particular aspects of operating concession; collateral warranties between the Contracting Authority and the subcontractors; insurance arrangements; and shareholders agreement between PPP contractor and shareholders (if required). Further information on these components is contained in Section 13. Design Build & Operate ( DBO ) 5.16 There are some similarities between the contractual frameworks for DBFO and DBO. However, without the financing element, the contractual framework for a DBO transaction is usually simpler than for a DBFO. In this circumstance, responsibility for financing of the project remains with the Contracting Authority. This for example may apply where the PPP contractor is responsible for the design and building of new infrastructure, with train Page 30 of 245

41 PUBLIC PRIVATE PARTNERSHIPS continued services on the new railway being provided by the PPP contractor, with the Contracting Authority paying the PPP contractor for these works and services The DBO approach is preferable in situations where the Contracting Authority decides that capital grant offers better value for money to the Exchequer As for DBFO, the DBO model may include a requirement to carry out certain maintenance work in addition to design, construction and operations services The following diagram contains an illustration of a simple DBO-type contractual framework. Contracting Authority Insurance Proceeds Project Agreement Lease, licence or other agreement on land access Collateral Warranties Shareholders Agreement Shareholders of SPV PPP Contractor (SPV) Insurance Arrangements Insurers Collateral Warranties Construction Company (design and construction services) Subcontracts Subcontracts Train Operator (may include maintenance and also operation of infrastructure) Collateral Warranties Subcontractors e.g. design engineers, architects, environmental specialists, signalling, civil infrastructure. Subcontractors e.g. maintenance firm, facilities services. Collateral Warranties Figure 5.4: Contractual Framework for DBO(M) 5.20 The following components of the contractual framework will be used in a DBO-style transaction: the Project Agreement, to be made between the Contracting authority and the PPP contractor; possibly, other agreements between the Contracting Authority and the PPP contractor, such as those governing access to land; subcontracts for project design, construction, operation and (if applicable) maintenance work; further contracts between these subcontractors and specialists dealing with particular issues (such as architects and environmental engineers) should the need for specialist services arise; Page 31 of 245

42 PUBLIC PRIVATE PARTNERSHIPS continued collateral warranties between the Contracting Authority and subcontractors; service contracts between the PPP contractor and third party service providers (or subcontractors and third party service providers), as the need arises; insurance arrangements; and consortium/shareholders agreements (if required). Further information on these components is contained in Section 13. Design Build Finance and Maintain ( DBFM ) 5.21 This model may be appropriate in the context of system extensions where an operator is already in place for the existing network but a PPP approach is to be adopted for the provision of extensions to existing lines. The private partner might be given responsibility for delivery of the extension to a required output specification and is responsible for design, construction, financing and possibly maintenance of the infrastructure, the operating concession being procured separately. This structure will be similar to the DBFO outlined below but will exclude the operations elements and typically would be a DBFM+O. Design Build Finance & Operate ( DBFO ) 5.22 This structure requires the private partner to deliver the infrastructure and operate the trains over an agreed period. Financing will generally be provided in the form of both debt and private equity, while returns are likely to be generated from a mix of availability payments, ticketing revenues and other sources of income. The DBFO approach may be suitable particularly where large-scale new rail infrastructure is required and can be procured either as part of the requirements for any expansion of an existing network or alternatively where a network is being procured on a stand alone basis (so that there are no complications or difficulties in having to interface and/or integrate with other operators or to buy out any existing operators). A further discussion of the issues relating to the phasing of network development and concession structure is contained in section The following components of the contractual framework will be used in a DBFO-style transaction: the Project Agreement, to be made between the Contracting authority and the PPP contractor; possibly, other agreements between the Contracting Authority and the PPP contractor, such as those governing access to land; subcontracts for project design, construction, operation and (if applicable) maintenance work; further contracts between these subcontractors and specialists dealing with particular issues (such as architects and environmental engineers) should the need for specialist services arise; collateral warranties between the Contracting Authority and subcontractors; collateral warranties between the Lenders and subcontractors; lenders agreements with the PPP contractor (SPV) and with principals in the case of limited recourse financing; lenders direct (step in) agreements with the Contracting Authority; service contracts between the PPP contractor and third party service providers (or subcontractors and third party service providers), as the need arises; Page 32 of 245

43 PUBLIC PRIVATE PARTNERSHIPS continued insurance arrangements; and consortium/shareholders agreements (as required). Further information on these components is contained in Section The following diagram contains an illustration of how a DBFO-type contractual framework would function. Direct Agreement Contracting Authority Lenders (one or more financial institutions often with lead financier acting as agent for these financial institutions) Funding Agreement Project Agreement Lease, licence or other agreement regulating land access Shareholders Agreement Shareholders (assuming contractor is SPV). Alternatively project could be established pursuant to joint venture etc. PPP Contractor (SPV) Insurance Arrangements Subcontracts Collateral Warranty Construction Company (design construction and maintenance services) Train Operator (may include maintenance and also operation of infrastructure) Collateral Warranty Subcontractors e.g. design engineers, architects, environmental specialists, signalling, civil infrastructure contractors. Subcontractors e.g. maintenance firm, facilities services. Collateral Warranties Figure 5.5: Contractual Framework for DBFO Page 33 of 245

44 DEPARTEMNT OF POLICY OBJECTIVES/ISSUES 6 Introduction 6.1 This section sets out the primary goals associated with the development of the rail projects and the specific objectives of the Government in adopting the PPP route for procurement. It then articulates specific policy issues/constraints related to these and summarises the agreed objectives to be secured through the application of PPP approaches to procurement of rail projects. Goal of Transport Policy 6.2 The primary purpose of any public transport system is the movement of people and goods around the nation safely, efficiently and effectively. It is within the context of this overarching theme that the Department of Public Enterprise has adopted the primary strategic objective of securing an integrated public transport system for the Greater Dublin Area and, ultimately, at national level. 6.3 The consultation paper - A New Institutional and Regulatory Framework for Public Transport expresses the overall objectives of public transport policy as being: to ensure the provision of a well functioning, integrated public transport system which enhances competitiveness, sustains economic progress and contributes to social cohesion; to ensure the provision of a defined standard of public transport, at reasonable cost to the customer and the taxpayer; and to ensure the timely and cost effective delivery of the accelerated investment in infrastructure and facilities necessary to ensure improved public transport provision. 6.4 With regard to the development of a rail network for the Greater Dublin Area, a number of strategic objectives have been adopted: to procure a quality, customer centred transport system within an acceptable timescale; to improve the quality of life for citizens through the provision of an attractive alternative to the private car and thus address the problem of congestion on roads; to comply with environmental obligations in the context of the recently published National Climate Change Strategy and other relevant policies; to promote an adequate public transport system which will contribute to economic growth; and to improve accessibility/mobility. PPP and Rail Projects 6.5 Against the background of a need for improved quality services and the capital costs of developing a more comprehensive rail network, the Government has determined that utilisation of PPPs for rail projects is desirable in order to secure: value for money for the Exchequer; accelerated delivery of rail capacity; delivery within acceptable timeframes while causing minimum disruption during implementation; Page 34 of 245

45 POLICY OBJECTIVES/ISSUES continued enhanced innovation and efficiency thus achieving optimum use of resources and reduced dependence on public subsidy; a whole life approach to asset management; the use of partnerships with private partners in innovative ways; safe, quality, frequent and reliable services; acceptable transfer of risk to private partners; hand back of rail assets to the State at the end of the concession period, for nil consideration and a defined residual asset life; integration of all parts of the transport network (Rail, Bus, Car, Air, Sea); and further extensions to the urban and suburban rail system. Page 35 of 245

46 LEGISLATIVE ENVIRONMENT - IRELAND 7 Introduction 7.1 This section considers issues presented by the current Irish legislative regime which might materially affect or otherwise impact on light railway/metro PPP projects in Ireland. Accordingly, it aims to consider: the capacity of a public rail infrastructure procurement entity to carry out the desired functions and achieve the Department of Public Enterprise s PPP objectives under current legislation, and in particular the Transport (Railway Infrastructure) Act (i.e. does the enabling legislation provide sufficient basis to achieve the desired outcomes?); whether there are any particular legislative issues which could affect the procurement of light railway/metro PPPs, including issues that could render a project unbankable, such as unreasonably complex or lengthy approval requirements or objectors appeal rights for project proposals; and how the procurement of light railway/metro PPPs will operate, having regard to other existing and proposed Irish legislation. 7.2 These issues have been approached by providing in this section: a brief overview of work done previously to identify legislative and regulatory issues which might affect the procurement of future PPP rail projects; a summary of the structure and operative provisions of the Transport (Railway Infrastructure) Act, which forms the basis of the statutory regime for procurement of light railway and metro PPPs in Ireland; and a discussion and analysis of existing Irish transport, railways and other relevant legislation, with the objective of identifying legislation which may present particular issues for the procurement of future light railway/metro projects as PPPs. Previous PPP Studies 7.3 The Government has on several occasions recently either undertaken itself or commissioned consultants to consider the possibility of using a PPP approach for procurement of public infrastructure. Although none of this work has investigated in any detail the potential effects of the legislative regime on the procurement of light railway/metro PPPs, some relevant commentary on legislative issues has been included in this work. A summary of relevant findings from previous PPP studies is contained in Appendix D. Transport (Railway Infrastructure) Act, The recently passed Transport (Railway Infrastructure) Act forms the basis of the legislative regime for the procurement of railways and rail infrastructure as PPPs. This Act includes provisions designed to address vires issues including those identified in previous PPP Studies (see Appendix D). The broad objectives of the Act are to: establish RPA, in order to facilitate the procurement of light railway and metro infrastructure in Ireland, including by means of public private partnership; provide a stream-lined application process for the making of railway orders by the Minister for Public Enterprise to authorise the design, construction, operation and maintenance of railways and railway infrastructure (or individual components of this work) whether by RPA, CIÉ or some other party authorised by RPA; Page 36 of 245

47 LEGISLATIVE ENVIRONMENT - IRELAND continued set out the powers which may be exercised in order to design, finance, construct, operate and maintain these railways and railway infrastructure (and to ensure that these powers are sufficiently broad to accommodate the various PPP models); and clarify certain rights and obligations in relation to light railway works on public roads. 7.5 Summaries of: the key operative provisions of the Transport (Railway Infrastructure) Act; and the railway order application and approval process under Part 3 of the Act, are contained in Appendices E and G respectively. Given that no light railway/metro construction work may commence without a railway order in place, Appendix H also contains a discussion on issues associated with the obtaining of a railway order which should be taken into account when RPA carries out initial project due diligence, and formulates its detailed project development and procurement strategy for a particular project. Transport (Railway Infrastructure) Act - Analysis and Commentary 7.6 In preparing this Framework, material issues presented by the Transport (Railway Infrastructure) Act and other existing or proposed Irish legislation, which might affect the future procurement of light railways, metro and rail infrastructure by PPP (particularly through RPA, as is contemplated by the Transport (Railway Infrastructure) Act) were identified through: sessions with officials of the Department of Public Enterprise and other Government Departments, which included discussions about the terms of various drafts of the Transport (Railway Infrastructure) Bill; a separate, detailed review of Irish legislation governing railways and general transport matters, as well as relevant reports and studies; and consideration of how foreign jurisdictions have sought to manage vires issues through legislation, and whether approaches which have proved successful in dealing with vires issues overseas can usefully be pursued in Ireland. 7.7 The issues and approaches identified through this process were discussed and presented in the draft versions of this Framework provided to the Department of Public Enterprise in December 2000 and January Generally, the key issues identified were adequately resolved at the time through discussion and (where required) amendment to the draft Transport (Railway Infrastructure) Bill before it was published in February In summary, and subject to the comments made in the following paragraphs, the view of the Project team is that the Transport (Railway Infrastructure) Act provides an adequate legislative basis for the procurement of light railways, metro and rail infrastructure in Ireland by PPP. Vires Issues under the Transport (Railway Infrastructure) Act 7.9 In its traditional sense vires refers to the power or capacity (typically conferred by law) of a body to carry out its functions The Transport (Railway Infrastructure) Act establishes RPA with functions which include the procurement of light railways and metro as PPPs. RPA has broad powers under this legislation to pursue these functions. In particular, the Act provides that RPA has all powers as are necessary or incidental or ancillary to the performance of its functions, which are stated to be: Page 37 of 245

48 LEGISLATIVE ENVIRONMENT - IRELAND continued to secure the provision of, or to provide, such light railway and metro railway infrastructure as may be determined by the Minister for Public Enterprise; to monitor and publish regular reports on the safety of light railway and metro infrastructure; to enter into agreements with third parties in order to secure the provision of railway infrastructure, whether by means of a concession, joint venture, public private partnership or any other means; and to acquire and facilitate the development of land adjacent to any railway works (the subject of an application for a railway order) where such acquisition and development contributes to the economic viability of these railway works, as well as any additional functions in relation to public transport by rail or road as the Minister considers appropriate. Furthermore, RPA (or a railway undertaking on behalf of RPA) may exploit commercial opportunities arising from its functions. It may receive income arising from, and make payments in respect of, its functions A key issue in relation to these powers is the scope of concession, joint venture, public private partnership or other means as well as the term railway infrastructure. Given the broad ambit of the former phrase, and the broad scope of public private partnership arrangement contained in the State Authorities (Public Private Partnership Arrangements) Bill, 2001 (which would be relevant in any statutory interpretation exercise) there is little doubt that concession, joint venture, public private partnership or other means should not unduly restrict RPA from entered into any PPP arrangement with a PPP contractor Railway infrastructure is also defined broadly in the Act, so as to encompass railway works and also railway services: railway infrastructure means any land, buildings, structures, equipment, systems, vehicles, services or other thing used in connection with, or necessary or incidental to, the movement of passengers or freight by railway; As this definition extends to services, or indeed any other thing used in connection with railways, it is clearly broad enough to extend to operation and maintenance services for light railway and metro (whether as part of a DBFO arrangement, or a separate operating concession) in addition to the design and construction of railway works In relation to project financing arrangements, the Act relevantly provides: where RPA enters into an agreement with a person and in connection with that agreement another person makes a financial loan to, or provides any other form of finance for, a party to the agreement, RPA is deemed to have the power to enter into an arrangement with that other person; RPA may (with the consent of the Ministers for Public Enterprise and Finance) raise or borrow money for the purpose of carrying out its functions; the Minister for Finance may guarantee the due repayment of any amount (or payment of interest on such amount) borrowed by RPA; and the Minister for Public Enterprise may advance to RPA such sums as he or she may determine for the purpose of expenditure in the performance of its functions A limit on RPA borrowings of 600 million (IR ) is provided in the Act. Whilst it could be suggested that this limit may be insufficient (particularly in the situation where there are several major projects running simultaneously), the Project team is of the view that this limitation should not present an issue given that section 17 of the Act permits the Minister for Public Enterprise to make advances of funds to RPA from sums Page 38 of 245

49 LEGISLATIVE ENVIRONMENT - IRELAND continued provided by the Oireachtas. This mechanism is expected to be a major source of RPA funding The Act also states that RPA s functions may be performed by subsidiaries, and RPA (or a subsidiary) is also given the power to promote and take part in the formation or establishment of a company, enter into joint ventures or partnerships for the purpose of fulfilling any of its functions RPA is sufficiently empowered by these provisions to carry out its desired functions and achieve the Department of Public Enterprise s current PPP objectives for light railways and metro, and to procure PPP projects based on the models described in this Framework. However, in the event that any doubt arises over any particular aspect of a PPP project, it is noted that further support on RPA s vires in relation to that aspect may be derived from: section 2 of the State Authorities (Development and Management) Act, 1993 (which contains general powers designed to permit State authorities to facilitate or procure development); section 2 of the Financial Transactions of Certain Companies and Other Bodies Act, 1992 (which relates to hedging arrangements); and the PPP Bill, which is discussed further in the following paragraphs. PPP Bill 7.17 Despite the conclusion in paragraph 7.16, should any doubts remain about the capacity of RPA to procure particular light railway or metro PPP projects (or parts thereof), these could be resolved providing that the PPP Bill will apply to acts of RPA. This Bill has been formulated in order to address any vires issues which affect the ability of State authorities to enter into PPP-type transactions (whether current or future) State authority is defined in the PPP Bill to include Ministers of the Government, local authorities and the NRA. As at the date of this Framework: the PPP Bill is currently before Oireachtas; and the PPP Bill is not expressed to extend to RPA (noting however that the PPP Bill may subsequently be amended at the Committee to include RPA, or alternatively under the terms of the Bill the Minister for Finance could, once the Bill is in force, make an order to the effect that RPA shall be a State authority for purposes of the Bill) The PPP Bill relevantly authorises State authorities to enter into public private partnership arrangements with persons for the discharge of specified functions of the State authority in relation to: design/construct an asset, together with the operation of services relating to the asset (and, if required, financing of the design/construct/operate components); construct/operate an asset and, if required, financing of the construct/operate components; design/construct of an asset and financing of the design/construct components; and provision of services relating to an asset for at least 5 years. Page 39 of 245

50 LEGISLATIVE ENVIRONMENT - IRELAND continued 7.20 The Bill also permits State authorities to: arrange or provide payment to a partner, to enter into direct agreements with lenders, impose terms and conditions on the performance by the partner of obligations under a PPP arrangement (performance standards), as well as transfer the State authority s interest in an asset to the partner (whether by conveyance, lease, licence or otherwise); and create and own shares in a company for the purposes of a PPP arrangement or to enter into such an arrangement (subject to the consent of the appropriate Minister) Section 5 of the Bill operates to overcome vires issues affecting existing PPP projects by providing that a PPP arrangement or direct agreement, whenever entered into shall (where entered into in good faith by the State authority concerned) have effect and be deemed always to have had effect as if the State authority: has or had the power to enter into it; and has or had duly exercised that power. Vires and the General Application of Railways Legislation 7.22 The assessment of Irish legislation carried out by the Project team included an assessment of whether any legislation other than the Transport (Railway Infrastructure) Act would restrict or prevent all or any aspect of the procurement and implementation of future light railway or metro PPP projects in Ireland (i.e. whether any act or acts of RPA or another State entity required to facilitate a project, would be contrary to that legislation, or otherwise ultra vires, or beyond power ) There is a large quantity of existing legislation which governs railways and general transport matters in Ireland (see the list of legislation in Appendix B). All of this legislation was reviewed in the course of the preparation of this Framework Based on our review of this legislation, existing railways and general transport legislation should notmaterially affect the scope of RPA s powers to procure light railway and metro PPP projects in Ireland, or the implementation of such projects, they adopt or have structures similar to the PPP models outlined in Section 5 of this Framework This situation may of course alter in the event of any change of law, for example through the repeal of existing legislation or the introduction at some point in the future of legislation limiting existing powers PPP transactions are generally complex and, by their very nature, often innovative. It is therefore impossible to state in absolute terms that the present legislative regime is always going to be totally sufficient to permit all types of transaction structures devised both now and in the future. Accordingly, a vires assessment should still be carried out as part of the preliminary PPP assessment for any future project. Other Particular Legislative Issues for PPPs 7.27 One of the objectives of the Transport (Railway Infrastructure) Act is to provide a streamlined process leading to the grant of approval to carry out railway works, and also to ensure the smooth operation of the railway works when constructed. It is in the best interests of the key stakeholders that: the statutory approvals needed prior to construction of a light railway/metro are as few (and as simple) as possible; and Page 40 of 245

51 LEGISLATIVE ENVIRONMENT - IRELAND continued the powers of the State to intervene with the operation of a privately-operated railway are not unreasonably excessive, but are sufficient to ensure public confidence in procurement of railways as PPPs In the remainder of this section, we highlight some issues presented by the existing Irish legislative environment which will be relevant to RPA s assessment of the viability of future light railway/metro PPP projects (having regard to the proposed apportionment of statutory risk between RPA and the PPP contractor, as set out in Section 14), namely: the acquisition of land for additional development; transfer of employment issues; and the impacts of 19 th century railways legislation (which remains in force today). Project Land Requirements 7.29 The Transport (Railway Infrastructure) Act contemplates that RPA may seek to develop (or procure the development of) land adjacent to railway works for non-railway purposes. In particular, section 11(1)(d) of the Act provides that RPA has the function to compulsorily acquire and facilitate the development of land adjacent to any railway works subject to an application for a railway order where such an acquisition contributes to the economic viability of the railway works Accordingly, when a railway order is made by the Minister under Part 3 of the Act, section 45 provides that it shall operate as a confirmed compulsory purchase order in respect of all land specified in the order (comprising land required for railway works and, potentially, additional lands required for non-railway purposes). These CPO powers extend not only to the acquisition of freehold title to land but also to lesser rights in land (such as wayleaves), as well as to substrata of land. A description of the CPO process under section 45 is contained in Appendix E In addition to compulsory acquisition of land, the Transport (Railway Infrastructure) Act permits RPA to acquire land on commercial terms: where the land is adjacent to land acquired by CPO, in the opinion of RPA it is more efficient and economical to do so, and the Minister and persons with interests in the relevant land have consented (section 45(2)); and where the land is adjacent to any railway works subject to a railway order under the Act, where such acquisition and development contributes to the economic viability of those works In the event that the inclusion (and, if necessary, the acquisition) of land for additional development is planned as part of a light railway/metro PPP project, RPA will satisfy itself of several matters: firstly, development which is outside the scope of railway works under the Transport (Railway Infrastructure) Act will generally not benefit from the exemption from planning permission requirements which exists for railway works under this Act (see section 38). Accordingly, the need for planning permission under the Planning and Development Act, 2000 should be incorporated into RPA s project strategy if the additional land is required as part of the PPP project for nonrailway works - see, generally, Appendix E and H. An additional factor to take into account will be whether RPA decides that responsibility for obtaining this planning permission should be transferred under the Project Agreement to the PPP contractor. Page 41 of 245

52 LEGISLATIVE ENVIRONMENT - IRELAND continued Accordingly, a railway project incorporating an additional non-railway development might need (separately) to be authorised by (1) an application for a railway order including an environmental impact statement (EIS) and other supporting documents and (2) an application for planning permission, probably also including an EIS requirement. In some circumstances railway works and additional development may be inextricably linked (for example where a commercial development is proposed to be constructed on top of an underground Metro station), so that practicalities would dictate that one environmental impact statement would need to be prepared for the whole development (even though under the Transport (Railway Infrastructure) Act, for the purposes of the railway order, an EIS is only required for the railway works component, not the additional development component); secondly, RPA must ensure that where acquisition of additional land is contemplated, the acquisition contributes to the economic viability of the railway works in question. Unfortunately, the Act does not provide any additional guidance on the meaning of this term. A similar issue arises in section 45(2) of the Act, which states that acquisition of additional adjoining land is permissible if it is more efficient and economical to do so; and thirdly, an issue could arise where it is proposed to compulsorily acquire more land than is necessary for a railway undertaking (so as to enable for example a commercial development with a private sector partner) in that it could be argued that such an acquisition might contravene (or be limited in scope by) Articles and 43 of the Constitution of Ireland, which seek to protect private property rights. Generally, when the validity of CPO legislation has previously been questioned in the Courts on Constitutional grounds, the legislation has been held to be valid so long as the mechanism for calculation of compensation payable to the owners of land the subject of a CPO is considered to result in those land owners being fairly and adequately compensated. Transfer of Employment Requirements 7.33 In Ireland the protection of employees on the transfer of an undertaking is governed by the European Communities (Safeguarding of Employees' Rights on Transfer of Undertakings) Regulations, 1980 to 2000 (the Regulations ). The Regulations enact into Irish law the Acquired Rights Directive (Council Directive 77/187/EEC and Directive 2001/23/EC) which was introduced by the EU to ensure continuity of employment relationships and the protection of employees rights within a business irrespective of any change of ownership The principal effects of the Regulations are: the employees who are employed in the transferred business will be entitled to continued employment with the transferee under the same terms and conditions of employment as those they enjoyed with the transferor. All employment rights and obligations whether express or implied (other than pension rights) are transferred. Restrictions are imposed on changes in the terms and conditions of employment of the employees. If the employment is terminated by the employee because of substantial change in working conditions the employer may be deemed to be responsible for the termination; all employees are protected against transfer-connected dismissals whether occurring before or after the transfer. This does not prevent dismissals for economic, technical or organisational reasons entailing changes in the workforce. Any dismissal for a reason connected with the transfer will be deemed to be automatically unfair whether it occurs before or after the transfer. There is no Page 42 of 245

53 LEGISLATIVE ENVIRONMENT - IRELAND continued formal limit in time to when a dismissal is connected with a transfer it is not the timing but the reason which will be important. But in practice the longer the time period between the dismissal and the transfer, the more likely it is that the dismissal can be shown to be for a reason not connected with the transfer; employees or their representatives must be informed in good time before the transfer about the date and time of the transfer, reasons for the transfer, implications of the transfer for employees and must be consulted with in relation to how it will affect the workforce; all collective agreements transfer and the recognition of trade unions continues; and civil liability under contract, statute or common law also transfers with the business Depending on the circumstances of any particular PPP project, the provisions of the Regulations may be pertinent. The Regulations will apply to the transfer of any business or a part of a business where the business or part transferred is an identifiable, stable and autonomous economic entity which retains its identity following the transfer, and will need to be considered in situations such as: transfer of State employees to a PPP Co (and any subsequent transfer from the PPP Co to a subcontractor of the PPP Co) at the commencement of an operating concession; transfer of PPP Co (or subcontractor) employees to the State, at the end of the term of or on the termination otherwise arising of a PPP arrangement; and transfer of the employees of one PPP Co to another PPP Co (for example where a contract including train operation obligations is awarded for the whole of a light railway network, to include the operation of new lines as well as to assume control of existing lines) 7.36 Only those employees who work exclusively or mainly in the part of the business to be transferred will be entitled to transfer to the employment of the transferee Employees have the right to object to the transfer of their employment. If an employee objects to the transfer and opts not to avail of the protection of employment ensured by the Regulations, that employee may, depending on the particular circumstances of the case, be entitled to a statutory redundancy payment from the transferor under the Redundancy Payments and Unfair Dismissals Acts, 1967 to 1993, in the event that the transferor does not have work for the employee subsequent to the transfer To date, contracting authorities in the UK have tended to seek to have the PPP Co act as if the UK-equivalent regulations (TUPE) apply even if there is doubt about whether these regulations actually apply. The Public-Private Informal Advisory Group in its Framework for Public Private Partnerships recommends that PPPs should be approached on the basis that no less favourable terms than the Regulations apply. Having regard to this position, it is recommended that RPA assess transfer of employment issues and the impact of the Regulations on a project by project basis. 19 th Century Railways Legislation 7.39 There is a great body of legislation governing railways and transport in Ireland which was enacted prior to the Transport (Railway Infrastructure) Act and which remains in force, including a large number of statutes enacted in the 19 th century (See Appendix B). Many of these statutes imposed approval or notification requirements on the owner/operators of new railways. However, these are considered not to affect materially the light railway/metro PPP procurement process (mainly owing to (1) the insignificance of the penalties under the relevant legislation for failure to comply and (2) the questionable current status of entities established at that time to enforce these requirements). Page 43 of 245

54 LEGISLATIVE ENVIRONMENT - IRELAND continued 7.40 In addition, many of these requirements are only triggered in respect of railways constructed and operated pursuant to special Acts (i.e. legislation enacted specifically for the purpose of authorising a particular railway). Special Act is generally defined in the legislation to mean: any Act which shall be hereafter passed authorising the Construction of a Railway, and with which this Act shall be so incorporated as aforesaid; [this particular definition is contained in the Railways Clauses Consolidation Act, 1845] 7.41 The Transport (Railway Infrastructure) Act does not itself constitute a special Act, given that it does not authorise the construction of a particular railway, light railway or metro (it merely sets up a mechanism for orders to be made by the Minister authorising particular railway projects). Accordingly, the requirements in this 19 th century legislation which apply only to those railways authorised by special Act should not apply to projects authorised by a railway order under the Transport (Railway Infrastructure) Act If, however a particular project is sought to be procured by means of a project-specific piece of legislation, then the effects of the legislation which applies to railways established by special Act will need to be considered More recent legislation has included several requirements for Ministerial approval which could be required in connection with a future railway project, but since responsibility for such approvals is vested by the relevant Act in the Minister for Public Enterprise (who also has responsibility for making railway orders under the Transport (Railway Infrastructure) Act), any need to obtain any of these approvals should not present a material issue for any future project. Conclusions 7.44 The review of existing Irish legislation and other documentation for the purpose of preparing this Framework has led to the conclusion that: although there is a large body of legislation governing railways and related matters in Ireland, the primary source of Irish legislative provision in relation to the approval and implementation of future light railway/metro PPP projects is the Transport (Railway Infrastructure) Act itself (rather than other legislation). In addition to the material contained in this section, Appendices H and I contains information on issues presented by the railway order process which could impact on a project procurement process (for example the possibility of time delays arising from the railway order public inquiry, and the possibility that the Minister may impose unreasonable conditions when making the railway order); the procedures and processes of the Transport (Railway Infrastructure) Act should not present any unreasonable constraint for future light railway/metro PPP projects, if the railway order application process (and consultation carried out in relation to a project with stakeholders particularly Government decision makers and also key public interest groups) is well managed: including (1) formulating a railway order approval strategy and commencing consultations with stakeholders as early as possible, and (2) involving the private sector as early as practicable (to gain the benefit of relevant experience in other projects, and to provide technical input to responses to issues raised, by stakeholders, and in the preparation of documents such as the EIS which are required to accompany the railway order application); apart from the Transport (Railway Infrastructure) Act, none of the other Irish railways or general transport statutes reviewed should pose any material constraint for future light railway/metro PPP projects. It is important to note however that the Transport (Railway Infrastructure) Act does not purport to establish a one-stop Page 44 of 245

55 LEGISLATIVE ENVIRONMENT - IRELAND continued shop for approvals for railway projects. Major railway projects will generally require a number of other statutory approvals (e.g. railway safety case and environmental approvals as an integrated pollution control licence required in connection with project construction works). The need for and timing of such approvals should be a key component of the project strategy for every project, and responsibility for such approvals apportioned between RPA and the PPP contractor according to the project risk framework; and RPA is sufficiently empowered by the Transport (Railway Infrastructure) Act to carry out its desired functions and achieve the Department of Public Enterprise s current PPP objectives for light railways/metro As noted previously however, PPP transactions are often complex, involving a number of issues specific to the project in question. Despite the broad powers vested in RPA by the Transport (Railway Infrastructure) Act, an assessment of the specific circumstances of any proposed project and the resulting application of legislation should remain an integral part of the PPP assessment which takes place before formal commencement of the procurement process for that project A pertinent example of project-specific circumstances would arise in the event that it is proposed to restore and commence operation of a new service on one of the number of disused railway lines throughout Ireland. Many of these routes were constructed in the 19th century pursuant to project-specific enabling legislation, much of which remains in force today. Accordingly, if any of these disused lines are proposed to be restored and reused, it is recommended that the relevant project-specific legislation be reviewed, to ensure that it does not present any issue for the project, or give any aggrieved person or group or person an unreasonably broad right to object to or otherwise disrupt the project. Page 45 of 245

56 LEGISLATIVE ENVIRONMENT EUROPEAN UNION 8 Introduction 8.1 This section contains discussion and analysis of the potential issues presented by European Union legislation in relation to future light railway/metro PPP projects in Ireland. It focuses on those governing: railway operations (the railway package of Directives, comprising Directives 91/440/EEC, 95/18/EC and 95/19/EC); the regulation of State aids ; and public procurement. 8.2 Although public procurement of light railway/metro PPP projects will be governed by the EC Public Procurement Directives, Irish legislation also impacts on this area to a limited degree. For ease of reference the Irish legislation is considered at the end of in this section with the EC public procurement material, rather than in Section 7. Railway Package of Directives 8.3 The railway package of Directives have been transposed into Irish law as follows: Directive 91/440/EEC was largely transposed by the European Communities (Access to Railway Infrastructure) Regulations, 1996 (SI 204 of 1996) noting that some of the provisions of this Directive were already enshrined in Irish law; Directive 95/19/EC was transposed by the European Communities (Allocation of Railway Infrastructure Capacity and Charging of Infrastructure Fees) Regulations, 1999 (SI 281 of 1999); and Directive 95/18/EC was transposed by the European Communities (Licensing of Railway Undertakings) Regulations, Directive 91/440/EEC requires each EU Member State: on specific terms, to guarantee rights of access for rail transport operators in other Member States to international passenger, freight and combined transport services in that State; to manage railway undertakings in such a way that they understand the need for competitiveness and sound financial management; and to manage railway undertakings independently by giving them a budget and system of accounts which are separate from those of the State, and to have separate accounting for railway infrastructure and the operation of transport services as such. 8.5 Directive 95/19/EC regulates the allocation of railway infrastructure capacity and the charging of infrastructure fees for certain railway undertakings, while Directive 95/18/EC prescribes certain criteria applicable to the issue, renewal or amendment of licences by a Member State intended for certain railway undertakings when they provide the services referred to in art.10 of Directive 91/440/EEC. Page 46 of 245

57 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued 8.6 These Directives should not impact on light railway and metro PPP projects in Ireland since: article 2 of Directive 91/440/EEC provides that Member States may exclude from the scope of the Directive railway undertakings whose activity is limited to the provision of solely urban, suburban or regional services. Regulation 3 of SI 204 of 1996 provides for this exclusion to apply in Ireland. There is no doubt that light railway and metro services are by their very nature limited to solely urban or suburban services; and Directives 95/18EC and 95/19/EC both contain provisions stating that where the activities of railway undertakings are limited to the operation of urban, suburban and regional services they shall be excluded from the scope of the relevant Directive (art. 1(2) of each Directive). The application of these Directives in Irish law is based upon the application of Directive 91/440/EEC. Given the effect of reg.3 of SI 204 of 1996, and the provisions of the Directives themselves, they should have no effect on light rail and metro services in Ireland (assuming such services are limited to urban and suburban services). 8.7 It is noted that as at the date of this Framework Directive 95/19/EC has been superseded at EC level and Directives 91/440/EEC and 95/18/EC have been amended. However, these changes have yet to be transposed into Irish law. State Aid Issues 8.8 EU legislation governing the provision of aid by Member States could restrict or constrain the provision of funding by the State (or the manner in which funding is provided) to future light railway/metro PPP projects in Ireland. The basis for regulation of state aid derives from Article 87 of the EC Treaty. Article 87 (1) provides: Save as otherwise provided in this Treaty, any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market 8.9 The concept of state aid is defined in relation to its effects, and is very wide. It often includes measures other than direct subsidies, such as reduced (or deferred) taxes or tariffs, guarantees and loans Articles 87(2) and 87(3) of the EC Treaty contain certain exemptions to the general prohibition on state aid. The EC Treaty also contains special rules for the transport sector (Articles 73 and 76 EC Treaty) authorising, for example, aid meeting transport coordination needs or aid to cover the costs inherent in providing a public transport system In the event that the provision of a subsidy or some other benefit is assessed to be state aid, Article 88 of the EC Treaty obliges the Member State concerned to notify to the European Commission plans to grant new aid and not to put the proposed measures into effect until the Commission has taken a decision on the case. The time spent by the Commission assessing the case (and its compliance, or lack thereof, with the EC Treaty) could substantially delay the realisation of the project in question, particularly if it decides to open a formal investigation. Page 47 of 245

58 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued Analysis 8.12 It seems most unlikely that the EC Treaty s state aid rules would apply to any subsidy granted by RPA for the construction and operation of PPP light railway and/or metro projects in Ireland which, in the widest possible sense, could only be described as city or town-based suburban passenger (light) rail transport systems, without any possible effect on trade with any other Member States including across the nearest other EC country border (Northern Ireland). In that respect, it seems most unlikely that the test of State aid affecting trade between Member States could be satisfied (even if the impacts of such suburban railway systems on competing modes of transport such as buses were taken into account) However and assuming that there could possibly be an effect (arising from the provision of State subsidies or other benefits on urban or suburban railways) on trade between Ireland and another Member State, then provided the project in question was competitively tendered and awarded in full compliance with the EU s public procurement rules, the aid could be deemed to be automatically approved (thus not requiring notification to Brussels). This is because a non-discriminatory, competitive tendering procedure would provide the requisite guarantee that the subsidy corresponded to the minimum necessary to accomplish the project. Proposed Reform 8.14 On 26 July 2000 the Commission tabled a draft proposal for a new Regulation applying the EC state aid rules to the transport sector (COM (2000) 5 final). One of the aims of the Proposal is to provide a comprehensive exemption for state aid for the development and operation of rail transport infrastructure which benefits infrastructure managers. This draft Regulation is not however expected to come into force for some time In addition, in April 2000, the Commission also adopted guidelines explaining how the EC Treaty state aid rules apply to PPPs executed on the basis of services concessions. The Communication confirms that the grant of such concessions should be subject to the fundamental EC Treaty rules on non-discrimination, equal treatment (between potential bidders), transparency (of the tendering process), mutual recognition (of relevant technical proposals) and proportionality Depending on whether the subsidy is planned to be awarded before or after the entry into force of the Proposal, it may be advisable to arrange an early discussion with the Commission to ensure that a project is compatible with Community law The Proposal changes the current position in relation to PPPs. It makes it very clear that: if an open and non-discriminatory procedure is carried out to select the relevant undertaking or consortium [to build and manage the project and/or use the infrastructure] this ought in principle to solve any issues [of state aid] and make the aid compatible with the common market (paragraph 46). In that case, the state aid would be deemed automatically compatible with the common market under Article 3 of the Proposal as opposed to being exposed to the potential risk of being declared incompatible after the grant had been made In the event that the PPP project was not competitively tendered (or not adequately tendered for example, by restricting the advertisement to one or two EU countries), then Page 48 of 245

59 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued the Proposal again makes it clear that the state aid could still be declared compatible with the EC Treaty but only after it had been notified to the European Commission. REGULATION OF PUBLIC PROCUREMENT 8.19 The remainder of Section 8 comprises an outline of the rules governing the procurement by public bodies in Ireland of rail infrastructure and railway services, including relevant works and services pertaining to these, and the procurement alternatives available. These rules will apply to PPP light railway/metro procurement, and are provided as background to the commentary and analysis of contractual and procurement issues set out in Section The primary source, in Ireland, of regulation of public procurement processes are the European Communities Public Procurement Directives (as incorporated into Irish law by statutory instrument). These directives generally govern, among other things, the procurement of rail infrastructure and railway services (including light rail and metro works and services) of substantial value. Also relevant to Semi-State bodies such as RPA are the Irish Government Guidelines for Semi-State Bodies (see comments at paragraphs 8.47 to 8.49) Specific pieces of Irish legislation (such as the Transport (Railway Infrastructure) Act) may also affect the mechanics of the procurement process. European Union Procurement 8.21 Public procurement in the European Union is governed by basic principles of the EC Treaty as well as specific Public Procurement Directives. The Directives are based on the EC Treaty principles of free movement, freedom of establishment, freedom to provide services and competition. Whilst detailed rules regarding the procurement process are included in the Directives themselves, their application is subject to the over-riding principles of EC law encapsulated (where relevant) in the provisions of the EC Treaty The Public Procurement Directives compel public bodies and certain entities controlled or influenced by the State (including central government, local government and utilities, and State agencies such as RPA) to advertise contracts in excess of specified threshold amounts in the Official Journal of the European Communities (OJEC) and to follow nondiscriminatory, transparent and objective tendering procedures when awarding these contracts. In addition, in key elements of the transport sector (including rail) the Directives also apply to procurement by non-state entities which enjoy special or exclusive rights There are six main Procurement Directives: (a) Public Supply Contracts ( Supplies Directive ): Council Directive 93/36/EEC of 14 June 1993 (as amended by Council Directive 97/52/EC of 13 October 1997). (b) Public Works Contracts ( Works Directive ): Council Directive 93/37/EEC of 14 June 1993 (as amended by Council Directive 97/52/EC of 13 October 1997). (c) Public Service Contracts ( Services Directive ): Council Directive 92/50/EEC of 18 June 1992 (as amended by Council Directive 97/52/EC of 13 October 1997). (d) (e) Utilities i.e. water, energy, transport and telecommunications sectors ( Utilities Directive ): Council Directive 93/38/EEC of 14 June 1993 (as amended by European Parliament and Council Directive 98/4/EC of 16 February 1998). Review Procedures for the Award of Public Supply, Works and Services Contracts: Council Directive 89/665/EEC of 21 December Page 49 of 245

60 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued (f) Review Procedures for the Award of Contracts by entities operating in the water, energy, transport and telecommunications sectors. Council Directive 92/13/EEC of 25 February The Supplies, Works, Services and Utilities Directives set out the actual procurement process and procedures. The Directives listed in (e) and (f) are referred to as the Remedies Directives and enable the Supplies, Works, Services and Utilities Directives to be enforced by any interested party who suspects that there has been any irregularity in the procurement process (for example, an aggrieved tenderer), by applying to the courts to review the procedure Under the Procurement Directives ((a) to (d)), there are three alternative tendering procedures available to a contracting authority in procuring a contract the open, restricted and negotiated procedures. The procurement procedure which applies in any particular case will depend on which Directive applies. So in assessing the impact of the Procurement Directives on the procurement of light railway/metro PPPs in Ireland, it is necessary to consider: firstly, which of the Directives applies to the procurement of light railway/metro PPPs; and secondly, which procedure should be used under the applicable Directive. The Procurement Directives and Light Railway/Metro PPPs 8.26 The Utilities Directive should generally apply to the procurement in Ireland of light railways/metro and rail infrastructure by PPP, for the reasons set out in the following paragraphs. This means that the other three Procurement Directives should not apply to procurement of light railway/metro projects by PPP in Ireland (at least under the current procurement regime). The Utilities Directive applies to: public authorities and public undertakings exercising activities listed in the Directive (see 8.27 and the following paragraphs) or pertaining to such activities; and private entities exercising the same relevant activities, but only on the basis of special or exclusive rights granted by a State body, but the Utilities Directive is generally not considered to apply to certain concession contracts (see discussion at paragraphs 8.38 to 8.42) The list of relevant activities in the Utilities Directive includes: the operation of networks providing a service to the public in the field of transport by railway tramway The design, construction, financing and operation of light rail and Metro services in Ireland should fall within the scope of these activities (or be considered as pertaining to the provision of such a service). Under Article 1.2(c) of the Directive, a network is considered to exist where the service is provided under operating conditions laid down by a competent authority of a Member State. Page 50 of 245

61 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued 8.29 The European Commission maintains that where a body has responsibility for procuring operation but does not itself operate a network, that body will be considered a contracting entity subject to the Utilities Directive where it benefits from the exploitation of the network. On the basis that RPA will benefit directly from the exploitation of the network, it would therefore be considered a contracting entity 2 for the purposes of the Utilities Directive and may therefore avail itself of the Negotiated Procedure (see discussion below in relation to tendering procedures under the Utilities Directive). Even if, under certain possible circumstances, the applicable Directive might not be the Utilities Directive, it is considered that it would in any case for purposes of this Project (and in light of recent proposals to amend the Utilities Directive) ordinarily be permitted to have recourse to the Negotiated Procedure under relevant Directives. Tendering Procedures under the Utilities Directive 8.30 The Utilities Directive essentially gives a contracting authority a free choice to use either the Open, Restricted or Negotiated Procedure. The Open Procedure operates so that all interested suppliers, contractors or service providers may submit tenders or offers in response to a published contract notice. This procedure provides for the greatest degree of competition between potential contractors. However, in a large project with voluminous documentation and complex technical requirements the costs of conducting such a procedure may well outweigh the benefits of open competition. Accordingly, it is considered that the Open Procedure is totally unsuitable for large, complex projects such as light railway/metro PPPs The Restricted Procedure operates so that of the suppliers, contractors or services providers who have expressed their interest following publication of a contract notice in the OJEC, only those invited by the contracting authority may submit tenders. Under the Works, Supplies and Services Directives, a rigid procedure applies to the selection of contractors for invitation to tender. The Utilities Directive does not stipulate such a rigid procedure. Instead it states that candidates should be selected according to objective criteria set by the contracting authority subject to the qualification that the number of candidates selected must take account of the need to ensure adequate competition. Following receipt of tenders, under the Restricted Procedure the contracting authority may not negotiate with the shortlisted bidders at all it may only seek or offer clarification of certain aspects of the individual bids or tenders. Furthermore, under the Restricted Procedure a contract may only be awarded on the basis of either the lowest price or the most economically advantageous tender Under the Negotiated Procedure, a contracting authority may consult the suppliers, contractors or service providers (as the case may be) of its choice and negotiate the terms of the contract with one or more of them. The Utilities Directive (under the Negotiated Procedure) does not stipulate a rigid procedure for the selection of contractors with whom the contracting authority chooses to negotiate but states that the number of candidates selected must take account of the need to ensure adequate competition PFI projects in the UK in both the public and utilities sectors have to a large extent used the Negotiated Procedure on the basis that, by their very nature, these projects require 2 Chapter 10, Competition for the Award of a Contract for the Operation of Light Rail Services (Phase One Report, Masons, Booz-Allen & Hamilton, Babtie, December 2000), which referred to a meeting with officials of the European Commission 7 th September, Page 51 of 245

