Changing track on skills
An evolving rail industry requires traditional project finance roles to broaden and encompass new skills.
CIMA marks 100 years of evolution this year, but the management accounting profession is not the only area to see rapid change over a long period. In the UK and globally, the rail industry, which is around 200 years old, is currently going through a period of change that reflects a significant growth in demand and an evolving industry structure. It is also having to drive efficiencies and value for money (ie, obtaining the optimum balance between quality, sustainability, and price for goods and services) in the face of mounting pressure on public finances.
These pressures are exacerbated by the growth in urbanisation and the emergence of an increasing number of megacities (those with more than 10 million residents), which combine to put ever more pressure on transport networks. As a result, governments across the globe are looking for greater private-sector involvement to bring innovation and provide investment (see the sidebar "Private Finance Poised to Play Larger Role").
Because of these changes to the operation of the rail transport market, the traditional project finance roles in organisations in the sector are also changing. Increasingly, they require finance professionals to be much more commercially focused and collaborative. They also need to be equipped with a broader range of skills, such as an ability to perform complex data analysis, an in-depth understanding of the risk-sharing arrangements associated with alternative business models, and the ability to educate a wide variety of stakeholders from different backgrounds.
Given the worldwide increase in demand for new and enhanced rail infrastructure, the developments in the UK are already being seen in other parts of the world, most notably in the US, and are changing the way finance teams work and support their businesses.
Similar transitions are also taking place for finance teams working in organisations supplying to other infrastructure-based industries such as other transport types, general construction, energy, healthcare, and education, as well as those manufacturing both consumer and industrial products. In all of these, the changes are driven by ever-increasing customer demands, and a desire to obtain greater value for money.
Evolution of roles
The skillset of the traditional professional in companies involved in long-term rail construction projects has historically spanned a broad range of activities, from supporting bids and assessing estimates to reviewing project progress against budget, and agreeing and collecting project overruns.
However, the varied and exciting roles that are available to the modern finance professional require additional skills and the ability to embrace a much broader remit. Most of these roles are driven by the requirement for private-sector suppliers to have more "skin in the game", in terms of greater risk-sharing. They are also driven by the need to bring more private investment and/or financing into the infrastructure procurement process.
The key elements of these new roles include:
Working collaboratively, with a broader commercial focus
With the shift towards projects delivering on outcomes and the focus on realising benefits, finance teams need to understand influencing factors to enable them to help demonstrate, quantify, and forecast the financial benefits of new technology (see the sidebar "New Technologies"). Finance leaders also need to work together with users of that technology to determine which benefits can actually be realised.
Equally, when contracting under alternative business models, such as service-based contracts or using future savings to finance initial investment, input will often be required from a number of stakeholders working collaboratively to share information.
The commercial aspects of a project, in particular risk management, and mitigation and management of costs over the whole life of an asset, are just as important as the traditional "financials". These complementary skills will grow alongside traditional financial and accounting expertise.
Professionals will also need to have a greater understanding of new technologies and their organisations' business strategies, enabling them to understand whether all the risks have been considered. This will involve working closely with nonfinance colleagues, such as engineers, other technical specialists, and lawyers.
Data analysis and modelling skills
Advanced data analysis and modelling skills, utilising complex formulas and developing appropriate estimates, are vitally important in a number of areas:
- Identifying trends in equipment performance data, obtained to predict how and when it might fail in the future — so that corrective action can be taken in advance as well as for planning and pricing maintenance regimes over time. This is more challenging for new technologies, as limited historic data is available.
- Determining suitable probabilities, indices, and mitigation costs to price future risks appropriately, so that margins can be protected and risks can be better managed whilst remaining competitive.
- Working with customers to help build business cases over the life of an asset that enable suitable payment mechanisms to be designed that meet their objectives and constraints.
Engaging and educating key stakeholders
Increasingly, new technologies are more and more complex and the supplier tends to be the "expert" on these, with other stakeholders, including the customer and potential financiers, only having a limited understanding of the new technologies and the risks that these bring.
Therefore, a good deal of education is required both within supplier organisations and with the wider stakeholder community to ensure that the best overall solution to the problem statement is achieved. Often, this involves taking into account different, sometimes conflicting, objectives. In addition, guidance will be needed for those stakeholders who are not used to looking at a long-term or whole-life perspective when making decisions.
Solving challenging problems
In summary, organisations providing infrastructure across the globe need to continue to be innovative and exploit new technologies in today's digital world.
As solutions become more complex, there is a much greater focus on collaborative working and balanced risk-sharing between the public and private sectors, resulting in alternative business models being developed, which include the introduction of private finance.
The evolving structure in the rail industry requires finance professionals to step up and support their business partners more holistically. Finance roles are continuing to develop, providing exciting and varied opportunities for modern finance professionals to broaden their skillset and become much more commercially focused, collaborating with a wider set of stakeholders and undertaking complex data analysis and modelling.
This all makes for a rewarding career in infrastructure. Those who take this path are helping to solve some of the world's most challenging problems and improving the overall experience for people going about their daily lives.
