Select Committee on Transport Written Evidence

Memorandum by Balfour Beatty (FOR 111)



  Balfour Beatty is an international engineering, construction and services group with annual sales in excess of £3.5 billion. Approximately 25% of these sales are in the rail sector, of which approximately half are in the UK and half in a range of overseas markets, most notably the USA, Germany and Italy. As the largest fixed infrastructure rail contractor in the world, the company has successful, long-standing relationships with rail network owners and operators in many countries.

  Balfour Beatty's origins in railways have their roots in the 19th century with the manufacture and supply of switches and crossings and it had been a major contractor and supplier to British Rail for decades before the privatisation of the network in the mid-1990s. In particular, it was responsible for the original electrification of the West Coast Main Line in the 1960s and of the re-electrification of the East Coast Main Line in the 1980s. Of its projected 2004 rail turnover of £850 million, approximately £120 million per annum will be in rail maintenance under its two on-going contracts in the UK.

  The scope of Balfour Beatty's expertise covers electrification, track work, signalling, performance products, specialist plant and equipment, the manufacture of switches and crossings, renewals and maintenance. These skills are deployed in single, multi-discipline or major turnkey rail projects. The company invests significantly in innovation. For example, it has developed an embedded track system that has a number of safety features not currently available on conventional ballasted track which requires virtually no maintenance and, as a result, presents lower "through life" cost.

  Balfour Beatty is committed to remaining a major contributor to the improvement of the UK railway system.


  Balfour Beatty does not regard rail contracting as a "gravy train". As a committed partner to Network Rail in a range of rail engineering disciplines, we seek an equitable balance of risk and reward on the contracts carried out. Typically, we believe that the risks that we bear, the nature of the work undertaken and the level of investment in plant, equipment, manufacturing and R & D should attract profit margins of a minimum 5%. Below this level of return, the value of our participation in the industry to our shareholders becomes marginal. Typically, on a worldwide basis, we achieve these margins, which, by definition, are acceptable to the network owners for whom we work.


  The conversion of the RTla maintenance contracts let in 1996 at the time of privatisation (which were increasingly onerous to contractors in their latter years) to IMC2000 contracts in 2001 offered a painshare, gainshare target cost formula more likely to balance the interests of customer and contractor. Latterly, the introduction of the New Maintenance Contracts (NMC) will provide a reduced risk profile and acceptable margins for the contractor, as the asset owner takes the preponderance of key engineering decisions in-house. Quality and safety issues will remain the responsibility of the contractor.

  In partnership with Network Rail, Balfour Beatty has carried out much of the necessary process redesign and development and training work to facilitate the introduction of NMC. NMC has been implemented on our Anglia contract and will be implemented in Southern Region, of which our Kent contract forms a part, at the end of November. These contracts both run to March 2006.

  Balfour Beatty's Wessex maintenance contract expires in April 2004. As part of its intention to become a more informed buyer of contracting services, Network Rail will be taking the work under this contract in-house. This decision was disappointing for Balfour Beatty, but we have co-operated fully with our customer in making the necessary arrangements, and, in the interests of reducing the duration of a period of uncertainty for employees and companies, the transfer date has been brought forward to November 2003.

  Balfour Beatty believes that a period of stability around a mixture of NMC and Network Rail's direct management of a part of the network is a critical ingredient in ensuring that the maintenance industry has the opportunity to rebase its activities and expectations, to move ahead with confidence and to deliver the required increase in efficiency.

  The company continues to be a participant in the maintenance market as part of its wider, long-term commitment to serving Network Rail. It is tendering for the West Country maintenance region, which is due to be adjudicated for the commencement of a new contract in April 2004, and would consider other opportunities should they arise, on appropriate terms.


  In respect of the key general issues which the Committee is to explore, Balfour Beatty would comment as follows. The demand for efficient rail transportation is growing worldwide. In a small and crowded island, the effective use of the existing rail footprint must be a critical element in any transportation policy and yet the system has been the victim of substantial under-investment by successive governments over a long period of time with, for example, rail being replaced at rates of about 1% per annum.

  The present network requires both substantially improved network quality and reliability, the relief of key bottlenecks and new lines in strategic positions if it is to make a proper contribution to an integrated transport policy. Long-distance freight lines and high-density commuter routes are the most critical contributions to economic success.

  In other countries, investment in rail has outstripped that in the UK and the efficiency of the networks in these countries is consequently superior. In many places (eg the US, Sweden, Germany, Hong Kong, Australia), network operators are actively considering, and in some cases already pursuing, the outsourcing of maintenance to independent contractors as a more cost-efficient method of ensuring that their rail systems meet and maintain appropriate standards.

  In the UK, there is ample expertise to deliver a superior cost-effective network. Appropriate levels of investment must be made to achieve this aim.

Mike Welton

Chief Executive

15 October 2003

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