62 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued bidders to propose innovative approaches for addressing the output specifications, and their complexity will generally require detailed negotiations with the private sector bidders. This use of the Negotiated Procedure has, however, been criticised recently by the European Commission (although in this respect it is noted that (1) this criticism has derived from the use of the Negotiated Procedure under Directives other than the Utilities Directive and (2) the Utilities Directive allows for much greater flexibility than the other Public Procurement Directives as to when the Negotiated Procedure can be used). In particular, the European Commission has suggested that the UK PFI/PPP practice of invariably using the Negotiated Procedure and negotiating with a single, preferred bidder could potentially be illegal under the Public Procurement Directives. However, as noted previously this appears to be primarily an issue for PPP procurement under any of the Works, Services or Supplies Directives, and not the Utilities Directive. Having regard to this, it is likely that the Negotiated Procedure under the Utilities Directive will be the most appropriate and useful procedure to procure large PPP light railway/metro projects for Ireland, particularly given that it is too premature to determine whether it might be possible at some point in the future to introduce any element of standardisation into the procurement of such projects (standardisation might result in a decrease in the need for complex negotiations). Priority and Non-Priority Services under the Utilities Directive 8.34 The information provided previously on tendering procedures under the Utilities Directive should however be read subject to the distinction made in that Directive between priority and non-priority services (by reference to categories of services in Annexes to the Directive) The procurement of priority services is subject to the full procedures laid down by the Utilities Directive (advertisement of a call for competition in the OJEC, time limits, choice of tendering procedures, limited pre-selection and award criteria etc). By contrast, the procurement of non-priority services is subject to a much more limited set of rules The provision of light railway/metro services is not specifically mentioned in the relevant Annexes to the Utilities Directive, whereas the provision of rail transport services are stated to be non-priority services (since at the time the Directive was adopted it was considered that there was limited scope for cross-border competition in the provision of rail transport services). The European Commission has yet to formally decide the Annex of the Utilities Directive under which light railway/metro services fall. However, an informal view has been expressed by Commission officials that light railway services are priority services and must therefore be procured in accordance with the full application of the Utilities Directive In the present case (and notwithstanding the concessions analysis below (at paragraphs 8.38 to 8.42)), we consider it prudent to assume that a contract for the procurement of light rail and Metro services in Ireland should be awarded following a full OJEC Negotiated Procedure which approach could also help to minimise difficulties arising from other proposed EU legislation (see below at paragraph 8.43 to 8.46). Concession Contracts 8.38 A further complication to the application of the Utilities Directive to light railway/metro PPP procurement in Ireland could arise in the event that a particular PPP project is considered to be the grant of a concession to a private sector bidder The general view is that concession contracts are outside the scope of the Utilities Directive. This view is supported in the European Court of Justice s recent judgment in Page 52 of 245

63 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued Telaustria Verlags GmbH, Telefonadress GmbH v- Telekom Austria AG, judgment of 07 December, 2000 at paragraph 57 (Case C-324/98, Official Journal C95,24/3/01). In determining what constitutes a concession the Interpretative Communication on Concessions under Community Law (OJEC C121 of 29 April 2000) provides assistance by defining a services concession as follows: Application of this criterion [of exploitation] means that there is a concession when the operator bears the risk involved in operating the service in question (establishing and exploiting the system) obtaining a significant part of the revenue from the user, particularly by charging fees in any form. As is the case for works concessions, the way in which the operator is remunerated is a factor which helps to determine who bears the exploitation risk. Similarly, service concessions are also characterised by a transfer of the responsibility of the exploitation and may be subject to exclusive and special rights This issue is however complicated in that the Directive does not contain specific rules relating to works or services concession contracts. Concession contracts are generally understood to be contracts under which the works/services provider is paid, in whole or in part, by being allowed to exploit the work or service provided under the contract However, according to the European Commission, unless the operator of a services concession bears the full demand-risk (i.e. risk of users charges not covering the operating cost of the new rail infrastructure and services) then this would not amount to a services concession (meaning that the Utilities Directive would apply). Conversely, if the operator s revenue from the users or indeed from the body that awards the concession (so-called shadow tolling ) depends on the number of users of the particular infrastructure, the European Commission might accept that this was a full services concession contract which did not require competitive tendering under the Utilities Directive It is understood that for future light railway/metro PPPs in Ireland the position as regards apportionment of demand risk between the public and private sectors is not yet settled. In the absence of a PPP contractor bearing all demand risk the Utilities Directive should apply and require the service concession contract to be competitively tendered. Proposed Regulation COM(2000) 7 Final 8.43 The procurement of future light railway/metro projects in Ireland by PPP may be affected by a recent European Commission proposal for a Regulation of the European Parliament and of the Council on action by Member States concerning public service requirements and the award of public service contracts in passenger transport by rail, road and inland waterway (COM(2000) 7 final) ( the Proposal ) The Proposal relevantly provides that: each Member State must secure adequate public passenger transport services that are of a high quality and availability ; and in the event that a Member State pays financial compensation to the operator for the cost of complying with the contractual public service requirements, then the Government must award a public service contract to that operator which must also be competitively tendered (save in certain circumstances). A public service contract which must be competitively tendered must generally be no longer than five years duration. However, the duration of the contract may take into account the payback period where the contract makes the operator responsible for providing Page 53 of 245

64 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued railway rolling stock or infrastructure (provided such assets are tied to specific, geographically defined transport services) and those assets have a payback period for the operator that is longer than 5 years A particular concern arising from the current draft of the Proposal (July 2000) is that it appears to preclude the option for a train service operator to leave responsibility for maintenance of rolling stock with the supplier thereof It is important to note that the Proposal provides that it would only apply in the event that neither the Utilities nor Services Directive applies (as to the requirement for mandatory tendering) to a public service contract (and therefore that contract is not subject to the competitive tendering procedures under either of those Directives). In this respect Article 2 of the Proposal relevantly provides that the Proposal shall be without prejudice to the obligations on competent authorities which flow from Directives 92/50/EEC and 93/38/EEC, and excludes the operation of parts of the Proposal where those Directives make the tendering of a public service contract mandatory. Accordingly, the terms of the Proposal will only be relevant in the present case if: Directives 92/50/EEC or 93/38/EEC do not make the tendering of the relevant contract mandatory; the services concerned are non-priority services; or a concession is to be awarded. Irish Procurement Policy 8.47 The awarding of public contracts in Ireland by semi-state bodies (which includes CIÉ and RPA) must be in accordance with the Irish Government s Procurement Guidelines for Semi-State Bodies. As a semi-state body, RPA is not required to observe the Government procurement policy set out in An Outline of Government Contracts Procedures (latest edition published in 1994, and known as the Green Book ). The Guidelines for Semi- State Bodies relevantly require that major contracts awarded by such bodies must be competitively tendered Some Government Departments and State agencies may also have their own internal procurement policies that could be relevant in individual cases The effect of local procurement guidelines and policy is, however, likely to be minimal for large scale PPP rail projects given that the EU Procurement Directives (and in particular the Utilities Directive) should apply to these projects, to the exclusion of any conflicting or otherwise inconsistent local procurement policy. This is because: the value of large light railway/metro PPP projects will invariably exceed the minimum contract value threshold amount which must be exceeded for the Procurement Directives to apply; and as the Procurement Directives are each enshrined in Irish law (by Statutory Instrument), this leaves little scope for the application of conflicting or otherwise inconsistent local procurement rules. Irish Legislation 8.50 The proposed procurement of light railways/metro and infrastructure in Ireland may be affected by the provisions of the Transport (Railway Infrastructure) Act - however the effect of this legislation on procurement is likely to be at a very basic level, given that it does not seek to regulate procurement procedures as such. The main effects of the Act on procurement procedure are likely to arise from: Page 54 of 245

65 LEGISLATIVE ENVIRONMENT EUROPEAN UNION continued the requirement in section 11 of the Act that RPA s function to procure light railway and metro railway infrastructure is only exercisable in relation to railway infrastructure nominated by the Minister for Public Enterprise (i.e. any exercise of RPA procurement powers is conditional upon a nomination by the Minister); the powers set out in the Transport (Railway Infrastructure) Act which dictate the extent to which RPA may enter into arrangements with third parties (whether from the private sector or otherwise) to provide railway infrastructure, facilities and services (see discussion of these powers in Section 7); and the requirement in Part 3 of the Act that railway works cannot be carried out until a railway order has been made by the Minister for Public Enterprise. The interaction between the railway order application process and the PPP procurement process is discussed further in Appendices H and I Regard may be had in certain circumstances to administrative requirements (e.g. under Departmental Circular) governing certain entities. Conclusions 8.52 The review of existing EU legislation for the purpose of preparing this section has led to the conclusion that: the railway package of Directives should not adversely impact on the procurement or implementation of light railway or metro PPP projects, given that such projects should invariably be for the provision of urban or suburban services ; and provisions regulating the provision of State aid to these projects should not unreasonably restrict or constrain their successful development of such projects which, in the widest possible sense, could only be described as city or town-based suburban passenger (light) rail transport systems, without any possible effect on trade with any other Member States (and therefore outside the scope of the State aid test) By way of summary, the present position as regards the procurement of light railway/metro infrastructure and services (including for present purposes a DBFO-style PPP) for Ireland is as follows: such procurement should be governed by the Utilities Directive (unless the project concerned falls within the scope of a concession, in which case the application of the other Public Procurement Directives and in particular the Works Directive should be considered). There are definite benefits of proceeding under the Utilities Directive, most relevantly the flexibility to choose between the open, restricted and negotiated procedures (which flexibility is not generally available under the other Public Procurement Directives); it is recommended that such projects be procured on the basis that they fall into the category of priority services in the relevant Annex to the Utilities Directive (unless conclusive evidence exists that a project does not fall within this service category); on the basis of previous experience, and the likely size and complexity of future light railway/metro PPPs in Ireland, it is recommended that the negotiated procedure would be the most appropriate tendering procedure; and procuring such projects by means of the full negotiated procedure under the Utilities Directive should avoid any potential difficulties associated with the proposed regulation COM(2000) 7 Final, unless the Directive does not provide for mandatory competitive tendering in the relevant case. Page 55 of 245

66 REGULATORY ENVIRONMENT 9 Introduction 9.1 This section provides information on the key developments currently in progress and the potential shape of the regulatory environment within which light railway/metro PPP projects are likely to be procured and operated. Specific proposals with regard to the issues of Regulation and Safety are discussed. Finally, the role of the key public sector bodies (current and planned) involved in rail transport in Ireland is outlined. The illustration below represents one interpretation of how these bodies may interact. Indicative Regulatory Structure Policy Development Dept. of Public Enterprise Dept. of the Environment & Local Government Regulation & Policy Implementation Railway Safety Authority Railway Procurement Agency DSLTB Strategic Land and Transport Planning + Transport Regulator Operators Metro and Light Rail Infrastructure and Operating Companies CIÉ Group (Infrastructure and Operating Companies) Private Bus Operators Key Developments 9.2 In August 2000 the Department of Public Enterprise published a consultation document A New Institutional and Regulatory Framework for Public Transport. This document outlines the context within which future investment in public transport is to be delivered. 9.3 In March 2001, a further consultation document New Institutional Arrangements for Land Use and Transport in the Greater Dublin Area was published. This document outlines the proposed reform package which is to include the establishment of a Strategic Body (DSLTB) which will be set up with responsibility for strategic planning in the Greater Dublin Area in terms of land use and transport. The proposed powers and functions of this body are outlined in the following page. Status of the Regulator 9.4 At present there is no independent transport regulator in Ireland. The transport regulatory function is currently performed by the Minister for Public Enterprise. 9.5 The Department of Public Enterprise s paper A New Institutional and Regulatory Framework for Public Transport (August 2000) foreshadows the establishment of an independent public transport regulatory function (see extract in Appendix D). Further Government proposals in this area are set out in the consultation paper New Institutional Arrangements for Land Use and Transport in the Greater Dublin Area (Department of Page 56 of 245

67 REGULATORY ENVIRONMENT continued Public Enterprise and the Department of the Environment and Local Government, March 2001). 9.6 As part of the new Institutional arrangements for the Greater Dublin Area (GDA) it is proposed that a new DSLTB will be set up with responsibility for strategic planning in terms of land use and transport. The consultation paper outlines the proposed reform package which is to include the establishment of this body. This body s functions are to include: preparing and reviewing long term strategies, medium-term implementation programmes and short term action plans for transport in the Greater Dublin Area. Public transport providers will be required to operate services in accordance with these strategies, and a network and service blueprint set down by the DSLTB; setting detailed service requirements and standards for all modes of public transport (bus, light railway, metro and Dublin suburban railway, but not mainline railway); monitoring implementation and use its enforcement powers to ensure that implementing agencies implement the strategy and deliver on targets; managing (directly or through a third party) the integrated fares and ticketing system and passenger information; regulating fares; ensuring competition and a level playing field where the public transport market is open to competition; calling-in projects itself where it considers it appropriate and carry them out itself; allocating finance to implementing agencies from an Exchequer block grant; and embracing the functions of the Dublin Transportation Office. 9.7 This new DSLTB will also prepare and regularly update a land use strategy for the Greater Dublin Area and will monitor and enforce compliance by local planning authorities. The relevant powers available to the Minister for the Environment and Local Government under the Planning and Development Act, 2000 will be transferred to the new body. 9.8 It will act as independent regulator of all Dublin public transport. All regulatory functions in relation to public transport will be carried out by the Minister of Public Enterprise pending the establishment of the new DSLTB. 9.9 RPA will operate on a stand-alone basis but will only undertake projects which are in accordance with the regulatory framework set by the new DSLTB The National Roads Authority (NRA) will continue to carry out all its national road functions in the Greater Dublin Area, but will be obliged to adopt and implement a programme which is consistent with the strategy adopted by the new DSLTB As part of the implementation of these new proposals, it is expected that: Detailed traffic/demand management policies will be set by the new DSLTB (e.g. demand management strategy, regional parking policy, regional cycle network, heavy goods vehicle management strategy). Implementation of some other strategic or regional measures will be allocated to the Director of Traffic (acting for the GDA or just Dublin City and County as appropriate). A review will be conducted to identify appropriate functions. One example is Quality Bus Corridors (QBCs), but other areas will be reviewed Page 57 of 245

68 REGULATORY ENVIRONMENT continued including traffic management on strategic routes (e.g. M50), regional traffic information services, and the development of a strategic cycle network. Local traffic management functions will remain with the local authorities but they will be asked to review their implementation arrangements, having regard to the experience of the Director of Traffic. Measures to increase enforcement resources are proposed including more use of contracting-out, automated systems and administrative sanctions and ring-fencing of Garda manpower. The DSLTB will regularly report to Government on the adequacy of enforcement. A number of initiatives are already underway to address suburban rail delivery (e.g. the high level review of Iarnrod Eireann, an internal Iarnrod Eireann restructuring programme, recruitment of project management expertise) and it is proposed to press ahead with these. In addition, a single dedicated QBC project team has been established by the Director of Traffic to implement QBCs on a whole route basis for the Dublin area The proposed new DSLTB will be responsible for the allocating of Exchequer capital and revenue grants for transport in the Greater Dublin Area, other than national road grants administered by the NRA. It will be a matter for the Government to decide the amounts of the annual grants in the context of the National Development Plan provisions and other relevant policy considerations. The strategies, plans and expenditure of the proposed DSLTB will require Government approval. The proposed DSLTB will be placed under a statutory obligation to have regard to cost effectiveness and value for money in the discharge of its functions and will be obliged to have regard to the financial implications when using its powers of direction Following a period of public consultation, it is at present proposed that legislation to implement the recommendations set out in the consultation paper will be published in Discussion 9.14 The current lack of an independent regulator for light railway/metro PPP projects in Ireland could raise some concerns in the market, given that the establishment of this DSLTB at some point in the future may result in changes to the regulatory environment (from the regulatory position set by the Minister for Public Enterprise in carrying out this role in the intervening period), for example in relation to: determination of fare amounts; and how the proposed revenue stream of a light railway/metro PPP project might complement other competing transport modes and networks such as buses Until a regulatory entity is formally established pursuant to the legislation contemplated by the consultation paper, a regulatory function will be performed by the Minister for Public Enterprise. This will be exercised: pursuant to bye-laws, given that under section 66 of the Transport (Railway Infrastructure) Act the Minister for Public Enterprise, RPA and a railway undertaking (with the consent of RPA) are each vested with broad powers to make bye-laws for the management, control, operation and the regulation of a railway that has been built pursuant to a railway order, including the regulation of timetables and fixing of fares; or contractually, through the provisions of the Project Agreement governing a particular PPP project. Page 58 of 245

69 REGULATORY ENVIRONMENT continued 9.16 The former approach is preferred, as regulatory requirements should be separate and distinct from the commercial deal. In imposing interim (pre-dsltb) regulatory requirements pursuant to this bye-law-making power, such requirements should be imposed by the Minister rather than RPA or the railway undertaking (given that if RPA or indeed the railway undertaking are seen to be determining regulatory arrangements, as parties to the PPP transaction they could be perceived to have a conflict of interest). It is expected that ultimately, the bye-law-making power will be transferred, in relation to the Greater Dublin Area, to the DSLTB Should a light railway/metro PPP project reach legal and financial close before the establishment of the DSLTB (or an equivalent independent transport regulator), any adverse impacts on the implementation and operation of that PPP project arising from changes to the regulatory environment subsequently imposed by the DSLTB, could be dealt with through the terms of the Project Agreement. A possible approach would be for the PPP contractor to become entitled to compensation in circumstances where the regulatory changes are considered by the parties to unreasonably impact on the PPP contractor s position (for example, as a consequence of a discriminatory change of law ). Railway Safety 9.18 Under the Transport (Railway Infrastructure) Act, the current regime governing railway safety in Ireland is applied to railway projects established and operated pursuant to that Act. A description of this regime is contained in Section 9 of A Review of Railway Safety in Ireland (prepared by International Risk Management Services (IRMS) for the Department of Public Enterprise, dated October 1998). In summary, the key statutes currently regulating railway safety at present are the Regulation of Railways Acts of 1842 and 1871, and the Safety, Health and Welfare at Work Act, 1989, as well as regulations made pursuant to the 1989 Act. In addition, a substantial part of the current railway safety regulatory regime arises from informal (non-statutory) arrangements made between the Office of the Railway Inspectorate and CIÉ Each of these statutes is framed broadly so as to apply to railway undertakings and companies generally. However, as noted in the IRMS report, statutory regulation of railway safety (including light railways/metro) is generally limited at present to: the inspection process prior to the opening of railways spur lines, station junctions and level crossings; and investigation of railway accidents, and does not extend to such matters as: the routine inspection of the current state of railways and rail infrastructure and monitoring of safety performance; the power to make orders requiring a railway operator to replace or repair damaged or faulty infrastructure or vehicles detected in the course of the inspection (which is why the informal arrangements have been put in place); and certain works on existing railway lines The issue arises therefore as to how existing informal regulatory arrangements between CIÉ and the Railway Inspecting Officer will be applied (if at all) to a future light railway/metro PPP, given the limited coverage of the existing statutory railway safety regime It is intended that this issue should be resolved through the implementation of new railway safety legislation which is in preparation. The Railway Safety Bill, 2001 seeks to impose a Page 59 of 245

70 REGULATORY ENVIRONMENT continued comprehensive regulatory code governing railway safety in Ireland. A summary of the key points of this new railway safety legislation is contained in Appendix F It is noted that neither the draft Railway Safety Bill nor the Transport (Railway Infrastructure) Act proposes any combined, stream-lined process of approval of: railway works under the Transport (Railway Infrastructure) Act; and a railway safety case or statement under the Railway Safety Bill This means that despite having a railway PPP project approved by way of a railway order it will still be necessary for the PPP contractor to separately procure a safety approval, and maintain compliance with a safety regime, under the auspices of the new Railway Safety Authority. Nevertheless, operational safety issues should be taken into account in the design and construction phases of such a project. Page 60 of 245

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72 Part B CONTENTS PAGE Introduction 61 Project Appraisal and Development 63 Project Planning 95 Procurement and Contractual 127 Risk Management 158 Commercial and Financial Considerations 170 Performance Standards and Output Specifications 209 Contract Management 228

73 INTRODUCTION This section of the Framework outlines the major considerations and issues likely to arise at the key stages in the procurement of rail projects as PPPs. Each section consists of technical guidance on the key characteristics of Rail PPPs and suggests methodologies, tools and techniques which can be applied to the development of rail projects. This part of the framework is organised around the key issues identified as requiring specific attention during the process of building and concluding contractual relationships with private partners on rail projects. This Part is likely to be of most interest to bodies such as the Railway Procurement Agency as they commence the task of implementing the rail component of the Government s strategy for public transport Sections 11 and 12 describe the project appraisal, development and planning processes. Objectives and approaches to assessing and evaluating projects against agreed objectives are explained. In addition, key gateways at which relevant approvals might be secured are identified Sections 13 details the contractual considerations and describes the major documents likely to form the core of these PPP agreements while the procurement process is analysed with each stage described in some detail. This assumes application of the negotiated procedure under the Utilities Directives Section 14 and 15 outline an approach to risk management and the major financial structuring and commercial considerations likely to impact affordability and bankability issues Finally, Sections 16 and 17 describe the development of performance standards, output specifications and the process of contract management as it applies to long term PPP arrangements The Appendices contain additional explanatory information on particular issues and techniques The key activities involved in each of these sections are highlighted in Figure 10.1 overleaf, which summarises key stages of the procurement process and at which points the techniques, tools and processes described should be of assistance. Page 61 of 245

74 INTRODUCTION continued Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Risk Allocation High level risk identification using broad categories. Initial allocation matrix and quantification using single point techniques ref risk framework 2 nd iteration of the allocation matrix and information requirements on bidders attitudes to risk. Risk modelling. Detailed risk allocation matrix, linkages to contractual documents, monte-carlo analysis and evaluation of bidder s risk position. Clarifications on bidders risk position, further modelling for the VfM comparator and linkage to contractual position. Refinements to overall quantification and risk allocation; detailed modelling of VfM. Initiation of contract risk management. Linkage to negotiation strategy, final allocation position and VfM quantification. Further development of contract risk management. Finalisation of financial risk position and hedging strategy. Activate contract risk management process. Contract risk management including periodic reports and issues management. Project Appraisal Establish the strategic context. Establish need. Develop scheme options. Detailed options appraisal. Undertake procurement assessment. Prepare cost benefit analysis. Prepare detailed VfM comparator & VfM model. Establish affordability envelope. Define PPP Model & risk profile. Update cost benefit analysis Update VfM comparator & VfM model for agreed clarifications. Update project scope and business case. Analyse bids returned, confirm VfM. Update business case to reflect actual costs. Reconfirm affordability. Agree BAFO format. Update VfM comparator & VfM to reflect BAFO conditions. Receive BAFO. Confirm Business Case. Confirm VfM. Confirm affordability. Document risk ownership. Finalise VfM, business case and affordability. Monitor the delivery of benefits and strategic objectives. Project Planning Establish project objectives and outline scope. Assess scheme characteristics through feasibility study and costbenefit analysis. Outline planning to establish preferred route alignment and envelope. Evaluation of bidders designs with respect to value for money and deliverability. Clarification of bidders plans and designs, with modifications based on risk assessments. Evaluation of final bids against scheme objectives and risk assessments. Minor modifications to project scope. Finalisation of detailed design sufficient to secure Railway Order and final refinements of revenue forecasts and risk assessments. Incorporation of amendments to project scope or works resulting from Railway Order, final revision of construction prices. Development of detailed operating plans, construction of railway, ongoing monitoring and review. Commercial & Financial High level assessment of pursuing the project as a PPP. Identifying major obstacles. As part of the overall project appraisal a detailed PPP assessment of the project to establish if PPP is the selected procurement route. A detailed PSC will be produced at this stage in advance of ITN. At this stage market reaction to proposed PPP structure should be obtained, amending the proposed structure if appropriate. Detailed description of proposed PPP structure including funding, risk, payment mechanism. Clarification to bidders communicating any changes to the proposed PPP structure that may have resulted from clarifications. Ensure that Bidders BAFO positions are accurately reflected in the VfM assessment. Ensure that any variation to the key elements of the proposed structure have been documented. Assess the impact of changes of PPP structure through negotiations against overall objectives. Initiate the contract for the preferred PPP structure. Initiate the contract management procedures. Ongoing contract management including assessment of key commercial and financial elements such as any step in service payments. Performance Standards Set outline performance measures. Assign and quantify targets to measure, link to risk and revenue projections. Early simulations showing achievability of key targets, supplier affiliations & measurement linkages. Detailed computations on key targets, definition of secondary targets, policies, safety case proposals, linkages to design, risk, other documentation, assess bidders proposals. Refinement & agreement on bidders measures & targets, detailed management plans, detailed inputs to payment modelling. Further contribution to VfM, agreement on contractual position & linkage to payment models. Final selection of performance objectives, agreement with design, measurement reporting content, fully costed implications & agreement with payment models, RPA contingency plans. Final positions on achievable savings & benefits. RPA organisation in place to monitor contract progress. Early indication on performance prospects. Contingency plans in action. Contract Management & Monitoring High level assessment of partnership approach & general areas of service to be managed and monitored. Quantification of broad work packages and general performance criteria. Link back to objectives and critical success factors. Input to selection criteria and assessment of technical, safety and operational capability. Detail the performance monitoring allocation matrix. Ensure clear linkages to contractual positions. Quantification of risk. Clarification of bidders positions and revisions to reflect any movements in contractual positions. Establish a sound understanding of potential retained risks. Review of the bidders quantification and risk allocation. Initiation of contract risk management strategies to control retained risks. Main driver of negotiation strategy. Ensure risk allocation is agreed. Further development of contract risk management including project whole life risk profiles. Final revision to risk allocation. Full contract management activated. Initiate contract management and monitoring controls. Figure 10.1: PPP Procurement Process Page 62 of 245

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76 Project Appraisal and Development CONTENTS PAGE Introduction 63 Specific Objectives of Project Appraisal & Development 65 Project Appraisal and Development Process 66 Project Appraisal 71 Option analysis 73 Cost Benefit Analysis 76 Value for Money Comparator 82 Affordability 88 Bid Evaluation 90 Procurement Process 93

77 PROJECT APPRAISAL & DEVELOPMENT 11 INTRODUCTION 11.1 This section outlines the project appraisal and development process in the context of the procurement of rail projects as PPPs. It describes the process, the tools and the techniques which will be of assistance to RPA throughout the project life cycle. The aim of this section is to provide guidance and background to the appraisal techniques that are applied to Rail PPPs. It highlights the integration of traditional appraisal techniques such as CBA and those used for the appraisal of PPP projects such as VfM, risk analysis and affordability This section is structured as follows: Introduction - sets out the background to the commercial and financial considerations and the application of PPPs to rail projects; Specific Project Appraisal and Development Objectives these paragraphs outline the role of project appraisals within the approvals and decision making process and describes appropriate objectives; Project Appraisal and Development Process provides guidance on the requirements for project appraisal with detail on techniques and methods which will be relevant; and Procurement Process indicates the key appraisal activities required during the PPP procurement process. Role of Project Appraisal 11.3 The project appraisal and development process is concerned with recording and communicating the important attributes of a project for sponsors, approving bodies and potential investors/service providers. In addition, a well-researched and documented appraisal can also be an indispensable management tool throughout the project s life. The steps required to develop an appraisal forces all involved to introduce discipline and a logical thought process into all of the planning activities associated with bringing a project forward for procurement and throughout the procurement process Appraisal is undertaken to improve the quality of information available in order to assist decision making at key milestones in the development of projects. One of the key tools used to record and communicate the outcome of appraisals is the business case. At the early stages this document may be little more than an outline but will be continuously reviewed and updated as the project moves from the original identification of need through to the contract management and monitoring phases. The key objectives of appraisal are: to establish the strategic and business need for a rail project; the identification of possible alternative means of meeting the need; the assessment of procurement options; the making of recommendations on the optimal approach; and to facilitate comparison, for the purpose of prioritisation, with other rail and infrastructure projects Underpinning the appraisal of rail projects will be a robust set of demand forecasting tools and the need to test a wide range of sensitivities for economic growth, demand management and modal shifts. Typically these are encapsulated in one model which is used to appraise different options. Page 63 of 245

78 PROJECT APPRAISAL & DEVELOPMENT continued Elements of an Appraisal 11.6 The appraisal must state the case for the solution ultimately chosen. In order to adequately document the process followed in coming to the final decision, the following areas should be addressed in the appraisal: Project Identification, Strategic context and Business Need; Outline Options and Options Appraisal; Cost Benefit Analysis; Procurement route; Affordability; and Implementation plan and Timetable. Continuous Process 11.7 Finally, it has to be stressed that project appraisal is a continuous process. In rail projects the appraisal will determine the scope, phasing and procurement route for the project. As the project progresses through procurement, the appraisal process will be used to continually test tenderers bids ensuring value for money for the Exchequer and delivery of strategic objectives. Page 64 of 245

79 PROJECT APPRAISAL & DEVELOPMENT continued SPECIFIC OBJECTIVES OF PROJECT APPRAISAL & DEVELOPMENT Introduction 11.8 Section 6 of Part A has set out the PPP and transport objectives in relation to rail projects. Specific objectives for the appraisal and development of projects are summarised below: Accountability and Project Control A key objective is to provide accountability and project control. This ensures that projects are tested and monitored against the necessary criteria; Justification Justification is highly relevant for rail projects whose eventual success will be measured in terms of the benefits that the project realises. The justification will be based on the social benefits to be generated as compared to the costs of delivery typically in the form of a CBA; Procurement selection In overall terms the decision on whether a project is procured as a PPP or through traditional procurement is dependent on which option would provide best value for money to the Exchequer. Whilst value for money is a key driver, a fundamental consideration will be affordability i.e. whether sufficient resources will be available to meet obligations; and Strategic fit Consideration of the benefits that a project can realise must be undertaken within the context of the overall transport strategy, for example, securing an integrated transport system that helps relieve congestion in Dublin. Transport systems should be conceived with a view to complementing each other through an integrated approach to service delivery In addition to the above objectives the project appraisal has the function of ensuring that the projects which are taken to market are bankable thus minimising the potential for failure and undue cost for both the public and potential private partners. Page 65 of 245

80 PROJECT APPRAISAL & DEVELOPMENT continued PROJECT APPRAISAL AND DEVELOPMENT PROCESS Introduction The project appraisal and development process also provides information and data that can: inform decisions and approvals; shape the nature and direction of the project; enable the assessment of potential project benefits and their contribution to overall strategic objectives; and aid the procurement and implementation of projects The Figure 11.1 overleaf highlights the need for a sound project development process, an acceptable affordability envelope and significant potential for value for money for the Exchequer before the issue of an ITN. It is recommended that these factors are satisfactorily resolved before approval to issue the ITN is given. This process ensures that RPA and private bidders are not exposed to expending substantial financial resource on unsound projects. Once the project has passed this point the process becomes focused on monitoring developments against the original appraisal as more accurate information is received from bidders during the tender process. The following paragraphs outline the aspects of the appraisal that need to be addressed before issue of ITN In order to illustrate the role of the appraisal process within the overall procurement and approval process the flow chart sets out the steps, activities and approval points for rail PPPs. It is assumed that the approvals decisions will be taken by RPA Board with appropriate Ministerial approvals and sanctions being provided at relevant milestones The process illustrated is based on the assumption that the activities listed flow from positive approval decisions at each key gateway or decision point 3. Although not illustrated, a negative decision could result in one or more of the following actions: revision of project scope; re-appraisal of the affordability parameters to gain more certainty over Exchequer exposure prior to issue of ITN; re-scoping of the project to deliver VfM and an acceptable risk profile; and/or withdrawal of Government commitment to the project. 3 Department of Finance are currently timelining the Project Development and Approval process that might effect the sequence of events overleaf. Page 66 of 245

81 PROJECT APPRAISAL & DEVELOPMENT continued Approvals Process Business Case Demonstrated Yes Acceptable VfM & affordable bids Yes Develop Detail Options Appraisal Procurement Route Issue ITN Approve Shortlist Approve Preferred Party Approve Contract Signature Yes PPP Yes Yes Yes Yes Appraisal Process Establish the strategic context Establish Need Develop Scheme Options Detailed options appraisal Undertake Procurement assessment Prepare Cost benefit analysis Prepare detailed VfM comparator & VfM model Establish and set affordability envelope Define PPP Model & Risk profile Update cost benefit analysis Update VfM comparator & VfM model for agreed clarifications Update project scope and business case Analyse bids returned, confirm VfM Update business case to reflect actual costs Reconfirm affordability Agree BAFO format Update VfM comparator & VfM to reflect BAFO conditions Receive BAFO Confirm Business case Confirm VfM Confirm affordability Document Risk Ownership Finalise VfM, business case and affordability PPP Procurement Process Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Tender Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Figure 11.1 Project Appraisal and Approval Process Page 67 of 245

82 PROJECT APPRAISAL & DEVELOPMENT continued Project Identification, Strategic Context and Business Need The rationale for undertaking the project must be clearly stated. This will entail identification of the strategic issues giving rise to the need or service requirement. In the case of rail projects this rationale may be based on the impact of the project on the following issues: demographic data including population growth forecasts, household formation and car ownership, geographic spread of development, land zoning and expected trends in the number, type and dispersion of employment locations; trends in the pattern of travel and leisure; traffic congestion; and other public transport plans. Consideration of these other plans should facilitate and influence development of individual project plans so that an integrated transport network for Dublin is developed The objectives to be achieved by the project should be stated unambiguously at this stage, in terms which facilitate assessment at the appraisal stage. These objectives will be helpful in determining the output specification later in the procurement process It should be noted that in the Greater Dublin Area it is expected that much of the strategic planning previously undertaken by the DTO, will be undertaken by the new DSLTB in terms of the evaluation of different transport options. RPA will be focused on identifying and adopting appropriate objectives and options for rail projects which have been proposed by this body. Detailed Options Appraisal Having determined the strategic context and business need for a rail project, it is necessary to identify the potential ways of satisfying that requirement. Identification and assessment of options must be undertaken in a systematic and structured fashion with the focus of appraisal being on the achievement of the chosen objectives The option appraisal process will involve consideration of different opportunities available for the project. These may include: different options reflecting either different rail routes or different output specifications for the rail network. These could include, for example, a metro and a light rail system being reviewed and the relative merits and impacts; and different phasing options for implementation The appraisal would consider both the financial and non-financial impacts of these options and recommend the preferred option. The financial implications of the options will form part of the appraisal and these indicative costs can be used for value for money for the Exchequer and affordability tests to ensure unrealistic options are not pursued. Cost Benefit Analysis CBA is a decision tool which judges projects according to a discounted monetary comparison of all of their costs and benefits over their lifetime. It serves to inform policy by establishing whether a project offers a net economic benefit to society, and the actual extent of that benefit, for comparison purposes. Only those projects for which, at a minimum, the benefits exceed the costs should proceed. Detailed discussion of CBA is included later in this section. Page 68 of 245

83 PROJECT APPRAISAL & DEVELOPMENT continued Procurement route Following the recommendation of the preferred option an appraisal of the alternative means of procuring that option is required. This would include consideration of: a traditionally-funded route, for example, design and build, where the project would be financed by RPA with Exchequer funds; and PPP alternative structures where the project would be delivered through a PPP mechanism As the various procurement routes would involve different sets of processes and different levels of risk transfer these assumptions need to be reflected in appropriate adjustments in the appraisal. A detailed discussion of making a risk adjusted comparison through a Value for Money Comparator is discussed in later paragraphs. The decision on preferred procurement route should be based on capturing best value for money to the Exchequer At the Value for Money Comparator stage a Reference Project could be used to test the viability of the project. This Reference Project would be based on the desired output specification for the project. The Value for Money Comparator comparing the traditional procurement route to a PPP route should be based on the Reference Project with appropriate assumptions regarding risk transfer, development, operations, funding, etc While a preferred procurement route should be put forward at this stage that choice should be continually tested and re-appraised throughout the procurement process to ensure that the optimal solution is being developed and that value for money for the Exchequer is being achieved The value for money comparator and affordability will be determined before issue of the ITN and the ability of the private sector bidders to match the affordability criteria throughout the procurement process will be undertaken periodically. Affordability Note that whereas CBA provides for an informed judgement of the economic benefits that the project is expected to realise, that view is independent of the financial impact of the project. By their nature rail-based public transport projects on a large scale are rarely selfsustaining on a commercial basis. Accordingly they are generally subvented on an ongoing basis and may possibly need a largescale upfront capital contribution. An assessment of the level of Exchequer support required over the life of the project should be made irrespective of the preferred procurement route. This will test the affordability of the project and the resources that RPA will need. RPA and Government must be confident, before embarking on procurement, that the project is affordable. In order to fully assess the affordability a Shadow Financial Model will need to be prepared. Using benchmarked costs from the Value for Money Comparator and financing assumptions the Shadow Financial Model can profile likely annual funding levels and hence likely revenue and availability income requirements. This is discussed in further detail later in this section of the Framework. Value for Money Comparator Prior to issuing an ITN the scope of PPP will be finalised. This could be influenced by consultation with the private sector during the Expression of Interest stage. The Government has to be confident that the project has the potential to deliver value for money. The Department of Finances will have to grant approval regarding affordability. In order to carry this out a detailed value for money comparator needs to be developed together with assessment of the risk ownership. Page 69 of 245

84 PROJECT APPRAISAL & DEVELOPMENT continued Implementation Plan and Timetable The Business Plan should include a detailed implementation plan that includes key milestones for the procurement and the development of the project. This implementation plan would be based on the preferred procurement route and would outline the key stages in the procurement process, anticipated start date of the project and the anticipated start date for the rail service The implementation plan should be realistic and based on achievable targets. This would give some perspective in terms of when the service should be expected and would demonstrate to potential partners the commitment of RPA. Page 70 of 245

85 PROJECT APPRAISAL & DEVELOPMENT continued PROJECT APPRAISAL Introduction The term Project Appraisal describes the process used to assess the options available to satisfy identified needs or to decide whether or not a project should be undertaken. Project Appraisal consists not just of a strictly financial evaluation but also considers other criteria affecting the decision-making process, such as, the importance of the project in the light of service and public policy objectives, the public need; the implications if the project does not proceed; achievability/practicality e.g. securing the route; revenue and social consequences of not carrying out the project compared to those which would arise if the project is implemented; capital/operating costs and revenue implications over the life cycle of the project A number of approaches may be adopted in order to identify and assess impacts arising from decisions to proceed with particular projects. These impacts may be classified as social, environmental, economic or financial and are evaluated using: Environmental Impact Assessments analysis of the anticipated environmental impacts (both positive and negative) arising from the project with an assessment of potential means of mitigating adverse effects; CBA appraisal of the likely social/economic inputs and outputs taking account of timing issues; and Investment Appraisal evaluation of the cash flows projected over the life of the project in terms of a hurdle or required rate of return Procurement of major projects as PPPs require that the projects are assessed on the basis of anticipated benefits, costs and other impacts arising at differing rates over very long time periods. This involves some difficult measurement problems related to the difficulty of quantifying some impacts and also the uncertainties attached to estimates related to events which are likely to occur over an extended time period. Consequently, a two stage approach is often appropriate, as recommended by the Department of Finance s Guidelines for the Appraisal and Management of Capital Expenditure Projects in the Public Sector, July 1994 i.e. A Preliminary Appraisal should be undertaken involving a high level assessment of the project to determine, without the commitment of unnecessary resources, whether the project is capable of meeting the identified need. This stage will conclude whether a more detailed and complex appraisal is justified. In the procurement process outlined, this would occur in the Project Definition phase; A Detailed Appraisal will form the basis of any decision, in principle, to proceed with the project. This will involve detailed financial and economic forecasts along with qualitative assessment of non-quantifiable impacts e.g. attaching indicative labels to particular impacts such as whether noise is extremely bad, bad or neutral. This detailed appraisal would be carried out during the Detailed Project Development phase as a result of consultation with the private sector on the project. An example being the Appraisal Summary Tables (AST) used in roads appraisals. An example has been included in Appendix J. Page 71 of 245

86 PROJECT APPRAISAL & DEVELOPMENT continued Project Appraisal Techniques Some of the most used techniques include: CBA; Net present value ( NPV ), internal rate of return ( IRR ); Return on Equity; Financial sensitivity and scenario analysis; and Qualitative scoring and points systems. Financial Models Use of an Appraisal Model designed for the purpose will facilitate calculation of the quantitative measures used in appraisal. In addition, the content and structure of the model used to calculate the Value for Money Comparator may be useful in the comparison with bids during bid evaluation. Recommended Approach The approach adopted for appraisal of rail projects must be centred on assessing the key objectives of the public transport system and should provide clear, easily understood evidence of the basis used to make decisions on these large complex projects. Table 11.1 suggests the measures which might be in order to emphasise an approach to assessment based on achievement of the adopted objectives for the public transport system: Table Appraisal Tools Objective Value for Money Quality Safety Integration Environment Appraisal Tools NPV of Financial Flows vs a Value for Money Comparator Points system; User surveys; Inspections Compliance with Standards; Safety case; Quantified risk assessment Punctuality, reliability, ticketing, passenger information, interchange Use of Benchmarks Economic Benefit CBA Some of the above are qualitative and will best be measured by a points scoring or ranking system which indicates the relative success in achieving the desired state. An appraisal Table will be used to compare each heading with its equivalent in any other option. Both qualitative and quantitative comparators will be utilised where appropriate, however we are aware that the subjective quantification of otherwise qualitative assessment criteria can be as controversial as it is helpful if not rigorously applied, and that therefore not all authorities regard these techniques as clearly proven. Page 72 of 245

87 PROJECT APPRAISAL & DEVELOPMENT continued OPTION ANALYSIS Introduction Once the strategic and business need for a project have been determined the options available for the procurement need to be examined. These options would include the form of the project as well as the form and structure of the route itself. In order to ensure that the available options are critically assessed and the preferred option selected to meet the project s objectives a systematic and structured approach to options analysis needs to be undertaken. Option Analysis A systematic and structured approach to options analysis is illustrated below. Information gathering Establish objectives Identify Constraints Long list of strategic options Cost / Benefits criteria Short list of development options Financial Analysis Economic Analysis Social Impacts Other Factors Recommendations Preferred options Figure 11.2: Option Analysis Information gathering This initial stage in the options appraisal sets the scene for the procurement process. Having identified the need for a particular rail project, information regarding the proposed project needs to be gathered to enable an informed decision to be made regarding the options appraisal process and the procurement. Page 73 of 245

88 PROJECT APPRAISAL & DEVELOPMENT continued The information that would be required at this stage would include: description of the proposed rail project. This would include the proposed route and preferred solution, e.g. metro or light rail; identification of specific objectives for the project. Whereas the proposed rail project should meet the overall objectives of transport policy the project may have specific objectives, for example in the social and economic regeneration of a particular area. Where specific objectives exist different criteria for option appraisal may be required; and identification of constraints relating to the project. These may include constraints in relation to availability of resources, commercial viability, political and social considerations. Long list of strategic options Once the information regarding the project has been obtained a long list of strategic options can be developed. These options could include different procurement routes, phasing, scope and technology options The choice of project implementation strategy would be dependent on the option that best meets the overall objectives and goals of RPA. In general terms, however, light rail and metro projects exhibit the following characteristics that make them suitable for PPP projects, i.e. the capital value is usually in excess of 100m; there is typically a significant service element; the public sector requirements can be described in output terms; and there is scope for private sector innovation and efficiency As typical light rail and metro projects meet the above requirements the PPP assessment should focus on the type of PPP to be adopted. However, the final assessment of whether to adopt PPP or conventional procurement procedures will depend on the following criteria: PPP provides VfM compared to traditional procurement; long term affordability; financial viability; and balance between cost and benefits A further discussion of the PPP structure options as part of the procurement route and their appropriateness is discussed in the Financial & Commercial Section Other options may include the type of project being considered. These could include a metro or light rail scheme or various proposed routes being selected. Whereas a large number of options may exist at the inception stage the project development must focus on the most practical and most appropriate. Page 74 of 245

89 PROJECT APPRAISAL & DEVELOPMENT continued Shortlist of development options From the long list of strategic options a shortlist of development options should be selected. This shortlist would normally consist of not more than three options. On the basis that all options would meet the minimum output specification requirements, selection should be based on the following: The practicality of the options; The costs of the options; The disbenefits that the different options may have. For example a metro and light rail scheme would have different environmental and social disbenefits that would need to be accounted for; and The timing of delivery and social impact that the options may have. Recommendations/Preferred options The final recommendations that lead up to the preferred options should be based on further financial and non-financial analysis. Page 75 of 245

