Roy McNulty’s interim report on how to get value for money from the railway sector suggests that train operating companies are set to be turned into quasi developers

This week David Higgins, Network Rail chief executive, revealed a radical shake-up that will split the network into nine regional units in a bid to drive savings. The seeds were sown in December 2009, when the transport secretary announced that a rail value for money study was to be carried out by Sir Roy McNulty.

The full report is due to be published in April this year but in the meantime McNulty has published his interim report and it indicates an overhaul along the lines Higgins announced.

Broadly speaking, the full report’s terms of reference are to examine the overall cost structure of all elements of the railway sector and identify options for improving value for money while continuing to expand capacity and drive up passenger satisfaction.

Whatever the recommendations, the McNulty report is likely to herald a sea change in the way GB Rail operates and, more importantly from a construction perspective, how it is developed over the coming years.

The report provides an insight into the scope of potential cost savings in GB Rail and of initiatives that might be employed to effect such savings. The idea will be to implement a set of wide ranging and interdependent initiatives aimed at achieving value for money, without adversely affecting customer satisfaction.

One such aim is to provide “greater clarity of roles between government and industry, with government involved in less detail, and the rail industry accepting greater responsibility for delivering the broad objectives set by government”.

Thus far train operating companies have only had to take on responsibility for redecoration and maintenance

The interim report is quite revealing - according to McNulty, Network Rail’s maintenance and renewal expenditure in 2006/2007 was between 30% and 50% less efficient than comparable European railways with civil engineering costs in the UK being typically double those in Europe. The whole industry’s costs in 2008/2009 rose to about £12bn, of which about half was paid by government funders. It doesn’t take a genius to work out that this is nowhere near sustainable on a long-term basis. The full McNulty report is likely to suggest changes in the way the regeneration of areas on or around stations is procured. Currently, as part of the franchise arrangement, train operating companies (TOCs) lease the stations along their routes from Network Rail. The main terminal stations are still looked after by Network Rail.

A typical station lease requires the TOC to repair and keep the station in no worse state of repair than is set out in the statement of condition - an obligation the TOCs would no doubt acknowledge is fairly light. Many large-scale refurbishments and station regeneration projects are, therefore, still procured by Network Rail, mainly in partnership with commercial developers with the consent of the individual TOC, rather than solely by the individual TOCs themselves.

It is anticipated that post-McNulty, the franchising arrangements will change so as to shift the obligation to carry out large-scale refurbishments and station regeneration projects on to the individual TOCs. They are likely to be obliged to sign up to full repairing and insuring leases and, as part of the franchise, to agree programmes for the development and regeneration of many of the stations along their franchised routes.

So how will the TOCs deal with this potential new arrangement? After all, thus far they have only had to take on responsibility for redecorating and maintenance. TOCs will be expected to take on much more of the development risk and will no doubt look to share this risk by forming strategic partnerships with commercial property developers. This will have implications for their own risk profile as well as the availability and cost of funding - good news for the hitherto overburdened tax payer.

Should this approach be adopted, it would offer a wealth of opportunities for developers and TOCs alike. The TOCs will become the new “landlords” of stations that will be redeveloped so as to include and form part of a possibly larger mixed-use development. Epsom station in Surrey, for example, is being redeveloped by Solum Regeneration (a partnership between Network Rail and Kier Property) to include retail, residential and hotel accommodation on the one site. Post-McNulty, TOCs can expect to turn into quasi-developers with all the challenges and rewards this brings.

Joe Griffiths is a partner in Manches