Australia: Achieving Best Practice In PPP Procurement: The RailCorp RollingStock PPP

Last Updated: 18 October 2007
Article by Owen Hayford

The RailCorp Rolling Stock Public Private Partnership ("PPP") between Railcorp and Reliance Rail is unique. It is the first time that Government has procured rolling stock for an existing railway under a PPP delivery model where:

  • Government takes demand risk, retains responsibility for operating the trains, sets and collects fares, and maintains the track; and
  • the private sector finances, designs, manufactures and maintains the trains, and makes them available for use by RailCorp in return for a performance-based availability payment.

Unlike a tollroad, hospital or school PPP, there was no existing market precedent which RailCorp could use as a basis for its contract. Accordingly, RailCorp started with a blank piece of paper and worked up a Commercial Terms Sheet which, once settled, became the basis of the PPP contract.

Investing in getting the contract right

RailCorp, to its credit, invested significantly in getting the contract right before issuing it to the market as part of its request for detailed proposals ("RDP"). RailCorp engaged extensively with the market on the proposed payment regime and other risk allocation issues and, most importantly, made the tough decisions upfront – there was no "let’s just run with this (probably) unrealistic risk allocation and see how the market responds". This investment translated into:

  • bids which could be readily compared from a risk allocation perspective (for example, all bidders basically accepted most aspects of the proposed payment regime)
  • a relatively limited number of commercial issues requiring further negotiations, which enabled a short negotiation phase with the two short listed bidders and very swift deal closure following receipt of final committed proposals; and
  • a final risk allocation which is fundamentally the same as that contained in the RDP.

Sophisticated approach to risk allocation

The project involved many complex operational interfaces which required a sophisticated approach to the allocation of risks.

For example, Reliance Rail’s revenue stream depends on the availability and reliability of the trains. The reliability of the trains, however, is also affected by how well RailCorp’s crews operate the trains and respond to problems with the trains. RailCorp would not provide any warranties in relation to the operation of trains, so a more sophisticated approach was required.

Reliance Rail incurs abatements to its availability payment – called reliability and disruption adjustments or RDAs – if a train runs more than three or 10 minutes late, or is cancelled and taken out of service, because of a Reliance Rail-related problem. If the delay is attributable to both Reliance Rail and RailCorp, the RDA will be calculated by reference to only that part of the delay caused by Reliance Rail.

This all seems simple enough, however it can become much more complex. A train may become late because of a Reliance Rail-related problem, for example if the train’s doors won’t shut due to a train malfunction after letting passengers on and off at a station. But then RailCorp’s crew may fail to press the reset button to fix the problem, or may press the wrong button making the problem worse, and cause further delay. Should the crew be contractually obliged to take action to address the problem? And if it fails to take such action, or takes the wrong action, should the additional delay so caused be ignored when calculating the RDA?

The contract addresses these issues by providing that RailCorp’s crew may take steps to mitigate the effects of a Reliance Rail related problem but is not obliged to. Obviously, however, it is in RailCorp’s interest to do what it can to minimise delays and interferences to timetabled services. The contract also states that the failure by RailCorp to take mitigating steps, or the taking of steps which make a problem worse, will not count as a separate cause of delay for which RailCorp bears responsibility.

This however is subject to the deemed action regime. Under this regime, there are a number of deemed actions (such as pressing the reset button when the doors won’t shut) for which deemed action times are to be agreed by the time the seventh train enters into operational service. Where a delay to a train is due to a problem which can be fixed by a deemed action, the delay time will be recorded as the lesser of the actual delay time and the deemed action time. Therefore, if RailCorp’s crew takes longer than it should to take the deemed action, Reliance Rail will only be penalised for the time it should have taken.

The above is just one of many examples of the sophisticated approach which has been taken to risk allocation on this project to ensure a workable solution that delivers a value-for-money outcome to the State’s taxpayers.

Thanks to Jennifer Ingram for her help in writing this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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