90 PROJECT APPRAISAL & DEVELOPMENT continued COST BENEFIT ANALYSIS Introduction This section sets out the principle public policy considerations and approach to CBA in the appraisal of rail projects within the overall rail investment programme. In the context of public policies aimed at the provision of public transport services, the principles of public sector appraisal should apply equally to those involving the use of private finance through a PPP as to those procured through traditional publicly funded routes. While the former method places emphasis on outputs required to meet public policy objectives, the latter emphasises the inputs such objectives will need. However the basic requirement of value for money for the Exchequer overrides the choice of procurement method, and there is an onus on policy makers to establish value for money and the best use of resources before irrevocable procurement choices are made CBA is the appropriate form of public transport policy economic appraisal. It seeks to inform policy by comparing the discounted monetary value of the project s costs and its benefits in their widest sense. By doing so, it can indicate whether projects will offer net economic benefits, and are therefore worthwhile, as well as comparing the net economic return on alternative options so as to maximise the return on the choice to be made The section is structured as follows: CBA Principles and Objectives - introduces the main concepts and purposes of CBAs; CBA in Rail Project Appraisal describes the specific features of CBAs applied to the appraisal of public rail investment; Application and Techniques gives a simple overview of the methodological approaches taken; CBA Parameter Values presents details on the appropriate valuation of important CBA parameters, such as the value of time savings and vehicle operating cost savings; and CBA Working Rules offers a number of proposed analytical and procedural working rules which will help to ensure consistency and robustness in CBA application. CBA Principles and Objectives CBA seeks to evaluate in monetary terms the costs and benefits of a project from the public or community social and economic perspective. Its scope therefore is wider than a purely financial appraisal which examines only the actual financial flows. A distinction often used is that whereas financial appraisal assesses transaction (or traded) financial flows, CBA includes both traded and non-traded costs and benefits CBA is a decision tool which judges projects according to a discounted monetary comparison of all of their costs and benefits over their lifetime. It serves to inform policy by establishing whether a project offers a net economic benefit to society, and the actual extent of that benefit, for comparison purposes. Only those projects for which, at a minimum, the discounted benefits exceed the discounted costs would normally proceed The use of CBA in public project appraisal arises due to the non-traded nature of many economic goods and services. These include items such as environmental quality and the value of time. By including all such effects, it allows a wider public welfare perspective Page 76 of 245

91 PROJECT APPRAISAL & DEVELOPMENT continued to be brought to bear on an investment choice, rather than just a narrower financial appraisal. It is therefore an important tool in situations where the public cost or benefit of a course of action is likely to diverge from the private cost or benefit Such divergence occurs as a result of external effects (or externalities) that reflect inefficiencies in the definition of property rights, the existence of public or collective goods, monopoly situations or other economic distortions. Such externalities usually mean that market prices do not adequately reflect the full economic cost/benefit of a course of action From the point of view of a programme of rail investment, CBA will have, inter alia, the following purposes: to establish whether or not a specific project has net economic benefits and is worthwhile in the first instance; to compare alternative options so as to identify those with the greatest net economic return; to trace the full range of project costs and benefits, their extent and their relative importance in the final outcome; to highlight areas of uncertainty (or risk), and the degree to which they influence the overall project outcome; to establish the parameters of rail user demand, and the impact on a project s viability of variance in that demand; and to highlight timing considerations, the flow of costs and benefits, and to distinguish between capital (once off) and operating (ongoing) costs In addition, recent research in the environmental research area has been used to place a social cost on air and ground pollution resulting from transport projects (or their nonavailability). The use of these parameters also helps to include the wider externalities into a process of reasonably objective numerical analysis, without needing to introduce subjective weightings into the process of assessment A number of operational and analytical considerations will influence how beneficial the use of CBA will be in the programming of projects. These include the following: the timing of appraisals CBA should inform decision making as part of the programme planning process, rather than simply its execution; CBAs should be open to ongoing review, particularly where assumptions may vary before implementation; there should be cross-checking of assumptions in different but related analyses (e.g. aggregate population assumptions); they should be as comprehensive as required to assess the project in a meaningful manner, but not so broad as to include other projects not required in the initial assessment; assumptions, forecasts and trends should be robust, and subject to external reality checking; there will need to be clear responsibilities to initiate, undertake, vet and review appraisals; the use of quantified measures, or at a minimum descriptions, of impacts not amenable to monetary valuation; there will need to be consistent approaches to assumptions, monetary valuations and discounting, and the use of counterfactuals; and Page 77 of 245

92 PROJECT APPRAISAL & DEVELOPMENT continued outcomes will need to be comparable to alternative projects (or do-nothing options). Standard methods and calculations can ensure this. CBA in Rail Project Appraisal CBA has a long history in public rail transport investment appraisal, and it is one of the investment areas which employs the methodology most frequently. As with most transport investment, CBA in rail planning tends to highlight the benefits accruing to transport users, usually including travel time savings, transport cost savings, safety benefits and so on. Here it differs for example from industrial projects (which emphasise jobs and industrial activity) Reflecting the specific technical and user issues of rail transport development, CBAs in the area have a number of common themes and issues of which consideration will need to be given Large-scale rail investments can have secondary, multiplier and/or macroeconomic effects that arise from the removal of logistical inefficiencies. CBA should, ideally, attempt to include such macro effects Costs tend to be somewhat front-loaded, while benefits are spread over the lifetime of the project. This is due to the heavy construction costs associated with rail investment. This raises the importance of appropriate discounting and knowledge of cost and market trends Where investment is intended to ease wider transport congestion, or initiate a change in travel patterns, assumptions regarding the degree of modal split and behavioural outcomes become key. Where appropriate, testing of such assumptions can lend weight to the analysis (e.g. through market research, and international ex-ante and ex-post comparison) Related to this, transport demand forecasts tend to strongly influence the size of overall discounted benefits. This in turn highlights the importance of the assumptions behind those forecasts, such as population (or catchment), income growth, preferences, and the likely attractiveness of alternative travel options In a multi-dimensional and integrated rail and wider transport investment programme, many of the social and economic impacts of specific projects will be contingent on the outcomes of other related projects. In cost-benefit appraisals, the assumptions regarding wider developments will need to be clear, and the sensitivity of results should be tested for changes in the wider transport development programme The accuracy and reliability of costings will need to be continually checked, as technological and/or other cost fluctuations will necessarily influence the project s desirability. Application and Techniques In the application of CBA the full impact of the project needs to be considered. The costs would therefore reflect the capital and operating expenditures but also any disbenefits arising from the project. These disbenefits could include negative environmental impacts, disruption costs, decommissioning costs, noise pollution, etc Conversely the benefits would include all savings arising out of the operations of the rail network including a quantification of the time savings. Other benefits would include environmental benefits resulting from the alleviation of congestion within Dublin, user charges (revenues), residual values, etc. the so called Non User Benefits In order to make the CBA meaningful all the costs and benefits should be stated in NPV terms in current prices. The assessment of the NPV of the elements of the CBA, for Page 78 of 245

93 PROJECT APPRAISAL & DEVELOPMENT continued example the capital and operating costs would be based on the Reference Project. Other elements would incorporate an economic assessment of the costs and benefits, for example the environmental impact or time savings, which are intangible. The derivation of these values would result from recognised processes as described below In order to ensure that the CBA is robust a sensitivity analyses should be performed. This would sensitise some of the key parameters and indicate how any changes would affect the conclusion. CBA Parameter Values An example of the parameter values that should be considered in the CBA analysis are as follows: Updated (study to be undertaken) behavioural values of time (work, leisure, journey to work, etc.) for the different market segments to be addressed; Accident savings, reduced risk exposure and safety; Vehicle and transport system operating and maintenance costs or savings for users and non-users; Disruption costs; Environmental valuation; and User charges. The impact of these will generally be quantified on an NPV basis. CBA Working Rules The following are a number of proposed analytical and procedural working rules which will help to ensure consistency and robustness in CBA application. Additionally the appraisal should follow the CBA rules set out in Proposed Working Rules for CBA, CSF Evaluation Unit 1999: Objective setting Shadow Pricing (labour, public funds) Timing Scale and unit of analysis Responsible Authority Discount Rates Vary starting dates Displacement Direct/indirect/induced effects Taxation and subsidisation Counterfactual In addition to the CBA it may be appropriate to consider the application of multi-criteria analysis. Page 79 of 245

94 PROJECT APPRAISAL & DEVELOPMENT continued Multi-criteria analysis Multi-criteria Analysis (MCA) techniques are a means of simplifying large amounts of complex information in a consistent way to support complex decisions. Typically they combine a range of project, policy or programme option impacts into a single framework for easier assimilation by decision makers. MCA applications usually involve a combination of criteria valued in monetary terms with other criteria for which monetary valuations do not exist or cannot be reasonably compiled. MCA is therefore broader than purely financial techniques, such as CBA, which is supported by a more unified body of techniques Multi-criteria analysis establishes preferences between options by reference to an explicit set of objectives that the decision making body has identified, and for which it has established measurable criteria to assess the extent to which the objectives have been achieved. In simple circumstances, the process of identifying objectives and criteria may alone provide enough information for decision-makers. However, where a level of detail broadly akin to CBA is required, MCA provides a number of ways of aggregating the data on individual criteria to provide indicators of the overall performance of options A key feature of MCA is its emphasis on the judgement of the decision-making team, in establishing objectives and criteria, estimating relative importance weights and, to some extent, in judging the contribution of each option to each performance criterion. This arises principally from the combination of financial and non-financial data. The subjectivity that pervades this can be a matter of concern, and for this reason a fully quantified approach may not be considered appropriate for all appraisals. Its foundation, in principle, is the decision makers own choices of objectives, criteria, weights and assessments of achieving the objectives, although objective data such as observed prices can also be included. MCA, however, can bring a degree of structure, analysis and openness to classes of decision that lie beyond the practical reach of CBA Some of the advantages offered by MCA over informal judgement unsupported by analysis are as follows: it is open and explicit; the choice of objectives and criteria that any decision-making group may make are open to analysis and to change if they are felt to be inappropriate; scores and weightings, if considered appropriate, are explicit and may if structured correctly, be developed according to established techniques. Advanced statistical analysis of the results may be used to yield some correction for subjective bias, although this is always a concern within the structure of a quantified MCA; performance measurement can be sub-contracted to experts, so need not necessarily be left in the hands of the decision making body itself; and it can provide an important means of communication, within the decision-making body and sometimes, later, between that body and the wider community. Application of MCA The application and appropriateness of MCA techniques varies. Broadly, they can be used to identify a single most preferred option, to rank options, to shortlist a limited number of options for subsequent detailed appraisal, or simply to distinguish acceptable from unacceptable possibilities. Some are of little practical use as a basis for decision-making in a public sector environment yet they can be of considerable value elsewhere. Some are complex and untested in practice while others lack sound theoretical foundations. Page 80 of 245

95 PROJECT APPRAISAL & DEVELOPMENT continued In simple terms all MCA techniques should conform to the following rigour: identify objectives; identify options for achieving objectives; identify criteria to be used to compare the options; analyse the options; make choices; review and evaluate All MCA approaches should clearly articulate the options under consideration and the basis of their contribution to the different criteria should be explicit. Where techniques differ is in how they combine the data. Formal MCA techniques often provide an explicit relative weighting system for the different criteria In many MCA techniques the information in the matrix is converted into numerical values of agreed common base. In addition the relevant importance of each category in the matrix is weighted in numerical importance by the use of factors derived from judgement, generally assessed from a panel of key stakeholders or acknowledged subject matter experts (SMEs). This technique allows easy common assessment of options beside each other, but is also open to the perception of manipulation if great care is not taken in the process. Page 81 of 245

96 PROJECT APPRAISAL & DEVELOPMENT continued VALUE FOR MONEY COMPARATOR Introduction PPP is primarily concerned with the delivery of services over the longer term. Consequently, assessments must focus on whole life costs. In other words, the evaluation of value for money for the Exchequer, and bids, needs to focus on the overall cost of services over the life of the contract rather than on the phasing of items of expenditure or individual cost components within it Any assessment should also take into account the risk adjusted costs in the project using a Value for Money Comparator. Where different risk transfer would take place, for example between a traditional procurement and a PPP route, the risk adjusted costs would be different in both cases and these would need to be separately calculated Discounted cash flow techniques (e.g. NPV) represent the preferred approach to measuring, on a comparable basis, the whole life costs of bidders proposals. The Value for Money Comparator Achievement of value for money for the Exchequer will normally be driven by the private sector bidding in competition. However, there is a need to measure the success of this competitive process in securing value for money compared to the results which might have been obtained through traditional procurement. Computation of a Value for Money Comparator represents a systematic approach to assessing whole life value for money compared with alternative approaches to achieving the public sector s objectives The Value for Money Comparator is constructed and refined during the initial assessment of a project. Its role here is to perform the following: to provide clarity of the scope of service that is required; to promote full life costing at an early stage of the project; to act as a key management tool during the procurement process by focusing on output specification and risk allocation; to examine the costs, benefits and risks of meeting the requirements set out in the output specification; to act as a benchmark against private sector bids to ensure that comparison across bids is made on an even basis; to encourage competition; and to provide a reliable source of demonstrating value for money for the Exchequer. Components of a Value for Money Comparator The components of a value for money comparator are: project Costs; retained risk; and transferable risk. Page 82 of 245

97 PROJECT APPRAISAL & DEVELOPMENT continued All these components should be captured in the Value for Money Comparator on NPV terms (see overleaf). Methods of quantifying risk are discussed in the Risk Section of the Framework. Project costs This is the base cost comprising all costs which would be incurred if procurement of the project were initiated on a traditional basis, that is, the assets being owned by, and most of the risk of the project being retained by, the public sector. The appraisal of the costs should be made over the time frame of the proposed PPP and over the useful life of the asset The Project Costs associated with the traditional procurement include the following: capital costs relating to the development of the rail infrastructure and acquiring the rolling stock; costs relating to operating the rail system including life cycle maintenance; and operating revenues Only Project Costs should be reflected in the Value for Money Comparator and other costs such as development costs, which would be neutral regardless of procurement route selected, should be ignored. Figure 11.3 below illustrates how the value for money comparator is produced from the business case and risk models. Operations Risk xxx xxx xxx xxx Risk Assessment Model Construction Demand Public Risk Risk Sector xxx xxx xxx xxx xxx xxx xxx xxx Yes No Yes Yes Business Case Model Public Sector Comparator Transferred Risk Retained Risk Operations Costs xxx xxx Construction Costs xxx xxx Whole Life Costs xxx xxx Benefits xxx xxx Benefits O&M Costs Capital Costs Whole life Costs xxx xxx xxx xxx xxx xxx xxx xxx Figure Value for Money Comparator Retained risk In any PPP project there will be risks that are retained by the public sector. These would be risks for which value for money for the Exchequer would be eroded if transferred. These Page 83 of 245

98 PROJECT APPRAISAL & DEVELOPMENT continued may include planning risks which the private sector may be unwilling to assume under the project. Transferable risk One of the principle aims of PPP is to secure optimal risk transfer. The value of the transferable risk must to be included in a Value for Money Comparator to ensure like-forlike comparison with private sector bids Figure 11.4 illustrates the components of a Value for Money Comparator. Transferable risks Project Costs Retained risks Traditional Procurement Figure 11.4 Illustration of a Value for Money Comparator In order to ensure that the Value for Money Comparator reflects accurately the costs and risks of the service to be delivered it is crucial that the scope of service as defined by the specification, levels of service, residual requirements and contractual requirements are fully understood. Reference Project The Value for Money Comparator should be based on the Reference Project. This is the most likely and efficient form of public sector delivery that provides the required output specification and based on current best practice if the project were to be procured under traditional procurement The Reference Project should be framed as the conforming bid against which all private sector bids are appraised and challenged. It is critical that sufficient resources are provided in defining and specifying the Reference Project at the early stages of the project as this will form the basis of the PPP Where the assumptions and desired output specification change due to circumstances the Reference Project should be updated to reflect these changes. Value for Money The purpose of measuring value for money for the Exchequer is to determine the procurement route that offers greatest benefits to the public purse. This can be demonstrated by comparing the Value for Money Comparator to a risk adjusted PPP solution. The route with a smaller risk adjusted cost offers overall value for money and should other things being equal, be the preferred route. Page 84 of 245

99 PROJECT APPRAISAL & DEVELOPMENT continued Value for money can however be further extracted by holding a competitive process to extract the most competitive terms and by ensuring optimal risk transfer. Note however that the transfer of too much risk can result in an erosion of value for money as illustrated in figure 11.5 below: VFM RISK TRANSFER Figure 11.5 Value for money and Risk Transfer Use of Comparators The use of Value for Money Comparators is critical in establishing the preferred procurement route for the proposed rail project. As this initial test can affect the eventual procurement process it is important that a robust Value for Money Comparator is prepared for the purpose. Value for Money Comparators will be prepared prior to the issue of the ITN to ensure: that RPA is well informed with regard to the potential financial profiles likely to be confronted by bidders; and a metric is independently established against which bids can evaluated The independence of the Value for Money Comparator is important to the assessment of value for money for the Exchequer and therefore critical that a fully developed value for money comparator is in place before the issue of ITN. Consequently it will not normally be adjusted in the light of bids received unless there is overwhelming market evidence that an adjustment is required. Bid evaluation During the competitive process bids should be evaluated against the Value for Money Comparator to determine if they offer value for money for the Exchequer. This provides a ranking between different bids on a financial basis. Page 85 of 245

100 PROJECT APPRAISAL & DEVELOPMENT continued The comparison is also useful in determining whether submitted bids have been made in accordance with the required output specification. This is done by comparing the different elements of the submitted bids against the elements of the Value for Money Comparator. In order to ensure that an even comparison is made between bids and to ensure that value for money for the Exchequer is being delivered it may be necessary to make adjustments. This is demonstrated in Figure 11.6 below. Adjustment Transferable risks NPV of Public Sector Payments NPV of Public Sector Payments Project Costs Retained risks Retained risks Retained risks Traditional Procurement Bid 1 Bid 2 Figure 11.6 Bid Analysis Discount rates The project and risk adjusted costs for both procurement routes should be compared on a net present value basis using an appropriate discount rate (based on the exchequer cost of funds as advised by the Department of Finance). This technique recognises the time value of money and expresses all future costs in terms of their present values. The NPV is the difference between the Present Value of Cash Inflows and the Present Value of Cash Outflows over the whole life of the project, possibly 25 to 30 years. Sensitivity Testing Sensitivity Testing is used as an indicator of risk by evaluating the variability of NPV to change in key assumptions or variables. It involves the process of varying the assumptions used in the estimation of cash flows and measuring the impact on NPV. The more variable NPV is to such variations the more risky the project. This tool is particularly useful in options appraisal as a means of ranking these options which remain robust under change. Page 86 of 245

101 PROJECT APPRAISAL & DEVELOPMENT continued Scenario Planning Scenario planning evaluates the success or failure of an option by combining various assumptions about the possible outcomes. For example, a pessimistic scenario might be that capital costs increased and as a result project completion is slowed down. As a consequence of project delay, revenue generation is pushed back. Such scenarios can be subjected to a series of sensitivity analysis in terms of variations in key variables in order to evaluate the effect on the success of an option. Page 87 of 245

102 PROJECT APPRAISAL & DEVELOPMENT continued AFFORDABILITY Introduction RPA must at all times be aware of the issue of affordability. This concept refers to the process of continually affirming the ability of RPA to meet the financial obligations arising from the PPP once the project has been approved and is operational Before appointing a preferred bidder, RPA will need to be satisfied not only that the best value for money option has been secured, but also that this option can be delivered within the budget available for the purpose. It must be remembered that PPP deals have to be affordable over the duration of the contract, which can be for years. This will have particular importance for RPA as the commitments may be very material to their annual spending The private sector partner, and the banks who fund the project, will need to be satisfied that RPA is in a position to make a formal statement with regard to its ability to meet all of its obligations under the PPP agreement. PPP procurement In a PPP procurement the support from RPA can take a number of forms depending on the form of PPP selected from the following: Operate; Design, Build & Operate; Design, Build, Finance & Operate; and Design, Build, Finance & Maintain. Operate In an Operate PPP, RPA s support for the project may include an annual operating subsidy to cover some of the private sector s operating costs. This subsidy requirement may decrease over the concession but RPA would still need to understand what the Affordability levels are at all times and how these would be funded. Design, Build & Operate RPA s support may include an annual subsidy and an up-front capital funding. Design, Build, Finance & Operate / Design, Build, Finance & Maintain RPA s support in this instance may comprise availability payments, upfront capital support and/or an annual operating subsidy. Page 88 of 245

103 PROJECT APPRAISAL & DEVELOPMENT continued Affordability Level Regardless of the form of the PPP RPA needs to understand the nature and extent of its financial commitments to the project so that it can make arrangements to meet these commitments when they fall due. These arrangements will include securing the commitment from the Exchequer to support the project over the concession The determination of the Affordability level can be made at the pre ITN stage using a Shadow Bid model based on the Reference Project. This assessment is then updated when bids are received and finalised on selection of preferred bidder post BAFO. Figure 11.7 below illustrates the relationship between the Transport Model, Value for Money Comparator and Shadow Financial Model. INPUTS OUTPUTS INPUTS OUTPUTS Route Stations Demographics Costs Transport Model Demand Revenue Demand Revenue Operating Cost Capital Cost Whole life Cost Risk Analysis Value for Money Comparator Public Sector Option Benefits Funding Structure Financial Assumptions Risk Premium Economic Assumptions Concession Length Macro Assumptions Shadow Financial Model Private Sector Option Figure 11.7 Model Relationships The diagram illustrates the linkages between the Value for Money Comparator and the Shadow Financial Model. The cost inputs from the Value for Money Comparator have to be benchmarked against comparable schemes. Sensitivities may have to run to reflect the different experience of actual outturn costs for both the public and private sectors. In addition the Shadow Financial Model could be used as a Value for money benchmark in the event that a realistic Value for Money Comparator is not a practical option. Page 89 of 245

104 PROJECT APPRAISAL & DEVELOPMENT continued BID EVALUATION Introduction Competitive tendering is a key driver in the process of securing value for money for the Exchequer. In order to ensure that value is maximised the competition must be structured to secure bidding interest from capable potential PPP service providers and that no collusion takes place between the bidders. An important consideration for any potential bidder will be whether the bidding process will be managed in an even handed, open and transparent way. This is generally secured by deciding on the criteria to be applied in assessing bids in advance of receiving any bids and ensuring that evaluation is carried out in an objective, independent manner and in accordance with EU procurement laws. RPA will be concerned that the following risks are minimised: failure to secure a suitable PPP provider; chosen providers not matching requirements or quality standards; failure to comply with legal and procedural requirements resulting in legal challenge; and biased selection The bidding process will generally take place in two stages: pre-qualification stage; and formal bid stage. Note: a detailed analysis of the PPP procurement phase is discussed in the Procurement and Contractual Framework. Pre-qualification The Pre-qualification stage is designed to identify consortia who are potentially capable of meeting the objectives set out by RPA. These consortia must be assessed on the basis of pre-qualification criteria before they are deemed suitable to progress as potential bidders. Information presented at this stage of the bidding process is essentially indicative and may include: identification of key members of the bidding and advisory team; evidence of relevant experience in designing, building and or operating similar schemes; experience of financing similar projects; financial statements evidencing capacity to finance/deliver; outline of approach to delivering the project; experience of financial, legal and technical advisers in working with the bidding consortium and in working on PPP rail projects; outline Funding plans indicating sources of funds; and experience and knowledge of the PPP process In selecting bidders to go forward to the next stage RPA may only take into account factors relating to the economic and financial standing, ability and technical capacity of the Page 90 of 245

105 PROJECT APPRAISAL & DEVELOPMENT continued bidders. Factors relating to the award of the contract itself, for example a bidders approach to design issues, etc., may only be considered at the Formal Bid stage Therefore robust criteria on the pre-qualification of bidders need to be agreed prior to the issue of the OJEC notice and the Information Memorandum. These would include: an objective means of measuring the economic and financial standing of the bidding consortia. This may include a points system for key financial ratios based on published audited accounts; the consortia s technical ability which may be demonstrated in an essay response highlighting the consortia s approach to technical issues; and the consortia s finance raising capacity which may be demonstrated in an essay response highlighting the consortia s approach to raising finance for the project. A shortlist of three to four bidders would be selected on the basis of the scoring and their written responses as above. RPA might choose to interview bidders at pre-qualification stage. Formal Bid At this stage bidders must demonstrate that they have the resources and management skills to undertake the required services as outlined in the Output Specification. Confidence with regard to deliverability is a key consideration and if there is any lack of confidence in this regard only those bidders who have secured the confidence of RPA in their ability to deliver should be invited to submit formal bids On the assumption that all shortlisted bidders are capable of meeting delivery and quality standards, RPA will need to deal with its approach to the inevitable trade-offs which will arise between cost and quality in the formal bids A detailed methodology (usually involving a scoring system) for making selection decisions must be finalised before bids are received. Bidders should be clear on: how their bids will be evaluated; how variant bids will be dealt with - variant bids can be considered if a compliant bid is submitted (procedures and criteria for evaluating variant bids must have also been determined before bids are submitted); and non-compliant bids leading to their exclusion from the competition It is in the best interests of the overall competition if bidders are encouraged to put forward proposals which will meet RPA s requirements. Consequently, the criteria to be applied should be clearly communicated to bidders. This does not mean that the detailed scoring and weightings are to be provided Appointment of the preferred bidder should be based on: satisfying the output specification and performance standards; securing value for money for the Exchequer (over the life of the proposed agreement); acceptance of the key contractual terms; achieving the required transfer of risk; confirmed access to finance (if applicable) that does not require underwriting by the public sector or revisions to the contractual terms; a robust business plan and affordable costs for RPA; and Page 91 of 245

106 PROJECT APPRAISAL & DEVELOPMENT continued concluding an agreement with an entity which has cohesive management structures capable of long term performance and compliance with contract management and monitoring requirements A key consideration at this stage is the maintenance of a reserve bidder to maintain competitive pressure on the preferred bidder thus minimising the risk of last minute attempts to re-negotiate key terms. Otherwise, RPA risks either exposing itself to the costs and time associated with re tendering or submitting to what may be material changes to terms Criteria for Shortlisting While it is acknowledged that the criteria and/or their weightings will vary from project to project, they will generally embrace: technical merit of solutions; Value for Money over the life of the agreement; physical deliverability; financial deliverability credibility of business plans and robustness of financial model; quality; and experience of the bidding team and cohesiveness of structures These criteria would be applicable whether proceeding from the ITN stage to the BAFO stage or when proceeding from BAFO to preferred bidder Note that whereas a reserve bidder should always be retained RPA should ensure that it does not lose its competitive edge in the selection of the preferred bidder. To that extent the selection of the preferred bidder should be made on the assumptions of the bid and the bidder would need to underwrite any further changes to their assumptions. This should prevent the preferred bidder from unwinding the process once they have been selected. Page 92 of 245

107 PROJECT APPRAISAL & DEVELOPMENT continued PROCUREMENT PROCESS The key activities that need to be carried out as part of the project appraisal have been discussed in detail in the previous section. These activities have to be undertaken within the PPP procurement framework. Figure 11.1 highlighted key steps for the project appraisal and the approvals process. This section provides further guidance on the requirements for project appraisal at each stage of the procurement process. Figure 11.8 below summarises the approach. Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Establish the strategic context Establish need Develop scheme options Detailed options appraisal Undertake Procurement assessment Prepare Cost benefit analysis Prepare detailed VfM comparator & VfM model Establish and set affordability envelope Define PPP Model & Risk profile Update VfM comparator & VfM model for agreed clarifications Update project scope and business case Analyse bids returned, confirm VfM Update business case to reflect actual costs Reconfirm affordability Agree BAFO format Update VfM comparator & VfM to reflect BAFO conditions Receive BAFO Confirm Business case Confirm VfM Confirm affordability Document risk ownership Finalise VfM, business case and affordability Monitor the delivery of benefits and strategic objectives Update cost benefit analysis Project Definition Detailed Project Development Figure PPP Procurement Process Project Definition At this stage the scoping of the potential project to meet the need identified is carried out at a strategic level. In the context of Rail PPP in the Greater Dublin Area, the need would be identified through the Platform for Change or over time by the DSLTB. The DSLTB define the strategic need for service, and RPA will define the Projects which meet that need, insofar as the constraints can be satisfied, or alternatives if they cannot. Detailed Project Development Having established the need for the project at a strategic level it then needs to be developed and refined to establish the detailed cost benefit assessment (CBA). The CBA will be used in the options appraisal, filtering the options to those that best deliver the strategic objectives. Finally at this stage, the Procurement route has to be selected. This should involve an assessment of PPP options versus the traditional options. Page 93 of 245

108 PROJECT APPRAISAL & DEVELOPMENT continued Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Expression of Interest and Pre-qualification Assuming that a positive decision has been obtained to proceed as a PPP, there are a number of activities that need to be undertaken during this stage of the procurement process. The Exchequer needs to establish the likely exposure by adopting a PPP approach therefore a detailed affordability assessment needs to be carried out. This should be assessed using a Shadow Financial Model In addition the potential for value for money for the Exchequer needs to be assessed at this stage. This should analyse the likely risk ownership profile between the Public and Private Sectors. It should also review the potential for Private Sector efficiencies that may be delivered as part of the PPP approach. It is critical that these activities are undertaken before the issue of an ITN as the results of the analysis will enforce the decision as to whether to proceed with the project or not. Invitation to Negotiate During this stage of the procurement process the bidders will develop their solutions to deliver the outputs of the brief. Inevitably during this phase there will be clarifications to ITN documents. These clarifications may also have an impact on the Value for Money Comparator, CBA and/or affordability assessment. The role of RPA during this stage will be to assess the materiality of such clarifications and to amend the relevant models if appropriate. Any appropriate amendments to the relevant models, should remain within the approved affordability envelope. Shortlist At this stage the tenders will have been returned and the detailed evaluation of the bids will be undertaken. The activities required for bid evaluation and risk adjustments have been detailed in the Procurement and Contractual section. It is critical that the output from this evaluation is fed back to update the CBA, value for money and affordability assessment. These feedbacks are simply to provide the bidders figures elements of these, and it is not intended that the value for money comparator or affordability envelope themselves would be subject to change. BAFO, Negotiations and Financial Close During these stages of the procurement process final risk positions, pricing and scope of services will be established. These should be reflected in revised value for money, affordability and CBA positions. This information will form part of the overall assessment of the PPP bids and will feed into the selection of preferred bidder and approval of final contract positions. Construction and Operations Finally, the implementation of the project will see the delivery of the benefits identified at the onset of the project. The appraisal of the project should be used in the measurement of the performance of the PPP contract. Information on actual performance and impacts should be fed back into the appraisal process such that the projection of project benefits can be assessed against actual project experience. Page 94 of 245

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110 Project Planning CONTENTS PAGE Introduction 95 Specific Objectives for Project Planning 97 Transport Planning & Design Considerations 102 Procurement Process 120

111 PROJECT PLANNING 12 INTRODUCTION Introduction 12.1 Project planning drives the overall development process for new rail schemes, by determining the overall objectives for the project. Government transport policy, strategic land use plans, changes in economic activity and environmental objectives will identify the need for the development of a new public transport service. The planned new DSLTB (see Section 9 of this framework) will be responsible for the strategic evaluation of transport options in order to assess which of the available options meet the identified needs. Following a determination that a light rail or metro project is to be developed, RPA will be tasked with making arrangements for the generation of plans and designs necessary to develop, construct and operate the railway. In PPP transactions, these activities must be carried out against the background of developing a scheme that is bankable and attractive to the private sector, while still ensuring that the original planning objectives and value for money for the Exchequer are achieved This section of the policy framework is structured as follows: Introduction sets out the context of project planning within the overall PPP process; Specific Project Planning Objectives presents the objectives of project planning and design at the different stages of the project life-cycle; Project Planning Considerations will highlight the linkages between the planning streams of work and also the interaction with other issues such as performance standards and project appraisal; and Procurement Process provides a step-by-step guide to the PPP procurement process and the requirements for project planning activities. Key elements of project planning 12.3 For any new transport system, the planning environment requires that a wide range of issues be considered and assessed before a system design can be agreed and implemented. The key elements of project planning in such an environment comprise: Initial planning and establishment of scheme-specific objectives taking account of national and local transport policies and public policy on land use, environment, etc.; Consultation with the public and with key stakeholders in the projects; Specification of scheme characteristics particularly the route selection, alignment and choice of technology (metro, light rail, etc.); Demand and revenue assessment to establish the required scope of the scheme and to feed into the detailed project development and cost-benefit analyses; Operational and safety planning specification of required capacity, frequency of operation, development of operational and safety plans; Design from initial project scoping, through initial design to detailed design; Cost estimation based on the scheme design and operational plans; Environmental impact assessment identifying and quantifying where possible all potential environmental effects, leading to the inclusion of environmental mitigating measures in scheme design; Page 95 of 245

112 PROJECT PLANNING continued Project appraisal CBA and other tools, to provide justification for public sector support for the scheme (see Section 11); Railway order and planning approvals process acquiring the necessary powers to implement the scheme and any planning consents that may be required; and Overall feasibility assessing the buildability, safety and environmental impact of construction. Interfaces 12.4 These elements interact considerably and cannot be carried out in isolation. For example, the planning process requires the scheme to have been specified and a certain level of design carried out before a railway order is granted. Appraisal of the proposed project may show that certain elements of the scheme are not economically viable or breach environmental guidelines and that the scheme needs re-scoping or re-design In addition, the planning and design processes also interact with issues that are discussed in other sections of this framework. For example, operational planning and performance standards are interconnected tasks that cannot be considered in isolation. Project Life Cycle 12.6 The planning and design tasks will be carried out to various degrees of detail and sophistication at different times of the project life-cycle: an initial planning and appraisal process will be carried out at an early stage of project scoping in order to establish in broad terms whether the proposed scheme is appropriate to meet the identified objectives; further detailed analyses are then carried out while considering alternative options and presenting an outline design for the preferred scheme; and at the detailed design stages, any modifications to the original scheme must be carefully planned and evaluated to ensure that the original objectives are still being met Project appraisal, including financial appraisal, detailed project development analysis and the Value for money Comparator, are discussed fully in Section 11. However, since it is normal to incorporate CBA within the project planning process, this is also discussed briefly in this section. Page 96 of 245

113 PROJECT PLANNING continued SPECIFIC OBJECTIVES FOR PROJECT PLANNING Introduction 12.8 The overall transport planning objectives have been set out in Section 6, this section sets out the primary goals and objectives for project planning and design. To derive more detailed project planning objectives than those outlined in Section 6 requires a consideration of current regional/local objectives and issues. In addition there are specific policy issues that affect project planning and design including: Safety regulation currently, safety on the railways is regulated according to statutes imposing rail safety requirements and arrangements between the Railway Inspectorate and CIÉ. The Railway Safety Bill 2001 will impose a safety regime which will apply to all passenger railways, light railways, metros and trams and railway undertakings operating such railways will have to prepare and comply with a railway safety case ; Access the DTO s objectives under its integrated transport strategy requires that public transport networks will be fully accessible. In addition, EU regulations on disabled access must be complied with; Environment EU and Irish regulation on environmental assessment and protection imposes requirements to identify, manage and mitigate environmental impacts; Industry regulation as mentioned above, a new public transport regulator (DSLTB) for the Greater Dublin Area will be established to undertake market regulation responsibilities. The precise scope and nature of regulation has yet to be determined; and Economic to ensure optimal use of public funds, schemes that require state financial support will be required to meet or exceed a pre-determined economic rate of return when a CBA is carried out. Scheme Objectives 12.9 In addition to the overall objectives there will be scheme-specific objectives that will normally be developed for any new rail project. Typically these set out desired outcomes on issues such as: the areas, nodes or developments to be served by the new railway line or network; integration with other existing public transport modes, either at specific sites or by means such as fares integration; integration with the road network (particularly through park-and-ride sites); facilities for pedestrians and cyclists; contribution to regeneration or economic development of the local area; and relief of local environmental problems It is not possible at this stage to set out detailed objectives on these issues as they will vary from scheme to scheme. The establishment and evaluation of scheme objectives is an integral part of the project appraisal process, as described in Section 11, Project Appraisal and Development. Page 97 of 245

114 PROJECT PLANNING continued Objectives for Project Planning & Design In considering the planning and design process at this level, there is little difference between the objectives for light rail, metro or heavy rail schemes. It is only at the detailed level that differences between the types of rail system impact upon planning and design. Light rail, with on-street running, requires road traffic management to be addressed for example, while this is less of an issue for segregated metro or heavy rail systems. Table 12.1 below does not therefore distinguish between different types of rail system. Table 12.1 Objectives for Project Planning & Design Key Element Objective Task Components Planning and objectives Consultation Scheme specification Demand & revenue assessment Determine and agree public policy objectives for scheme Ensure that stakeholders are informed of the scheme and that views are taken into consideration Determine the preferred alignment and rail technology Provide robust forecasts of ranges of demand and revenues over the project life-cycle and assess the key risks Consideration of transport policies, strategies and objectives Examination of local & regional planning and development issues Establishment of evaluation criteria for scheme options Public consultation Ongoing stakeholder consultation and public relations Analysis of planning issues, engineering & alignment constraints Route planning, alignment, station/stop siting and related amenities e.g. car parks, interchanges, busses etc. Technology choice Multi-modal demand model Demand forecasting Fare structures Revenue forecasting and yield analysis Page 98 of 245

115 PROJECT PLANNING continued Key Element Objective Task Components Operational and safety planning Design Cost estimation Environmental impact assessment Project appraisal Planning approvals Specify appropriate frequency, capacity, route patterns and set performance specifications Establish safety management systems Set out the scope of the scheme from initial definition, carry out feasibility, scheme and detailed design Provide robust estimates of costs over the project life-cycle and assess the key risks in increasing detail Evaluate all potential environmental impacts and recommend mitigating actions Assess whether the scheme provides positive net economic benefits and identify a preferred alternative Secure the required legislative, regulatory and planning approvals Assessment of capacity requirements Specification of headways, speeds, vehicle capacity, service patterns, reliability, integration with other public transport, safety regime Interface with technical specification Establish design standards Assessment & buildability Scope and design of: vehicles; traction supply; track; structures; stations/stops and platforms; signalling & control; utilities & diversions; traffic engineering Outline design, construction, operating & maintenance costs Detailed costs, budgets, contingency and programme Assessment of impacts on land use, severance, ecology, noise & vibration, air quality, water, soil, landscape, cultural heritage CBA Multi-Criteria Assessment (MCA) Risk assessment (see Finance and Commercial Analysis and Section 14) Land acquisition (including CPO) Preparation of documentation, including EIS, for Railway Order Page 99 of 245

116 PROJECT PLANNING continued Analysis of Planning & Design Objectives and PPP Structure The PPP structure adopted has different implications for the allocation of responsibilities for delivering the planning and design objectives (as set out in the Table 12.1). The objectives have been assessed under the different structures and Table 12.2 sets out the differences between the PPP options In general terms, a distinction can be made between the initial stages of a project normally up to the stage when projects approvals/legal powers are obtained and the later development stages when the scheme progresses and the detailed scheme design is determined Under any PPP structure, RPA should take prime responsibility for project planning and design in the initial stages of the project life cycle. This is driven to a considerable extent by the need to obtain planning and legislative approval for the scheme before the necessary legal powers to proceed are obtained. Also, the private sector is likely to be unwilling to take planning risk without provision for compensation should the project not proceed During the later development stages of a project, the private sector will become involved and take responsibility for carrying out some of the planning and design tasks, as highlighted in Table Table 12.2 Responsibility for delivering Project Planning & Design Objectives Objective O DBO DBFO* Comments Planning and objectives RPA RPA RPA Should remain responsibility of RPA under all PPP options Consultation RPA RPA/PS RPA/PS Responsibility of RPA during initial stages, but private sector needs to be involved if taking responsibility for operations Scheme specification Demand & revenue assessment Operational characteristics RPA PS/RPA PS/RPA Can be influenced by RPA even under DB options by detailed performance specifications PS/RPA PS/RPA PS/RPA Depends on allocation of revenue risk this categorisation assumes revenue risk is taken by operator RPA/PS RPA/PS RPA/PS Depends on allocation of operational risk and specification of performance standards Scheme design RPA PS PS Risk will eventually be passed to private sector under all DB options Cost estimation RPA PS PS Risk will eventually be passed to private sector under all DB options, but RPA will carry out its own initial estimates for Public Sector Comparator Environmental impact assessment RPA RPA/PS RPA/PS Should remain prime responsibility of RPA under all PPP options, although private sector may develop mitigating measures Project appraisal RPA RPA/PS RPA/PS Should remain prime responsibility of RPA under all PPP options, even if data is provided by private sector Planning approvals RPA RPA/PS RPA/PS Largely the responsibility of RPA, but private sector will be involved in approvals process where necessary PS: Private sector bidders/contractors *For simplicity only DBFO has been shown. The responsibilities would be similar for a separate DBFM and Operate structure. Page 100 of 245

117 PROJECT PLANNING continued Summary The private sector will have most responsibility for subsequent project development under the DBO and DBFO options, where it will be responsible for ongoing operation of the rail network and must therefore be an active partner in the development of the scheme Although not shown explicitly in Table 12.2, it is considered to be highly desirable, under O, DBO and DBFO options, to involve the private sector in the initial stages of project planning, particularly on operational issues. This would help to ensure that the eventual scheme has the necessary characteristics to attract private sector investment and can meet bidders or contractors objectives as well as those of RPA. Page 101 of 245

118 PROJECT PLANNING continued TRANSPORT PLANNING & DESIGN CONSIDERATIONS Introduction Project planning drives the overall development process for new rail schemes, by determining the overall objectives for the project. Government transport policy, strategic land use plans, changes in economic activity and environmental objectives will identify the need for the development of a new public transport service. The project planning process will then evaluate a wide range of options in order to assess which ones meet the identified needs. Plans and designs are then generated for the development, construction and operation of the railway. In PPP transactions, this has to be carried out against the background of developing a scheme that is bankable and attractive to the private sector, while still ensuring the original planning objectives are met. Key elements of project planning & design This section sets out the key elements of the project planning and design process, highlighting where appropriate the approaches and methodologies that can be used. The linkages and interactions between elements of the process are identified in overall terms, these are illustrated in Figure 12.1 below. There are also linkages with other sections of the Framework, in particular Section 14, Risk Management and Section 16, Performance Standards. Set objectives Scheme specification Demand and revenue assessment Outline design/ feasibility Operational planning Cost estimation Project appraisal Planning approval Detailed design Environmental assessment Consultation Figure 12.1 Project Planning and Design process The planning and design process will go through a number of iterations during the project development cycle. Under a PPP framework, all the stages from Set Objectives to Project Appraisal will need to be carried out before the procurement stage (by Invitation to Negotiate). It should be noted that under the Railway Order Process (under the Transport (Railway Infrastructure) Act), there is no outline planning stage therefore may need to undertake these activities necessary to the deliver sufficient information on the preferred route. The output from this work should be sufficient to provide an envelope within which bids can be prepared without unduly constraining the potential for innovation Depending on the type of PPP offered, bidders will review a number of the planning and design elements and will carry out or commission their own studies to verify and develop Page 102 of 245

119 PROJECT PLANNING continued RPA s plans and estimates. Typically, bidders will review the system specification, demand and revenue assessment, operational plans, and will develop more detailed scheme designs and cost estimates Once initial bids for the PPP concession have been received, RPA will need to re-appraise the project to assess whether the original objectives are being met. Reviews of bidders submissions will take place to identify their proposed changes to design, cost or revenues. This process will continue during the Best and Final Offer and Negotiation stages, in order that RPA can ensure that bidders are offering a compliant value for money solution that meets the scheme objectives. Planning and objectives Land use planning is a function of local authorities, under the direction of the Minister for the Environment and Local Government. The planning of public transport (but not roads) is carried out by the Minister for Public Enterprise, in conjunction with local authorities and other interested parties. Each planning authority is required to produce or review a development plan every six years these should contain direction on the future transport needs and provision of the local area The identification of the need for a new rail scheme would normally originate from national or regional development plans, after considering national and local transport policies and strategies, the current local transport system and local economic, environmental and social circumstances. Policies on economic development, land use planning and environmental issues are also likely to weigh heavily. These issues will establish objectives for developing a rail scheme Consultation with the Local Authorities is especially important at Project planning stage to understand the requirements of their area integrated planning documentation and the implications for the development of detailed project design Objectives for rail schemes are likely to include one or more of the following issues: to provide a public transport system that serves certain corridors or development sites; to relieve road congestion; to improve the condition of the environment; to generate net economic benefits to the nation by providing a more efficient transport network; to provide an accessible and affordable means of transport; to generate new employment opportunities; and to promote deprived area regeneration and ensure social inclusion Normally, the objectives for a rail scheme should drive the planning and design of the project. The objectives may be set out explicitly from the outset of the project planning process or may be taken into account implicitly in the planning process by the scheme promoters. If clear objectives are set, criteria can then be developed to allow alternative schemes to be compared with one another and for the overall scheme to be evaluated, in order to ensure that the original objectives are met by the final design. These criteria will drive the subsequent project appraisal process Given that the objectives for a rail scheme are normally developed from a public sector, national welfare point of view, then these may not always coincide with private sector objectives under a PPP arrangement. This is likely to be the case if there are social or Page 103 of 245