UK rail network: A brief history
The UK’s rail network is the oldest in the world, dating to the early 1800s when a number of small private companies operated local rail links. These isolated links were brought together into something resembling a network in the 1840s, and, over the course of the 19th and early 20th centuries, the railway expanded rapidly.
This golden era of rail expansion and popularity slowed considerably as the motor car gained popularity. As mass car production increasingly made independent travel an affordable option, public and private investment steadily transferred from rail to road infrastructure. As the UK’s rail industry came under increasing financial pressure, there was wholesale closure of rural railway routes in the 1960s and 1970s to concentrate resources on core intercity lines.
The past 20 years have seen rapid population growth and a significant increase in the demand for all forms of travel globally. Major roads, railways, and airports worldwide are increasingly running at or near full capacity for longer periods — not just in peak hours.
With increasing road congestion and a drive towards more sustainable transport solutions, the number of rail passenger journeys on the UK’s rail network has doubled in the past 20 years with some reports suggesting a possible further doubling in freight and passenger traffic by 2030. This all adds up to a transport network that is under unprecedented levels of pressure, so further increases in capacity together with improved efficiencies are badly needed.
The UK rail industry model
After its privatisation in the early 1990s, the UK rail industry became fragmented, with many stakeholders and different private organisations operating trains and managing infrastructure.
Private train and freight operating companies operate the trains — some with the support of government subsidies. Almost all of England’s, Scotland’s, and Wales’s fixed infrastructure, including the track, stations, signalling, and train control equipment, is owned, operated, and maintained by Network Rail, which then charges operators to use its assets.
Network Rail is also responsible for upgrading, renewing, and expanding the infrastructure, a task made more difficult by economics. It is not always easy to recover the investment from the end users (the fare-paying passengers and freight users), due to the fragmented nature of the industry and the fact that most passenger fares are set by the industry regulator.
These financial pressures were exacerbated from 2014, when Network Rail was re-classified as a central government body, meaning that its debts became part of the UK public finance deficit. The move also put an end to the legacy practice of borrowing to finance investment.
New technologies
Much of the UK’s current infrastructure network is reaching the end of its operating life. However, following significant investment in R&D, the development of digital technology is enabling the industry to cost-effectively squeeze more capacity out of the existing network, helping take pressure off the capacity shortfall.
The new digital signalling and control solutions enable trains to safely run more closely together, allowing more trains (and therefore passengers) to be on the track at any given time. They also allow traffic to be managed more effectively following a disruption, and even enable trains to operate automatically through the most heavily congested areas.
In the future, collaboration between industry stakeholders will be improved by plans to more closely align track infrastructure and train operating companies’ strategies and also their investment programmes. Network Rail and the train operators will work together to implement the right technology solutions in their local geographical area, which will involve investment in both the trains (so they have enough capacity and are compatible with the new equipment) and the new technology being implemented in the fixed infrastructure.
Private finance poised to play larger role
Technology for the rail industry is now so advanced that infrastructure owners worldwide are looking to identify supply partners to help share the risks associated with the design and construction of new systems. Often, these suppliers are best placed to manage and mitigate the risks involved. This approach can also provide them with an incentive to successfully deliver on new projects.
As a result, the industry is beginning to make decisions on a longer-term basis, taking into account the costs of an asset over its whole life. In the past, short-term decision-making often led to infrastructure being procured on the basis of its initial purchase price, without consideration of the costs of operating and maintaining it, or the potential it provided for future upgrades.
Whilst affordability (the ability to spread the cost of upgrades) over the short term is now less of a focus than was previously the case, private finance can be an attractive option to support much-needed upgrades when they are required, rather than having to wait until funding becomes available. Upgrade programmes can then bring the benefits of reduced operating and maintenance costs and, ultimately, the increased revenue from passengers and freight. In turn, this can be used to pay for both the initial investment and the associated finance costs over time, delivering a truly “self-funded” project.
This approach also has the advantage of possibly keeping the investment off the UK public balance sheet — something the UK government is keen to achieve. This is only possible if most risk is transferred to the private sector (which may be difficult in practice, as some risks — for example, demand risk — cannot currently be controlled by the supplier). In the past, lease accounting rules could sometimes be used to achieve an off-balance-sheet treatment by structuring the risk-sharing, so that an operating lease was achieved. However, this “loophole” has now been closed following the introduction of the new accounting standard for leases, IFRS 16, effective from January 2019. Network Rail still is — and always has been since privatisation — a private company in the UK, although it receives almost all its funding from the UK government. It has a UK regulatory requirement, however, to report in the manner of a UK-listed public company, and so from 1 April 2005 it has been reporting under EU-adopted IFRS.
Olcay Yılmaz, FCMA, CGMA, Ph.D., is finance director at Siemens Rail Automation, a part of Siemens Mobility Ltd, where he heads a 75-strong finance team across the UK. The Rail Automation business unit has 1,700 specialist employees including an R&D team of around 200 people and manufacturing facilities in the UK. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.