Sir Roy McNulty‘s value-for-money report, Realising the Potential of GB Rail, published in 2011, found a lack of trust between industry players was one of the causes of increased costs and delays to large-scale infrastructure projects. And as High Speed 2 (HS2), the proposed link between the north of England, Birmingham and London, embarks on a multibillion-pound procurement programme, it is charged with learning the lessons spelled out in the report.
Individual infrastructure companies tend to work separately, the report suggests, with little regard for overall system benefits. This leads to “the duplication of activities that could be done better in a single place, if industry members were able to trust other parties to deliver their requirements”, it says.
The procurement of HS2, which is expected to be completed in 2033 and cost around £55bn, is set against a history of high costs compared to similar projects in the rest of Europe. Infrastructure UK, a government body supporting major projects, showed construction costs in the UK were significantly higher than for the four most directly comparable projects on the continent. For HS1, the Channel Tunnel links, costs were at least 23% higher and station development costs indicate the UK is 50% more expensive, for example, than Spain.
The person charged with securing value for money in the HS2 project, commercial director Beth West, explains why rail procurement can sometimes be relatively high in the UK. “Say, you’re planning a wedding: as soon as you tell the caterers what they are booked for, the price goes up. Rail procurement is like that. As soon as you tell a supplier it’s a rail project, then the cost starts to climb.”
Such behaviour sets the relationship off on an antagonistic path and quickly erodes any trust that did exist between the two parties.
However, the McNulty report puts this, in part, down to procurement. It says: “Rail procurement has a very uneven demand profile, coupled with a short-term approach to relationships and investment with poor cost transparency. There is poor application of supply chain management, including a poor take-up of collaborative approaches around the high-risk and high-value procurements.”
HS2 is working hard to put this right by developing a better relationship with suppliers, West says.
"When commencing any kind of contracting process, my approach is to look at it through a risk lens and ask, ‘What are the objectives and risks?’ and try to mitigate the risks and achieve those objectives," she suggests.
She adds that one of the big risks for HS2 is a lack of mobilisation in the supply chain, given the scale of the work. "We are conscious of being a good client. The risk is, in terms of mobilising a massive supply chain, people cannot be bothered or put their rubbish teams on the job. Or we could procure things in such a way that makes suppliers use really sharp commercial practices, which is not to the benefit of anybody."
West says she wants suppliers to recognise how much HS2 has listened to them and hopes that this will help build trust.
"We have gone through three years of consultation. It’s the first time we have consulted on the whole of procurement strategy, not just individual packages. We have really tried to listen to suppliers and go through a process to understand how they feel about our proposals and we have made changes based on what we are hearing from our suppliers," she points out.
One of the main reasons why such projects have incurred higher prices from suppliers is because of the provision of safety measures while working on live railways, says West. HS2 is trying to avoid these costs by encouraging suppliers to construct more elements of the system off-site, away from the live railway.
"This is a design issue, but it is also about creating a procurement process where we are looking for innovative techniques. We’re going to be asking our suppliers to really demonstrate how they would do things differently compared with a traditional British rail network build process," she says.
Collaboration is a vital part of this trust-building process, but it is not only important when dealing with external suppliers. Internally too, it is critical to build trust with other stakeholders as most of the work HS2 produces will come through its contracts, adds West.
West has herself had a varied career working for the US House of Representatives before moving into banking. Then in 2003, she joined Transport for London where she worked in a number of risk, finance and commercial roles. She was also head of commercial for Thames Water’s Thames Tideway Tunnel project, which has won praise for its procurement processes. She joined HS2 in 2012 and clearly has a strong understanding of the needs and requirements of other stakeholders.
"We, as an organisation, are focused on making sure that when we put together the scope of work, we’ve got the team in other parts of the business involved in those actives as well as participating in evaluation. No procurement is done by just procurement people.
"We try very hard to make sure that we understand internal customers’ requirements too. Without that, we will not get a happy outcome. We don’t want to hand them a contract they don’t want, or a supplier they don’t want," she says.
Fortunately, some of procurement’s preferences, in terms of off-site building, are shared by the technical team, who also want to see standardised processes to maintain quality. This, West believes, will help procurement further down the line by keeping down whole-life costs, as it is cheaper and more effective to maintain standardised components.
But, West suggests, it is important to put these arguments forward when dealing with HS2’s ultimate stakeholder and source of funding, the public, as they are represented by political leaders.
"There is a maturity within government that is helping them to move in the direction of understanding whole-life costs, but the capital costs are the near-term focus so there is always a tension. The real issue is striking that balance between making sure capital costs are not ridiculous while making sure you drive down the maintenance side of things," says West.
UK infrastructure projects have a history of difficulties in justifying capital investment on the basis of long-term savings on whole-life costs. While there is growing trust in these arguments, procurement still needs to bring evidence to secure funding.
"It is a difficult area. The industry has worked hard to educate the politicians [in] this area. Procurement is asked to drive down whole-life costs, but also needs to bring that within fixed funding. At the margins, these two priorities can be in conflict," says Richard Threlfall, head of infrastructure, building and construction at KPMG.
Threlfall suggests that there is an increased role for data in procurement and building information modelling to justify upfront spending in terms of whole-life savings.
"There was a point when the politicians would think the argument for a better asset now and lower costs later was gold plating. But now there is much better evidential data. If the case is well made, then the Treasury will listen. They are interested in this area but the evidence needs to be clear," he says.
In the autumn of 2015, UK chancellor, George Osborne, pledged £100bn by 2020 to be spent on infrastructure projects. The challenge for the procurement profession will be to ensure value for money in this colossal investment programme.
All eyes will be on HS2 to see whether or not its efforts to improve trust across all stakeholders and nurture collaboration will actually bear fruit.
Be a good customer
"We need to be a client that contractors want to work for not just feel that they have to work for. We need them to bid for projects through the life of the programme and be advocates of that."
Work in cross-functional teams
"When we look at the big programmes, most of the people working on the procurement are not procurement people. This is a really big cross-functional, multi-disciplinary activity."
Look at whole-life costs
"My experience working for London Underground told me that in 1909, when they put in escalators, they did it one way for one station, and a different way for another. We have learned a lot of lessons since then and in HS2 are still evolving."
Recruit a balanced procurement team
"Construction-procurement people, with infrastructure experience, are incredibly useful, but we also have a lot to learn within public sector procurement about how things are done in other industries."
Build a good culture
"We work on team building and recognise that culturally we’re trying to play to people’s strengths. Everybody has stuff to learn."
This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.
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