120 PROJECT PLANNING continued environmental reasons for developing the scheme, or a component of the scheme, which are not in line with commercial imperatives. For example, a decision may be made that the railway should serve a socially deprived area in order to improve accessibility to its residents; however, this may involve higher construction costs or lower revenues than other alternatives. In these instances, a trade-off may need to be considered between meeting the original scheme objectives and developing a bankable PPP scheme. Consultation Consultation is both a tool of good planning and a statutory requirement. The aims are to inform interested parties of the proposed scheme, to seek views and feedback on its development and if possible to achieve a consensus on the need for and shape of the scheme. Public acceptability is essential to the success of a scheme. Stakeholders can range from local people who may be affected by a specific proposal through to existing or potential customers In order to carry out an Environmental Impact Statement (EIS), which is required to be submitted with the railway order application, a certain level of public consultation must be carried out to determine stakeholder views on potential environmental and related impacts arising from the project in question. This will normally encompass consulting public representatives, residents associations, business groups and the general public. A variety of tools can be used, including individual and group briefings, production of newsletters or brochures, a telephone hotline, website, information video, permanent or temporary exhibitions, public meetings, special liaison groups, and/or research surveys. Depending on the timing of the selection of the preferred private partner there may be a joint EIS which the Private Partner may lead Consultation of stakeholders must be carried out to ensure the scheme is developed in a way that meets the objectives of all stakeholders which are not necessarily the same as those of RPA. Indeed, some stakeholders may have conflicting objectives. Local business groups may have the objectives of stimulating development and facilitating journeys to work for employees. Local authorities may require reductions in road congestion and improvements in the local environment. Residents may seek to improve the range of travel opportunities but are also likely to be concerned with planning blight or the local effects on their neighbourhood. If these objectives are not met or at least taken into account there is the risk of opposition to the scheme and RPA is less likely to achieve sufficient consensus to get through a public inquiry Public and community relations are an ongoing task throughout the life of the project, but needs to be particularly focused during the initial stages of project development. Effective public and community relations will help gain public support to the scheme and achieve consensus on the need for the project. Much of this will be carried out during the public and stakeholder consultation, but it is good practice to continue to keep these groups informed as the project progresses, beyond the formal consultation timetable. Scheme specification The scheme specification stage of the planning process will determine the preferred technology and the routing of the line, taking into account overall levels of demand and physical or planning constraints on alignment. The key features of the two main technologies - light rail and metro are described below. It should be noted that the characteristics described are not definitive and in practice there is substantial overlap between types of rail system. Page 104 of 245

121 PROJECT PLANNING continued Light Rail Light rail services tend to use short and light tram style rolling stock, suitable for street running or with minimal segregation. This type of stock can accommodate tight radius curves and steep gradients enabling the alignment to fit within the existing streetscape in urban areas with a minimum of property effects and requirement for new structures The capacity of light rail systems tends to be smaller than for metro or heavy rail because trains are shorter, but is suitable for a high frequency service, limiting waiting times for passengers at stops. The average speed is relatively low, as light rail works on line of sight driving, with only at-grade road crossings being signalled. Where full segregation is proposed, automatic operation becomes viable. The average passenger journey length tends to be short with stops spaced at less than 1 kilometre. A varied service pattern is possible as destinations can be clearly shown on the front of the vehicle. Light rail can exist in situations with a varying amount of segregated running and with a variety of differing signalling and control philosophies. Metro Metro services tend to use fully segregated track beds, and longer high capacity rolling stock. This type of stock operates at speeds that limit the curvature of alignments, which together with the longer trains, makes it less compatible with street running. Accordingly, metros tend to be in tunnels or elevated through dense urban areas, and segregated at-grade in suburban areas The capacity of metro vehicles is high, but with the expectation of a large number of standing passengers at peak times. The average speed of operation is higher than light rail, which may require sophisticated signalling systems, potentially with automatic operation to maximise frequency and thus capacity. Journey lengths tend to be longer than light rail, reflecting the longer station waiting and the walking times from street level. Station spacing tends to be relatively close in city centre areas, serving business and commercial areas, but wider spaced in suburban areas. The service pattern tends to be based on specific routes, with few options, and trains calling at all stations. Choice of technology The demand level and average journey length will determine which is the appropriate technology for any specific scheme. For example, where the required journey lengths are short, the walk length to a station becomes a significant factor in choosing the train, accordingly a light rail solution may be appropriate. However if the demand exceeds that possible with a street running system, a metro system may be more appropriate. Where the journey distance is long, metro or heavy rail would be appropriate, possibly with feeding light rail or bus services. During the initial stages of scheme development, only outline information will be available on future demand and passenger journey characteristics. However, this will normally be sufficient to make an initial choice of technology and the decision can be reviewed once further demand modelling and forecasting work has been undertaken. Route selection The initial route selection will largely be based on demand characteristics, planning objectives, land availability and physical constraints on alignments. Stations or stops will need to be spaced according to demand levels and centres of population or economic Page 105 of 245

122 PROJECT PLANNING continued activity. Account will need to be taken of planning objectives such as the DTO objective to ensure that the public transport network in Dublin can be accessed by a 10-minute walk Following the initial route selection and the development of demand and cost forecasts, the preferred route and any alternatives will need to be evaluated to identify the optimal route. This evaluation process will take into account effects on demand and revenues, capital and operating costs, social and economic impacts, accessibility and land use. Demand and revenue assessment Where the private sector is being asked to take (or share) demand and revenue risk, forecasts of demand and revenue will become central to the PPP negotiations. There will be a requirement therefore for a high degree of confidence in the accuracy of forecasts, both by RPA and the private sector bidders. There will be an expectation that any demand forecasting tool should be capable of reflecting the full range of factors that could influence demand. These will range from external factors (e.g. economic growth, and the size and distribution of jobs and population), to the specification of the system itself and of competing transport systems. This suggests that a tool is required which as a minimum can represent: stop to stop movements which can be interpreted in revenue terms; the impact of alternative fares strategies and levels; the impact of alternative operating patterns, including journey time and frequency; and the competitiveness of alternative modes, e.g. the impacts of a competitive bus provision Assessment of demand for a scheme can be undertaken with varying degrees of sophistication and accuracy, depending upon the specific requirements at different stages of the project life cycle. Tools may range from spatially aggregate spreadsheet type elasticity based models, to much more spatially disaggregate network-based tools, often based upon proprietary software (such as SATURN/SATCHMO, TRIPS or EMME/2). Most models would feature at least some of the following components, again represented at varying levels of detail: current and future overall levels of travel demand, often categorised in terms of car availability; representations of the generalised cost of travel by alternative modes; in the case of public transport, usually comprising wait time, walk time, in vehicle time, interchange penalties, and fares; and behavioural parameters or elasticities, which reflect aggregate responses (sometimes by travel market segments) to changes in public transport costs The DTO model is currently the most comprehensive tool available for the assessment of future travel demands across the Dublin area. The model was developed initially to assist in the appraisal and selection of project strategies for Dublin during the Dublin Transport Initiative in the early 1990s. Based upon extensive surveys of travel patterns and behaviour, an updated version of the model has been used to inform the development of the project strategy set out within Platform for Change The model is multi-modal in nature, with explicit representation of public transport modes as well as road options. Within the current mode choice model, different types of rail technology (light rail, metro, heavy rail) are not presented as alternative modal choices, Page 106 of 245

123 PROJECT PLANNING continued though the distinct attributes of each type of rail technology (journey time, frequency, etc.) are fully represented The DTO model gives rail demand forecasts on a link-by-link basis. The level of accuracy of forecasts is consistent with the size and strategic nature of the model. Flows at the broad corridor level may be expected to be robust, but accuracy is more difficult to achieve at the local level, where demand for modes may represent the choices made between a range of relatively closely competing options. In summary, the DTO model provides an adequate tool for the earlier stages of scheme assessment with its accuracy improving as the chosen scheme is developed and better quality information is fed into the model. It is more limited (as currently specified) as a basis for the more detailed demand and revenue estimates required for the PPP process. It should be noted that RPA has undertaken more detailed work in this area and is developing its own model in this regard The accuracy with which the model is able to represent behavioural responses to a range of alternative operating parameters and fares assumptions will be entirely dependent upon the underlying behavioural parameters within the model. There will be a requirement in developing an appropriate tool to consider how such information is to be derived. Options will include local behavioural research using techniques such as Stated Preference, or a more intuitive approach based on standard demand elasticities, and the results of the analysis of impacts of similar types of schemes elsewhere. In any event, it will be necessary to adopt an appropriate level of market segmentation both for research, and for any subsequent model application. PPP Structure and Risk The contractual structure for the scheme will determine what demand forecasting outputs are required both for RPA and for the private sector contractors. The concession structure, the payment mechanism and the risk allocation are factors that are linked by the issue of demand risk. For this reason RPA or other promotional agencies and bidders will consider the development of more simplified and localised rail patronage sub-models as an essential part of the appraisal process. These will allow a simpler assessment of the range of sensitivities of factors affecting gross patronage on the project being promoted, which will help determine the appropriate risk profile for the procurement: which party takes the farebox revenue risk does this remain with RPA or does the private sector concessionaire collect and retain fare revenues to finance project capital and operating costs? if the private sector does not take on revenue risk, is there a payment mechanism that passes on an element of demand or usage risk? How is usage measured (passenger volumes, tickets sold, etc.) and how is the risk shared between RPA and the private sector? The demand forecasting model will therefore need to be able to take into account the following issues: Whether the public transport network will be restructured in order to integrate bus services (forming feeders rather than competing services, for instance) with the rail lines. Consideration of enforcement by regulation or licensing, or the extent to which there will be competition between bus and rail. The likelihood of the planning authorities desire to implement demand management policies to constrain the demand for private road transport by such measures as road pricing or parking controls. Page 107 of 245

124 PROJECT PLANNING continued How the fare structure could be specified and regulated and whether there could be integrated ticketing with an element of regulation of fare levels in order to promote usage of the public transport network and maximise social benefit? Or will the rail operator (or other public transport operators) be able to set market fares to maximise revenues? These issues can be accommodated within the demand forecasting model by considering future capacity levels, fare levels and interchange penalties and the structure and nature of other public transport and road systems. The allocation of these risks between the public and the private sector is a critical issue and the private sector may be unwilling to assume demand risk if contractual assurances are not given by RPA over issues such as fares regulation, demand management or bus network restructuring. Operational planning The scheme specification and the demand assessment phases will determine the level of capacity that the railway system is capable of providing and the level of demand that needs to be accommodated on the transport corridor. Operational planning will balance levels of capacity with frequency of services, in order to meet varying demand levels by time of day, day of week and location. A rail system will typically be designed to provide sufficient capacity to meet weekday peak levels of demand; at periods of lesser demand, less frequent services will be provided Total train capacity is a factor of vehicle size, the number of seats and standing space provided and the length of trains. As described in the Performance Standards framework (Section 16), seating:standing ratios will differ between types of rail system. Typically, there will be higher ratios of standing passengers on light rail and metro than on heavy/suburban rail services. Vehicle size and train length will affect the design of platforms and may be constrained by available space for stations or stops In conjunction with planning capacity levels, a workable service pattern needs to be developed that provides levels of frequency sufficient to attract and accommodate demand. The overall system specification will determine the minimum headways and hence the maximum frequencies that can be operated on the railway. There may be additional constraints on frequency if uneven service patterns or interweaving of fast and stopping trains is necessary. It may be appropriate to operate higher frequency services in a central area and terminate some trains short of the end of the line in order to tailor service provision to demand. Service planning also needs to accommodate interactions with other lines or services, to take into account any conflicting trains movements at junctions or sharing of track, stations or platforms. Service planning will need to be modelled (both by RPA and Private Sector) in progressively more detail throughout the project life cycle, starting with simple run-time models and ending in full operational simulation prior to contract close, in order to assess the validity of the assumptions made by various organisations involved. These will be important not only for light rail (whose interaction with road traffic is a critical factor), but also for the Metro - operational pattern could become an issue of some complexity There may be trade-offs between performance standards and the level of services that can be operated. If a train service pattern is designed to the maximum capacity of the network, the lack of flexibility and recovery capability means that any perturbations in operations will often have severe impacts on other services throughout the system and for some period of time. This will need to be taken into account in the performance standards for frequency levels, system reliability and availability. Page 108 of 245

125 PROJECT PLANNING continued Also to be taken into account in operational planning is the integration of the rail services with other services and other modes of transport, particularly bus services. The benefits of an integrated transport policy will only be fully achieved when passengers perceive the network as an integrated network, rather than individual lines, and can make maximum use of all elements of the system. This may require integration of timetabling for different rail lines at interchanges, remodelling the bus network to provide feeders rather than competing services, park-and-ride sites at suitable junctions with the road network and facilities for cyclists and pedestrians. Critical to an integrated transport system is an integrated fares and ticketing system that allows passengers to make multi-stage journeys on one ticket and without interchange penalty. An independent passenger information system is also a very important component of an integrated public transport network Key to assessment of reliability of the network is the ability to undertake detailed dynamic operational simulations and recovery assessments. Without flexibility of operation, the impact of service perturbation is magnified within the separate routes and can cascade the effects into other subsidiary routes, therefore making the experience for the travelling public worse for longer periods. Scheme design During the development of a project, design progresses through a number of defined stages: (i) (ii) (iii) (iv) Project scoping determination of areas to be serviced, service levels and the appropriate level of technology; Feasibility design determination of the feasibility of implementation of the project scope, alignment and station options and opportunities and determination of the order of magnitude of cost; Design design of the major elements of the rail systems to a level suitable for inviting the private sector to bid and to allow determination of the expected construction cost and risks. In Ireland, a more detailed level of design is required before planning and regulatory approval can be secured; Detailed design design of all elements of the railway systems such that construction contracts can be let and the scheme implemented Design must comply with technical standards and with any policy or legislative requirements on accessibility, integration or the environment that will be highlighted during the planning process. The choice of rail technology will largely set the technical standards for the railways systems based on national and international practice A railway consists of inter-linked systems that together enable the efficient operation of train services. Design of a rail scheme must address the following elements: Rolling stock to address the capacity required and the chosen technology. The choice of rolling stock will to a large part set the level of systems required for other design elements; Track alignment the assessment of practical alignments, to carry the chosen rolling stock and serve the desired areas within available land corridors and topography; Structures the availability of land corridors and infrastructure to be crossed, and the rail technology proposed will determine the extent of track supporting structures required and the extent of tunnelling; Page 109 of 245

126 PROJECT PLANNING continued Signalling and control systems the rail technology used will tend to determine the type of signalling and control systems required; Traction power the rail technology used will tend to set the type of traction power systems required varying from lower voltage DC to higher voltage AC systems; Station design will depend on the required capacity and the rail technology proposed, varying from light rail halts to fully supervised stations. The location of stations will be dependent on the area to be served, other transport links and land availability. Utilities the effect of the proposed alignment on utilities, identifying necessary diversions or protection Within the context of a PPP contractual structure, the allocation of risk and responsibility for system integration becomes a critical issue. Integration of system design for each rail system element at each stage in the project development process is essential to avoid time and cost overruns that may arise from incompatibility between system elements. For a DBFO project structure, system integration risk will normally be passed to the contractor, who will be responsible for delivering a fully functioning railway There may be instances, however, in which RPA may need to retain some control and responsibility over the specification of system components and over system integration. This may arise if responsibility for operations is split from responsibility for design and build. In this situation, the operator (regardless of whether operations is retained in the public sector or let as a concession) will need to ensure that infrastructure systems are compatible with each other in order that an integrated service can be operated with common rolling stock. Even if a full DBFO contract is let, however, the practical need to develop a rail network in phased stages, means that the specification of the initial line will determine to some extent the technical specifications for all subsequent lines. This is a particular issue for signalling and control systems that must be compatible across all lines of a network to allow integrated operations. Successful implementation of a phased network requires a long term and flexible approach, with central management and decision making RPA must make a careful evaluation therefore of the type of PPP structure that is most appropriate to ensure the development of an integrated network, and should have a clear position on how to handle the risk of system integration within and between individual railway lines. Cost estimation The key cost estimation stages will follow the development of the design: (i) (ii) (iii) Project Scoping A broad order of cost can be determined from the identification of the main elements of work required and the technology chosen; Feasibility design This will identify the extent of structures required for the alignment options chosen for evaluation. Options will be costed in terms of capital and maintenance costs to assist in the route/option evaluation against the demand and revenue forecast. The operational plans will determine expected operating costs; Scheme Design This stage determines the expected cost of the preferred scheme to be taken forward for approval. At this stage a formal cost and programme risk assessment should be undertaken to confirm the range of likely final capital cost. A similar process should be undertaken for operating and maintenance costs. Page 110 of 245

127 PROJECT PLANNING continued At each stage the estimates of capital, maintenance and operating costs feed into the CBA, business case, risk assessment and project financing plan. Environmental impact assessment The Transport (Railway Infrastructure) Act 2001 requires that an EIS accompany an application for a railway order. An EIS requires that specified information is provided: a description of the proposed works and land use requirements; data necessary to identify and assess the main expected effects on the environment; a description of the likely effects on the environment; a description of mitigating measures; an outline of the main alternatives considered and justification for the proposed alternative; and a non-technical summary The environmental impacts considered in the EIS must include effects on; human beings - demography, employment, social deprivation, land use planning and development, vehicular and pedestrian traffic, safety, community severance; flora and fauna; soil - geology, contaminated land, spoil; water - surface water, hydrogeology; air - noise, vibration, lighting, electromagnetic interference; climate - air quality; landscape - urban landscape and townscape, trees; material assets - public utilities, property; and cultural heritage - local history, buildings of artistic, historic and architectural merit, archaeology. For further detail on these requirements, consult section 39 of the Transport (Railway Infrastructure) Act. Project appraisal After scheme specification, demand and cost assessment and outline design have been carried out, sufficient information is available to assess whether the planned scheme meets the original planning objectives. All schemes requiring public subsidy will require a suitable and agreed cost benefit analysis to demonstrate that the scheme can deliver net economic benefits to the national economy, compared to a do nothing alternative. If the net economic return of the project is not positive, then either the scheme should be rejected, or more likely, the scheme specification and design will be reconsidered in order to identify more viable alternatives This appraisal will need to be carried out by RPA at the initial scheme development stage, before the pre-qualification and procurement process commences, in order to ensure that the public authorities can support the preferred project. Typically this appraisal will include a cost benefit assessment and/or other appraisal criteria such as multi criteria assessment (MCA) to reflect non-monitorised benefits. The analysis will then need to be revisited at each stage of the procurement process following submission of initial bids, Page 111 of 245

128 PROJECT PLANNING continued following submission of BAFOs and during the negotiation process to ensure at each stage that the scheme under consideration provides a net economic benefit to the state The choice of appraisal technique is described fully within the framework in Section 11, Project Appraisal and Development. A basic CBA is described briefly here due to its close links with other aspects of the planning and design process, however it should be recognised that other analysis techniques do exist and may, in certain circumstances be preferred by RPA. Inputs to the CBA include economic benefits such as users and nonusers time savings and vehicle operating cost savings, that will arise from a modal shift from road to rail these outputs will be generated by the demand analysis. Capital, operating and maintenance costs will be derived from the cost estimation process and the operational plans. These benefits and costs will be compared over the lifetime of the project, and net present values and internal rates of return generated to evaluate alternatives The CBA differs from evaluations carried out by private sector bidders who will be concerned that the scheme is financially viable. RPA will also need to carry out public sector comparator tests to ensure the preferred PPP structure delivers value for money for the Exchequer. These tests will use the data and information generated by the project planning and design process but will take into account other commercial and risk allocation information as well. Further detail on project appraisal is included in Section 11. Planning approvals Under the Transport (Railway Infrastructure) Act, in order to obtain powers to construct, maintain and operate railways, as well as to compulsorily acquire land, a railway order must be made. Further details of the process and procedure, as well as the legal issues arising in connection with securing the railway order are presented in Section 7 of this framework In brief, to obtain a railway order, an application must be made to the Minister. The application must include a plan of the proposed works (which should include details of the alignment and structures, although this is not specifically stated in the Act), references to affected properties, an Environmental Impact Statement and a draft order. The process of application includes public notifications and exhibitions and a public inquiry, which will make recommendations to the Minister. A person may seek judicial review of the Minister s decision to make a railway order within eight weeks commencing on the date on which the order is made The railway order confers powers for compulsory acquisition of land, for maintenance and improvement of the railway and for the execution of any other relevant works necessary to construct and operate the Railway. In general, rail developments which are the subject of a railway order are exempt from any other requirements to make applications to planning authorities to obtain planning permission (this is discussed in Section 7) Given the level of detail that must be specified before a railway order can be obtained and the uncertainty over timescales, it is unrealistic to expect the private sector to take the whole risk of obtaining a railway order to authorise a new rail scheme. This means that RPA must have carried out a substantial amount of scheme development work before the private sector will assume any risk associated with securing the railway order. This then leads to the next issue when is the optimum time to involve the private sector in the process leading to the securing of the railway order? Typically under PPP projects in other European countries the planning approval process is a two stage process requiring, firstly, an outline planning approval with associated outline Page 112 of 245

129 PROJECT PLANNING continued design and then a detailed planning approval when the design of infrastructure is completed. There are, however, exceptions to the approach, for example, in Austria where full design approval is required as part of the statutory process for rail tunnel projects. In the context of the light rail and metro projects this would translate to an outline design involving route alignment, envelope, station positions and type of service to be provided etc. which would be used to secure outline planning approval, and then detailed design involving station designs, rolling stock, structures etc. forming the basis of an application to secure detailed planning approval. Typically under PPP the private sector will not commit to carry out detailed design until outline planning has been approved as this is normally a condition precedent to the release of funding from equity and debt providers Experience of PPP in other European countries has seen the public sector bear the responsibility for securing the outline planning approval that then facilitates the commencement of private sector involvement in the detailed design phase. Securing the outline planning approval can be done sequentially or in parallel with a competition to select a PPP contractor, but the outline planning approval tends to be secured before contractual close. The fact it is only outline planning approval that has been secured still enables the private sector bidders enough freedom to deliver innovation and optimise the design in terms of efficiency and value for money. At this stage the private sector will commit resource at risk to develop the design as part of the tendering process. As part of the procurement process the design would be developed to provide the public sector with enough certainty on cost to select a preferred bidder to take the design forward (and through the detailed planning approval process) and be confident that the total cost will not differ significantly at financial close The issue in relation to the proposed rail PPPs in Ireland is the fact that the process to secure outline planning (through obtaining a railway order) is particularly onerous and there is no subsequent planning approval required where the detailed design requirements proposed by the private sector can separately be approved. The experience of LRPO in obtaining light railway orders for the Luas project has shown that a greater level of detailed design (than would generally be expected for an outline planning approval) is required to support the railway order application (including an EIS and other documentation). Experience on the Luas line would indicate as much as 25%-30% of the total design work is required to support the railway order process. The private sector will be reluctant to commit this level of resource whilst still in competition The issue for the private sector is that this level of design would typically be undertaken either when they have been selected as preferred bidder but more typically after the contract award. The issue for RPA s procurement of future PPP s is, therefore, having regard to: the need to obtain a railway order before financial close can occur and the project can be implemented; the private sector s reluctance to carry out the detailed design work (which is required as part of the railway order application) whilst still in competition; and what is the optimum point for the private sector to become involved in the railway order process? It would not be practical to run two bidders (working up their own designs) through the railway order process due to the potential for public confusion which two competing applications would cause, the substantial costs incurred in preparing two complete applications, in addition to the extra resources required for two parallel public consultation processes (including two public inquiries). Accordingly, two design options in two separate railway order applications cannot be considered as a viable option. This option Page 113 of 245

130 PROJECT PLANNING continued would probably not be practical given the required level of public consultation. None of the respondents to the market consultation were comfortable with the concept of running two bidders on detailed design unless bid costs are reimbursed to the loser Accordingly, RPA has to engage a single preferred party at some point in the design development process. Three possible options are as follows: Project Definition at this stage the business case has been established and the output specification would have been developed; Virtual Outline similar to the outline planning stage in the UK and other European countries - at this stage there will been enough design development work to secure outline planning (ie preferred route alignment, envelope, station positions etc) in those countries. However, it appears likely (based on the LRPO experience) that the design work carried out to this point would not be adequate to secure any approvals at this stage in Ireland; or Order Made - at this stage the railway order application (incorporating design work) has been lodged, processed and the railway order has been made by the Minister for Public Enterprise The advantages and disadvantage of each option are highlighted in table Page 114 of 245

131 PROJECT PLANNING continued Table 12.3: Advantages and disadvantages of private sector involvement of each option Stage Potential Procurement Route Private Sector Involvement Advantages Private Sector Involvement Disadvantages Project Definition The procurement route could proceed via the Project Development Group route. Run on a competitive basis the preferred party would be selected on their ability to procure the necessary approvals and deliver the projects in an efficient manner. The evaluation would primarily be based on experience and track record. Whilst the initial work (design development and procuring approvals) would not be subject to conditions precedent, the parties would need to structure contractual documentation so that project obligations which accrue after the railway order has been made are conditional upon the making of the railway order. Involving the private sector at this early stage would allow them the greatest freedom to develop the design to maximise innovation and efficiency. The private sector party would also be able to gain a greater understanding of the process involved in securing the railway order (and spend time planning the strategy for securing the order). This option could offer greater value in terms of the amount of design risk that is transferred as the private sector has more ownership of the whole design and subsequent performance risk. In addition, this option includes the potentially to have all contractual documentation resolved at this early stage in the process (although due to the inherent uncertainty as regards project scope, it may result in a contract which does not reflect the optimum risk profile for the project). d be difficult to facilitate a competition other than based on th capability of the potential private sector parties to deliver th project. There would be no substantial specification on which to gain a price and the open ended nature of the options at this early stage could lead to difficulties in comparing bids. Selecting preferred party this early in the process could also lead to price uncertainty, as the competitive tension is lost. The option of buying the design from the PDG to run a competitive process once the railway order is secured would also have to be protected, although there will be a perception in the market place of the incumbent PDG having an advantage in the subsequent competition The preparation of contractual documentation is likely to be problematic due to the fact that the project remains in the conceptual stage, with much work to be done working up designs and obtaining the railway order and other approvals. Contractual issues include: (1) all contractual obligations which accrue after the making of the railway order need to be conditional upon the making of that order (indeed it may be more manageable to have pre and post-railway order obligations in separate contracts); (2) the private sector may insist that the railway order condition precedent is only satisfied if the railway order is made in terms acceptable to the concessionaire or to both parties (this then raises the issue of how to determine whether the railway order is in acceptable form); (3) the overall term of contract will be uncertain (the term and other key dates such as longstop dates will need to be defined by reference to defined terms rather than actual dates); (4) a mechanism will need to be in place to address changes in Page 115 of 245

132 PROJECT PLANNING continued Stage Potential Procurement Route Private Sector Involvement Advantages Private Sector Involvement Disadvantages scope of work/output specification which might be caused by railway order conditions; (5) contractual documentation for PPP projects generally includes documents governing the provision of debt and equity funding. At this early stage in project development, funders will be most reluctant to give any firm commitment (meaning that it may be difficult to factor in the financing side of the transaction into the overall contract documentation); (6) what mechanism is put in place for RPA to monitor (and where necessary input to) the design development and railway order process? Page 116 of 245

133 PROJECT PLANNING continued Stage Potential Procurement Route Private Sector Involvement Advantages Private Sector Involvement Disadvantages Virtual Outline The procurement option for involving the private sector at this stage is similar to the light rail schemes in other jurisdictions. RPA would itself develop the metro to a stage where they have the preferred route alignment and envelope in which the metro would be designed. RPA would also have to develop their objectives and priorities for the metro. The private sector parties would bid on the basis of optimising their design within the envelope at the same time maximising the objectives and priorities of RPA. The evaluation of the bids would be on the basis of ability to maximise RPA objectives and deliverability of the design through the railway order process. This would require an evaluation of the price certainty risk attached to each design solution in the bids. It would not however, be possible to secure financial close at this stage, as the making of the Railway Order will probably be a condition precedent for private sector funding. There could be commercial close where agreement would be reached on the target construction prices; project IRR and variation mechanisms to cover changes arising from the making of Railway Order (eg. changes to project scope or the mode of carrying out particular works, resulting from railway order conditions). The option would offer less freedom for the private sector to optimise the design as they are involved at a later stage of the process. However, there is still flexibility in that it will be only the route envelope that is constrained. There will still be opportunities to deliver design efficiencies within the envelope. As there will be more information on which to base their bids there should be more cost certainty and it may prove simpler to compare bids, as there will be less variation in the possible solutions. It may also be possible to transfer some risk in relation to the Railway Order approval process but this would rely on clearly defined change, target cost and Project IRR mechanisms. This option will also allow RPA to require bidders/preferred bidder to bear a portion of the total design costs. Selecting a preferred party at this stage still has the potential for cost increases as the proposals move through the railway order stage. Therefore it will be crucial for robust evaluation of deliverability of the design solutions at the tender stage. The fact that financial close cannot realistically be achieved until Railway Order has been made also has some draw back as there will be a reliance on change, target cost and project IRR mechanisms. This option also reduces the design risk transfer as the alignment and route will have already been selected. There may also be issues in relation to ground conditions associated with a predefined route. There could also be a time disadvantage associated with this option, as effectively the design process will be advanced then paused as the tendering process runs it course although if it is run properly the tendering process should allow substantial advances to be made in relation to the design, in this period. Page 117 of 245

134 PROJECT PLANNING continued Stage Potential Procurement Route Private Sector Involvement Advantages Private Sector Involvement Disadvantages Order Made The procurement route here would be to run the tendering process on the design developed by RPA to secure the Railway Order. The preferred party would be selected on the basis of those maximising the objectives of RPA and overall value for money for the Exchequer. The main advantage of this option is the degree of price certainty that would be achieved as a result of requiring tenders to be based on the design developed for the railway order process (and approved by the Minister). There would also be no delays in relation to financial close as this could occur simultaneously with contractual close (given that the railway order will have already been made when this point is reached). No need for contract to incorporate mechanism for dealing with variations in scope caused arising from unexpected railway order conditions (although the contract will probably still include some form of variation mechanism to deal with later variations in the course of the project). Indeed, with this option there is no prospect of the parties being ambushed by unreasonable railway order conditions. One of the drawbacks of this option is the loss of innovation and design optimisation. It may also be difficult to transfer full performance risk under this option as part of the design had been developed by RPA. Funders and equity providers will be cautious in respect of performance risk associated with the design if they do not have full responsibility for the solution. Under this scenario it may be possible to transfer the design risk associated with the infrastructure through innovation of the design following a period of contractor due diligence. RPA would retain all the risk (and cost) associated with Railway Order approval process. In addition, RPA loses the benefit of the experience of the private sector in procuring railway order-type approvals for other projects. There will also be a reduction in the whole life ownership of the design and there may be more potential for disputes over responsibility for performance as the private sector party may not fully own the design of systems. There will also be the lost opportunity for the private sector to develop a design solution that maximises RPA s objectives. General uncertainty as to when to commence the procurement process as it is uncertain as to when the Railway Order will be made. Page 118 of 245

135 PROJECT PLANNING continued Timing One of the issues highlighted with the Virtual Outline approach would be the extended time before contractual close. Figure 12.2 below illustrates the possible timing implications for such an approach. The contractual and procurement issues in relation to the railway order are discussed further in Section 13 and Appendices H and I. PPP Procurement Process Railway Order Process Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Feasibility, Route Options, Updates and Route Analysis, Updates and Demand Model, EPR changes as bids Design, EIS, RO Changes through develop Application The approval Financial Close Project Launch EPR Contractual Close Railway Order Application Railway Order Approval Project Definition Expression of Interest & Pre-qualification Invitation to Tender Shortlist and BAFO Negotiations Design Development Railway Order Approvals Process Construction Operations Figure 12.2 Railway Order and Procurement Process Page 119 of 245

136 PROJECT PLANNING continued PROCUREMENT PROCESS Introduction The planning and design elements described in Section 11, Project Appraisal and Development, will be carried out within a framework driven by the procurement and planning process. Figure 12.3 below summarises the approach to planning and design at each stage of a PPP procurement process. Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Establish project objectives and outline scope. Assess scheme characteristics through feasibility study and cost - benefit analysis. Outline planning to establish preferred route alignment and envelope. Evaluation of bidders designs with respect to value for money and deliverability. Clarification of bidders plans and designs, with modifications based on risk assessments. Evaluation of final bids against scheme objectives and risk assessments. Minor modifications to project scope. Finalisation of detailed design sufficient to secure Railway Order and final refinements of revenue forecasts and risk assessments. Incorporation of amendments to project scope or works resulting from Railway Order, final revision of construction prices. Development of detailed operating plans, construction of railway, ongoing monitoring and review. Figure12.3 PPP Procurement Process The remainder of this chapter identifies: the level of assessment required at each stage of the procurement process; and how the analysis should be used in the overall evaluation of rail PPP projects The issues that need to be considered and the techniques that can be used were discussed in the previous chapter. Project Definition Project Definition At this stage, the overall scheme objectives are to be determined, from the perspective of the planning authority and other stakeholders, taking into account local, regional and national policy objectives. The scope of the project, in terms of corridor identification and technology type, will be established, by undertaking an initial review of the potential market size and demand levels. This may also allow an initial qualitative assessment to be made of whether there is a transport and economic case for the project Initial planning will commence at this stage, to identify the planning requirements and any potential constraints on physical or technical scheme specification that will need to be taken into account in later stages. While the scheme will not be developed sufficiently to allow formal consultation, some informal soundings of stakeholders can be made, to identify at an early stage the key issues that are likely to arise for different groups, whether residents, businesses, commuters, or policy makers. Page 120 of 245

137 PROJECT PLANNING continued Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Detailed project development The development of the detailed project development will require significant input from the project planning and design process. Following from the project definition stage, more detailed objectives for the scheme can be drawn up, taking into account local and regional priorities as raised during the soundings of stakeholders and issues identified during the initial planning A critical element of this stage will be the development of a demand model to forecast potential demand and revenue levels. Once potential options in terms of routeing, technology type, capacity, and service levels have been identified, the demand model can test the impact of each of these upon patronage and revenues This option testing will allow the most viable route, technology and service patterns to be identified, alongside an assessment of technical feasibility. This will require design to feasibility design levels, which will also allow initial cost estimation to be carried out. A formal project appraisal will focus on CBA, to assess whether there is an economic case for the project, and on identification and assessment of environmental impacts. A financial appraisal will assess whether the project is deliverable and what project financing structure would be the most appropriate Once the detailed project development has been developed and a clear forward plan has been developed, it will be appropriate to initiate the first stages of public consultation. Expression of Interest and Pre-Qualification During the expression of interest and bidder pre-qualification stages, initial private sector feedback will allow the scheme objectives and outline specification to be modified where necessary Before invitations to tender can be issued, scheme designs need to be developed by RPA to a level commensurate to outline planning design levels. This will determine the preferred route alignment and envelope within which the private sector bidders will develop their detailed designs. This progression of design will be accompanied by further development of patronage and revenue forecasts, operational requirements and detailed costings. Linkages between operational requirements, performance standards and risk allocation will be identified and specified at this stage. Invitation to Negotiate During the tendering stage, bidders will develop detailed designs for the scheme, based on the outline design proposals developed by RPA. The designs will aim to optimise efficiency and whole life costs within the constraints of the scheme objectives, the required levels of operations, RPA s outline design and railway technical standards. Bidders will also develop outline operational, safety and environmental plans. RPA will verify that these proposals comply with the original specification and will evaluate deliverability and value for money for the Exchequer The demand forecasts will also be reviewed at this stage, taking into account bidders proposals and their own forecasts (where demand risk is being transferred to the private sector). Refinement of forecasts will be based on the allocation of risk, operational and marketing plans and any project-specific behavioural research that is carried out. It is usual during the tendering stage for the bidders to run test scenarios on the demand forecast model to assess different sensitivities of demand. Page 121 of 245

138 PROJECT PLANNING continued Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Sortlist and Best and Final Offers At the shortlisting and BAFO stages, the designs and plans proposed during the tender will be refined by bidders, with additional design where necessary to develop the costs and risk assessment to the necessary levels. RPA should keep under review the original scheme objectives to ensure that these are still appropriate and are being met by the BAFO proposals Consultation with stakeholders will need to be ongoing, within the constraints of commercial confidentiality where more than one bidder s proposals are still on the table. Negotiations During the negotiation stage, depending on progress of the Railway Order, it may lead to selection of the preferred Private Sector Partner to jointly obtain the Railway Order. The procurement and contractual issues in relation Railway Order Process are detailed in Section 13, Appendices H and I The submission of the Railway Order will also require an Environmental Impact Statement, which will incorporate details of land and property issues, environmental impacts, proposed mitigating measures and a justification for the scheme compared with other alternatives. Full and extensive public consultation will be required to support this process. Financial Close Before Financial Close can take place, amendments to the project scope or works resulting from the Railway Order must be incorporated and final construction prices revised accordingly. Final detailed operational plans will be drawn up and linked with the contractual performance standards. Latest revenue forecasts will feed into the financial risk assessment and into the contractual risk allocation The remainder of the detailed design process will commence once Financial Close has been achieved. All elements of the railway system will be designed such that construction contracts can be let. The property acquisition process will commence once the Railway Order has been secured. Construction and Operation During the construction process, RPA will monitor progress against contractual milestones and will ensure that any amendments to scheme design are within the planning constraints and contractual scope. The contractor will draw up a detailed timetable and operating, safety and environmental plans will be finalised ready for operations Once railway operations commence, RPA will monitor performance and the contractor s compliance with contractual conditions. Demand forecasts will require regular review and updating and a post-project review should be carried out to determine whether the project has met its original objectives and secured value for money for the Exchequer. Summary The planning and design processes discussed in this section are linked with the procurement cycle described in Table This sets out the key stages of development for each element of the planning and design process. Page 122 of 245

139 PROJECT PLANNING continued PLANNING & DESIGN IN THE PROCUREMENT CYCLE Table 12.4 Planning & Design in the Procurement Cycle Initial project scoping Detailed project development Prequalification Invitation to Negotiate Shortlist Best and Final Offer Negotiation Financial Close Construction & operation Planning and objectives Determine project objectives Develop detailed objectives Initial evaluation of scheme against objectives Evaluate bidders proposals against objectives Review objectives Evaluate BAFO proposals against objectives Monitor any changes to scheme Review final scheme against objectives Monitor progress against objectives Consultation Initial consultation with stakeholders Initial public consultation Ongoing consultation with public and stakeholders Ongoing consultation with public and stakeholders Ongoing consultation with public and stakeholders Ongoing consultation with public and stakeholders Full public consultation in preparation of Railway Order Ongoing consultation with public and stakeholders Ongoing consultation with public and stakeholders Scheme specification (technology, alignment) Establish corridor for scheme and technology type Route selection and specification of scheme Develop output specification Value & risk assessments Confirm bidders proposals comply with original specification Minor modifications based on risk identification & allocation Ongoing review and refinement Ongoing review and refinement Final scheme specification Amendments within planning constraints Complete Document3.doc Page 123 of 249

140 PROJECT PLANNING continued Initial project scoping Detailed project development Prequalification Invitation to Negotiate Shortlist Best and Final Offer Negotiation Financial Close Construction & operation Demand & revenue assessment Initial demand review Set up demand model & forecast revenues Further development of model & sensitivity tests Re-work based on bidders proposals Evaluate impact of risk allocation Refine revenue forecasts Refine revenue forecasts as deal is modified Final demand & revenue forecasts Review & monitoring of demand Operational characteristics High level specification Establish frequency and capacity requirements Operational requirements linked to performance standards Outline operational, safety, environmental plans Refinement of operational plans Minor modifications based on risk identification & allocation Ongoing review and refinement Final detailed operational plans based on risk allocation & performance standards Detailed timetable & operating, safety and environmental plans developed Design Determination of initial scope Feasibility design and option testing Outline scheme design developed Bidders first detailed designs Additional design where necessary for cost & risk assessment Finalisation of sufficient detailed design certainty to secure Railway Order Remainder of detailed design commences Detailed design & construction Page 124 of 245

141 PROJECT PLANNING continued Initial project scoping Detailed project development Prequalification Invitation to Negotiate Shortlist Best and Final Offer Negotiation Financial Close Construction & operation Cost estimation Initial scoping based on scheme specification Initial cost estimation based on feasibility design Detailed costing based on scheme design & risk assessment, whole life costing Modifications of costs based on performance standards Review of bidders proposals & risk allocation Risk allocations fully priced Ongoing review if minor modifications are made Final position on performance standards & risk taken into account Ongoing monitoring & review Environmental impact assessment Identify high level constraints Environmental impacts identified and assessed for project appraisal Environmental impacts reassessed in light of bidders proposals Plans for mitigation of environmental impacts detailed Full Environmental Impact Assessment Final environmental plans drawn up Implement mitigating strategies Project appraisal Initial qualitative assessment CBA MCA Update of CBA based on latest cost & revenues Update of CBA based on latest cost & revenues Ongoing reviews if scheme is modified Ongoing reviews if scheme is modified Ongoing reviews if scheme is modified Final review to ensure scheme meets objectives Ongoing monitoring & review Page 125 of 245

142 PROJECT PLANNING continued Initial project scoping Detailed project development Prequalification Invitation to Negotiate Shortlist Best and Final Offer Negotiation Financial Close Construction & operation Planning approvals Establish planning requirements & constraints Develop programme of consents and property acquisition Selection of preferred private sector partner Invitation of Railway Order Process Railway Order Achieved Financial Close Initiate property acquisition process. All property secured Environmental Impact Study, Public Inquiry Page 126 of 245

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144 Procurement and Contractual CONTENTS PAGE Introduction 127 Contractual documentation 128 Procurement Process 135

145 PROCUREMENT AND CONTRACTUAL 13 INTRODUCTION 13.1 This section contains guidance on the project procurement process and in particular procurement and contractual issues which might arise in the course of procuring a rail project in Ireland as a PPP The first part of the section contains background material on the types of contractual documentation which might be used in a typical PPP transaction The second part of this section considers particular contractual and procurement issues which might arise at each of the steps in the procurement process (from Detailed Project Development to Financial Close, assuming that the negotiated procedure is used) Issues which might arise up to Detailed Project Development stage are discussed separately in Section 11. Issues which might arise after Financial Close are also considered separately in Section Please note that this section should be read in conjunction with: that part of Section 8 (beginning at paragraph 8.19) which describes the rules governing public procurement in Ireland (particularly the application of the EC Public Procurement Rules); Appendix N, which contains details of particular contractual issues; and Appendices G to I, which describes the process for the application for a railway order under the Transport (Railway Infrastructure) Act, and how this process might affect the project procurement process and strategy. In particular, the contents of Appendix H should be taken into account when formulating the project procurement strategy and developing the business case. Page 127 of 245

146 PROCUREMENT AND CONTRACTUAL continued CONTRACTUAL DOCUMENTATION Introduction 13.6 Part A of this Framework outlined the PPP structures which may be appropriate for use in light railway/metro projects in Ireland. The purpose of this section is to provide some basic guidance on the typical contractual documents used in such PPP arrangements It should be noted, that the contractual documentation used in any particular PPP project might vary from the guideline documentation described in this section, depending on particular project-specific issues which might be encountered (for example, any operational constraints bought about by the requirements of the existing national rail network). There may also be reasons why it is desirable to use a DBFO model which only provides for infrastructure operation (for example where it may be decided that another party for reasons of integration of the network should provide the train services). Nevertheless we can make some useful generalisations about the type of transactions and agreements involved. Basic Contractual Structuring 13.8 To date, the contractual framework of many larger PPP projects has been influenced by the tendency for consortia bidding for those projects to form special purpose vehicle (SPV) companies which, in the case of the successful bidding consortia, ultimately becomes the PPP contractor. The shareholders of the SPV will usually comprise the members of the bidding consortium, with the relative shareholdings dependent on such factors as the expected role of the various consortium members in the project (through subcontracts of the various project obligations made with the SPV). In addition, where a PPP project involves a financing element (e.g. DBFO), the funds required to procure the project will generally be borrowed through the SPV entity A further major influence on PPP contractual frameworks is the objective of consortia bidding for PPP projects to ensure that to the extent that an SPV company is exposed to project-related risks, it transfers such risks through the contractual structure to the subcontractors which it has engaged to perform various aspects of the project in question so that optimal risk is passed from the SPV to the subcontractors Although the contractual framework for a specific project will obviously depend on which PPP model is adopted, generally the contractual framework would provide for: the input into the project through subcontracts let by the SPV of management resources, technical expertise and general labour, which will facilitate the provision of the project infrastructure specified usually in output terms: a service to be provided by way of rail operation defined by reference to factors such as capacity (number of train paths per hour, stopping patterns, train journey times), capability (signalling requirements, train performance) and minimum standards (railway standards for safety, quality and compliance), as well as the maintenance obligations (potentially extended to both the infrastructure and rolling stock); where the project incorporates a financing element the provision of funding for the project in question (primarily through equity subscriptions, bond issues and loan facilities); and minimisation of any impact on project income stream caused by events outside the control of the PPP contractor (SPV) by means of an appropriate insurance package The following paragraphs contain descriptions of the various forms of contractual documentation which would be likely to be used in a standard-type PPP transaction. As has been noted previously, the framework of contracts used will vary depending on the Page 128 of 245

147 PROCUREMENT AND CONTRACTUAL continued PPP model adopted, although many of the key components of the framework will be the same or similar. Project Agreement The Project Agreement is the overarching agreement which sets out the commercial transaction and governs the relationship between RPA and the PPP contractor. It is used in all of the various PPP models, and contains all key rights and obligations, including those relating to design, construction, commissioning, operational requirements as defined and reflected in the output specification, maintenance obligations and all required technical specifications for the various components of the project (which would generally be included in the Agreement as annexures) In some cases, instead of having one overall Project Agreement, RPA might separately provide for: the design and construction phase of a project under a development agreement ; and the provision of operation, maintenance and other service obligations under a facilities management/operator agreement The latter approach is sometimes justified on the basis that the design and construction part of the documentation will no longer be relevant after the project is commissioned, so this part of the contractual structure is kept as a stand alone document In practice, the separation of the design and construction component from operation and maintenance requirements will be a matter to be considered on a case by case basis. For example it may well be desirable in a situation where it is decided to have separate concessions for design and construction and for service provision, particularly if an existing service provider is to operate the trains running on the new infrastructure In addition to the Project Agreement, it may not be uncommon for there to be various subsidiary agreements made between RPA and the PPP contractor. For example, a lease, sub-lease or licence of land having a term the same length as the Project Agreement may be separately granted to the PPP contractor (although it is noted that access to land is often dealt with wholly within the Project Agreement). Developing a Project Agreement At present there is no Project Agreement template for rail PPP projects in Ireland. As at the date of this Framework it is not considered worthwhile to immediately commence detailed work to develop a non-project specific template for light railway/metro PPPs, given that: it is not expected that in the rail sector there will be the large number of PPPs that there will be in other sectors such as water, roads and education (and therefore a non-project specific template will be of less benefit to rail projects than in these other sectors). Rail PPPs are expected to be more limited in number, but on a larger scale (and potentially more complex) than many of the PPP projects in other sectors in Ireland; to date the use of PPP as a procurement method in the Irish rail sector has been limited to the proposed appointment of an operator for the Luas so there is not a wide range of local precedent documentation to use as a starting point. The contractual documentation for the Luas operating concession was not reviewed in preparing this Framework; while it may contain some useful provisions in the wider light railway/metro PPP context, the lack of a design and build element in this contract means that it would not of itself be a suitable basis for a light railway/metro PPP (DBFO) template agreement; and Page 129 of 245

148 PROCUREMENT AND CONTRACTUAL continued experience overseas has shown that the contractual structure of large scale railway PPPs is often heavily influenced by sector-specific and project-specific issues (i.e. standard form documentation is likely to be of less use in dealing with complex railway projects than in other sectors) Having regard to these factors, and the time and resources which would be required to prepare and settle a template agreement, it is considered that the preparation and application of a uniform contractual template (or at least some standardised clauses) is best left to a point in time when: the results of the pilot PPP projects in various sectors in Ireland can be assessed and lessons learnt from all PPP pilots available; and there is a clear demonstrated need for template contractual documentation. A practical alternative to producing a standardised document on its own would be to use the documentation from the first Irish light railway/metro PPP particularly if it incorporates all of the design, build, operate, finance and maintain components as a basis for subsequent projects (assuming that the PPP model adopted is the same or similar) When the time comes to develop a Project Agreement for a particular transaction involving Metro or light rail systems, there is some model documentation in existence originating from jurisdictions outside Ireland which could be a useful source of information in preparing this documentation. This will ensure that existing best practice is applied to the project in question and recognising what has been achieved in relation to optimum risk transfer to the private sector. Information on key contractual issues which will generally need to be dealt with in developing a Project Agreement is set out in Appendix N Caution should however be exercised when using model contracts from other jurisdictions due to the potential for substantial differences to exist in statutory and regulatory regimes In addition, it is recommended that in the course of preparing the Project Agreement for a particular project, the RPA should consult existing Project Agreements prepared for recent pilot PPP projects in Ireland (to the extent that such agreements are made available), as an illustration of current approaches to key issues and the contractual allocation of risk generally. Such agreements should not, however, be adopted absolutely as precedents for the rail sector, given the differences which are likely to exist between PPP projects in the rail sector and in the other sectors It is also important that care is exercised in using foreign model contracts as the basis for a Project Agreement. Standard form construction contracts (such as those published by the International Federation of Consulting Engineers (FIDIC)) whilst useful in a DB situation are generally not appropriate for use in DBFO or DBO scenarios (given that in particular they do not address the complexity of matters associated with the operational or financing requirements of a light railway/metro project). Also the level of detail and control in relation to the construction phase is generally not in accordance with the risk profile of a DBFO project, where delivery of the required service is measured against an output specification rather than the scope of work which is a feature of the DB approach. Page 130 of 245

149 PROCUREMENT AND CONTRACTUAL continued Subcontract for Project Design and Construction This subcontract is made between the PPP contractor and the construction company which is to be responsible for the design and construction of the project (even though in practice this construction company will often enter into further contracts with other contractors for the specialist engineering aspects of a project). It forms part of the contractual framework for all of the PPP models considered in this Framework, with the exception of a simple operating concession. The subcontract is usually a fixed-price construction contract, and will generally seek to transfer all of the design and construction risk for the project up to commencement of the operational phase from the PPP contractor to the construction company The construction subcontract may also include provision for incentivising cost savings. This could be achieved by incorporating key performance indicators into the provisions of the construction sub-contract, which if achieved by the construction contractor will result in payment of a bonus. Similarly, if a target price contract, rather than a fixed price contract, was used, such incentives would be shared through the use of a painshare/gainshare mechanism A construction subcontract will generally incorporate obligations and specifications in relation to both design and construction components, rather than having separate subcontracts for these components. This is because lenders prefer that if there is a defect there is one party contractually responsible, rather than disputes arising as to whether the defect is the fault of a design subcontractor or construction subcontractor Lenders will insist that a substantial contractor (supported, if necessary, by parent company guarantees) should be a single point of responsibility for both design and construction obligations under the construction subcontract. Subcontract for Project Operations An operations subcontract made between the PPP contractor and an operating service provider is likely to incorporate requirements to carry out maintenance and ancillary services in addition to the operation of the railway infrastructure and/or the railway services (i.e. commitment to particular timetabling requirements, quality of train sets, provision of passenger information systems). If the infrastructure operator is different to that of the train service provider, then the Project Agreement will need to address any applicable interface issues (for example ensuring the desired rolling stock will operate on the applicable infrastructure). An operations subcontract will form a part of the contractual framework for the PPP models considered by this Framework, but will not, of course, be relevant to traditional (design and build) procurement. Service Contracts In addition to subcontracts governing design, construction and operations, in some cases the contractual framework also contains additional service contracts, made between the PPP contractor and third parties (or subcontractors of the PPP contractor and third parties) in relation to the supply of additional incidental services. These might include maintenance or facilities management contracts. Collateral Warranties Often collateral warranties will be put in place between RPA and subcontractors retained by the PPP contractor to carry out the design, construction, operations and (if applicable) any maintenance and facilities management aspects of the project. The primary purpose of a collateral warranty is to give RPA the benefit of a direct, independent obligation in relation to the carrying out of the works or the provision of services by the relevant subcontractor. Page 131 of 245

150 PROCUREMENT AND CONTRACTUAL continued A collateral warranty will generally provide step in rights so that RPA may (subject to the rights granted to lenders), step into the role (or, more likely, appoint a third party contractor to step into the role) of the relevant subcontractor in the event of any default (for example the insolvency of that sub-contractor) In some circumstances collateral warranties will be entered into between RPA and contractors retained by subcontractors (for example, the design team retained by the design and construct subcontractor). Agreements with Lenders For PPP projects debt finance is generally made available to the PPP contractor under a loan facility agreement with one or more financial institutions (depending on the project size). A typical loan agreement would be made between the PPP contractor as borrower, the syndicate of financial institutions, and one of those institutions acting as agent for the syndicate (with specific authority to exercise all of the financial institutions rights under the agreement in connection with the project) The main form of security granted by the PPP contractor to the lending syndicate will generally be a debenture which will include assignments by way of security of key project documents as well as ancillary rights such as the insurance package. The security that can be taken will be primarily over the income stream available from infrastructure provision and/or from providing train services. Direct Agreement between Lenders and RPA It is a defining characteristic of project finance PPP structures that lenders cannot effectively take security over the capital asset provided by the project (for example mortgages of land are often not feasible given that the PPP contractor would rarely be transferred freehold title to the land required for the project). Consequently, lenders are exposed to a significant risk of major losses if project performance is so poor that RPA becomes entitled to terminate the main agreement The lenders will seek to mitigate this risk by ensuring that the Project Agreement stipulates that the PPP contractor must be notified of circumstances which may lead to termination so that it has an appropriate opportunity to remedy any default If, however, a right of termination does in fact arise, then the lenders final rights to save the project (and so to recover the funds they provide) are set out in a direct agreement with RPA. This usually provides that the authority must notify the lenders agent if a right of termination arises or may arise if a default is not corrected, and gives the lenders an opportunity to state whether or not they will step in to the project before the right of termination is exercised (this step in right is generally a priority right over any equivalent right exercisable by RPA, subject to any overall statutory obligation vested in RPA for themselves or another entity approved by them with the consent of the lenders to provide the services in question) There may also be provision in this agreement for temporary step in rights without liability on the part of the lenders The advantage to RPA in having the banks involved at this level is that it provides an independent check on the PPP contractor and the robustness of the technical solution being proposed. Agreement between Lenders and Construction and Operations Subcontractors A further issue for lenders is the possibility that key subcontractors (such as those providing design, construction, operations and maintenance services to the PPP Contractor) may seek to terminate their contracts with the PPP contractor. To counter this risk, lenders may enter into agreements directly with the key subcontractors. Page 132 of 245

151 PROCUREMENT AND CONTRACTUAL continued Often these direct agreements are in the form of collateral warranties. They may also provide that the subcontractors must not exercise rights of termination without first giving notice to the lenders and then waiting for a specified period before exercising rights to terminate: this allows the option of step in to the lenders. Insurance Arrangements A PPP contractor will generally negotiate a package of insurance so that during the course of a project it will: have the financial resources to enable it to repair damage to the capital assets caused by the widest possible set of risks (for example, including costs overrun project and/or revenue risk insurance); be provided with income through business interruption cover and cover for machinery malfunction if any of the insured risks affect the project asset so that the income stream is diminished; be protected against the possibility of claims by third parties for liability of the PPP contractor arising out of personal injuries or property damage; and be protected from liability in the case of failure of the project or some part of the project (professional indemnity insurance) RPA will need to satisfy itself that: any contractual indemnities given by the PPP contractor; and any contractual obligations of the PPP contractor to insure, are covered by comprehensive insurance with adequate indemnity limits and low excesses. RPA should generally require its interest in the insurance to be noted with insurers (or the insurance to be taken out showing RPA as an insured party) and to seek evidence of the taking out of insurance with approved insurers. RPA must to be cautious in agreeing very wide policy terms as these may not represent best value for money for the Exchequer. Ultimately, RPA pays the insurance premiums through the concession payment and it must carry out a careful analysis to check that it is not effectively paying twice: once for the PPP contractor to take the risk and once for the insurer to take the risk The PPP contractor should consider imposing similar requirements, where necessary, upon its own sub-contractors These insurance arrangements may well be best achieved by the placement of a project insurance policy which would apply to RPA and to the PPP contractor. Page 133 of 245

152 PROCUREMENT AND CONTRACTUAL continued Establishment of Consortium For large projects, a Consortium Agreement may be entered into by parties joining together to tender for the project. Such an agreement would generally cover issues such as: sharing of costs and fees; approach to bidding for projects; the extent of management resources to be devoted to the project and general arrangements for establishing and providing staff to the Project SPV; division of responsibility for developing different aspects of the project tender and, if successful, the project itself - for example construction and design/operation of the services/maintenance and operation of the infrastructure (if this is not to be carried out by the train operator); exclusivity/non-competition between consortium members (particularly if they leave the consortium); duration of the arrangement and the circumstances in which it can be brought to an end; confidentiality; and disputes and their resolution As noted previously, a project SPV will often be established, which will become the PPP contractor. Shares in the SPV would be held by members of the bidding consortium (where the successful tenderer is a consortium rather than an individual party). In addition to the procedural and constitutional matters covered by the articles of association of the SPV, the shareholders will generally enter into a separate shareholders agreement between themselves to further regulate the conduct of the project company s business and the relationship between its shareholders. Obviously such an agreement is only necessary if the vehicle for carrying out the project is an SPV in which the consortium members hold shares although similar considerations apply in relation to unincorporated associations of companies. Page 134 of 245

153 PROCUREMENT AND CONTRACTUAL continued Detailed Project Development PROCUREMENT PROCESS Detailed Project Development Following initial exploration of procurement options (see Section 11, Project Appraisal and Development section), at detailed project development stage the possibility of a PPP solution should be explored in greater detail. The outline business case prepared at this stage should include: an indicative outline of the proposed contractual terms (e.g. by way of a term sheet), reflecting the risks intended to be transferred to the private sector, as well as liabilities being assumed by or remaining with RPA; an outline summary of the key outputs required (including a clear definition of the service delivery being sought and to be achieved, yet allowing the greatest scope for innovation and flexibility from the private sector in providing the service). This material will form the basis of the output specification; an identification of key statutory approvals required to establish and operate the project; and an indicative outline of possible procurement strategies, including the strategy and possible timetable for obtaining key statutory approvals (most notably the railway order) The outcome of the detailed project development process should result in the identification of one preferred PPP option as well as the reference project against which the proposed PPP solution as it is developed can continue to be assessed for affordability Key considerations and issues to be addressed at this stage in the procurement are discussed in Section 15, Commercial & Financial A discussion of particular statutory issues which need to be considered at detailed project development stage is contained in Appendix H. Procurement Process, Strategy and Project Documentation At this stage RPA should proceed to formulate its procurement strategy for the project, its position on key contractual and risk issues, as well as the tactics to be used at each subsequent stage of the procurement process including how the negotiations with bidders are to be conducted. The project procurement strategy (assuming the procurement will be under the Utilities Directive using the negotiated procedure see Section 8 of this Framework) will need to address issues such as: the number of discrete stages the procurement process should have and the preferred timetable for these stages; what each stage of the procurement process is intended to achieve and what is expected of each of the bidders at each stage (bearing in mind the intended objective of the procurement process is to obtain fully priced bids which are based on a full negotiation of the commercial terms to which the bidder and its lender sign up); the contents of the project information memorandum (to be sent to all parties who submitted an expression of interest); the pre-qualification process envisaged and the process for shortlisting prequalified parties (including objective pre-qualification criteria, the assessment of applications and communications with bidders); the evaluation criteria and intended scoring systems to select the short-list from those pre-qualifying bidders; Page 135 of 245

154 PROCUREMENT AND CONTRACTUAL continued the preferred number of pre-qualified consortia who will be allowed to proceed to work up a full bid (having regard to the cost of formulating a full detailed bid, as well as RPA s position for the relevant project on whether it will be reimbursing any of the shortlisted bidders bid costs); RPA s in principle position for the project in question on whether it will be prepared to reimburse any of the costs incurred by bidders in preparing their bids. In this respect the Public-Private Informal Advisory Group s paper Framework for Public Private Partnerships (November 2001) notes that in so far as possible the procurement process should be operated in a manner that does not unnecessarily raise the costs of bidding for PPP projects for firms/consortia. Section of the Programme for Prosperity and Fairness (Irish Government, February 2000) requires that the issue of contributions to the costs of bidding for PPP projects be negotiated ; and (where the railway order for the project has yet to be secured) the process of applying for the railway order, including (1) how far the preparation of the railway order application should be advanced by RPA before bidders/preferred bidder are involved (2) the process for co-operation between RPA and the preferred bidder leading up to the finalisation and lodgement of the railway order application The refinement of project strategy and tactics will continue into the Expression of Interest/Pre-Qualification Stage, as the Project documentation is developed It is recommended that the chosen PPP procurement strategy allows for the provision to bidding consortia of regular, up to date and comprehensive information on RPA's progress in developing project designs at each stage of the procurement process (and, where practicable, seeks the involvement and input of shortlisted bidders and in particular the preferred bidder, when appointed). This could include allowing parties to raise design-related issues and questions in the course of negotiations, and (most importantly) consulting with and, potentially, delegating the task of finalising the design work for the railway order application to the preferred bidder. Documentation provided to bidders (including the project information memorandum and ITN) should where practicable include information on the development of the project design and how RPA proposes to involve and inform bidders about ongoing design work through the course of the procurement process At this point, RPA should determine its preferred format of tendering (e.g. if permissible, is electronic tendering acceptable?) An additional issue to be addressed in determining the procurement strategy is whether and at what stage should the outline business case be shared with bidders. If it is shared too soon it may discourage full competition in the pricing of bids. However, if it is not shared bidders may embark on wasted options, which were never realistic. A compromise could be to share the outline business case without disclosing the financial information to bidders at an early stage and then to provide such financial information only after indicative priced bids have been received A decision must be made by RPA as to who within the project team should be involved in the drafting of the Project Agreement and all other agreements required. Consideration should also be given to formulating a detailed and disciplined work programme for the drafting of the Project Agreement and other project documentation, which ensures attendance at the relevant review meetings by those members of the project team (legal, financial or technical) responsible for the production of the documentation, as well as periodic liaison with Government stakeholders in relation to various drafts of the document (recognising however that such stakeholders would not be directly involved in the drafting of the documentation). At this point RPA should also put in place a management programme to ensure that the project procurement process proceeds in accordance with the agreed project objectives and timetable. Page 136 of 245

155 PROCUREMENT AND CONTRACTUAL continued Also by the end of this stage, RPA Board should have approved an outline business case for a particular project being procured as a PPP (by way of a long term service provision, based on an output specification). Following Board approval, the business case would then be submitted to the Minister for approval. Commensurate with these approvals being given to the outline business case will be approval to commence all necessary further work to procure the project. Expression of interest and Prequalification Expression of Interest and Pre-Qualification This stage will generally include a number of discrete tasks: carrying out further market soundings (if not completed in the detailed project development phase); issuing an OJEC notice to invite expressions of interest; preparing and making available the project information memorandum; pre-qualification of parties who submitted an expression of interest; selection of shortlisted bidders from those who pre-qualified; and discussions and further assessment following shortlisting. Market Study At this point there may be a need to undertake further consultation with the private sector to ascertain whether there is a market of potential suppliers able and willing to meet the service requirements/output specification (and, potentially, to get feedback on the process envisaged for involving the private sector in design development and the railway order application process). Also at this stage the bankability of the project will need to be confirmed following discussions with lenders and other relevant parties This market consultation could be initiated by inserting a periodic indicative notice (in accordance with the Utilities Directive (art.21)). It is noted, however, that initiating such consultation using a periodic indicative notice (PIN) is not mandatory (it is recommended that in this respect RPA should seek the input of its procurement advisors) Market consultation could proceed as an industry open day with individual contractors, relevant service providers and other interested parties being invited to participate (or, if they are not able to attend, to make submissions in writing), or alternatively by holding individual sessions with interested parties Responses from the private sector to any market sounding will be of great assistance in helping shape not only the pre-qualification and negotiation process but also key issues attaching to contract structure and transaction process. Page 137 of 245

156 PROCUREMENT AND CONTRACTUAL continued Developing Project Documentation This stage will see RPA and its advisers commencing detailed development of: a draft invitation to negotiate (ITN), which will ultimately be sent to shortlisted bidders. This work will draw upon the procurement strategy formulated as part of the outline business case. Suggested contents of the ITN package are described in the ITN Stage outlined in the following pages; and a draft Project Agreement, using as a basis the heads of terms and the risk profile for the project which formed part of the approved outline business case of key contractual terms are contained in Appendix N The key contractual terms will have to take into account interest of potential lenders and the issues likely to be raised by debt funders during negotiations. Particular issues which ought to be considered include: the allocation of risk; the projected cash flow, including the mechanism for payment of the PPP contractor for the services performed under the project agreement (debt funders will wish to ensure that any loan can be serviced adequately); the minimisation and passing of risks relating to completion and to the operation of the project; the risk of change of control of the Project SPV; that satisfactory insurance arrangements will be available and that the party will be under an obligation to maintain such insurance; and that, in the event of termination, the contract provides adequate step in and compensation rights. Issuing the OJEC Notice to Invite Expressions of Interest The next step is the publishing in the OJEC of the contract notice (which would most likely stipulate the negotiated procedure) seeking expressions of interest from the private sector in relation to the project The expression of interest will generally be a very preliminary response from interested parties requesting a copy of the project information memorandum so the bidder can then proceed to prepare a pre-qualification submission There are several points which should be noted in preparing of the OJEC notice Firstly, assuming that a railway order has not yet been made in relation to the project, the notice needs to be carefully drafted to ensure that the description of the project is sufficiently flexible to accommodate, as far as practicable, any changes in project scope arising from the railway order process (e.g. as a consequence of issues raised at the public inquiry) This is an issue because the core requirements of the rail project in question (as set out in the OJEC Notice) cannot change during the procurement process. If there is a change to the project s core requirements, the procurement process may well have to be re-commenced The notice will also need to be worded to avoid the situation where a large number of potential bidders can meet the stipulated pre-qualification criteria but do not have the necessary skills and capabilities for the project. This can generally be achieved by making it clear in the notice that only a PPP solution is being sought The notice might also set out the applicable pre-qualification criteria (but if constrained by space this could be incorporated into the information memorandum). Details should be provided in the event that it is intended to convene briefing meeting(s) with all Page 138 of 245

157 PROCUREMENT AND CONTRACTUAL continued potential applicants seeking to pre-qualify, as well as any intention to restrict the ITN to a limited number of shortlisted bidders RPA should also consider whether any notices need to be placed in other media. Any other advertising can only occur after the publication of the OJEC Notice and should only contain that information provided in the OJEC Notice. Call for Competition In Section 8 of this Framework it is recommended that the procurement of light railway/metro PPPs in Ireland should generally be awarded following a full OJEC Negotiated Procedure. Having regard to this, it is recommended that RPA should preserve the maximum degree of flexibility in the choice of preferred bidder(s) by using, as a prior call for competition, a notice on the existence of a qualification system for selection of pre-qualified bidders which is drawn up in accordance with the standard form notice at Annex XIII to the Utilities Directive (referred to as a QSN ) The advantage of using the QSN as a call for competition is that, apart from requiring far less information than if a periodic indicative notice (PIN) were to be used, a qualification system offers the most administratively efficient vehicle (for example, in terms of EU publicity requirements and internal selection processes) for selecting, negotiating with and awarding a contract to the preferred bidder. RPA should, however, ensure that the qualification system is operated in accordance with the EU procurement rules and is reviewed on a regular basis to ensure that pre-qualified bidders remain eligible to be considered for future projects. The detailed rules in relation to the operation of a qualification system are set out in Article 30 of the Utilities Directive Should RPA choose the QSN as a call for competition, then it should also (where relevant) publish the short-form PIN in the OJEC where (as is likely) future light railway/metro projects are worth more than 750, (Article 22 of the Utilities Directive) (service contracts). Preparation for Expressions of Interest and Negotiation Stages At this point it is recommended that RPA develop a position on its approach to notification of parties who are either not successful in pre-qualifying, or who successfully pre-qualify but which are not shortlisted (in this respect Article 41(4) of the Utilities Directive will be relevant) The bidding consortia will have to decide prior to lodgement of expressions of interest, whether they will bid as separate legal entities or alternatively incur further costs to put in place at that point contractual arrangements to document the relationship between consortium members (i.e. a consortium agreement). In this respect, article 33 of the Utilities Directive specifically permits groupings of suppliers, contractors or service providers to participate in tender competitions. The conversion of such groupings into a specific legal form is not required under the Directive in order to submit a tender or negotiate, but the grouping selected may be required so to convert itself once it has been awarded the contract, where such conversion is necessary for the proper performance of the contract. Making Available the Information Memorandum Following the receipt of expressions of interest, those parties expressing an interest in the project should be sent a project information memorandum The information memorandum should contain the following information: Background: this will describe the identity of RPA, the need for an integrated transport solution to the relevant area s rail infrastructure needs and how the proposed project is intended to provide a solution to identified transport needs. Page 139 of 245

158 PROCUREMENT AND CONTRACTUAL continued It should also describe the management and advisory teams involved in the project. The Project: this should describe the proposed project in outline (including the draft of key output requirements in a summary form) and the scope for innovation sought from the private sector (including the ability for revenue generating schemes). It will put the project in the strategic and political context and will set out any relevant issues and constraints. Information should be provided on the current status of the railway order application or the work being carried out to prepare this application (bidders will want as much information as possible about the railway order application process the proposed timetable and the extent they will be expected and entitled to contribute to that process). The funding of the income stream by RPA is likely to be of particular concern to the bidders. Timetable: bidders will want to know the timetable for the procurement including a deadline for pre-qualification applications and the date on which they will be informed of their success or failure to reach the next stage. Pre-qualification criteria: the pre-qualification criteria should give bidders as much guidance as possible so they can make a fully informed decision as to whether they want (and have the capabilities) to be involved in the tender competition. If the ITN evaluation criteria are available, it may be helpful for bidders to see these, if only to understand the nature of the contest. Contract terms: draft proposed contractual terms should where practicable be provided and if these are not available (given that it is quite likely that contractual terms will still be developed and refined), certainly an outline of such terms (heads of terms). In relation to the payment mechanism it is for the bidders rather than RPA to indicate the level of subsidy they require and the basis on which they calculate such amount. In this regard RPA should provide an indication as to whether payment is to be on the basis of the infrastructure being available at the required level of service or on the basis of fare box revenues (or a mixture of both). Information required from applicants (including a pre-qualification questionnaire): a form detailing precisely what is expected from bidders seeking to pre-qualify should be attached to the information memorandum. To avoid any prospect of legal challenge it is important that only questions within the scope of the project, or of any criteria published in the OJEC notice, are asked. Queries: the procedure and contact details to be used by bidders in raising any queries should be included in the Information Memorandum RPA should reserve the right to decline to consider any bidder who fails to comply fully with the pre-qualification process. RPA may also wish to reserve the right to amend the terms and conditions of the selection process at any stage or to cancel it. In the case of amendment to the terms and conditions, a material change is likely to increase the risk of the process being subject to challenge (for example, from an unsuccessful bidder) RPA will want to ensure that it attracts a number of quality bidders who will not drop out at an early stage. To achieve this, in addition to making available the information memorandum, RPA may decide to hold a conference at which further information can be given to interested parties and so that those parties also have the opportunity to ask questions. If such a conference takes place, it is imperative that the information given to each interested party is the same and all parties are treated in the same manner Regardless of how queries are handled procedurally, it is important to ensure that bidders are not prejudiced or preferred in any response given to their queries. Accordingly it will be necessary to ensure that all bidders receive the same information. The suggested method of answering queries is to send circulars to all bidders without disclosing either the identity of the bidder raising the query or the nature of the question raised (so the circular would only contain RPA s response to the query). This Page 140 of 245

159 PROCUREMENT AND CONTRACTUAL continued procedure should be retained at later stages in the process to ensure that bidders are not prejudiced. Pre-qualification Process and the Selection of the Shortlisted Bidders Following receipt of pre-qualification submissions from interested parties, RPA must then proceed to: determine which of those interested parties has successfully pre-qualified; and draw up a shortlist from those applicants which have successfully pre-qualified The sponsors of the bidding consortia will wish to keep the costs of responding to the OJEC notice as low as possible, and as such may delay introducing specialist suppliers (i.e. train operators/rolling stock and signalling providers) until a later stage in the procurement process The EU Public Procurement Rules prescribe a pre-qualification procedure but provide little guidance about the distinct stage of shortlisting, following pre-qualification. Thus, RPA needs to be careful to characterise the stages as separate and distinct (to ensure that Procurement Directive requirements as regards pre-qualification are satisfied) even if RPA decides to request information for both stages in the same information memorandum. As the stages can become blurred in practice, information might be sought at pre-qualification other than that allowed by the rules for pre-qualification (such as how the bidder views the PPP). RPA will therefore need to make it clear that it proposes to use such information to select the shortlist, not to pre-qualify bidders At the pre-qualification stage respondents to the OJEC notice are evaluated against minimum standards as set out in the notice or in the information memorandum (generally relating to technical capacity, financial and economic standing). The EC Public Procurement Rules do not specify minimum standards in relation to the prequalification of bidding consortia. They merely describe the categories of information which it is legitimate to request from potential bidders The usual course is to draw up an evaluation matrix setting out each of the categories of information requested from bidders, RPA s standards for these categories, and the weighted scoring system to be applied for assessing financial strength or technical capabilities Whatever criteria are used for assessing the financial standing of potential bidders, RPA should ensure the criteria are based on objective standards and made available to potential bidders. The criteria can (but need not) be based on those laid down in the EC Public Procurement Rules and could, for example, include requirements such as: statements from the bidders bankers; statements of accounts or extracts relating to the bidders business where publication of those accounts is required under the bidders home State law; statements of the bidders turnover (both general and specific to the projects in question) over the previous three financial years; any other financial/economic information which, for example, a bidder would normally prepare for its annual reporting requirements; references to the bidders auditors reports and independent credit ratings assessments (preferably specific to the particular bidder) the number and value of similar projects the potential bidder has worked on; and the experience of members of the relevant consortium in PPP and other projects (particularly in the rail sector) Once the pre-qualification criteria have been satisfied by a number of bidders, RPA is then entitled to proceed to prepare a shortlist. The method of evaluation adopted by RPA in shortlisting will necessarily include an evaluation of the pre-qualification Page 141 of 245

160 PROCUREMENT AND CONTRACTUAL continued questionnaire and all supporting information provided by those candidates who have pre-qualified so that the shortlist contains the candidates who best meet the prequalification criteria. This evaluation process may also involve interviews with or presentations by the pre-qualified candidates and the use by RPA of a detailed scoring system (which attributes different weightings to different criteria). The successful shortlisted bidders should be notified and requested to confirm their intention to bid If any of the shortlisted pre-qualifiers decide, after submitting their applications, that they no longer wish to proceed with the competition, RPA may then, using objective criteria, include on the shortlist other candidates who may have achieved the minimum required number of points specified in the pre-qualification criteria, but who were not within the originally chosen group of shortlisted pre-qualifiers Having undertaken the pre-qualification and shortlisting exercises RPA will by this point have produced a shortlist of pre-qualified candidates who satisfy RPA s basic criteria. The ITN will usually be issued to a limited number of shortlisted candidates: a minimum of 3 (in the case of negotiated procedure) but almost certainly no more than 5; and at least 5 in the case of restricted procedure, (taking into account the competing factors of the need for adequate competition against the incurring of bid costs by each bidder, where, RPA has decided that it will make a contribution to the cost incurred by shortlisted bidders in preparing their bids). The final list should be limited to the least number of contenders needed to ensure there is genuine competition At the stage of shortlisting RPA will also need to ensure the structure of competing bidding consortia is adequate and acceptable (for example, so that it can survive if one member of a consortium withdraws). In the event that a consortium member does withdraw at this point, RPA will need to assess whether that consortium (minus the withdrawing party) still satisfies the pre-qualification criteria (and can therefore proceed in the tender competition). In such circumstances it will generally not be sufficient for that consortium to simply substitute in a new member - that is, unless: the remaining pre-qualified original members satisfy all pre-qualification criteria; or the consortium in its pre-qualification submission expressly reserved the right to substitute a consortium member, and RPA accepted that position (and such a withdrawal is not contrary to the rules of the tender competition). If a withdrawal and/or a substitution is proposed it is recommended that RPA consult its legal/procurement advisors. Consultation Procedure Following Shortlisting Following shortlisting, RPA may want to discuss the project further with the shortlisted bidders. There will also at this stage be the opportunity to revisit and refine the original appraisal of the project in the light of knowledge gained during the procurement process so far. This will enable refining and clarifying of the output specifications and potentially also some feedback from shortlisted bidders as to what will be the appropriate contractual terms These formal discussions still need to take place in as structured a manner as possible, so as to remove the risk of a competitive advantage being given to any particular bidder and so minimising the risk of the process being challenged by an aggrieved bidder. Page 142 of 245

161 PROCUREMENT AND CONTRACTUAL continued Invitation to Negotiate Invitation to Negotiate The next stage is to settle and dispatch the ITN to each of the bidders. The ITN establishes the framework for detailed bids and is fundamental to any project. It sets out the timetable for tenders to be returned and the overall project timetable to contract award and financial close The ITN stage may be quite lengthy for complex projects, encapsulating the settling of and issuing the ITN document, sessions with bidders (e.g. site visits), preparation and finally submission of tenders. There is often a lot of material for bidders to absorb in order to be able to formulate proposals and prepare a formal bid How RPA co-ordinates this stage will depend on the specifics of the project at hand. The focus will be on the amount of information required for each evaluation category as well as the number of formal tender rounds. This depends on the negotiation to be undertaken for a particular project it is not possible to make any recommendations about how many rounds there should be in a best practice situation because of these specific project considerations and constraints. However a procurement is structured, it is unlikely to avoid the need to invite Best and Final Offers ( BAFOs ) - final priced bids - from either three or two bidders at some time prior to the appointment of a preferred bidder. At this point RPA will need to reach a settled position on the extent (if any) to which the unsuccessful bidders will be compensated for their bidding costs (and the extent of such compensation). A statement on this position should be included in the ITN. Settling Project Documentation This stage of the process will also include consideration and refinement of RPA s preferred approach to: the terms and structure of the Project Agreement; the risk allocations contained in the draft risk register developed as part of the Detailed Project Development, and settling which risks should be retained by RPA, which risks should be transferred to the private sector, and which risks should be shared; and the other contractual documentation which will be used in the transaction (e.g. if the train operator function is to be split from the infrastructure provider what form the access contracts should take and what role any regulator or statutory body should play in this process; step in and direct agreements; agreements in respect of land or interfaces with connecting services/utilities or infrastructure; station agreements). Preliminary drafts of the Project Agreement should have been produced before this stage. However, amendments may need to be made to the project documentation to take into account any refinements to the preferred approach to key terms and conditions By this point the contents of the ITN package will be finalised. Immediately prior to its issue to shortlisted bidders the ITN should undergo one final review (particularly having regard to any feedback received up to this point from bidders). The preparation of unambiguous tender documentation is critical to a successful tender process. Any ambiguities, inaccuracies or omissions in the tender documentation may well result in bidders responding on the basis of different assumptions making the bid evaluation process of RPA extremely difficult and, in worst cases, could even leave the selection of the preferred bidder open to future challenge. Page 143 of 245

162 PROCUREMENT AND CONTRACTUAL continued The ITN documents should include a procedure which allows bidders to seek clarification in relation to particular issues associated with the project contractual documents, the bid process and the evaluation procedure and for responses to clarification questions to be distributed to all bidders A basic tender package might include, but does not necessarily have to be limited to the documents described in the following paragraphs. Instructions to Bidders The primary purpose of the Instruction to Bidders document is to define the conditions, procedures, information requirements and evaluation criteria which will apply to tenders It will therefore set out the commercial and regulatory framework for bids, describe the bidding conditions, summarise the key events of the competition, their associated dates and key project implementation dates The contents of the Instructions to Bidders document might include: background to the project; glossary of commonly used terms; particular conditions to which the ITN package is subject (for example, dealing with conflict between various components of the package, a general disclaimer in relation to the tender competition and the contents of the package, a reservation of the right to amend the package); particular conditions to which the tender process is subject (for example, the format and structure of tenders, tender lodgement procedure, acceptability of variant bids, confidentiality); procedure for handling queries and clarifications sought from bidders (contact details, arrangements for site inspections, details of consultation meetings with bidders and, possibly, mid-tender workshops with bidders); an indicative timetable for submission of tenders; a checklist for compliance with all requirements of the ITN package; information on the availability of project data through data rooms and/or electronic versions; an indication of RPA s position on the reimbursement of bid costs; assuming that RPA falls within the scope of public body in Schedule 1 of the Freedom of Information Act, a section detailing to Freedom of Information Act requirements (and specifying that where a bidder considers any information it may provide to RPA in the course of the competition to be commercially sensitive or confidential in nature, RPA must be advised and reasons specified. The nature of this documentation may then be taken into account by RPA in considering requests for access under Freedom of Information legislation); a summary of key technical, financial and commercial information (including an outline of project documentation, proposed payment mechanism, financial structure of the project SPV, requirements as to performance bonds, collateral warranties and project insurance); a summary of key regulatory and legislative matters; information on the current status of the development of project design, route selection, railway order application and related work; and the evaluation criteria and methodology to be used by RPA in assessing each bid. Page 144 of 245

163 PROCUREMENT AND CONTRACTUAL continued The evaluation criteria for the assessment of tenders will generally include the following: Commercial operation date certainty: Completion of the construction of the project in accordance with the timetable as set out in a bidder s tender will be of critical importance. Level of project development: A bidder s proposal must be sufficiently developed so that all parties can have confidence in its viability and pricing. Project liability and performance: This category of criteria would test the likely performance characteristics of the proposed project, for example, the bidders proposals for how the project will be operated and maintained and what warranties will be available to the project during the operational period. Exceptions to draft agreements: Although it is recommended that draft agreements issued to bidders should be prepared on a balanced basis, without significant bias to any of the parties and consistent with the requirement for a bankable project, experience shows that, even if this approach is adopted by RPA, bidders will invariably still take exception to some of the proposed terms contained in the draft agreements. These objections all need to be reviewed to assess their impact on the project although to limit the number of exceptions as far as possible, bidders might be advised that any major objection causing a change to the substance or spirit of the agreements might be viewed as a reason for disqualification. It is also strongly advisable to provide bidders with the opportunity to identify any major exceptions to the project agreements by a date sufficiently in advance of bid submission in order for RPA to have time to consider and respond to those exceptions. Major exceptions raised can either (1) be accepted by RPA and the documents revised so that all bidders can then take into account the exception or (2) alternatively the relevant bidders can be given the opportunity to withdraw that exception with the warning that, if they fail to do so, its inclusion in a bid may render that bid unacceptable. It is recommended that RPA request that bidders frame their responses on contractual terms as marked up versions of the contractual documentation provided with the ITN, and that RPA should not accept from bidders any position papers from bidders legal advisors on particular issues. Exceptions to the output specification Project financing: In the event that it is anticipated that a bidder might be financed on a non-recourse or limited recourse basis (i.e. the lender only having recourse to the assets of the borrower SPV over which it has taken security), the feasibility of each bidder s proposed financing plan will need to be evaluated by RPA s financial advisors taking into account the following criteria: - the amount and timing of the equity to be invested; - the SPV s ability to repay its financing costs, as measured by debt service cover ratios; - the level of commitment demonstrated by the bidder s potential lenders; - project capital costs; - fixed and variable operating and maintenance costs; and - financing costs (including the required return on equity). Design Development: The way forward for development of the project (in association with the application for the railway order, assuming that the railway order has not already been made). Page 145 of 245

164 PROCUREMENT AND CONTRACTUAL continued Full Output Specification At the previous stages in the competition, bidders would have only received summaries of the output specification. The ITN should contain a complete version of the output specification The key components of the output specification are discussed in greater detail in Section 16, but might include the following: definitions and interpretation; provision of paths and operating requirements (i.e. number of train paths per hour), including service pattern and journey times, provision of track and signalling capacity, power supply, train control systems (automatic train protection) and train recovery systems; provision of infrastructure works, including train stabling, rail loops, servicing and maintenance and operating staff facilities; provision of infrastructure capability, including line speed enhancement and/or reduction in existing journey times, operational times, availability, performance regimes, facilities to be provided for operational flexibility; station works and station capabilities, including peak hour boarding and alighting capacity, facilities (stairs, lifts, escalators, ramps and passageways), standard of finish (i.e. retail and other commercial facilities, toilet and first aid facilities), outlying station works, interchange facilities with other operators (where relevant) and modes of transport, ticketing and passenger information, management, maintenance, catering and other support facilities; mileage accumulation and driver training; and rolling stock specification. Draft Project Agreement The ITN package should include the Project Agreement and related contractual documentation. ITN stage is generally the first stage in which a full version of the draft documentation is made available to bidders. Site details and other relevant background information The ITN package will generally include details of the project site and all related land and interests in land to be provided by RPA, as well as other background information, such as details of the regulatory and safety regimes to which the project will be subject. RPA would not generally warrant the accuracy of the information provided this should be expressly stated in the tender package (unless RPA forms the view that a significant reduction in liability for bidders costs could result from the provision of such a warranty for example if RPA was to carry out a programme of bores to ascertain conditions for tunneling it might be prepared to warrant this information rather than have each bidder carry out its own programme). Financial Information The ITN package will include a document seeking financial information generally a pro forma to be completed by bidders by inserting information relating to the financial model and specified categories of investment and operational expenditure, including the amount of subvention/public sector support they envisage they will require. The extent of such information required to be provided by both RPA and the bidders will need to be considered. Page 146 of 245

165 PROCUREMENT AND CONTRACTUAL continued Approach to Bid Clarification The ITN should include full details of RPA s envisaged bid clarification and consultation process. This process will allow RPA to better understand the approach of each of the bidders At a minimum, the clarification process would include a timetable of consultation meetings between RPA and each bidder, where each party can ask questions of the other (with bidder questions recorded and RPA s response issued to all bidders). For example, these meetings could be structured so that a timeslot is allocated to each bidder to meet with RPA at the beginning of each of the first three or four months of the period between issuing the ITN and the deadline for lodgement of tenders Consultation meetings will also allow bidders to understand any mandatory technical issues (for example design constraints imposed as a result of the railway order process), explore innovative solutions to meeting the output specification, and discuss bidders material points on the contractual documentation. Risk Allocation It is suggested that bidders should be required to submit evidence that RPA s proposed project risk allocation would be acceptable in principle to their proposed lenders (with a letter confirming this). Value for Money Comparator RPA will also need to consider whether the bidding process may be assisted by issuing the business case and/or the Value for Money comparator to shortlisted bidders. Generally, this is not the approach favoured because bidders tend to challenge the assumptions and conclusions contained within them. Variant Bids When inviting tenders, RPA should specify whether variant bids will be acceptable or whether it requires bidders to submit at this stage only standard bids. The standard bid should however only be standard as regards commercial issues. It is essential that there is no standard requirement as regards technical or operational issues (i.e. how the output specification is to be delivered) unless there are specific essential constraints of the project (for example, constraints imposed by the railway order process) but although there is no standard technical or operational requirement, variant bids must still meet minimum standards in operational and technical areas The benefit of permitting variant bids is that it allows for creativity and encourages competition on the part of bidders and may therefore result in enhanced savings/better value for money for the Exchequer. However, the allowance of variant bids will generally require greater resources on the part of RPA at the evaluation stage, as variant bids may not be prepared by reference to the precise criteria listed in the bid documents. If variant bids are to be allowed, RPA should specify that such bids must be structurally and functionally equivalent to the standard bid requirements as presented in the tender documents, and in compliance with any minimum requirements. Variant bids must also be accompanied by a compliant bid in order to be acceptable, so RPA can still fall back if necessary on the compliant bids. Shortlist Shortlist Having considered the ITN package, the bidders will return to RPA completed tenders together with supporting documentation relating to the commercial, technical and financial aspects of the bid. Evaluation of bids by RPA for purposes of shortlisting down to two bidders will proceed in a similar manner to pre-qualification i.e. with an Page 147 of 245

166 PROCUREMENT AND CONTRACTUAL continued evaluation matrix etc. Only the evaluation criteria as described in the ITN package can be applied to this evaluation It is expected that this stage of the procurement process will proceed as follows: opening of bids; process whereby each of the bids received are subject to preliminary review and, where necessary, clarification; evaluation criteria are applied to shortlist two bidders from those who lodged bids; negotiate with the two shortlisted bidders; and proceed to BAFO stage. Clarification Meetings Following receipt of the bids, it is recommended that RPA put in place a timetable for meetings and discussions with the bidders (including appropriate confidentiality safeguards) These discussions should be confidential to each bidder, except where they result in any modification to the definition of the service or output requirements. If this is the case such changes must be notified to all bidders. As a general rule, it is acceptable for RPA to change output/performance requirements as a consequence of clarification discussions whilst all bidders remain in the competition, however, when shortlisting to two bidders has occurred, no further change should be contemplated As a matter of practice, bidders should: be invited to make a formal presentation following the submission of their bids; and following the presentation, be interviewed on the contents of their proposals. Inevitably, there will be much in a response which needs clarifying. A series of structured meetings should therefore be held with each bidder to resolve uncertainties in the bids. This is normally facilitated by the issue of a detailed set of questions on the legal, financial and technical points to be responded to prior to a meeting. Evaluation RPA should, by using the stated evaluation matrix and considering the clarifications from bidders meetings (and any negotiated position), be able to determine which of the bidders should proceed to BAFO stage. The unsuccessful parties should be advised at this point (in the interest of saving bid costs, where RPA has committed to contribute to the costs incurred by bidders in the process). The method and conclusions reached for purpose of justifying this shortlisting should be recorded, to provide protection in the event of a challenge by an aggrieved bidder. This process should leave two bidders to negotiate with RPA and ultimately submit BAFOs. Negotiations Negotiations with the bidders should be conducted in a series of both formal and informal stages pursuant to the already developed and agreed timetable for negotiations. The integrity of the evaluation process must be maintained throughout and RPA should ensure suitable procedures are established for single-point communications with bidders and for document control. As part of this, arrangements should be put into place to enable reports of individual negotiations to be distributed to the whole RPA negotiating team. Page 148 of 245

167 PROCUREMENT AND CONTRACTUAL continued It is advisable to make the best use of the competition and to negotiate and agree (as much as possible) the commercial and contractual terms while there is more than one bidder. Where practicable, attempts should be made to include each bidder s financiers at key meetings and to confirm their acceptance to the terms. Although this may be difficult to achieve in practice the benefit it delivers in terms of finalising contractual terms prior to Financial Close is hugely significant The following matters should be taken into account in preparing for negotiations: RPA must have in place a negotiation strategy before the negotiation sessions. RPA s team must decide in advance what is negotiable and what is not in order to minimise time and costs at this stage. For this purpose it is suggested that RPA and its advisors produce and maintain a confidential Negotiating Brief which lists the contract clauses and against each clause describes each bidder s position, the suggested response of RPA, and the fallback position which RPA may be prepared to accept. Agendas should be set for each meeting with all the key issues being identified. RPA should consider in advance what sort of specialist support will be required during the negotiations. RPA should (1) to record by way of minutes (to be signed by each party to the relevant meeting) each issue to be discussed and the position reached and (2) at all times retain control of the contract drafting. Best & Final Offers BAFO (Best and Final Offer) At the end of the period of parallel negotiations with the remaining two bidders it may be desirable at this point to invite BAFOs from the bidders against an agreed contractual framework. If RPA decides to proceed with a BAFO stage, a further round of evaluation should be carried out following the receipt of BAFO bids. The same principles apply as for evaluation of offers in response to the ITN It is recommended that an invitation to BAFO should be prepared on the same basis as the ITN with an acknowledgement of the positions reached on each bid as reflected in separately revised contracts against which the remaining bidders will bid. RPA should set a deadline for receipt of the BAFO bids and if necessary revise the timescales for completion and financial close (if different from the earlier schedule) Where required, RPA may enter into discussions with BAFO bidders after BAFO tenders have been received so as to allow the BAFO bidders to clarify their offers RPA should carefully manage its own expectations before finally appointing one of the bidders as the preferred bidder once it has done so, its negotiating strength will be significantly diminished. In order to extend RPA s competitive bidding position for as long as possible, it may be appropriate to negotiate in parallel with each of the bidders (or if more than two bidders remain in the competition, to negotiate with the two leading bidders). The effectiveness of such an approach can only really be assessed having regard to the circumstances of a particular project The process of reaching financial close can itself be quite lengthy. One reason for this is the financiers and their legal advisors will insist on undertaking a detailed review of all project documentation. Financiers will want to ensure that little or no risk (for example construction risk) affects the ability of the project company to repay its loan and the rate and in the timing provided. It is recommended that bidders financiers be invited to become involved in the process before the submission of BAFOs. This entails a further set of professional advisors (the financial institution s advisors) looking at the deal and re-visiting some issues (potentially in a great degree of detail). Undue delays at preferred bidder stage can often be avoided through involving the financiers at this earlier point. Page 149 of 245

168 PROCUREMENT AND CONTRACTUAL continued In addition to concerns about the risks of increased costs and delays, lenders will also be concerned about the robustness of the payment from RPA, and the circumstances in which it can be reduced, interlinked or terminated. Finally the amount payable on any termination of the Project Agreement will be of interest to lenders so at least financing costs can be next recovered It is therefore recommended that a condition of the BAFO is that a bidders lenders are committed to the transaction and have satisfied themselves as to the acceptability of all key commercial terms Finally, before selecting a preferred bidder, the PPP proposition should be re-tested against the key criteria of value for money and affordability. Page 150 of 245

169 PROCUREMENT AND CONTRACTUAL continued Legal and Contractual Issues In order to ensure as far as possible that bidders BAFOs are final, clarification meetings should be held with the bidders to confirm that the contract clauses are agreed. Bidder s financiers should also be present at these meetings. Minutes of these meetings should be taken and signed by all parties to record and confirm that the clauses are agreed. It is suggested that RPA include in the letter appointing the preferred bidder a statement that: RPA expressly relies on the agreed terms of the bid and the clarification meetings that have been convened; and any attempt to move away from the bid and its related agreed terms will result in the preferred bidder status being awarded to the next best bidder There should be few material commercial issues to be dealt with by this point in the process: the remaining bidders will already have agreed their internal risk allocation by signing up to heads of terms for the various sub-contracts and for the financing arrangements; the bidders, together with sub-contractors and lenders should have agreed the principal commercial terms of the transaction and (save for drafting issues) to the terms of the project documentation, which will be in an advanced form. Negotiations Negotiations Having evaluated the shortlisted bidders BAFOs, RPA will proceed to appoint a preferred bidder. How soon RPA reaches this stage will depend on the size of the project, the reaction of bidders competing with one or more other bidders at a time when the project is still speculative and the quality of responses received. In general, the larger the project and the higher the likely returns, the easier it is likely to keep several bidders in the competition. With a small project, it may be very difficult to persuade potential private sector partners to do a great deal of work prior to the appointment of a preferred bidder The preferred bidder stage carries with it certain difficulties. The first is that, after the preferred bidder is appointed, the only source of competition is the public sector comparator rather than a real private sector bidder. One option to avoid a re-negotiation of the terms is to keep an unsuccessful bidder in reserve in case any problem occurs in negotiations with the preferred bidder. However, given the efforts required to negotiate from preferred bidder through to Financial Close, the preferred bidder will enjoy a substantial advantage over any reserve bidder accordingly this strategy will only be effective if the reserve bidder is substituted within a relatively short period following the appointment of the preferred bidder. In practice, involvement of an unsuccessful bidder should only be considered where other options for resolving key issues with the preferred bidder have failed Secondly, the bidder s lenders should be asked to sign up by way of a formal written acknowledgement that the principal commercial terms are acceptable to avoid them rewriting the deal subsequently. The final negotiations should be limited to agreeing the final detail of the transaction documentation As has been noted previously, a detailed and disciplined negotiating programme should be organised and adhered to as far as practicable in progressing towards contract close. Page 151 of 245

170 PROCUREMENT AND CONTRACTUAL continued Financial Close Financial Close Before financial close can occur, the following steps will need to have occurred: all sub-contracts must be in place and approved; all financing documentation must be approved by RPA and be in place; all insurance arrangements should be agreed and in place; all securities (i.e. parent company guarantees and performance bonds) signed; and the assignment of any applicable agreements by RPA to the PPP contractor (for example utility diversion contracts with utilities companies) Depending on the circumstances of the project, there may be a variety of other matters which will need to be dealt with at this point. If the land required for the project is owned at this stage by RPA or another Government entity, a lease or some other interest in this land might be granted to the project company (if a license is to be provided this can be granted directly under the terms of the Project Agreement). In addition, other internal and external approvals may be required (these are discussed in the paragraphs below) Given that the railway order is essential for the project to proceed, it is likely that the preferred bidder and its lenders would resist proceeding to financial close until a railway order has been made (and in a form which is acceptable to all parties). This approach will allow any issues arising from the railway order application process to be resolved as far as possible before financial close (e.g. if the final form of the railway order results in a change to the project scope, the approach to this change could be agreed by the parties before financial close) An alternative approach would be to proceed to contract award and financial close without the railway order in place, but subject to the provision of sufficient contractual protection to: allow the PPP contractor and its lenders to be compensated or to withdraw from the deal without penalty in the event that the outcome of the railway order process is unsatisfactory to them. This would require a clear definition in the Project Agreement as to what does and does not constitute an unsatisfactory outcome; and govern any variations to project scope which arise as a consequence of the railway order being made in terms different to those sought (but which variations are considered by the parties to be, at least in principle, acceptable) In such circumstances, in addition to this contractual protection, it would be expected that the lenders would (in any case) make the provision of their funding conditional upon the making of the railway order The approach to this particular issue has the potential to become a significant point for both RPA and the private sector. It is therefore recommended that RPA seek views from the market before a firm position is adopted (recognizing though that the approach which is adopted will still need to be determined on a case by case basis) In progressing the project contractual documentation towards financial close and contract award, RPA will need to accommodate within its completion timetable any requirements for approval of the documentation both internally and also possibly from other Government stakeholders before it can proceed to award the contract. Internal approvals: RPA will need to follow its own Corporate Governance procedures in relation to approving the contract to be entered into. In practice, the full board of RPA should be involved in the approval process shortly before signing and power should be delegated to the project leader to sign on behalf of Page 152 of 245

171 PROCUREMENT AND CONTRACTUAL continued RPA and agree any last-minute changes. Financiers are likely to require a particular form of board resolution to prevent any challenge due to lack of authority. The final business case should be approved by RPA Board only after all the significant elements of the transaction have been agreed and the deal can progress to financial close. In practice, business case approval is likely to be contemporaneous with financial close. Although the final version of the full business case will be submitted at a relatively late date, drafts will be in circulation from much earlier and should be used as a mechanism for briefing the Board on the main features of the deal. The reason for late approval is to avoid the possibility of the deal not conforming in some way to the approvals given (e.g. as to contract value, scope, timing etc). Government Approvals: In the period before financial close RPA should ensure any necessary Government approvals for the project and the contractual documentation are obtained Contract award and financial close are likely to be virtually simultaneous. The contractual documents may be signed and held in escrow whilst the swaps are being arranged and the financial details can subsequently be inserted into the contract documentation Unsuccessful bidders should be debriefed as soon as possible after Contract award. In this respect, Article 41 of the Utilities Directive relevantly provides: that RPA must, promptly after the date on which a written request is received, inform (1) any eliminated bidder of the reasons for rejection of his application or tender and (2) any bidder who has made an admissible tender of the characteristics and relative advantage of the tender selected as well as the name of the successful bidder; but RPA may decide that certain information on the contract award be withheld where release of such information would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises or might prejudice fair competition between suppliers, contractors or service providers Finally, an award notice must be published in the OJEC confirming the contract has been awarded and giving details of the contract award. Construction and Operation Construction and Operation Following contract award and financial close, the implementation of the project will commence. The initial priorities for the PPP contractor (and subcontractors) will generally be: completing all design work required for the construction phase; if not already in place, ensuring that the railway order is secured in a form acceptable to both RPA and the PPP contractor (and its lenders); procuring other necessary statutory approvals; and commencing construction work. Land Acquisitions To the extent that land required for the project is not already vested in RPA, a significant issue to be dealt with at this point will be the acquisition of the relevant land. Identification of land requirements will have commenced as early as the detailed project development stage. Following the establishment of the preferred route alignment, a schedule of the interests in this land would be prepared, and this would have been Page 153 of 245

172 PROCUREMENT AND CONTRACTUAL continued included in the railway order application. A land acquisition strategy would generally be developed, centred upon: where practicable, acquisition of land by commercial agreement with owners and (to the extent relevant) occupiers (as an alternative to the more contentious railway order CPO power); and/or compulsory acquisition of the relevant land, using the CPO powers which accrue to RPA following the making of the railway order To the extent that land has not been acquired at this point, as stated in Section 14 land acquisition risk is to be borne by RPA. Nevertheless, there are several land-related issues which might arise in the course of the implementation of the project: RPA could seek to have the PPP contractor provide it with assistance in the land acquisition process (for example in negotiations with landowners). If so, it would be expected that the Project Agreement would make provision for this; in the course of implementing the project it may become apparent that additional land (or interests in land) not included in the railway order will be required (for example, as a consequence of a change in project scope). The Project Agreement should contain provisions which apportion risk and responsibility for such acquisitions. Particularly if the change is significant, it would be expected that a variation to the railway order would be sought, in accordance with procedure in section 43(7) of the Transport (Railway Infrastructure) Act; and in addition to land acquisitions, temporary access to some land may be required (e.g. for construction compounds and temporary diversions). Section 48 of the Transport (Railway Infrastructure) Act gives the railway undertaking powers to procure access to land for such work, subject to the requirement that the consent of owners/occupiers of the relevant land must be obtained. This section also includes a procedure which permits aggrieved landowners and occupiers to seek orders from the District Court prohibiting entry by the railway undertaking to their land. Accordingly, where a need for temporary occupation is identified, steps should be taken well in advance to ensure that the required land is available. Railway Order The railway order must be in place before: compulsory acquisition of land can proceed (pursuant to section 45 of the Transport (Railway Infrastructure) Act); and actual railway construction work can commence. It is expected that financial close would generally only occur following the making of the railway order (as well as the expiry of the judicial review period provided in section 47 of the Transport (Railway Infrastructure) Act). To the extent that the railway order is not in place at this point, the Project Agreement will need to regulate the responsibilities of RPA and the PPP contractor in progressing the railway order application (e.g. preparing submissions to the public inquiry), and make provision for possible variations in project scope (or indeed project termination) in the event that the railway order, once made, is not in the desired form A further issue with the railway order is whether the application has been made by RPA or by another party (e.g. the PPP contractor). If the application has been made by RPA, section 43(6) of the Transport (Railway Infrastructure) Act relevantly provides that RPA may, with the consent of the Minister for Public Enterprise, make arrangements with a nominated third party (e.g. the PPP contractor) to construct, maintain, improve or operate the railway works to which the order relates. Page 154 of 245

173 PROCUREMENT AND CONTRACTUAL continued Design Development Further design work will be required following lodgement of the railway order application, including production of detailed drawings, schedules and specifications of materials and workmanship and all the information necessary to enable the PPP contractor (through its subcontractors) to start work on site. Construction work may commence before all work on the detailed design is complete. It is expected that responsibility for the design development at this point will generally rest with the PPP contractor, but subject to a design development procedure, including requirements of monitoring by, and consultation with, RPA and its advisors, as the design is developed and finalised The extent to which RPA accepts design documents is an important one: acceptance (without qualification) implies risk and responsibility to RPA. For this reason it is recommended that RPA develop a procedure for it to monitor the design work being carried out by the PPP contractor, and which allows for RPA to make comments on the design without acceptance of risk and responsibility in relation to those comments Accordingly, the design review process in the Project Agreement could incorporate features such as: strict time limits for RPA to respond to design submissions (with a requirement that if RPA fails to respond in this period then the submission is deemed to be approved); the nature of the design elements which the PPP contractor is required to submit for review may be restricted to particular aspects of the design, such as sensitive areas or areas where a choice may be available to RPA at no additional cost or risk to the PPP contractor; and the basis of which RPA may make its comments and relevant criteria may be prescribed. Provision should be made for the rapid review, by a dispute resolution procedure, of any comment which the PPP contractor does not consider RPA is entitled to make The PPP contractor may seek to ensure that RPA will not, through this design review process, seek to impose a more expensive solution Meetings should be organised between the technical advisors of the PPP contractor and RPA, with a view to agreeing the detailed designs and reaching an understanding as to which elements of any design are being accepted by RPA. It is recommended that this process (or at least the framework for this process) is documented in the Project Agreement, even where all the design has been fully developed prior to execution, in case there is any defect in the design, or necessary modifications. The provisions of the Project Agreement should also set out clearly which elements of the design documentation has been approved by RPA at contract award Where any design has been developed by the preferred bidder prior to execution of the Project Agreement, the design documents should be clearly identified and will form part of that bidder s proposals so that it is clear that it accepts liability for such design, the co-ordination of such design with other design documents and the construction of the railway in accordance with its general obligations regarding workmanship and use of materials The mechanics of the design development procedure can cause administrative difficulties in practice. The PPP contractor may not be prepared to warrant that it will provide all the design documents within a certain time period as this would unduly fetter its ability to carry out the design at the most appropriate times. A rolling programme is therefore often agreed upon which will usually require the PPP contractor to set out periods during which design documents are to be produced and the nature of the design documents are to be produced. The PPP contractor will be permitted to Page 155 of 245

174 PROCUREMENT AND CONTRACTUAL continued update the programme from time to time but will be required to provide RPA with the design documents during the relevant periods as identified in the programme. Ongoing Management and Monitoring Traditional construction contracts provide for RPA s representative to have extensive powers to inspect the works as they progress and to order work to be opened up and tested. Such requirements may not, however, be appropriate for PPP projects. Given the extended duration of the PPP contract and the obligation of the PPP contractor to repair any defects which subsequently appear during the life of the contract, it is arguable that such an intrusive process during the course of construction is inappropriate Nevertheless, as with the design development process, the implementation of project works pursuant to the Project Agreement will require periodic reporting and consultation between the PPP contractor and RPA and its advisors, as well as the capacity for RPA to monitor the progress of work and compliance with approval conditions (such as those attached to the railway order). This process should ideally include a procedure for each party to raise particular issues, and for discussion, clarification and resolution of such issues, as required The Project Agreement will generally include: agreed project milestones, to be used to assess the performance of the PPP contractor in completing all works on or before time; and provision for the reporting and auditing of project revenues, particularly if the deal is structured so that RPA is to receive a share of project profits. Provision of the Asset RPA will not wish to certify as complete (and therefore start to use, or pay for) an asset which is not complete and usable in accordance with the Project Agreement. The PPP contractor will want to be certain that when the design and construction work has been completed, the real business of providing the asset to RPA in return for contract payments can start without any delay. Clarity, and objectivity, linked to a mechanism for rapid resolution of any disputes, will be key structural objectives at this time Whilst the Project Agreement is likely to include reference to an anticipated date by which the project assets are to be commissioned to a level capable of permitting the project to become operational, this date is often likely to be treated by the parties as indicative only, with some leeway provided for the operational phase to commence later, or possibly even earlier. However, a second date (a long stop date) may be provided for as a final date for the completion of the phase to ensure that, where any financial incentive for completing the development works promptly is not strong enough, an enforceable final date for completion of the phase does exist In many cases the commissioning process is likely to take account of a complex range of interests within the process itself, including the interests of any regulatory entity which must issue a license or a consent before the facilities can become fully operational. The complexities around these issues give cause for concern that disputes may arise over whether the PPP contractor has met its design and build obligations to the extent and the service level required for the project to be treated as having become operational. Disputes in this area will need rapid resolution and will be suitable for a fast track dispute resolution procedure The ability, or otherwise, of RPA to require changes to be made during the design and construction phase will be another area of sensitivity. It would be expected that RPA will seek to reserve the right, analogous to that under a traditional construction contract, to order changes, which will be valued and paid for in accordance with the contractual mechanism. PPP contractors and their lenders are likely to be concerned that the Page 156 of 245

175 PROCUREMENT AND CONTRACTUAL continued financial and practical effects of such changes will lead to disputes, leaving the PPP contractor in a position where it cannot fund the costs which it properly incurs, and is not able to achieve a status where completion can be satisfied (and so payments start to flow) with consequential disruption to the project economics These issues are discussed further in Appendix N. Page 157 of 245

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177 Risk Management CONTENTS PAGE Introduction 158 Risk Management Considerations 159 Implications for PPP Structure 163 Procurement Process 165

178 RISK MANAGEMENT 14 INTRODUCTION 14.1 PPP s will generally involve long term commitment under an agreement with a private partner. In order to be satisfied that long term value for money for the Exchequer is being achieved it is necessary to make predictions which may cover 25 to 30 years into the future. Such a process is subject to significant uncertainty with actual events and their impacts probably varying materially from original expectations. Understanding and managing risk has the aim of minimising the negative impacts of such variations The allocation of risk between the parties to a PPP transaction is also fundamental to making sure that only bankable projects are brought to the market if private investment is to be secured. Prior to introduction to the market it is important that RPA has established a clear position on its proposed allocations. The success of the project will be materially influenced by the ability of the private partners to raise the capital (debt and equity) needed for the project. Since investors and lenders will seek returns on investment equal to those they can obtain on other projects offering similar risk profiles, and given that RPA want to secure sustainable concessions, it is in the best interest of both parties to clearly understand what are acceptable levels of risk and what is required to ensure that the projects attract adequate financing at competitive rates. Consequently, creating an appropriate risk sharing structure is fundamental to attracting private interest. The general principle should be that each risk should be carried by the party best able to control and manage it. Purpose 14.3 This section outlines an approach to risk assessment and management. It is concerned with: describing an initial position on risk allocation which RPA can adopt ; providing an understanding of the risk management process; and providing guidance on the type of activities and analyses which are relevant at key points in the procurement process It should be stressed that every project will need to be subjected to rigorous risk assessments and it is unlikely that any two projects will be characterised by the same risk profile. In addition, early assessments of risk will need to be revised as a project develops, consequently, the methodology outlined herein advocates an iterative approach which becomes increasingly more sophisticated and detailed as the procurement process moves through each phase towards financial close as is illustrated overleaf This initial position has been developed against a background of significant change in the regulatory environment for public transport in Ireland and may need to be amended to reflect any changes from the proposals outlined in Section 9, Regulatory Environment, of this framework. Page 158 of 245

179 RISK MANAGEMENT continued RISK MANAGEMENT CONSIDERATIONS Risk Definition 14.6 In order to come to some understanding of what we mean by risk it is important to appreciate that it is not just focused on cost issues but on any source of undesirable outcome from the perspective of stakeholders. It can be defined as: The threat that an event or action will have an adverse impact on the ability of a project to achieve its objectives Given that typical rail infrastructure PPP projects cover periods of 25 to 30 years, the likelihood of adverse impacts must be acknowledged as probable. This leads to a degree of uncertainty as to the ultimate outcome of projects. Consequently, it is desirable to develop a way to control the consequences of change by developing an understanding of the potential sources of variance on projects and taking steps to ensure they are managed in order to minimise their impact. This is not only prudent but is also a key source of value for stakeholders whether in the public or private sectors and is the fundamental objective of risk management. Risk Management 14.8 The methodology proposed below will establish a systematic, structured approach to the risk management process. The purpose of this approach is to ensure that no risks are overlooked, and that all identified risks are monitored and managed in order to minimise potential adverse impacts. Monitor and Review Process Establish Objectives and Risk Appetite Risk Identification, Classification & Allocation Assessment, Impact and Quantification Identify Mitigation Procedures Prepare or Update Risk Register Figure 14.1: Risk Management Methodology Page 159 of 245

180 RISK MANAGEMENT continued 14.9 The above approach can be used to develop a Risk Management Strategy for Rail projects which will have the following objectives: To ensure that RPA s tolerance for risk is clearly signalled in terms of those levels of risk which are tolerable and manageable compared to those best managed by private partners; To have all the key risks identified, measured, prioritised, managed, monitored and treated in a consistent and effective manner across rail projects; To provide a framework which will ensure that key risks are managed effectively and appropriately allocated; To provide clarity regarding the objectives and performance implications of successful risk management; and To develop a recognised series of Key Risk Indicators ( KRIs ) which are integrated into reporting systems. Risk Identification Identification of risk will be a continuous activity throughout the development of PPP projects. A useful starting point is to establish the broad categories within which risks will be analysed: Land Acquisition Planning/Railway Order Utilities Design, Construction and Supply Commissioning, Operating and Maintenance Demand Residual Value Technology and Obsolescence Regulatory and Legal Environmental Financial Safety Force Majeure Risk Allocation Risk transfer is one of the key means of securing value for money for the Exchequer in PPP projects. The objective is to ensure that risks reside with the party best able to control and manage them, by minimising the crystallisation of risk, at a lower cost than might otherwise be achievable. Consequently, it is important to resist the natural temptation to enforce maximum risk transfer in favour of securing an appropriate allocation of relevant risks between RPA and private partners which reflects each party s capacity to control and manage that risk at a cost which is more attractive than other available options Table 14.1 sets down a process of securing an optimal allocation of risk. This allocation reflects the conclusions drawn by the Project Team from the market consultation which Page 160 of 245

181 RISK MANAGEMENT continued was undertaken during June/July It must be stressed, however, that arriving at final allocations is an iterative process through which initial positions will change as a result of actual experience and interaction with private partners throughout the tendering and/or negotiating processes on specific projects. However, the benefits of taking a structured, considered approach will crystallise as variations from initial positions can be rationally considered and documented rather than being the output from a less transparent haphazard approach to the process It is accepted that some risks must be shared (either in parallel or sequentially in time) and the peculiarities of specific projects may result in movement away from the desired risk profile. Notwithstanding the above, the table overleaf sets out the recommended initial position, at a high level, on risk allocation for the key categories of risks on light rail and metro projects. Table 14.1: Risk Ownership Matrix RISK CATEGORY RPA PRIVATE PARTNERS Land Acquisition Planning/Railway Order Utilities Design, Construction and Supply Commissioning, Operating and Maintenance Demand Residual Value Technology and Obsolescence Legislative Regulatory Environment Financial SHARED Page 161 of 245

182 RISK MANAGEMENT continued Mitigation Risk mitigation is concerned with reducing the likelihood of a risk crystallising or minimising the consequences of taking the risk, if it materialises. It attempts to reduce exposure to the risk and is a key element of the risk management strategy. Possible strategies will cover: avoid risks (do something different which means the risk no longer remains); manage the risk (accept the risk and plan procedures to minimize the likelihood and impact of occurrence) e.g. use of financial market hedging instruments; transfer the risk (through insurance policies or allocation of responsibility to another party); ignore risks (choose to do nothing) The primary strategy to be adopted will be that of transfer as part of the objective of securing value for money for the Exchequer. The Risk Allocation Matrix referred to earlier is the tool used to map the transfer of risks to those parties better able to manage them. The documentation of those transfers will require ongoing vigilance to ensure that the agreed transfers are not compromised and procedures must be developed to ensure the regular systematic review of the integrity of that allocation process Where a decision is taken to retain the risk, then appropriate procedures are required to ensure effective management of each retained risk. These procedures need to cover the whole range of effective control elements, not just the provision of a checking activity. The Risk Register is an important tool in this regard and represents a live record of the current state of the risk management process for the project (see sample risk register in Appendix O) Risk mitigation measures will have a cost and these need to be balanced against the benefits generated by those measures e.g. insurance premia. Risk Monitoring The final part of the proposed methodology relates to the monitoring and review process. Having identified, assessed, and mitigated known risks it is important that regular reviews are planned to ensure: new risks when identified are captured and managed; changes to the nature of existing risks are noted and dealt with; the integrity of agreed allocations and other mitigation procedures are preserved This process should continue throughout the tender stages and into the contract management phases of the project. Page 162 of 245

183 RISK MANAGEMENT continued IMPLICATIONS FOR PPP STRUCTURE Options The procurement options available have been outlined in Part A of this document. At one end the public sector retains operations, maintenance, life cycle investment, financing and demand risk, transferring only design and/or construction risk. At the other end of the spectrum the public sector transfers the design, construction, operations, maintenance, life cycle investment, financing and demand risk through a design, build, finance and operate concession. For the purposes of assessing the implications of risk allocation we have broken the potential structures into five broad categories namely: Operate ( O ) Design, build & operate ( DBO ); Design, build, finance & Maintain ( DBFM ); and Design, build, finance & operate ( DBFO ). Analysis of Risk Allocation and PPP Structures In order to assess how well the different structures meet RPA s objectives on risk allocation, a scoring system like the example below could be applied. SCORE DESCRIPTION 4 Fully meets RPA objectives 3 Meets RPA objectives but has minor deficiencies 2 Meets RPA objectives but has major deficiencies 1 Fails to meet the objectives The following table illustrates how each of the structuring options might be assessed in terms of the desired allocation of risks. Page 163 of 245

184 RISK MANAGEMENT continued Table 14.2: Structuring options RISK CATEGORY RISK ALLOCATION OBJECTIVES PPP STRUCTURE RPA PRIVATE PARTNERS SHARED O DBO DBF DBFO COMMENTS Land Acquisition Planning/Railway Order Utilities Design, Construction and Supply Commissioning, Operating and Maintenance Demand Residual Value Technology and Obsolescence Regulatory and Legislative Environment Financial Safety Scores are for illustration only. Page 164 of 245

185 RISK MANAGEMENT continued PROCUREMENT PROCESS The application of PPP to major capital projects changes the nature of asset provision from one of construction and hand over of infrastructure based on input specifications which is publicly funded via milestone payments, to the provision of a service over a number of years to meet an output specification. The move from input to output based specification radically changes the ownership of risks. In order to evaluate whether this represents value for money RPA will need to understand and quantify the value of risks retained under both options. Furthermore, RPA will not transfer all risks, therefore it is essential to establish the point at which transferring certain risks to the private sector does not represent value for money for the Exchequer. Finally as RPA will retain certain risks it will need a clear systematic approach to managing retained risks through the life of the PPP concession The following paragraphs describe the major risk related activities at each stage of the procurement process which is summarized below. Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation High level risk identification using broad categories. Initial allocation matrix and quantification using single point techniques ref risk framework. 2 nd iteration of the allocation matrix and information requirements on bidders attitudes to risk. Risk modelling. Detailed risk allocation matrix, linkages to contractual documents, monte-carlo analysis and evaluation of bidder s risk position. Clarifications on bidders risk position, further modelling for the VfM comparator and linkage to contractual position. Refinements to overall quantification and risk allocation; detailed modelling of VfM. Initiation of contract risk management. Linkage to negotiation strategy, final allocation position and VfM quantification. Further development of contract risk management. Finalisation of financial risk position and hedging strategy. Activate contract risk management process. Contract risk management including periodic reports and issues management. Figure 14.2: Procurement Process Project Definition Project Definition At this stage the focus is on the initial assessment of project viability. This will establish the broad boundaries of the project scope. The requirement for risk assessment at this stage is to identify potentially significant risks that may impede the development of the project and establish ways of identifying these risks. The risk categories referred to earlier can be used to begin the process of defining the types of risk likely to arise within each group. The sample risk register in Appendix O includes some indicative risks. Risk Identification The purpose of the identification of risk is to gain a clearer understanding of the nature of the major risks likely to be encountered, their potential effects on the project and the degree to which they interact. The approach adopted during this stage involves: understanding RPA s objectives for the project; Page 165 of 245

186 RISK MANAGEMENT continued identifying policy constraints on achieving these objectives; conducting workshops with relevant stakeholders; classifying major risks; preliminary allocation of risks between RPA and private partners; and preparing an outline risk allocation matrix (see Appendix Q) Identifying risks can be quite a difficult exercise if not managed and structured well. There are many techniques available for identifying risks, and selection of the most appropriate method or combination of methods is critical to achieving quality results. Risks can be identified by simply asking: What could go wrong? for a given process or business context. But this is not advisable without building a structure around when and in what context the question is asked. Without structure to guide the application of this question and proper context with which to consider possibilities, the challenge of identifying all relevant risks can seem insurmountable. The Risk Register provides such a structure and will be developed as the procurement progresses and throughout the project s life cycle An effective way in which to identify risk is through a workshop session. In order to ensure that all the risks are given full consideration it may be appropriate to have technical, legal, financial and operational advisors at the workshop. The diagram below illustrates the process. Workshop Steps Prepare Workshop Agenda Pre-Workshop Briefings Session 1 Unprompted Risk Identification Session 2 Prompted Risk Identification Session 3 Comprehension Check Session 4 Expert Clarification Session 5 - Classification Session 6 - Evaluation Session 7 - Review Comments Sets out the level of risk review, parties involved, advisors to attend and overall objectives. It also sets out the timing for sessions, etc. All parties should be contacted to pre-brief them on the agenda and supporting information if provided This first session is unprompted from first principles this will enable unconstrained thinking to identify risk types. The session is then repeated using prompt aids such as checklists, risk banks, case studies and precedent. The results of the first two sessions are reviewed to ensure that there are no obvious missed risks. This is usually carried out in an open brainstorm type session. An important factor in the identification is a clear understanding of the risks. If needed advisors can be used to explain the details and specific risks This session groups the risks under the generic categories, it is also an opportunity to identify duplication. In this session the risks are assessed on a qualitative basis. The technique for qualifications assessment is discussed below. This final session reviews the output and identifies all actions for further information Qualitative Assessment Having identified the major types of risk likely to arise on the project it is then necessary to estimate their impact in the event that they crystallize and to assess the probability of occurrence. There are a number of approaches to this process which are described in Appendix P. Following completion of this assessment it will be possible to assign expected values to each identified risk. These values should be recorded in the Risk Register. Page 166 of 245

187 RISK MANAGEMENT continued Detailed Project Development Detailed Project Development At this stage of the process it will be necessary to model sensitivities for the overall business case. As the project will still be evolving it is maybe appropriate to use a deterministic (single point) estimate of risks. This simply consists of an estimate of the cost expected to arise if the risk occurs, multiplied by a single probability of that risk occurring in a particular year. For example, the risk of cost increases in a particular service may be valued as follows: Estimated impact of cost overrun 2,000,000; Estimated probability of risk occurring 10%; Expected Value of risk = 2,000,000 x 10% i.e. 200, A more realistic estimate can be achieved using multi-point probability analysis. This technique assumes that for any risk a range of outcomes is possible and that a probability distribution gives a more complete picture of the possible outcomes. It also assumes that some of these outcomes are more likely than others. The expected outcome is the weighted average of all possible outcomes taking into account their different probabilities. Assuming a forecast cost of 20m., the expected variances might be analysed as follows: Possible Cost ( M) Variance from Forecast ( M) Probability of Occurrence Risk Value ( M) Linkages To Detailed Project Development and Value for money comparator At the Detailed Project Development stage PPP options will be considered which will involve the production of a value for money comparator. It is essential that the risk assessment is linked to the value for money comparator. To achieve this, the cost drivers in the business case or value for money comparator such as construction, operation, lifecycle and maintenance costs should be used to generate risk values using the approach described above As the evaluation needs to be carried out in present value terms all costs and risks will be discounted taking into account the period of evaluation. This is typically driven by concession length or asset life. Page 167 of 245

188 RISK MANAGEMENT continued Expression of interest and Prequalification Expression of Interest & Prequalification Effective risk management in PPP projects requires that at the outset a clear understanding of RPA s appetite for risk is established. This requires clarity with regard to objectives and clear signalling of the tolerance for risk in terms of those levels of risk which are acceptable and manageable for RPA compared to those best managed by private partners or other parties (e.g. Insurers). At the preliminary information stage it will be useful to assess the private sector view on RPA s appetite for risk A useful starting point will be to determine what risk management means to RPA, and to understand what risk management requires of RPA. The table below summarises the primary issues. Table 14.3: Primary issues of risk for RPA Risk Management means that RPA: knows what risks it is prepared to retain and the level of its exposure to those risks understands the capacity of its Partner to manage risks transferred or shared knows the actions it will take to respond to risks realises the impact of its actions on its risk position appreciates its tolerance of loss arising from crystallisation of risks and sets appropriate limits accordingly Risk Management requires that RPA identifies the risks it faces appreciates the degree of interrelationship existing between various categories of risk understands the risks and takes the appropriate actions has the right systems, processes and people in place to manage risks, and has access to information on risks which is timely, accurate and relevant As a result of the Expression of Interest stage, feedback from interested parties on risk ownership will be captured. This should be used to confirm the initial risk allocation matrix which is to be included in the Pre-qualification documents In the previous stages the risk assessment involved quantification of risk using multi-point techniques. It may be appropriate at this point to adopt more sophisticated tools for analysis. It is likely that a greater range of costs and probabilities need to be considered and stochastic modelling techniques can be used. The most common method of simulation is Monte Carlo. Monte Carlo refers to the traditional technique of using random numbers from a probability distribution In essence Monte Carlo simulation takes multipoint techniques a step further. Whereas the multipoint example had 5 possible outcomes across a range. Monte Carlo enables the simulation of a large number of possible outcomes through randomly generating outcome values from a pre-defined distribution. This is usually simulated using software tools. The software limits the number of distribution profiles that are available but typically the normal or triangular distributions are used. In order to define the distribution maximum, most likely and minimum impact values are estimated for each risk. Consideration is also Page 168 of 245

189 RISK MANAGEMENT continued given to the annual probability and timing of risk exposure on a basis which is consistent with the value for money comparator. This information for each risk forms the input to the Monte Carlo simulation which then takes values at random from the probability and cost distribution for each risk. One iteration of this provides an NPV outturn. Obviously one simulation would not provide a stable distribution therefore the software repeats this a large number of times, typically in the thousands, to achieve a stable distribution of NPV outturns. The mean value can then be used as the expected value of risk. Invitation to Negotiate Invitation to Negotiate At this stage the risk allocation must have clear linkages to contractual positions as set out in the project agreement. These should be cross referenced in the Risk Register. When the bids are received the bidders positions on the contract should be reflected in the risk assessment. This can be achieved by assessing the number of qualifications that bidders make to the contract. This will then determine the level of risk retained for each bid. Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Shortlist At this stage there should be no ambiguity as to the bid positions. This will ensure that the shortlisting decision will be based on a fair comparison of the various bids. The relative value for money position will need to have been established and the relative risk retention positions must be fully understood. BAFO, Negotiations, Financial Close During these final stages of the process there is further continual refinement of the risk assessment linking risk allocation, quantification and value for money. Any movements in contract negotiations should be reflected in the overall retained risk position and the value for money analysis. The risk assessment should also be a key tool in the contract negotiation strategies. Using the risk register as a tool for communicating the overall negotiation positions will ensure that there is no inconsistency during the actual final negotiations. The Risk Allocation Matrix will prove useful as a checklist to ensure all identified risks have been dealt with in the contractual documentation. Construction and Operation At this stage the project implementation has started and the risk management activities of RPA will relate to the ongoing management of the contract. The risk register developed through the procurement phase should provide a sound platform for the implementation phase. In particular the linkage between the contract and the risk assessment will clearly define the overall risk ownership position. Page 169 of 245

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191 Commercial & Financial Considerations CONTENTS PAGE Introduction 170 Key Commercial and Financial Objectives 172 PPP Structures 173 Project Structure 176 Project Phasing 183 Funding 187 Sources of Revenue 194 Payment Mechanisms 198 Taxation 201 Procurement Process 206

192 COMMERCIAL & FINANCIAL CONSIDERATIONS 15 INTRODUCTION 15.1 This section of the Framework deals with the commercial and financial issues as they relate to rail PPP. It considers the different structures and their application and aims to provide guidance on the commercial and financial issues that may influence the selection of a particular PPP structure. Given the nature and scale of potential investment in the rail sector in Ireland, RPA will be have to develop a number of different projects that could vary in size, complexity and duration. This section highlights the issues that will need to be considered in the development of commercial and financial approach This section is structured as follows: Introduction sets out the background to the commercial and financial considerations and the application of PPPs to rail projects. Specific Commercial & Financial Objectives details the specific commercial and financial objectives for PPP projects that complement overall PPP and transport objectives. Commercial and Financial Considerations considers the implications of the Department of Public Enterprise objectives on the commercial and financial elements of possible PPP s. It reviews key aspects such as structures, risk, payment mechanism, revenue and funding. Procurement Process provides guidance on the key commercial and financial elements likely to arise during the PPP procurement process. Project Finance 15.3 Project Finance structures, which are typically used in PPP projects, are unique financing structures which rely on the specific characteristics of the project. Traditionally this type of finance has developed for financing large scale asset-based projects such as power stations and oil rigs where the level of borrowing necessary to build the asset is usually too significant for the corporate balance sheet. Hence a special purpose vehicle (SPV) is created with the following characteristics: the assets delivering the service are able to generate positive cashflows; a long term usage contract if necessary underpins the financing and secures the necessary high levels of gearing; the main risks of the project are limited to construction and operation of the asset and fluctuations in the demand for the output of the asset; and the liability of the project sponsors is limited to the level of equity in the SPV and any additional contractual agreements Project Finance involves sophisticated legal and financial engineering which is now being adapted to finance public infrastructure where the public sector is the principal long term purchaser of the services of the asset. The contractual principles of clearly identifying and assigning responsibility for risk have been developed and successfully applied to PPPs even where the provision of private finance is not involved The options for private sector participation can be ranged along a spectrum. At one end of this spectrum are those arrangements under which the public sector retains full responsibility for operations, maintenance, capital investment, financing, and commercial risk. At the other end, are those arrangements under which the private sector takes on much of this responsibility. Across the spectrum there are a number of variants/hybrid Page 170 of 245

193 COMMERCIAL & FINANCIAL CONSIDERATIONS continued forms of contractual arrangements. In order to focus on the main type of PPP structures that are typically applied in rail projects, these section will consider the following categories: Operate Design, Build & Operate Design, Build, Finance & Maintain Design, Build, Finance & Operate 15.6 These categories generally assume that Operate contracts include responsibility for maintenance. In the DBFM version the operations element is split out and contracted separately. It should be noted that there are other variants such as Design, Build & Maintain and Design, Build & Finance. However these are not specifically analysed as the key components are easily identified in the four structures analysed in this Framework. Page 171 of 245

194 COMMERCIAL & FINANCIAL CONSIDERATIONS continued KEY COMMERCIAL AND FINANCIAL OBJECTIVES 15.7 Section 6, Policy Objectives & Issues, sets out the overall PPP and transport objectives and policy issues for rail PPP projects. In addition specific objectives for key commercial and financial elements have been identified and are set out below: PPP Structures The overriding objective is to have clear lines of responsibility for the ownership and management of risk. In order to achieve this it is preferable that there is a single point contractual relationship where one party is responsible for providing all the services. The aim is to reduce or eliminate interface risks. The preferred structure to achieve this is the Design, Build, Finance and Operate (DBFO) structure. It is, however, accepted that this may not be achievable in all cases due to factors such as existing contractual relationships, network constraints, etc. Funding There should be no preference as to the funding structure that is chosen as long as it is deliverable and provides value for money to the Exchequer. It should be robust so that it is not unravelled at a late stage due to unavailability of finance. The exact nature of funding will depend on the specific project risks and it may prove better value for money to provide an element of public funding. Revenue The relationship between funding requirements and potential sources of revenue is an important factor in determining ownership of risk under PPP. A primary objective is to transfer revenue risk where it is appropriate and provides value for money for the Exchequer. There may be exceptions where revenue risk can not be transferred particularly where transport is acting as a catalyst for regeneration. However, the collection and management of revenues should ideally be the responsibility of the private sector. Payment and Performance The payment mechanism and performance standards should have the following characteristics: - Be realistic and challenging but achievable; - Provide an incentive to meet performance standards; - Penalise unacceptable performance; - Match payments to outputs; - Incentivise rectification if standards are breached; and - Incentivise innovation and efficiency gains. Risk RPA s preferred position on risk allocation is described in Section 14. Page 172 of 245

195 COMMERCIAL & FINANCIAL CONSIDERATIONS continued PPP STRUCTURES Introduction 15.8 Public Private Partnerships ( PPP s ) refer to partnering agreements between the public and private sector to deliver public sector services, whilst maintaining public sector values and incorporating private sector efficiencies and methods of operations The appropriate project structure adopted for a PPP project will be critical to the success of the project in terms of achieving effective risk transfer and obtaining value for money for the Exchequer. It is therefore important that at the inception stage that sufficient resources are committed to establishing the project s parameters and the structure to be adopted. This is especially important for a rail PPP project which may require future extensions in the development of the network The previous section outlined the Department of Public Enterprise s objectives for rail PPPs, this section considers the main commercial and financial issues and their implications for Department of Public Enterprise objectives. Vertical and Horizontal Infrastructure models Before considering possible PPP structures it is useful to review the roles and responsibilities of parties within the rail environment. Due to the diverse nature of rail systems and the complex interchanges that occur throughout a network it is important to consider whether a horizontal or vertical responsibility model would be most appropriate both in the context of the total rail network and in the rolling out of the individual projects or phases of projects At its highest level the vertical model places both train operation and infrastructure provision under the control of one party. On the other hand the horizontal model splits these such that two separate parties provide the services. This is illustrated in Figure 15.1 below. In addition further division is possible to the extent that provision of the infrastructure may be the responsibility of more than one provider. Line A Integrated Concession (Design, Build, Finance, Operate & Maintain) Operations Track Stations Rolling Stock Power Signalling Ticketing Line B Operate Concession Infrastructure Concession (Design, Build, Finance & Maintain) Operations Track Stations Rolling Stock Power Signalling Ticketing Vertical Integration Horizontal Integration Figure 15.1: Vertical and Horizontal Integration Page 173 of 245

196 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Vertical Infrastructure model The individual component lines of a rail network in Figure 15.1 illustrate the example of a vertical infrastructure model this assumes that there are discrete operations on each line. The responsibilities of each line would be allocated to the contractor under the PPP contract so that the contractor has all responsibilities from maintenance of the rail infrastructure to operations Complications may arise where there is overlap between different lines creating uncertainties related to responsibility and risk ownership between the different parties. These uncertainties regarding where the responsibilities reside reduce the effectiveness of risk transfer and may impact on the overall value for money of the PPP A single contractual relationship should reduce any such overlap. Although these tensions may still exist between individual consortia members, the onus for resolving these lies with the private sector and not with RPA. It is likely that a commercial view would be taken by the private parties in resolving these issues A vertical model would therefore only be appropriate either across an entire network system or where each of the relevant lines are a distinct and discrete piece of the network. For this reason it may not be appropriate to structure PPP transactions for extensions to lines or networks where there is an established incumbent operator. However for individual discrete lines, vertical integration may be the appropriate way of achieving risk transfer and transparency. Horizontal Infrastructure model A Horizontal infrastructure model would be appropriate where the infrastructure network consists of discrete asset systems that could be packaged into a PPP. Figure 15.2 below illustrates some of the systems along which a PPP could be developed. High Voltage Power Station assets Communications Low Voltage Assets Lifts & Elevators Ticketing Signalling Track Trains Figure 15.2: Horizontal Infrastructure In this model discrete system components of the network could be put into seperate PPP transactions. As these systems would exist across the network they could be packaged effectively into separate PPP contracts. This could enable effective risk transfer and value for money to be obtained from existing and future infrastructure This model would only be appropriate where existing infrastructure exists or where there are limited integration issues for new infrastructure developments. Issues would however arise between the individual systems and how these interact Where separating the systems and their output would lead to uncertainty in terms of responsibility for and ownership of risk and poor value for money it may be appropriate to aggregate the systems together into one PPP. Examples of this would include packaging the management of the individual systems comprising the station infrastructure or packaging together the track and signalling infrastructure into individual PPP projects. Page 174 of 245

197 COMMERCIAL & FINANCIAL CONSIDERATIONS continued One of the major issues which was raised during the market consultation related to concern over the limited number of rolling stock manufacturers and the possible constraint on competition. Separating the rolling stock as an element of horizontal infrastructure would be one way of overcoming this issue. Page 175 of 245

198 COMMERCIAL & FINANCIAL CONSIDERATIONS continued PROJECT STRUCTURE Introduction The previous section highlighted the difference between horizontal and vertical structure options. Once the overall roles and responsibilities have been decided project structures need to be considered Fundamental to the project structure and a key feature of any PPP is the allocation of risks in the project. The overriding principle behind risk transfer is to allocate risks to the party that can best manage the risk. However the transfer of too much risk to the private sector can result in a project being unbankable from the private sector perspective. This means that the private sector would not be prepared to assume the risk transfer assumed in the project without either jeopardising the ability to raise funding for the project or else offering poor value for money for the Exchequer It is therefore important that as the project structure and risk transfer for a project are being determined that there is some cross check in terms of how the private sector might react to the proposals. Where proven models and structures exist this may give a precedent as to the private sector s reaction. However the development of new structures and projects might require a level of consultation to determine the private sector s reaction to the proposed PPP project and the structure envisaged The different options for PPP s and Rail projects have been described in Part A of this Framework. The PPP option selected will depend on how it meets RPA s overall requirements for the project. Each of the options described would envisage a different level of risk transfer and hence different funding solutions. Further there could be a blend of these categories creating a hybrid model based on the options discussed above. Some considerations relevant to each option are outlined below. Operate An Operate only concession would involve private partners providing services in relation to day-to-day operation of the system. Typically this would include driving trains, ticket issue, revenue collection, security and overall system control. Depending on the levels of patronage the private sector may tender a bid assigning a value to the future profit stream associated with projected patronage levels. Where patronage is not expected to achieve levels which would be necessary to achieve commercial viability it is likely that performance or availability based payments will be included in the payment mechanism. The length of the PPP contract should be set so that the private operator can provide the service to the required standards under the PPP contract whilst offering sufficient commercial return and value for money for the Exchequer. In this type of concession it is possible to include the provision of infrastructure maintenance and/or rolling stock maintenance This option would provide a single point contractual relationship for the operations although there would be an interface with the infrastructure maintainer. It would be most appropriate where there is existing infrastructure and the operations are to be transferred over to the private sector under a PPP This structure assumes that the provision of infrastructure and ongoing life cycle capital replacement is the responsibility of RPA. An option exists to include rolling stock which could either be funded by RPA and sourced and maintained by the Operator or funded Page 176 of 245

199 COMMERCIAL & FINANCIAL CONSIDERATIONS continued source and maintained by RPA. Under this option the rolling stock manufacturer usually provides the maintenance under contract Sufficient incentives need to be incorporated in the arrangements to ensure that the private Operator delivers the required service under the PPP contract. A penalty and incentive regime could be established to penalise poor performance and reward performance, which exceeds contractual minimums. The penalties should be set to reflect the service delivered and may involve a penalty payment from the operator to RPA This PPP structure is illustrated in the figure 15.3 below. Contracting Authority Project Agreement Shareholders Agreement Shareholders PPP Contractor (SPV) Insurance Arrangements Insurers Subcontract Subcontractors (Responsible for particular aspects of operating concession) Collateral Warranty Figure 15.3: Contractual Framework for Operating Concession Design, Build & Operate Under this form of PPP model, the private sector supplier s responsibilities include the operation and maintenance of the asset/infrastructure and/or services. The private sector operator must ensure that the system meets the predetermined output specification that will include the minimum standards of performance required, as elaborated in Section 16, Performance Standards Responsibility for the financing of the asset/infrastructure lies with RPA; hence, it may not be possible to transfer all of the availability risk relating to this type of structure, given the absence of private sector funding. However, it should be possible to structure the performance requirements to ensure that the private sector is incentivised to provide base load performance requirements This option builds on the operate model to include infrastructure provision. It meets the objective of providing a single point contractual relationship. RPA would provide the funding for the rail infrastructure. The operations element would be funded through fare box revenue Sufficient incentives would need to be set up to ensure that the private sector Operator provides the required service under the PPP contract. A penalty regime could be established to penalise against poor performance and would need to be established up Page 177 of 245

200 COMMERCIAL & FINANCIAL CONSIDERATIONS continued front. The penalties should be set to reflect the failure in service delivered and may involve a penalty payment from the operator to RPA This PPP structure is illustrated in figure 15.4 below. Contracting Authority Insurance Proceeds Project Agreement Lease, licence or other agreement on land access Collateral Warranties Shareholders Agreement Shareholders of SPV PPP Contractor (SPV) Insurance Arrangements Insurers Collateral Warranties Construction Company (design and construction services) Subcontracts Subcontracts Train Operator (may include maintenance and also operation of infrastructure) Collateral Warranties Subcontractors e.g. design engineers, architects, environmental specialists, signalling, civil infrastructure. Subcontractors e.g. maintenance firm, facilities services. Collateral Warranties Figure 15.4: Contractual Framework for DBO Design, Build, Finance & Operate This structure includes the finance element and theoretically the private sector would take the majority of the risks associated with the project This structure fully meets the objectives on structure and risk allocation. It would be appropriate where new rail infrastructure is required and where a particular line or area of the network could operate on a stand-alone basis, for example, where there are no complex interface complications with other operators The structure is output focused in nature. RPA would provide the output specification, in line with the performance levels required. Page 178 of 245

201 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Funding for the project would be provided from debt and equity sources. Payments to the private partners could be in the form of the fare box revenue supplemented by a availability payment reflecting the cost of funding the infrastructure The presence of third party funders would provide an additional layer of due diligence to the project. This may highlight funders concerns over the viability of the project and should give greater assurance to the success of the project Sufficient incentives would need to be set up to ensure that the private sector operator provides the required service under the PPP contract. A penalty regime could be established to penalise poor performance. The penalties could be set to reflect the service delivered and could involve deductions from the subvention payable to the operator. As these deductions could cause considerable distress this should provide an effective incentive to the operator to maintain performance at specified levels This PPP structure is illustrated in figure 15.5 below. Direct Agreement Contracting Authority Lenders (one or more financial institutions often with lead financier acting as agent for these financial institutions) Funding Agreement Project Agreement Lease, licence or other agreement regulating land access Shareholders Agreement Shareholders (assuming contractor is SPV). Alternatively project could be established pursuant to joint venture etc. PPP Contractor (SPV) Insurance Arrangements Subcontracts Collateral Warranty Collateral Warranty Construction Company (design construction and maintenance services) Train Operator (may include maintenance and also operation of infrastructure) Subcontractors e.g. design engineers, architects, environmental specialists, signalling, civil infrastructure contractors. Subcontractors e.g. maintenance firm, facilities services. Collateral Warranties Figure 15.5: Contractual Framework for DBFO Design, Build, Finance & Maintain A further variation on the DBFO is Design, Build, Finance & Maintain (DBFM), in this structure the infrastructure is split from the provision of operation services. It is similar in structure to the DBFO but typically under a DBFM the payment is based on availability, performance and reliability of the asset. As discussed earlier this approach creates a Page 179 of 245

202 COMMERCIAL & FINANCIAL CONSIDERATIONS continued horizontal split in the provision of the total services creating an interface between the operator and infrastructure provider. This approach may be appropriate where an existing line or network is being extended. Network Extensions One of the main issues facing RPA will be how to develop a network in manageable packages whilst retaining the integrity of common systems and infrastructure. Requirements will change as the network develops and evolves It is probable that a phased approach to the development of light rail and metro systems will be adopted and it would be preferable to have a single operator for each of the light rail and metro systems. There are a number of permutations available and the diagram below highlights possible options for managing network extensions. Phase 1 Phase 2 Phase 3 DBFO 1 DBFO 2 Option 1 DBFO 3 DBFM 1 DBFM 2 DBFM 3 Operate 1 Operate 2 Option 2 Operate 3 Finance 1 Finance 2 Finance 3 DBO 1 Option 3 DBO 2 DBO 3 Figure 15.6: Possible options for the management of network extensions Option This option assumes that a DBFO concession is let for the first phase and then is terminated and re let to included the next phase and so on. This option has the benefit of providing a single point of contact with no interface between the operations and infrastructure. It also allows for clear areas of responsibility and risk transfer. The major disadvantage of this is approach is the need to terminate the DBFO contract which can result in significant breakage costs relating to the debt and equity provided. It may be possible to separate the operating contract from the infrastructure elements and therefore retain the operator for phase 2. This would ensure continuity of operator through the phase 2 extension. Page 180 of 245

203 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Option This option separates the operations from infrastructure provision. In this option the operating concession (Operate) is let for periods of 5-7 years and the infrastructure concession (DBFM), which includes the finance, is let for years. When phase 2 of the network is required another infrastructure concession is let and the operating concession can be re let to cover the extended network. The process is repeated for subsequent extensions. As the operations and infrastructure are separated it may be possible to time the letting of the new operating concession with commissioning of phase 2. It may be possible to amend this option to include the selection of the operator by the first infrastructure provider and any subsequent infrastructure providers jointly selecting the operator and the interfaces being managed by the operator and infrastructure providers The main disadvantage of this option is the interface that is created between operations and infrastructure. In addition there would also be an interface between the existing DBFM 1 and DBFM 2 if they are different SPV s. Option This option separates the finance from the DBO concession. The funding for phase 1 would be raised separately either by RPA or by a separate funding vehicle that would raise private sector finance to support the phased development. The benefit of this approach is that the finance is not included in the DBO concession therefore to break and/or extend the concession would incur less breakage costs etc The main disadvantage of this option is the loss of leverage on performance that the inclusion of finance with the concession can create. Summary The options discussed above illustrate in principal how the issue of network extension could be dealt with. In practice, the detail of the solution would need to be developed on a case by case basis. Project Risk The allocation of risk between the parties to a PPP transaction is central to the process of securing value for money for the Exchequer and will also be important to ensuring that bankable projects are brought to the market. Prior to introduction to the market, it is important for RPA to clearly establish and communicate a clear position on its preferred allocation The success of those projects which are to be funded by private partners will be materially influenced by the ability to raise the capital (debt and equity) needed for the project. Since investors and lenders will seek returns on investment equal to those they can obtain on other projects offering similar risk profiles, and given that RPA is tasked with delivery of PPP rail projects, it will be in the best interest of both parties to clearly understand what are acceptable levels of risk and what is required to ensure concessions will attract adequate financing at competitive rates Consequently, creating an appropriate risk sharing structure is fundamental to attracting private interest. The general principle should be that each risk should be carried by the party best able to control and manage it In managing the risks allocated to them under a PPP transaction the private sector will normally conduct their affairs through a bidding company or special purpose vehicle. Page 181 of 245

204 COMMERCIAL & FINANCIAL CONSIDERATIONS continued The interested parties to the special purpose vehicle will allocate the risks through subcontracts to the special purpose vehicle. For example, the design and construction risk would be borne by the contractor who would undertake this work. In order to manage these risks the contractor will normally charge a higher than normal profit margin to compensate. Other examples of risk transfer would include a long-term maintenance subcontract for maintenance of the rail infrastructure, subcontracts for the operations and relevant insurance being taken out The level of risk in the special purpose vehicle and how it mitigates and manages these risks will have an impact on the funding structure. Generally the greater assurance that the funders may have regarding the management of the risks in the project, the higher the level of funding they will be prepared to provide Under a PPP there may be some confusion as to the eventual ownership of some risks by the private sector. This is illustrated in figure 15.7 below which demonstrates that some project risks may lie with a single entity and others may be shared. Funders Interest rates Legal Revenue Inadequate latent Availability defects Operating costs Performance Construction Safety Operations Company Maintenance Commissioning Equity Design Construction Company Figure 15.7: Ownership of risks Where this eventual ownership of risk is not clear it may result in duplicate pricing of the project and value for money being eroded. RPA should therefore try to structure the project so that this exposure is minimised. Interface with Operate concession Luas is currently being procured conventionally and a competition for the Operate concession is at the final stages. The potential structure of an Operate PPP has been described above In order to ensure the operation of an efficient network with effective risk transfer it is essential that there is a smooth interface between these lines and other future projects. In order to achieve this the responsibilities between the different parties need to be carefully mapped out and contractually agreed It should be noted that packaging Existing Operate PPP contracts with a future DBO or DBFO PPP contract would be attractive to the private sector. This would occur as the overall risk profile of the PPP would be reduced by including lines with known risks and demand profiles. This may therefore act as an attraction where private sector participation needs to be encouraged. Page 182 of 245

205 COMMERCIAL & FINANCIAL CONSIDERATIONS continued PROJECT PHASING Introduction Fundamental to the development of rail networks is consideration of future investment in network extensions and how the network may develop over time. Given the social function served by a rail network careful consideration needs to be given to the development of the network and how this fits into both current and future priorities. As future requirements may be unclear at the outset it is important to allow for flexibility in the procurement of the network to take account not only of technical advancements but also of the public requirements for the operation of the network. Future extensions may also be undertaken to take account of changes in the political, social and economic environment. Implementation Phases Given the level of investment anticipated in the DTO Strategy, A Platform for Change, it is probable that a phased approach to implementation will be appropriate. This approach is particularly relevant in the present economic environment both in Ireland and given the resource constraints facing the industry globally The development of the rail network in phases would facilitate detailed planning as extensions may be added as required and while the economic considerations are favourable. There are a number of criteria needed to be taken into account when determining how the network should be phased, which may be categorised as: Economic; Commercial; Physical location; Project Size; Market capacity; Timing; and Risk. Economic considerations Some of the objectives and policies which motivate the development of a rail network are related to addressing regeneration and social inclusion within the Greater Dublin Area. By providing transport links to less accessible locations the rail network could help address these issues. Other objectives lie in addressing the current congestion problem within Dublin. The creation of better public transport links will encourage greater patronage of public transport and thus contribute to reduction of the current congestion levels In order to address these objectives the economic circumstances of each proposed line need to be assessed. Such assessments include a comparison of a do-nothing approach to the development of the lines and their overall economic impact. Further information on economic considerations is included in Section 11, Project Appraisal and Development, and Section 12, Project Planning. Page 183 of 245

206 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Commercial considerations Whereas economic considerations may lie on the list of priorities for the public sector, the private partners will be driven by commercial considerations. The primary driver for private sector participation would lie in a given route having the potential revenues to provide a sufficient return to justify their interest. This could be demonstrated by a historically viable route, for example, developing an Operate PPP on an existing route, or by a route whose commercial success could be determined with reasonable certainty. Where the commercial success of a chosen route cannot be determined alternative sources of revenues may be required to entice private partners If the phasing of projects were to be determined solely by commercial considerations the development of routes will be prioritised on a basis which may not be consistent with declared policy objectives. Technical and Physical Considerations The physical location of a route will be a major determinant of its economic or commercial success. However, other factors may impact on when a particular route is phased during the developments. The location of the route may impose technical problems in procurement which could require the route to be delayed while those technical issues are resolved. This may include problems in resolving the gradient of the land for the track or rolling stock. Proximity of existing infrastructure, for example a disused rail line, which could be adapted to the needs of a new network, could also influence the development of the network as the capital works required for this route would be greatly reduced. Project size The development of the rail network proposed in its entirety would represent a major capital intensive project for private partners. Splitting this development into phases would create individual projects of a scale which would be more manageable. This approach may result in greater development costs being incurred by both the private and public partners. However managing the process through phases should allow lessons to be learnt from the earlier procurements with the potential for improved efficiencies and better practices benefiting subsequent stages. Market Capacity One advantage accruing from the development of the network in phases relates to the market s ability to absorb individual projects. The size of the investment required would mean that there may not be sufficient capacity or resources (including materials, labour and consultants) to develop the network through a single phase. A phased approach therefore enables these market capacity issues to be addressed more effectively The market consultation process has already demonstrated that while there are a number of organisations interested in forming consortia to bid for these projects, the number which could competently manage projects of the size envisaged is quite limited. A significant number of respondents referred to the capacity constraints facing the global rail industry, particularly design and signalling resource. Additionally, the number of projects likely to come through the pipeline in the UK and Europe may absorb equipment supplier capacity over the next few years. Most agreed that a phased approach was prudent but were concerned with regard to system extensions and contractual interfaces. Page 184 of 245

207 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Consequently, subject to addressing the balance between the costs of early breakage and the gains from phasing, it seems likely that a phased approach to the procurement should enable greater competition to take place and hence improved value for money for the Exchequer. Timing The timing of the procurement can be managed to mitigate the risk in the project, avoid market capacity issues and to prioritise and address social needs as discussed above. It is therefore important that at the outset a realistic and achievable timetable is set out addressing the phasing of the projects. A timetable would help identify any key issues and crunch points that may arise and enable an efficient procurement process. Prioritising Routes Where there are several potential routes that could be procured as PPPs there may be conflicting priorities in a phased development. In order to assess the routes in a structured and systematic way a scoring system could be used with weightings attached to the phasing criteria of each route - the route with the highest total weighted score taking preference. Risk There is a greater risk in procuring the network in a single phase than through a phased process as the level of complexity and uncertainty relating to the scope of the project is increased. A single phase PPP will probably involve a limited number of private sector entities and thus over-reliance on a few entities which may limit competition. Although given the scale of the Metro the limit to competition may not be significant. A phased approach may provide more opportunity to fully understand the risks associated with the projects as experience on early phases can be applied. Split between infrastructure and operations Any phased development will need to take into account the existing state of the network. Where there is a split between infrastructure and operations phasing can be applied whilst maintaining the current operators on the existing lines. Further concessions may be awarded competitively for the operation of the extensions or may be awarded to the existing operator under the existing concession. Similarly, the infrastructure concession may be awarded to the existing private infrastructure maintenance company or to others by competitive tender. Note, that competitive tendering may result in a number of different infrastructure providers which may result in a blurring of responsibilities where the network overlaps. Conversely, where a single private sector operator is solely responsible for the infrastructure and operations of a line a clear strategy will be required to manage the impact on future extensions Where there is no overlap between the existing line and the extension, the concession for the extension may be competitively tendered. In this case the responsibilities between the two private sector operators would be transparent and distinct and could be easily managed. Where however there is overlap between the existing line and the extension there may be issues surrounding the responsibilities of each operator. In this case, to ensure that appropriate responsibility is taken by the private partners, these two lines may be wrapped into a larger concession. Page 185 of 245

208 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Other Major Developments While the overall aim lies in the development of a fully integrated transport system other major developments, for example road and bus routes, need to be taken into account in the development plans for the network. Page 186 of 245

209 COMMERCIAL & FINANCIAL CONSIDERATIONS continued FUNDING Introduction This section examines the potential sources of funding that would be available to procurement of a PPP project. Funding of PPP projects usually involves elaborate and complicated financing structures. However a well-defined and proven structure has been developed for PPP projects. This is demonstrated by the PFI/PPP market in the UK and elsewhere in Europe where a well-developed market for the financing of projects, including transport and rail projects, has developed. This has resulted in plenty of competition and innovation leading to different funding structures being successfully implemented and better value for money being extracted by the public sector. Funding Sources There should be no preference as to the preferred funding structure, the key consideration being that it is deliverable and provides value for money to the Exchequer. The funding should be deliverable in order to avoid the project being cancelled at a late stage due to the unavailability of finance. Value for money should always underpin the reason for pursuing the project under a PPP rather than a traditional public sector procurement route A number of different funding structures exist but all will tend to display the main features of combined Debt (on a non or limited recourse basis) and Equity funding. The exact nature and structure of a particular project s funding structure will depend on the project risks that are being assumed by the Contractor. Given the nature and scale of investment required for metro and light rail projects it may be possible that a combination of funding sources may be used. This could include senior debt bond or EIB funding combined as the overall package Other sources of funding may include: Leasing; Development Levies and Capital Contributions; and Grant funding. Debt Funding As with any major Project Financing transaction an important feature is a high level of debt usually secured on a non or limited recourse financing basis. The transaction will generally be structured around a special purpose vehicle ( SPV ) that is formed specifically for the purposes of the PPP project for which the funding is required This means that the debt providers would have no recourse back to the project developers with exception to any committed equity funding or guarantees pledged by the contractors. Consequently the debt providers will be extremely concerned with regard to the security of income streams to the SPV and the nature of the risks retained in that company As the SPV will normally not have a trading record and will have been formed specifically for the purposes of the PPP the requirements for funding will differ from normal corporate debt, especially as the SPV s assets would normally not provide sufficient security. The security available to the lenders will be: The future cash flows of the project; Page 187 of 245

210 COMMERCIAL & FINANCIAL CONSIDERATIONS continued A charge over the shares in the SPV; The right to step in and take over management of the project if the SPV is in default; and Various covenants as defined by the lenders that the SPV needs to adhere to As a result the lenders will pay close attention to the project and the proposed contractual terms. They will therefore ensure that sufficient due diligence is undertaken to give the lenders assurance over the viability of the SPV to undertake its obligations under the proposed contractual terms. The due diligence involves: Financial due diligence; Legal due diligence; and Technical due diligence The level of debt funding that can be raised is a function of the risk in the project. PPP type projects can generally accommodate high levels of gearing because the risks in the project are carefully packaged and managed by the various parties. This ability to maximise the debt component of the capital structure of the project is important, as debt is normally the cheapest form of funding. Consequently high proportions of debt, relative to equity, will lower the overall weighted average cost of capital thus contributing to delivery of value for money for the Exchequer. Typically, gearing levels of 90% can be found across a range of sectors. The eventual gearing level would depend on the particular profile of risks retained, for example, in rail projects, if the SPV has to assume demand risk a lower gearing level will be appropriate than if RPA retained this risk Debt funding can be provided either in the form of senior debt bank funding or capital markets funding (in the form of a bond issue) The debt funding would normally bear the lowest risk of any forms of funding and will therefore have the lowest rate of return. It would rank above all other forms of funding and would therefore get paid out in preference to other funding sources The level of debt funding that can be raised is dependent on the risks in the project and how these are managed. As debt funding is normally the cheapest form of funding as it bears the lowest risk, a higher level of debt would result in lower financing costs. Senior Debt Bank funding in the form of senior debt is provided by commercial banks. The senior debt would be made available to the SPV during the initial construction phase and can be drawn down to meet the project s funding requirements. Repayment of the debt will start once operations have commenced although the exact terms may be relaxed to assist the SPV. The senior debt is normally paid out before any other form of funding. As a result the providers would prescribe conditions against the payment or raising of other funding for the SPV Although the senior debt is made available at variable interest rates the interest rate risk in the project would be eliminated at financial close by the SPV taking out an interest rate swap. This may be a pre-requisite of the senior debt providers and ensures that the SPV is not exposed to any interest rate movements and fixes its debt service requirements over the term of the PPP In the event that the SPV fails to meet its commitments under the PPP agreement the senior debt providers would look to take security over the SPV s assets and will require the Page 188 of 245

211 COMMERCIAL & FINANCIAL CONSIDERATIONS continued right to take over the project. This will probably be secured through a direct financing agreement with RPA The commercial banks normally have a credit committee which must approve the senior debt lending for the project. To ensure that no surprises occur late in the process it is essential to ensure that the SPV s proposed lenders have support from their credit committees prior to appointment of the preferred bidder Depending on the size of the project the senior debt could either be provided by a single bank or by a syndicate of banks (limiting the banks exposure to a particular project). Many already have substantial project finance expertise based in the IFSC in Dublin from which they are servicing overseas activities. Capital Markets Funding Capital markets funding would involve the SPV issuing a corporate bond that would normally be taken up by investors, such as pension funds and insurance companies. The bond could either be a public offering or a private placement made with individual institutions. In a public offering the bond may need an appropriate rating, from a rating agency, or else take out the appropriate insurance to protect ( wrap ) the bond holders and reduce the cost of funds ( monoline insurance). Recent experiences with projects involving tunnelling have raised the monoline insurers concern over some of the risk associated with these types of projects Bond funding must be drawn down up front and placed into a restricted account. Funds are then drawn down from this account to meet the projects funding requirements. Unlike senior debt where the interest and capital repayments commence once operations commence interest payments on the bond would take place on a semi-annual basis after draw down and repayment of the bond would take place once the operational phase commences. Due to the complexity of arranging bond financing and the up front costs involved this type of funding is normally more appropriate for large capital values. However by accessing this market a potentially cheaper source of funding can be raised. Suitability of senior debt or bond funding Whereas senior debt is a more flexible form of raising funding for a PPP project it is worth bearing in mind the following differences that may make a senior debt or bond solution more preferable. Term of Debt Traditionally, the tenor (term) for bond financing has been greater than that for senior debt. Longer terms normally provide improved affordability profiles as the debt is amortised over a longer period of time. This was evident in the earlier PPP transactions, however, the tenors for bank financing have now become as competitive as that for bonds. As PPP develops in Ireland this pattern may also develop or take advantage of lessons already learnt in other jurisdictions. Cost of Funds Whereas bond finance was traditionally cheaper than senior debt finance changes in the capital market need to be monitored as from time to time the pricing of the different sources of funds may favour one form over another. In order to assess which type of funding offers better value a comparison should be made at periodic intervals of the procurement. Bidders should also be encouraged to consider both forms of funding in Page 189 of 245

212 COMMERCIAL & FINANCIAL CONSIDERATIONS continued parallel and the funding option which offers better value for money for the Exchequer at financial close should be chosen. Up front costs There are substantially more up front costs in a bond financing than in a senior debt solution. These costs would include extra due diligence and possibly rating fees. Note these costs could be offset by cheaper terms which may be available. Project Structure The chosen project structure and future network expansions could also impact on the choice between senior debt and capital market funding. As the breakage costs associated with capital market funding are high in comparison to senior debt it may be preferable for a senior debt solution where it is anticipated that further investment is required and where the chosen project structure cannot manage with capital market funding as an efficient means of procuring the extensions. Flexibility As noted above senior debt is normally more flexible as it is easier to arrange. A senior debt solution would usually also include a stand-by facility that could be drawn down in certain circumstances. The flexibility of senior debt would also include the ability to refinance at a later date to take advantage of more favourable debt terms. Refinancing It is noted that in certain circumstance during the life of the project there may be opportunities to refinance the project. These opportunities may arise from the perspective of both the private and the public sectors. Refinancing generally involves repayment of certain categories of funding and replacing them with other more competitive sources of finance. This may arise as a consequence of: improved pricing or appetite in the debt and capital markets as compared to conditions which applied during the original procurement; or the project s risk profile becoming more attractive, for example, when the construction phase has been completed and the project has moved into steady state operations or, when experience of the farebox demonstrates a reasonably predictable revenue stream RPA will seek, as a minimum, to share equally in any gains delivered through refinancing. In addition, RPA will seek approval rights over such transactions as any refinancing of a project vehicle may materially change its overall structure and risk profile In addition, refinancing opportunities may also arise for the Exchequer where it is advantageous to substitute public finance for private finance. RPA, will seek to retain the option to take such action in the documentation of arrangements with private partners. Equity Funding The equity funding in PPP projects is also known as risk capital. This can be either in the form of ordinary share capital or subordinated debt, both of which would rank behind the debt funding in terms of priority. As the equity finance bears the highest risk of all funding instruments it tends to command the highest rate of return There has been a development of specialised PFI/PPP funds which invest solely in PFI/PPP projects due to the returns that equity investors can earn from this market. Such Page 190 of 245

213 COMMERCIAL & FINANCIAL CONSIDERATIONS continued funds would normally invest over the long term therefore bringing in expertise to the project as well as certainty as to the developers long term interest in making the project a success. Ordinary Share Capital The SPV must be capitalised with ordinary share capital an important indicator of commitment from the principals of the company. This is normally a nominal amount that is injected at the start of operations. The project sponsors will generally subscribe to this form of funding. Dividends would be payable to the holders, although due to the nature of PPP projects with a high initial capital spend these may not be available during the initial periods. Subordinated Debt Subordinated debt is also regarded as equity funding as it is subordinate to the senior debt and is therefore at risk over the project. The project developers would subscribe to this form of funding. Interest is payable on the subordinated debt, subject to debt covenants being maintained, after the senior debt interest and capital have been paid in any given period. As the payment of interest is not subject to distributable profits tests this allows the project developers to earn a return earlier in the project then they would if all the equity funding had been injected in the form of ordinary share capital. Note that interest payable on the subordinated debt would also be an allowable expense for corporation tax as compared to any returns in the form of dividends, hence improving tax efficiency. Other Sources of Funding Leasing Lease finance is an alternative form of debt financing that could be attractive where tax relief, in the form of capital allowances, on a large part of the capital expenditure can be obtained. Specialist leasing companies can offer competitive financing rates by obtaining the tax relief and passing the savings down As lease financing is generally only attractive where tax relief on the capital expenditure is available only certain types of projects would qualify for this form of financing. In particular financing of rolling stock could take place through lease financing. It is typical for Train operators to fund their rolling stock in this way. Development Levies and Capital Contributions Commercial developments have contributed substantially towards the financing of infrastructure around the world. These typically relate to access and promotion of a commercial activity, for example, provision of shopping and office accommodation at key stations and terminals This is potentially a lucrative from of funding that could be used to offset the PPP s construction costs making the project more commercially viable. Careful consideration of the potential for such funding would need to be given to ensure that the full value is realised for the benefit of the PPP and the Exchequer. For example, it may be possible to secure higher density development around stations thus enhancing values and generating substantial gains for the rail undertaking. Page 191 of 245

214 COMMERCIAL & FINANCIAL CONSIDERATIONS continued A possible source of funding derives from section 49 of the Planning and Development Act, This section permits local authorities, when granting planning permissions for development in their area of jurisdiction, to attach conditions to planning permissions requiring the payment by applicants of a contribution in relation to a "public infrastructure project or service" (which is defined in that Act to include "the provision of particular rail, light rail or other public transport infrastructure, including car parks and other ancillary development") Section 49(4) allows local authorities to enter into agreements with any persons in relation to the carrying out, or provision, of such public infrastructure projects or services. Whilst this section does represent a potential funding source, there are a number of issues which need to be taken into account in assessing whether it is viable for RPA to take full advantage of it: arrangements for payment of contributions pursuant can only be put in place by the local authority. Thus the agreement of the relevant authority (or authorities) will need to be secured. It would be expected that in return for making available development contributions each local authority would at the very least seek input and certain commitments from RPA in relation to the project at hand (e.g. the construction of a station or pedestrian access at a particular location); development contributions can only be sought for light rail/metro projects where the relevant local authority has prepared, publicly exhibited, sought comments from stakeholders and finally made a "supplementary development contribution scheme". Accordingly, possible delays in putting such a scheme in place (and settling the scope and applicable area of the scheme) need to be taken into account; under the contributions schemes contemplated by section 49, the payment of contributions can only be required as a condition of planning permissions in the area to which the relevant supplementary development contribution scheme applies (i.e. future planning permissions when the scheme is in place). Contributions cannot simply be levied from property owners in the relevant area. Hence any funding from contributions will be dependent on the amount, size and nature of new developments in the relevant area for which planning permission is sought, with the result that any flow of funds could vary dramatically over time; fourthly, any contributions levied must "benefit the development to which the permission relates when carried out". This means that any contributions sought would have to be used on local elements of the light rail/metro project in question (e.g. facilities at the local station, or a footbridge over the line), and could not, for example, be applied to a section of the network many kilometres away. The scope of this qualification has previously been considered in some detail by the Courts, and accordingly it is recommended that in any circumstance where a contributions scheme is agreed with a local authority, that the works which are to be funded (or part-funded) by the scheme be checked to ensure they satisfy this test. Grants These may be available to the PPP project and the availability of grant funding could be used to subsidise the construction costs of the project. The availability of grants may however be subject to certain conditions being achieved and maintained. Sources of grant funding could include the Trans European Network. Page 192 of 245

215 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Implications of Project Phasing The nature of limited recourse financing, which is specific to individual projects, may mean that it is inflexible when considering the phased development of a rail network. Individual projects may successfully be financed though this route if they are discrete and separate elements of the network. However as most rail developments would involve a degree of overlap, limited course financing may not always offer the best solution. Due to the overlap of various parts of the network, to ensure effective risk transfer and a clear allocation of responsibilities it would be necessary to package any future developments with existing operations. This may involve existing PPP contracts having to be bought out by the new PPP. Page 193 of 245

216 COMMERCIAL & FINANCIAL CONSIDERATIONS continued SOURCES OF REVENUE Introduction The main source of revenue in any rail project arises from ticketing charges levied on the patrons of the service. This is normally a relatively stable source of income once the project has been implemented and is operational. As with any commercial undertaking, fares structure will be established in the context of what the market will bear relative to alternative modes of travel The goal of securing an integrated transport system and improving accessibility will impact on fares structure if the cost of travel is to be affordable for all and is to improve mobility across the region. These considerations support the case for fares regulation. Indeed, regulation would need to take into account each of the following factors: Ridership; Access; Integration; Cross ticketing; and Customer charter Further discussions with the regulatory authorities should take place at an early stage in the development of the PPP to ensure that the factors listed above are addressed in the PPP. Revenue Sources There are a limited number of sources of operating revenues available to help finance a rail infrastructure project. These include: Ticketing revenues from rail passengers; Availability Payments by the public sector to the private sector for the operation of the rail infrastructure asset; Advertising revenues; Other revenue sources e.g., green trading, retailing, and telecommunications; and Duct capacity leasing. In practice a combination of some or all of these revenue sources would be used to fund the PPP project. Ticketing revenue Ticketing revenues from rail passengers will generally represent a significant source of operating revenue to the project. The ticketing revenue available through ticket charges may be regulated, depending on the regulatory arrangements ultimately put into effect. Revenue collection generally remains with the private partner under the PPP It is unlikely that revenues from the fare box will be sufficient to meet the annual funding requirement on rail projects where infrastructure and operations are combined. Consequently, additional payments may be required from RPA which should be performance related. These are discussed further below. Page 194 of 245

217 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Availability Based Payments Availability Payments may form part of the revenue mix to supplement fare box revenues. These payments to the private partner would be made on the basis that the rail infrastructure is made available on a pre agreed basis with penalty deductions applying for poor performance. These payments may be made from the ticketing revenues collected, where RPA retains demand risk. However additional payments may be required where the ticketing revenue is insufficient. An availability based payment is appropriate for an uncommercial route or where RPA takes some demand risk or limits the upside for the private partner. Usage Based Payments Where the private partner is required to charge fares on a basis set by a regulatory authority but RPA wishes to transfer volume risk, a payment mechanism based on usage can be designed. Such a mechanism will give the private partner an interest in the success of the network in terms of ridership but recognises that the full economic fare may not be appropriate in the context of public policy Under this scenario the private operator would retain the fare box and receive payments from RPA which will be calculated on the basis of volumes and agreed unit rates. This approach could give rise to a mismatch of costs and revenues with significant potential upside and downside for both parties. A collar solution could be used under which base level revenues are agreed with the private partner taking volume risk within agreed limits. Below the lower limit, RPA might make good the difference while above the upper limit the private partner would share revenues in a pre agreed ratio. Advertising Revenues Advertising revenue in train carriages or on station platforms will generate revenue for the project. This revenue will contribute annually to the overall revenues flowing from operations. RPA should bear this in mind when deciding whether this revenue source should be included within the PPP or retained by them. The revenue from advertising should be used to reduce subvention levels regardless of whether included or not in the PPP. The potential for advertising revenues should be evaluated and taken into consideration in the estimation of availability payments. It should be noted that planning considerations may limit the extent of advertising permitted. Revenue Risk Revenue risk represents one of the major risks in any rail infrastructure project. This risk is of much more concern where there is no proven track record on patronage levels, for example on new infrastructure. The final determination of whether this risk is retained by RPA or transferred to private partners will be a significant influence on the project structure and the funding structure of the SPV. Regardless of whether this risk is retained by RPA or transferred to the private sector both parties must undertake substantial due diligence to determine the sensitivities of the project in relation to variations in revenue, for example, very detailed complex demand modelling will be required as a minimum The relationship between the funding requirement of the project vehicle and the potential sources of revenue is an important factor in determining ownership of this risk under a PPP. This is illustrated in Figure the funding requirement for a PPP is contrasted with the relative time it can take for revenues to build up to the levels required under different scenarios. This profile will determine whether private partners have sufficient appetite which will, of course, be further conditioned depending on whether there is some Page 195 of 245

218 COMMERCIAL & FINANCIAL CONSIDERATIONS continued historical evidence of patronage trends or where the take-up can be reasonably forecast. Projects which fail to credibly demonstrate the potential to build up to required fare box revenues may require other forms of support in order for them to be delivered. High revenue potential project Revenue Commercial project Regeneration project PPP project funding requirement Time Figure 15.8: Funding requirement vs relative time for revenues to build up Revenue risk retained by the public sector In this scenario project revenues and risks are retained by the public sector although revenue collection remains with the private sector under the PPP As revenue or demand risk is retained by the public sector, payment to the private sector operator would be on an availability basis. In other words the PPP service provider is remunerated for making the relevant infrastructure asset or service available. In this case the private sector will assume the risk of making the asset/service available and should be exposed to penalty deductions for failure to maintain the asset/service to required standards and performance levels. The overall risk profile of this structure should result in a competitive funding structure from the private sector, as the revenue receivable would be reasonably controllable The availability payment to the private sector is in part or totally funded from the revenue from ticketing. Where the public sector is taking the revenue risk any shortfall in revenue collection would need to be met through the Exchequer whereas any surplus can be retained. By retaining this risk the public sector can also control the ticketing charges that are passed on to the rail patrons through the Regulator Revenue risk would be retained by the public sector where the revenues from the project are insufficient to meet the projects funding requirements (e.g. as demonstrated by the regeneration project in figure 15.8) or where the public sector wants to limit the potential upside in the PPP to the private sector. The overriding principle is that the public sector should retain revenue risk where it represents poor value for money to the Exchequer to transfer it. Page 196 of 245

219 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Revenue risk transferred to the private sector Under this scenario the private partner has full responsibility for managing fare box revenues from the project. As the revenue receivable is likely to be uncertain during the concession period this will create a potential threat to the revenues for the project company and to the ability of that company to meet debt repayments. In a rail environment, although this risk may have been transferred to the private partner the public sector will still want to monitor and regulate ticketing charges through the appropriate authorities If the private partner is to accept significant patronage and revenue risk, as a minimum a strong integrated transport policy and plan will need to be demonstrated. If this is not the case then future revenue streams will be heavily discounted in any private funding commitment and consequently may offer poor value for money to the Exchequer Revenue risk would normally be transferred where this represents a commercial opportunity for the private sector (e.g. in the High Potential Revenue and Commercial Project in the illustration above). Where however ticketing revenues would not be sufficient to the private partners to meet their requirements additional sources of funds will be required, particularly in an environment in which fares are set at affordable levels which are below a commercially acceptable minimum. Other revenue sources There are a number of other potential revenue sources available for example, Capital contributions from Utilities; Green trading. The benefit of using energy from renewable sources may be increasingly significant as the market value of greenness increases and non green energy users increasingly need access to green credits. Markets have already developed in mainland Europe and there is evidence of increasing awareness in Ireland as indicated by some recent transactions; Retailing. Income from rental of retail space or the profits from retailing activities may be significant particularly in the busiest stations where large numbers of passengers pass through on a daily basis; Telecommunications. The benefits of using the rail network as major arteries in cable networks can be captured and transformed into ongoing sources of funds; and Additional forms of taxation or congestion charges. Most of these may be politically unpopular but may have significant revenue raising capacity and are consistent with the objective of encouraging a modal shift from car to public transport. Page 197 of 245

220 COMMERCIAL & FINANCIAL CONSIDERATIONS continued PAYMENT MECHANISMS Introduction The payment mechanism plays a central role in any PPP project as it is the primary mechanism through which the risk transfer in the project is delivered. It sets out the basis on which the private sector operator is to be rewarded and how any penalties would be imposed for poor performance under the PPP agreement. Under traditional procurement the private sector is paid on a milestone basis throughout the construction phase. Under PPP, as it is primarily a contract for the delivery of services, the private partner does not receive payment until the service is being provided. Figure 15.9 illustrates the main difference in payment profiles between conventional and PPP procurement approaches. Traditional Procurement s Cost Overrun Estimated Capex Cost Cost Overrun Estimate Opex Years PPP Procurement s User Charges (farebox) Availability Payment Years Figure 15.9: Traditional vs PPP Procurement Under PPP procurement the balance between fare box revenues and subvention will depend in the fares policy and demand. Essentially the levels of subvention that will be required will impact on the overall approach to structuring the payment mechanism. Figure illustrates the main characteristics of payment mechanisms as they relate to overall subvention levels. Page 198 of 245

221 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Revenue Source Availability Payment Payment Characteristics -Revenue Suipport -Capital Grant -Guarantees Revenue Source Availability Payment Payment Characteristics - Performance - Availablility - Usage User Charges User Charges Figure 15.10: Main characteristics of payment mechanisms In general where there is less subvention required and the projects are more self-financing then the main incentive for the private sector to provide a high quality reliable service is the revenue risk that they bear. However, the majority of rail projects do require significant subventions and it is therefore critical that the payment mechanism is structured to incentivise ongoing performance. Objectives of the payment mechanism The payment mechanism must be individually structured to take account of the specific circumstances of individual PPP projects. The design of the payment mechanism should have the following objectives: Be realistic and challenging but achievable; Provide an incentive to meet performance standards; Penalise unacceptable performance; Match payments to outputs; Incentivise rectification if standards are breached; and Incentivise innovation and efficiency gains. Key features of a Payment Mechanism The important features to be designed in will embrace: No payments until the service is available; Payments are based on performance standards being met; Deductions for poor service delivery are meaningful; No apparent disaggregating of payment mechanism for individual elements, e.g. debt service; Measurable service delivery; Objective, transparent and easy to operate; Page 199 of 245

222 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Quantity and quality of service are capable of measurement; and Performance standards must be measurable, recordable and reflect commercial reality In addition to the above where there is an Exchequer subvention in the form of a capital contribution, milestone performance payments will need to be developed. The detail of what and how performance is measured is covered in detail in the Performance Standards and Contract Monitoring Sections. Page 200 of 245

223 COMMERCIAL & FINANCIAL CONSIDERATIONS continued TAXATION Introduction This section considers the different tax issues that relate to the financial elements of PPP bids. From RPA perspective an understanding of the issues will be useful in the assessment of bid submissions but the risk of tax assumptions and treatment ultimately rests with the private sector. Corporation Tax Basis of Assessment/Rates of Tax Corporation tax is levied at the company level on profits - i.e. income plus chargeable gains. It is charged on the profits at a rate which is fixed by reference to a financial year or part of a financial year. The rates of corporation tax which apply vary, depending on the quantum of profits and the type of income For the financial year ended 31 December 2001 the standard rate of corporation tax is 20%. This will reduce to 16% for the year ended 31 December 2002 and 12½% thereafter. In general, this rate will apply to profits derived from trading activities of the company A higher rate of tax of 25% also exists. In particular this applies to income which is considered passive - typical examples being deposit interest and rental income. Whether this higher rate could be considered relevant to the income received from the grant of usage rights to the users of railway tracks is not free from doubt. It is likely however, that such income would be considered income derived from a trading activity and thus taxed at the standard rate(s) mentioned above. Individual bidders will need to take appropriate advice on the structuring of their operations in this context. Disposal of Land When considering the correct treatment where surplus land of RPA is introduced into a particular contract, the terms of the relevant documentation, providing this accords with the facts, will be an important indicator when considering the tax treatment. Another important indicator will be the purpose of the payment from the point of view of RPA (as opposed to the purpose of the receipt from the operator s perspective ) as evidenced by the documentation itself The Revenue Commissioners Tax Briefing Magazine of March 2000 sets out the proposed tax treatment in each of the following circumstances: RPA has land surplus to its requirements and introduces that land as a payment (in money s worth) on account of future unitary receipts. The RPA has previously identified land which is surplus to its requirements, has entered into an agreement for the disposal of that land to a developer and arranges for all or part of the proceeds to be paid directly by the developer to the operator as a payment on account of future unitary receipts. Land is introduced by RPA as a payment in money s worth in order to reduce the capital cost of the project to the operator. The proceeds arising from the disposal of land are introduced by RPA in order to reduce the capital cost of the project to the operator. Page 201 of 245

224 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Bid Costs The issue here is whether a consortium company may claim tax relief for bid costs in relation to both an unsuccessful bid and a successful bid. The Revenue Commissioners issued a position paper in March 2000 concerning this matter. Examples of bid costs referred to in the position paper include architects, engineers, legal and other professional fees, salary and administration costs and financing costs. It should be noted that the treatments outlined below are specific to PPP projects and should not be regarded as having general application. Costs incurred in making an unsuccessful bid Where a consortium company incurs expenditure in putting together an unsuccessful bid, provided that the expenditure is revenue in nature and would otherwise have been deductible as an expense of its trade, the bidding company can claim unsuccessful bid costs as a deduction against the profits of its trade. Costs incurred in making a successful bid Where a bid made by a company succeeds, the project will normally be undertaken by a separate entity in the form of an Special Purpose Vehicle (SPV). The Revenue Commissioners have confirmed that a deduction for costs will not be disallowed by reason only of the fact that the project will be undertaken by a SPV. If the expenditure is revenue in nature and would otherwise have been deductible as an expense of its trade, the consortium company can claim a deduction for successful bid costs against the profits of its trade. Consortium Relief This is a more restrictive from of group relief whereby losses can only move upwards from a trading company to the members of the consortium A consortium exists where there are five or fewer companies [ members ] owning between them, directly and beneficially, 75% of the consortium [ trading company ] with no one member owning 75% or more. These members must be resident in a member state of the EU. Thus non EU resident companies and indeed individuals may own up to 25% of the trading company. However they cannot avail of loss relief from the consortium Losses can only be surrendered up to the members in proportion to their share in the consortium. Capital Allowances In general, provided the PPP service provider has a relevant interest, capital allowances are available for capital expenditure (net of grants) incurred on assets considered to be items of plant and machinery. Expenditure on plant and machinery is allowed as a deduction over a period of five years from being first brought into use It is easy enough to identify an item of machinery. However identifying an item as plant has proved troublesome and has been the subject of extensive case law. In general to be considered plant an asset must be an apparatus used in carrying on a business; kept for permanent use in the business; and functional in the context of the business, not part of a setting in which the business is carried on and not part of the building in which business is carried on. Page 202 of 245

225 COMMERCIAL & FINANCIAL CONSIDERATIONS continued It is likely, taking into account practice adopted in the UK, that the following would be considered items of plant: Train engines and carriages; Railway track including sleepers; Tramway rails; and Traffic Control Systems (incorporating signal boxes) Other items of expenditure such as expenditure on platforms, walkways etc. could also be considered expenditure on plant. Obvious items of plant would be: escalators, air conditioning equipment, security equipment, automatic doors, information boards, ticket vending machines, ticket scanners, movable partitions, etc. Capital Gains Tax Disposals by Local Authorities are exempt from CGT. However, transfers by other parties to the arrangements such as Contractor companies could give rise to a capital gain. Issues include: Whether any gain made on disposal is a capital or income receipt for the party concerned; and Where it is regarded as a capital gain, is the gain regarded as a development land gain with restricted offset of capital losses and restricted relief by way of allowance for inflation In the context of the commercial arrangements envisaged, irrespective of the consideration received (if any), CGT would apply on the market value of the property concerned The current rate of CGT is 20%. Stamp Duty The transfer of an interest in property to a Contractor company by either outright transfer or the grant of a lease would give rise to a stamp duty liability, whereas grant of a licence to a Contractor company may not Similarly any transfer of property from a Contractor company to another party at the end of their involvement in the project may result in a further charge to this tax. Additionally, due to the myriad of possibilities involved in structuring the PPP stamp duty may arise on other transactions apart from those transferring land. Value Added Tax There are many and varied VAT issues regarding the construction and operation of Rail Projects. To illustrate the issues which may occur we have assumed a scenario where separate entities are engaged for the construction of track, the operation of the transport system and the construction and operation of other infrastructure such as stations etc. If other arrangements are put in place, additional VAT issues may arise. Page 203 of 245

226 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Construction of Track VAT may be incurred on the acquisition of property/land by either the construction company or a public body. The disposal of property/land under a compulsory purchase order is a supply for VAT purposes and the treatment will depend on whether the property is in the VAT net. Any VAT charge in respect of the acquisition may not be recovered if the acquirer is a public body. VAT charged on property acquired by a commercial construction company should be recoverable If the construction contract is awarded to a foreign company/consortium, that entity will be obliged to register for Irish VAT Depending on the terms of the construction contract VAT may be chargeable by the contractor in relation to any payments received from the Exchequer The contractor s ability to recover VAT on its inputs will be dependent on whether it makes taxable supplies. If the contractor charges a licence fee (it is assumed that the licence will be for a period in excess of 10 years) to the transport operator for use of the track, VAT will be chargeable in relation to the supply and the construction company should be in a position to recover most of the VAT incurred on its costs. In this scenario the income stream will have to be capitalised and VAT charged up front. The treatment of any Exchequer grant payable may have implications for the contractors VAT recovery position. Transport Operator The transport of passengers and their accompanying baggage is, at present, an activity which is exempt from VAT Fares paid by the public for use of the facility will not be subject to VAT The implications of the exempt status of the transport operators services is that it will not be in a position to recover VAT on its costs. VAT charged to it by the construction company for the use of the track and VAT charged to it in relation to the purchase of carriages etc. will not be recoverable. A VAT cost would arise even where the carriages are sourced from other EU countries or from outside the EU. In the case of carriages sourced from other EU countries the operator would be obliged to register for Irish VAT and self account for VAT in respect of the acquisition of the carriages. Where the carriages are imported from a country outside the EU, VAT is payable at the point of entry into Ireland. VAT would not be recoverable either in relation to the VAT self accounted for on an intra-community acquisition or in the case of VAT paid at the point of entry In order to alleviate the upfront costs associated with the acquisition of rolling stock, it may be possible to put in place a structure whereby an additional Special purpose vehicle (SPV) acquires the assets and leases them over a number of years to the operating company. The SPV could recover the VAT on the costs of the assets and charge VAT to the operating company on the periodic lease payments. The upfront VAT cost of the stock could be spread over a number of years thus providing a significant cash flow benefit. Operators of Stations etc It is likely that the operators of stations will have income from two main sources. Firstly it may charge a fee to the transport operator for use of the station. Such a fee would be subject to VAT. Page 204 of 245

227 COMMERCIAL & FINANCIAL CONSIDERATIONS continued It may also engage in a letting of units in the station to retail operators. Costs incurred in relation to the construction of stations may be recoverable subject to the property being used for the purpose of taxable supplies. As stated above, any fee payable by the transport operator will be subject to VAT. Likewise, where retail units are let to tenants on longterm leases (i.e. leases in excess of 10 years), VAT will be chargeable on the capitalised value of the leases with a resultant right of recovery of VAT costs associated with the units. While units are short term let to tenants (i.e. leases of less than 10 years), the lettings will constitute an exempt supply for VAT purposes. VAT would not be recoverable on costs relating to these units unless the station operator waives its entitlement to exemption from VAT on rental income and opts to charge VAT on the rents paid by the tenants Where the station operator itself operates a retail unit, VAT will be chargeable on its supplies and VAT recoverable on its associated costs. Page 205 of 245

228 COMMERCIAL & FINANCIAL CONSIDERATIONS continued PROCUREMENT PROCESS Introduction This section describes factors that should be considered whilst developing the key commercial and financial elements of a rail PPP project. It is set out in the context of the PPP procurement process and highlights differences for different types of PPP that may need to be considered at the various stages of the project development process. The diagram below sets out the requirements for commercial & financial elements of the PPP. Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation High level assessment of pursuing the project as a PPP. Identifying major obstacles. As part of the overall project appraisal a detailed PPP assessment of the project to establish if PPP is the selected procurement route. A detailed PSC will be produced at this stage in advance of ITN. At this stage market reaction to proposed PPP structure should be obtained, amending the proposed structure if appropriate. Detailed description of proposed PPP structure including funding, risk, payment mechanism. Clarification to bidders communicating any changes to the proposed PPP structure that may have resulted from clarifications. Ensure that Bidders BAFO positions are accurately reflected in the VfM assessment. Ensure that any variation to the key elements of the proposed structure have been documented. Assess the impact of changes of PPP structure through negotiations against overall objectives. Initiate the contract for the preferred PPP structure. Initiate the contract management procedures. Ongoing contract management including assessment of key commercial and financial elements such as any step in service payments. Figure 15.11: PPP Procurement Process Project Definition Project Definition At this stage in the process the ideas on scope of the project are being developed. It will typically be at a high level with outline information on costings, demand and revenue projections. The Project Appraisal Framework sets out the activities involved in appraisal. In terms of developing the PPP structure at this stage the main activity is to identify any major impediments to the application of PPP and confirming that PPP is an appropriate approach During the scoping phase the shape of the project is being developed. In parallel the PPP structure should be developed. It is still a relatively early stage in the project development process and the assessment of PPP structures should look for any inherent boundaries that may shape PPP structure. For example if it is a discrete line that links the main termini and does not physically interface with the rest of the network then this may be suitable for a discrete DBFO project that is independent of the network. Or it could be that a private sector developer is willing to fund a specific extension to an existing network then this could be D&B with an extension to the existing operating contract A view on phasing and how the project should be managed should be taken at this stage. This will help develop the project s parameters and give views on issues that may impact on the project. Page 206 of 245

229 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Detailed Project Development Expression of interest and Prequalification Detailed Project Development At this stage a more formal assessment of the PPP options should be carried out (see Project Appraisal section). This should be a two stage assessment firstly, a review to assess the viability of a PPP option and then an assessment to identify the structure that best meets the objectives of the project. A pass/fail assessment could be a series of questions which need to be answered including: is the capital value greater than xx million pounds? is there a significant service element within the scope? can the public sector objectives and requirements be defined as desired outputs? is there scope for private sector innovation and efficiency within the scope? are there any potential risks/issues that would deter the market from bidding? If the project passes this initial assessment then there should be a review of specific commercial and financial elements to try and determine the PPP structure which represents the best fit with the objectives of RPA. This could take the form of an evaluation of the key elements such as: revenue; risk; performance required; payment; interface issues; and funding requirements A decision on project phasing will need to be taken by this stage in order that the parameters of the project can be determined. The funding aspects should also be reviewed to ensure there is sufficient private sector interest in developing the project as a PPP. This should include consideration of the estimated financial impact of the project. Expression of Interest & Prequalification This stage in the procurement process presents an opportunity to test the proposed PPP structure with the private sector. The structure that is being adapted should be presented with clear guidance on risk positions; split of responsibilities; performance requirements; payment mechanism; and revenue risk. The feedback from the private sector should be reviewed to incorporate any appropriate amendments to the proposed structure. Page 207 of 245

230 COMMERCIAL & FINANCIAL CONSIDERATIONS continued Invitation to Negotiate Invitation to Negotiate The ITN document should detail the proposed structure linking services required, performance levels payment mechanism, roles and responsibilities to the overall contractual framework (this is discussed in more detail in the Procurement and Contractual Section). Shortlist Best & Final Offers Shortlist At this stage in the process it is usual to go from three or four bidders to 2 bidders. It is important that all clarification that has been given on the PPP structure is documented and communicated to all the bidders The shortlist decision will be based on a number of factors but one of these will be the ability of the bidders to deliver the public sectors objectives through the proposed PPP structure At this stage focus should be on the following issues: risk position acceptance of revenue risk funding issues performance regime Best and Final Offer After shortlist there is usually more discussions on the detail of the PPP structure from a contractual perspective. It is therefore imperative that bidders BAFOs are based on an agreed understanding of the key elements of the PPP structure. RPA has to ensure that any change in the PPP structure as a result of negotiations and clarification are reflected in the legal documentation and tied down in the BAFO. Negotiations Financial Close Construction and Operation Negotiations By this stage the overall structure should be agreed however there may be negotiations on the detail of key commercial and financial elements. Also at this stage the contract management processes needs to consider key elements such as risk, performance, phasing and funding that should be fed into the management process Detailed review of funding and tax issues need to be reviewed to ensure that value for money is being received. Financial Close At this stage the finalisation of funding agreements will be achieved which reflect the PPP structure. Where a PPP structure does not include finance then funding provisions may relate to milestone payments and/or delivery of set performance. Construction & Operations The level of RPA requirements and resource input will depend on the PPP structure that has been adopted. This is discussed in more detail in Section 16, Performance Standards and Output Specifications and Section 17, Contract Management. Page 208 of 245

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232 Performance Standards and Output Specifications CONTENTS PAGE Introduction 209 Specific Performance Standard Objectives 212 Performance Standards Considerations 216 Procurement Process 220

233 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS 16 INTRODUCTION Introduction 16.1 This section describes an output specification approach to setting performance standards. It traces the performance linkage from strategic objectives and project objectives, through to performance measurement objectives, identifying the roles to be adopted by the principal parties. It is written for those who have to prepare ITNs and assess bids for projects considered suitable for PPP structures. The framework includes the aspect of design, since by definition; the party proposing the standards of performance must pass through a design stage to arrive at specifications for performance. Although not part of the overall framework the performance requirements for heavy rail systems are also considered. The purpose is to provide performance information across the spectrum of possible rail solutions. Performance Standard Framework 16.2 This section is structured as follows: Introduction& Background sets out the context of the performance specification within the overall PPP process assessing the relationship between service provision and output specification; Specific Performance Standards Objectives sets out the objectives for Performance standards in the context of PPP and overall transport objectives and policy issues; Performance Standards Considerations sets out the main considerations in the development of performance standards for PPP rail projects; and Procurement Process will provide a step-by-step guide to preparation of performance specifications for rail projects. It will develop criteria to determine the levels of specification that will be required. Background 16.3 In traditional procurement arrangements client functional, technical and performance specifications, for construction, operation and maintenance of assets, have been input driven. Design and construction activities were prescribed in order to determine as closely as possible the client s desired outcome. Operating and maintenance activities were prescribed in terms of what and how often a particular activity was performed. In addition clients either through in-house design teams or through contractual relationships with architects and designers, also retained the design rights of new assets This approach resulted in the risk associated with poor performance of an asset remaining with the client as the party owning the detailed specification. The PPP approach is used in situations where the client is essentially procuring not so much an asset as a service based around that asset. The PPP approach is to use output specifications. This requires the client to specify its service in terms of the output functions that it requires, e.g. services sufficiently frequent to move people between points in an environment conducive to daily use. The move away from asset provision towards service provision enables the private sector to be flexible and innovative in the provision of services that they will have to provide. It also results in the transfer of detailed design, construction and operational risks associated with providing the service. Page 209 of 245

234 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Level of Performance Specification 16.5 One of the first steps for RPA in the procurement of light rail or metro systems is to determine the level of performance specification. Some aspects of required performance will need to be specified in more detail as a result of safety or regulatory constraints. It may also be the case that performance requirements need to be specified in more detail where RPA has a particular requirement such as integrating with an existing rail system. There is a balance to be maintained between high- and low-level of detail when preparing specifications, shown in the figure 16.1 below. Input-based specification Mandatory outcome restricts innovation risk of poor quality assets & service Mandatory and highly prescriptive ignores market knowledge greater certainty of obtaining desired level of service & quality Ouput-based specification Bidder proposes outcome promotes innovation & flexibility less control for RPA but transfers more risk Joint RPAand bidder outcome bidders alternatives restricted less risk transfer Low level of detail High level of detail Figure 16.1: Effects of detail in specifications Output Performance Specifications 16.6 An output-based specification describes the desired result of a process based on various inputs. For example, A route section able to carry 6,000 people in one hour is a desired output. The process involved to arrive at it may be the design process, the procurement process, the build process, the commissioning process, or some combination, depending on the project s definition. The inputs are the detailed considerations needed to work up designs, identify suppliers, place orders to a time plan, build, and commission and hand over. The output specification needs to be the means by which risk, design and performance objectives and constraints, and actual performance are converted into payment (or abatement), via measurement and monitoring. It has to be practicable and be represented to the contractor in such a way as to incentivise, not prescribe. Input Performance Specifications 16.7 An input-based specification is required when RPA decides it has to carry the risk of performance of the outputs, and so has to make up its own mind about the desired features. An example might be prescribing stops at pre-determined locations along the route to satisfy factors in addition to level of demand (the market factor) that the bidder would normally not have to observe. The arbiter for the amount of detail provided by RPA to the bidder is the level of risk it is prepared to take. In this example, RPA takes the risk that the travelling public does not favour the location of the stops. In others, such as safety or mobility-impaired access, RPA, on behalf of the Inspector or Regulator may have to become prescriptive. Page 210 of 245

235 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Benefits of Output Specifications 16.8 The obvious attraction of output-based specifications in the context of PPP projects is that bidders are free to propose alternative designs and by doing so, to carry the risk of performance. RPA escapes the risk of non-performance - to a certain degree (ultimately it will be in the public eye in the case of catastrophic non-performance). On the other hand, RPA is obliged to accept the compromise represented by the winning bid s proposals, within the limits of the bid and negotiation process There is a strong connection with, and potential for much overlap between the specification of performance objectives (measures and targets) and the specification of planning and design objectives (see section on Project Planning). The two sets of objectives should be consistent and clear in their purposes so as to avoid duplication and contradiction RPA should be motivated toward a partnership arrangement from the outset, i.e. in its ITN specifications. This means an emphasis on outputs and on long-term outcomes such as service performance improvement, managed investment for lowest-cost maintenance and maximum availability, and maximum transfer of responsibility and highest residual life The provision of the rail service is in response to strategic objectives set by the State and in overall terms, the outputs from the rail system should reflect those objectives. There may need to be a hierarchy of outputs to satisfy the needs of the Department of Public Enterprise and RPA during design, construction and operation phases. These could provide an integrated measurement system to allow continuity of performance measures rather than a separate set of measures when the construction phase is completed. Summary The evolution of performance specifications for PPP projects has moved on from the early attempts where the output was defined so broadly that the Public Sector lost control of some of the key aspects of the service delivery. It is now good practice to understand where the performance requirements need to be defined more prescriptively so that the service provision meets safety, regulatory or quality requirements of RPA but at the same time allows for innovation and appropriate risk transfer. The performance is linked backward to ownership of risk, and forward, through monitoring, to payment (or abatement), through an agreed formula. Page 211 of 245

236 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued SPECIFIC PERFORMANCE STANDARD OBJECTIVES Introduction Section 6 sets out the overall PPP and transport objectives and policy issues for rail PPP projects. In addition specific objectives for key Performance Standard elements are required. The key elements and objectives are set out below. Objectives for setting performance standards and measures A key feature of PPP transactions is that they are about service provision, not asset procurement; where new assets are necessary this is a by-product of the need to satisfy the service requirement. This is a reason why PPP contracts tend to include long-term measurement structures. The primary measure against which the service provider is held accountable is its ability to provide a satisfactory service Performance is service rendered; non-performance is a failure to provide service. Service is rendered to agreed targets which are set so as to be specific, realistic, objective, measurable, appropriate and controllable. Targets are often represented as 'key performance indicators' or 'KPIs'. The targets for the service delivery are derived from the objectives, terms and scope of the contract, themselves derived from strategic goals. Their values are usually made to comply with relevant technical and regulatory standards, equivalent benchmarks or industry comparisons, and contractual objectives designed to ensure continuous improvement. Service is then measured against the KPIs, often written down in service level agreements, or 'SLAs'. Performance Standard Objectives In PPP projects the high level intent of developing performance specifications is: to satisfy promoter s strategic objectives; to define scope of the individual projects; to identify promoter s key (minimal) requirements; to allow bidders scope for innovation; to provide guidance on third party requirements; and to be time-bounded. Page 212 of 245

237 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued The performance objectives (measures and targets) have to translate into the requirements of the sub-systems of a rail transport system. Sub-systems of a rail transport system may be illustrated as follows: Transport systems Bus Rail Car Cycle/ped Rail transport systems Light rail Trams Metro Heavy suburban rail Characteristics of rail transport systems Street running Short trains (trams) Light, low-floor Open access Frequent, streetlevel tramstops Some signallling Driven/driverless Mainly segregated Longer trains Light vehicles Open access Less frequent than trams Station-type stops Signalled Driven/driverless Inter-changeable vehicles Conventional heavy rail Fully segregated Long trains Coach-type and freight vehicles More enclosed Less frequent than metro Station stops/freight terminals Signalled and driven Inter-changeable only with other heavy rail Rail sub-systems Rail infrastructure systems Signalling Power transmission / distribution Track Communications Electrical & mechanical equipment Civil structures Other systems Rolling stock Stations People Interface management Figure 16.2: Sub-systems of a rail transport system The contractor s proposals for specifying performance standards will need to reflect a set of requirements from RPA. These requirements will contain clear objectives, designed as outputs, thus leaving the bidder free to propose how to specify the assets and the service. Objectives appropriate to the three types of rail transport being considered are given in the following summary table, whose constituents are expanded in Appendix R. Page 213 of 245

238 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Performance Requirement Table 16.1-Performance Summary Capability Able to up to move up to 8,000* passengers per hour per line section. Light Rail Metro Suburban Heavy Rail Seating-to-standing ratios appropriate to street-running rail services providing commensurate levels of comfort. Able to move up to 20,000* passengers per hour per line section. Seating-to-standing ratios appropriate to segregated rail services providing commensurate levels of comfort. Able to move more than 20,000* passengers per hour per line section. Seating-to-standing ratios appropriate to heavy rail services providing commensurate levels of comfort. Station Separation Stops at intervals that reflect demand on this and other public service routes, and the patterns of other traffic. Stations at intervals that reflect demand on this and other public service routes. Stations at intervals that reflect demand on this and other public service routes, but not more than 10 km apart. Safety Meets comparable industry and Regulatory requirements. Meets comparable industry and Regulatory requirements. Meets comparable industry and Regulatory requirements. Availability 100% available during service hours. 100% available during service hours. 100% available during service hours. Reliability 96% of 1-way trips daily and 98% of trips per period, or better. 96% of 1-way trips daily and 98% of trips per period, or better. 96% of 1-way trips daily and 98% of trips per period, or better. Comfort Dynamic characteristics to allow normal activities such as standing, and reading. Dynamic characteristics to allow normal activities such as standing, and reading. Dynamic characteristics to allow normal activities such as standing, and reading. Interchangeability Compatible with Metro and fit for street running. Intermodal journeys on a single ticket. Compatible with Light rail. Intermodal journeys on a single ticket. Compatible with existing heavy rail. Intermodal journeys on a single ticket. Access Full equality of access for people with disabilities. Full equality of access for people with disabilities. Full equality of access for people with disabilities. Environment (External) Meets industry standards on lighting, noise, cleanliness etc. Meet industry standards on lighting, noise, cleanliness etc. Meet industry standards on lighting, noise, cleanliness etc. Electro-magnetic compatibility Meets industry standards on interference with signalling, power supply and communications. Meet industry standards on interference with signalling, power supply and communications. Meet industry standards on interference with signalling, power supply and communications. * These numbers are for illustration purposes only and need to be set at levels that reflect planning and other policies. Page 214 of 245

239 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Characteristics of good performance measures and targets The desirable characteristics will include: impartiality (independence from other targets); measurable (for the avoidance of doubt); appropriate (that which is measured reflects critical aspects of service); controllable (behaviour of the targeted service element responds to decisions and actions taken by the responsible party); relevance to output criteria; and timely in their production These may be used as cardinal tests for establishing good performance measures and targets for a rail system. For example, the measure of capability of delivering journey times should: be independent of other measurement objectives (impartial); be measured in minutes (measurable); represent a delivered service, frequently used (appropriate); and reflect the activities of the operator (controllable). Additional Attributes for Performance Requirements It is important that when considering the outputs they should have the following attributes: non-prescriptive: more emphasis on outputs than inputs to encourage risk transfer; simplicity: the concept must be recognisable and easy to interpret; clarity: so designers, builders, operators, maintainers and others know what is expected of them; enforceability: for the approval of payment for services satisfactorily supplied; embodiment of risk: RPA and the contractor assume responsibility only for those risks that they agree upon, and the management of these risks continues after the assets have been built and installed, and the contractor is operating the service; interfaces with other service elements such as at inter-changes are known and fully described; information required to measure the performance being targeted is obtainable, at the right quality and in usable form; and measurability: the outputs must be capable of objective measurement. Page 215 of 245

240 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued PERFORMANCE STANDARDS CONSIDERATIONS Introduction This section considers the implications of output-based performance within the content of PPP procurement. Partnering In a traditional procurement exercise, a prime contractor is appointed who sub-contracts various elements and manages the overall delivery. Once the assets are constructed and handed over, the prime contractor s involvement ends. In the PPP environment the concept of partnership is initiated from the outset, hopefully to develop into a long-term relationship. Aspects for performance that emerge from this realisation include the following: the measurement terms must be established when the designs are still on the drawing board; the project s complexity and its many measurement targets mean that the remuneration arrangements that depend on performance will themselves be complex; and resulting in detailed tabulations of targets and payment/penalty apportionment Assessment of bidders is based on a self-contained set of selection criteria, considered elsewhere. Some that are relevant to performance setting are: does the bidder s core business operate on a performance-based footing? does it match to an area of the project? is there a track record of long-term delivery in partnership arrangements that depend on measurement-based remuneration? does the supplier have the capacity to deliver the service claimed as core, in a performance-based environment? what working practices demonstrate ability to measure performance? Effects of contractual interfaces Contractual interfaces will be created between various suppliers. RPA is interested in identifying how each supplier s demands are protected, i.e. whether each member of the supply chain sets and receives performance measures and targets, and the arrangements for meeting them. Minimising the number of interfaces minimises the amount of supervision required of RPA and therefore the amount of information to be processed into the payment/penalty arrangements. One way of minimising the number of interfaces is to reduce the number of prime contracts let in each project. Whatever the arrangement RPA should establish how the supply chain will measure performance and its own arrangements for auditing them. Use of independent advisors It may be necessary to appoint independent professional advisors to help develop and/or confirm compliance with output specifications, particularly during the development stage. Page 216 of 245

241 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Conflicts of interest can arise where a contractor wishes to move from the role of designer to the role of developer. In this case RPA should appoint an independent advisor; it is important to ensure that any prior relationship between the advisor and the contractor can in no way compromise its advice Some suppliers to the contractor may already work for RPA, in which case it may need to be involved in managing the proposed new relationship, at least to begin with Lenders due diligence will instil a degree of realism and commercial discipline into the claims of the bidders and RPA should ask to see any such independent reports. Living up to public expectations The fact that PPP contracts emanate from the public sector creates responsibilities for RPA. Key among these are safety, service standards, pricing, and powers of influence over use of assets Measures related to safety will need not only to reflect the objectives developed in section 6 but also the Safety Case, approved by the Safety Regulator. Safety measures will also need to reflect the management strategies required by the various authorities, e.g. containment of traffic congestion Service standards have to reflect thorough planning, good design specifications, correct balance of costs and delivered product, product delivered on time and to cost, etc. Performance measures and targets that reflect a public service are subject to public scrutiny. The outcomes agreed in the negotiation process belong to RPA, since it accepts them. Via performance measurement, the contractor must be seen to be responsible for upholding them The farebox is a means for positively incentivising the contractor, such that not all the incentives are forced into performance measurement. Value for Money (VfM) One of the criteria for entering into a PPP arrangement is that the private sector must bring greater effect for less public expense. The techniques of planning for and securing value for money are dealt with in the Commercial framework, but there are some factors that have implications for performance measurement, as follows: accurate assessment of the service requirement; clear output-based specifications, to assist with supplier selection; measures and targets well specified in the contract; monitoring performance and effectiveness, from the start of the contract; and encouragement of continuous improvement (quality, service scope, price). Incentivisation Incentivisation in performance measurement is vital to establishing quality and reliability of monitoring data. Without it, improvements in performance and Value for money would be unlikely to occur at a rate to match the business need The motivation should be to provide extra value added services over those specified originally and which are of material benefit to the end-user. The process should benefit all parties concerned. Page 217 of 245

242 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Conditions for effective performance measurement include: that there is a constant outcome, quantifiable and measurable; that stable market conditions exist; that stretched performance targets are identifiable; that there is a clear necessity for incentives to achieve these targets (otherwise use a standard contract); that sufficient incentive can be given; and that the benefits exceed the effort required. Relationships of the parties in the PPP Once projects are defined and contracts are established, RPA enters into a new set of responsibilities, e.g. monitoring the performance of the contractors. To obtain the best outcome, relationships should be established early. Some rules will have to be developed and clearly set out, in order to manage this relationship RPA will need to decide the number and competence of its staff, in all departments, that it needs to properly interface with and extract from the contractor(s) the information required to define the desired outcome. The level and pitch of this interaction needs definition so as to avoid surprises when it is too late to return to the path leading to the desired outcome The implications for measurement are expressed in the following table alongside those of obtaining value for money. A key difference between partnerships and more formal arrangements is that the latter tend to be self-serving (e.g. fixed price, cost saving, fixed measures). Partnerships are based on give-and-take type communication, which involves a degree of confusion that needs to be worked out each time it occurs. Partnerships need more commitment and indicate less willingness to resort to contractual arrangements as a basis of agreement (though that has to be present). Table 16.2: Implications for measurement in value for money and partner-type relationship Issues for VfM in measurement Implications for partner-type relationship Accurate assessment of the service requirement Clear output-based specifications, to assist with supplier selection Measures and targets well specified in the contract Monitoring performance and effectiveness, from the start of the contract Encouragement of continuous improvement (quality, service scope, price) Planning and design objectives accurately reflect the desired outcome: effective early working arrangement agrees business critical issues. Parties give core support. Key performance objectives correspond to planning and design objectives and become central themes of the contract: changes emerge early and are negotiated, not parked. Performance objectives linked to agreed risk envelope and to payment mechanism: information exchange is mutual. Early behaviour and attitudes toward quality and service indicates future performance: corrective action required sooner rather than later. Relationship characterised by profusion of ideas, leading to possible difficulty in assessing performance. Trust engendered early leads to voluntary proposals. Commitment indicates intent to reveal and discuss mutually beneficial changes. Page 218 of 245

243 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Service level agreements SLAs may be useful as discrete mechanisms to record formal agreements about provision of services. They often occur between or within departments of an organisation or may be set up between supplier and buyer in the context of an overarching PPP contract. They may be contractually non-binding or may be set up as part of a formal contract. SLAs are useful for effecting performance measurement, in setting out the specification for measurement and the terms and conditions for its implementation. Pre-conditions for good PPP negotiations In general, both sides must have the appropriate outlook and share similar expectations to be able to enter into what frequently becomes a protracted period of negotiation. Preconditions, capabilities and assumptions to be considered are shown in table 16.3 below. Table 16.3 Preconditions for good PPP Negotiations RPA s perspective Bidder s perspective Project objectives and scope signed off with all stakeholders before embarking on ITN. Expects to find descriptions in initial public notices and later in Data Room, covering risk envelope and service standards. Appropriate expectations, strong sponsorship. Has to be able to identify a team with right attitude to risk. Output specification(s) written that reflect project objectives, signed off with all stakeholders. Must be able to interpret measures and targets to prepare detailed input specifications. Has ability in team to write ITN, manage procurement process, respond to enquiries, assess bids and effect financial close into contract. Expects instructions on content and format required for submission. Can identify all statutory obligations and assess their implications. Is able to show that safety and user appeal will be prominent. Able to set up payment formulae, linking risk and performance objectives, and to negotiate within set limits. Can identify and quantify revenue stream, also incentives, linked to service standards. Performance requirements driven by the business case. Demonstrates benefits of each service proposal. Equipped to assess consortium member companies. Demonstrates characteristics of winning team: stability of revenue collection, early completion, capped capex, improved environment, long life. Performance measurement: demonstrates successful techniques. Prepared at the outset, to adopt a front-end approach, so later activities become refinements only, avoiding scope creep over time. Shows early evidence of ability and commitment to long-term, partnership-type contractual arrangements. Page 219 of 245

244 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued PROCUREMENT PROCESS Introduction This section identifies the activities involved in achieving performance objectives and measures throughout the procurement process The outline Procurement Requirements Matrix (Appendix U) represents a first step towards the assignment of responsibility to the party that is best qualified to manage or control the threats posed. The requirements should be consistent with the detailed risk register (see Section 14) This matrix will become increasingly refined as the procurement progresses from initiation to completion and will capture the following information: Type of requirement Source of requirement Effects of requirement Procurement phase in which the requirement resides Indications of ability to manage requirement Characteristics Performance management strategy The requirements at each stage of the procurement process have to be identified for each sub-system, for each contract. Figure 16.3 summarises the requirements for performance standards during the PPP Procurement Process. Project Definition Detailed Project Development Expression of interest and Prequalification Invitation to Negotiate Shortlist Best & Final Offers Negotiations Financial Close Construction and Operation Set outline performance measures. Assign and quantify targets to measure, link to risk and revenue projections. Early simulations showing achievability of key targets, supplier affiliations & measurement linkages. Detailed computations on key targets, definition of secondary targets, policies, safety case proposals, linkages to design, risk, other documentation, assess bidders proposals. Refinement & agreement on bidders measures & targets, detailed management plans, detailed inputs to payment modelling. Further contribution to VfM, agreement on contractual position & linkage to payment models. Final selection of performance objectives, agreement with design, measurement reporting content, fully costed implications & agreement with payment models, RPA contingency plans. Final positions on achievable savings & benefits. RPA organisation in place to monitor contract progress. Early indication on performance prospects. Contingency plans in action. Figure PPP Procurement Process Page 220 of 245

245 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Project Definition Detailed Project Development Project Definition A structured approach to procurement will help to establish consistency and lessons learned. The process-based approach overleaf is suggested as a typical structure for RPA to adopt. It can be read in conjunction with the Requirements Matrix. Referring to this diagram, for the scheme as a whole and for each of its sub-systems, the key activities are: set the performance objectives (using the table in Appendix R); request bids from the market; test the feasibility of subsequent proposal(s); enter into more detailed design to produce an outline statement of how the scheme will work; then confirm the proposal by reference to all interested stakeholders; and finally, procure the scheme This is an iterative process that requires some initial input from RPA to develop the output-specified performance objectives, and which may also require early input from potential bidders and/or others, such as consultants These activities are discussed in broad terms below. There is a strong relationship between establishing performance objectives, designing solutions, and achieving performance objectives in the solution. It needs to be balanced against RPA s desire to see a preferred solution, and the market s need for room to innovate. That is, RPA should maintain the discipline of concentrating only on output specifications, throughout, while looking to the market for the detail of how they will achieve their proposed solution This framework will tend to shape the overall scheme of procurement since it requires a heavy design input. What follows is therefore based on the procurement process. Detailed Project Development The procurement process outlined here pre-supposes that RPA has carried out prefeasibility work that informs its output specification The proposed output specification should be compared with the technical and functional requirements of the planners and designers in order to ensure consistency. The effects that one measure has upon another should also be understood in order to allocate cause and effect, as the sub-systems of the rail transport system are considered in turn. The approach adopted during this stage involves: understanding RPA s objectives; identifying policy constraints on achieving these objectives; conducting workshops with relevant stakeholders; classifying key measures; preliminary allocation of measures between Public and Private Sectors; and preparing an outline (procurement) requirements matrix. Page 221 of 245

246 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Figure 16.4: Process for specifying performance levels and their translation and procured assets Project Definition and Detailed Project Development Pre Qualification and ITN Short list Best & Final offer Negotiation & financial close Construction & Operations Establish overall transport system objectives Establish subsystem objectives State as risks; quantify & identify issues State risks as required design outputs Identify outputs to be carried forward as performance measures Request Expressions of Interest Planning cycle Scheme outline design Scheme approval cycle Place contract Issue ITNs Manage & monitor contract Describe in specific project terms Test & re-set sub-system objectives Separate risks by stakeholder type & refine Identify objectives to be measured Assess bids Initial costing Refined costing Source funding Payment mechanism Fare adjustment mechanism Page 222 of 245

247 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Once the object of measurement has been agreed, the performance measures must be established, e.g. if reliability is an objective to be measured, what is the best way of measuring it and how? Reference to other rail systems will help this process. It is vital to identify appropriate measures. Once they are agreed, it will be extremely difficult to re-set them, as other project activities will build on their assumptions and implications The sub-systems must reflect the functionality of the rail transport system as a whole. Sub-systems are typically: rail infrastructure systems: signalling, power supply, trackwork, controls and communications, electrical and mechanical equipment buildings and structures vehicles station and depots highway works, utilities and services Performance targets have to be established for each sub-system, for the objectives identified in RPA s output specification, at each stage of the procurement process. They must be capable of being measured and reported Other activities involved in this first phase include: risk identification, prioritisation and management process; interfaces with the payment mechanism; and interfaces with the fare adjustment mechanism. Expression of interest and Prequalification Expression of Interest and Pre-qualification At the point where RPA is confident that its output specification represents its ideas about the transport system that it wants built, it will need to sound out the capability and appetite of the market to provide it. This means that Expressions of Interest can be prepared that will match the market s capability. The responses should therefore inform the preparation of Invitations to Negotiate and lead to the receipt of quality bids The RPA s Performance Requirements Matrix in Appendix S now comes into play and can be used to assess the responses Alternatively, RPA could elect not to approach the letting of full-scale contracts until after further feasibility studies have been carried out. Eventually however, the selected bidders will have to demonstrate the feasibility of their proposals for achieving RPA s outputs. Invitation to Negotiate Only when tenders have been issued can bidders demonstrate the feasibility of their proposals. Their detailed bids will demonstrate how performance objectives will be achieved and how they will be measured. This phase is represented in the Procurement Requirements Matrix in Appendix U by the stages up to and including Invitation to Negotiate. It includes discussions with third parties, such as planning and regulatory authorities to ensure that the measurement objectives and means of measurement reflect their requirements. The funding parties will need to be fully involved also, being aware of the risks and constraints that apply to the bidders proposals on measurement Assessment of proposed performance level involves comparing the bidders proposals with RPA s specification as stated in the Data Room and other channels during the bid process. Page 223 of 245

248 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued This process involves identifying performance targets in the bid submission documents, and aligning them with the requirements matrix A mechanism often used for assessing bids is to assign a weighting to each measure and target, for each sub-system. Assess the corresponding proposals and assign scores on a simple grading, arriving at a weighted score for each target. Shortlist Shortlist This phase is represented in the Procurements Requirements Matrix in Appendix U by the stages up to and including Shortlist. Here, RPA identifies the bidders that most closely meet its output specification. The discussion on selecting performance measures in the framework on Contract Management (Section 17) is useful At this stage, the preferred bidders have to be able to demonstrate, through sufficient outline and detailed design work, an appropriate degree of robustness as to how their proposals satisfy the output specification. The table overleaf indicates the amount of work needed for a bidder to reach the Best and Final Offer (BAFO) stage, which comes next The bidders must refine their detailed project developments in the light of all requirements from RPA and third parties and present fully costed proposals. Page 224 of 245

249 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Table 16.4-Scoping performance measurement in contracts Contract scope Aspect of Comment Light rail, Metro, Heavy rail development Design & Build Infrastructure sub-systems Technical studies: surveys, utilities EIS, safety, geotechnical, etc. Other subsystems Rolling stock Stations/depots/ workshops/ offices Ticketing systems Operate All subsystems Set outline performance objectives by which to measure progress against programme plan each contract. Set outline performance objectives for measurement on time basis. Route alignment Detailed civil design Tunnel & bridge construction Formation and related civil construction Track-laying Power supply & distribution Electrical & mechanical Emergency systems Test & commission Contracts covering: Signalling, CCTV, SCADA, PA, Phone, Radio, ATO, other communications systems Test & Commission Full tram/train sets with safety case Test & commission Tram stops: in civil works contract Building structures, including all systems Reader/gate-line equipment Processing system/business processes Test & commission Set contract term, review periods State investment/improvement expectations Request organisation design Request business processes design Request operational plans, timetable Request management plans, by system Request safety management plans Maintenance: inspection, renewals, RAMS plan, degraded operations plans, procurement strategies, etc. Statement of residual asset condition and monitoring mechanisms to technical and safety requirements Page 225 of 245

250 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Best & Final Offers Best and Final Offers This phase is represented in the Procurements Requirements Matrix in Appendix U by the stage BAFO, in which the preferred bidder is notified. The BAFO contract must be capable of being used for the purposes of actually undertaking the work, so it strives to become the finished article, although this is rarely achieved in practice The BAFO contract must include an equivalent commitment from third parties on all aspects of performance. This means that RPA must be in a position to take a comprehensive view of all requirements, whether operational, regulatory, statutory or financial. It is not that it should be prescriptive, rather that it should be in a position of knowing that all risks and opportunities have been covered. Negotiations Financial Close Construction and Operation Negotiations and Financial Close It remains for both sides to carry out final negotiations, prior to closing the deal. Hence at this stage, the bidder must be able to commit to installing the processes, systems and organisation needed to carry out performance measurement This is the point in the process at which RPA begins to hand over the running to the successful bidder in earnest. To this point it has made the running; from here on, it must adopt a different role, described in the framework in Section 17, Contract Management The funders must feel that they have been fully involved and are satisfied with the legal documentation. Construction and Operation Bidders will be expected to propose robust strategies for managing all aspects of performance, including management of cascaded activities. Objectives in assessing such strategies include: To ensure that RPA s tolerance for performance is clearly signalled; To have all the key activities identified, quantified in terms of performance, prioritised, managed, monitored and treated in a consistent and effective manner across rail projects; To ensure a framework is in place that will ensure that key performance objectives are managed effectively and that the likelihood of negative scope creep or opportunities being missed are minimised; To provide clarity regarding the objectives and performance implications of successful performance management; and To develop a recognised series of Key Performance Indicators which are integrated into reporting systems Examples of activities that require management strategies include: Effects of headway times on schedules; Systems interface planning, e.g. wheel/rail interface; Safety Case adherence; Organisation competence; Treatment of the mobility-impaired; Page 226 of 245

251 PERFORMANCE STANDARDS AND OUTPUT SPECIFICATIONS continued Effects of degraded operations, contingency planning; Supply chain management and lay-off of responsibility to performance; and Maintenance, procurement, quality management. Page 227 of 245

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