AUDITOR-GENERAL REPORT
PERFORMANCE AUDIT
S AUDITOR-GENERAL’S REPORT
PERFORMANCE AUDIT
State Rail Authority
The Millennium Train Project
State Library of New South Wales cataloguing-in publication data
New South Wales. Audit Office.
Performance audit: State Rail Authority: the Millennium Train Project / [The Audit Office of New South Wales]
0734721498
1. State Rail Authority – Auditing. 2. CityRail (N.S.W.) – Auditing. 3. Railroads – New South Wales –
Auditing. 4. Railroads – New South Wales – Passenger-cars. I. Title: State Rail Authority: the Millennium
Train Project. II. Title: Millennium Train Project. III. Title: Auditor-General’s report: performance audit: State
Rail Authority: the Millennium Train Project.
354.76709944
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Foreword
Large asset acquisitions – whether through construction or purchase – can involve
complex issues and significant risks that need to be carefully managed.
While this audit focuses on the Millennium Train, it has significant broader messages and
implications.
The Audit Office previously audited aspects of the last such rail acquisition, the Tangara.
I wanted to see if lessons had been learnt from the Tangara contract and if the
Millennium Train procurement was well handled. I also wanted to address the complex
issue of value-for-money from such a large acquisition.
Each 4-car Millennium Train set has an estimated service operating life of 35 years. If
all purchase and maintenance options under the Millennium Train supply contract are
exercised, a billion dollars of capital and operating funds will be expended over four
decades.
A project of this magnitude provides an ideal case study. The findings of this audit are
not only relevant to StateRail, but provide useful insights for all those involved with
managing major projects and those with interests in such matters.
The audit also highlights how decisions in one area may be linked to broader issues. This
is especially true of public infrastructure. Value-for-money needs to be assessed in the
context of the overall system, not only for individual acquisitions. This requires longerterm thinking and planning.
This report shows how the constraints imposed by Sydney’s current rail infrastructure
impact on achieving best value when buying new rolling stock. The report highlights the
significant issues and challenges that need to be addressed in providing rail public
transport in Sydney in the 21st century.
R J Sendt
Auditor-General
June 2003

Contents
Foreword
Executive Summary 1
1. Background 9
1.1 About CityRail 10
1.2 Purchase of a New Suburban Train 11
1.3 Previous New Train Purchase Review by the Audit Office 13
2. Strategic Issues and Challenges 15
2.1 Introduction 16
2.2 Infrastructure and Purchasing 16
2.3 Purchasing Process 21
2.4 Train Maintenance 23
3. Timing, Cost and Quality Outcomes 25
3.1 Introduction 26
3.2 Delivery and Costs Achievements at Time of Our Review 26
3.3 Compliance with Technical Requirements 33
4. Other Significant Process and Performance Matters 39
4.1 Introduction 40
4.2 Train Loading Standards Compliance 40
4.3 The Purchase Environment at StateRail 43
4.4 New South Wales Rail Industry Restructure 44
4.5 Intellectual Property Rights 47
4.6 Conflict of Interest 47
4.7 Risk Management 49
4.8 Customer and Staff Information Campaign Expenditure 50

Appendices	53
Appendix 1	Audit scope and objectives	54
Appendix 2	Chronology of Key Events	55
Appendix 3 Appendix 4	StateRail Board Paper Meeting 1 November 2002 Assessment of Status and Progress Made on Tangara Performance Audit Report Recommendations	58
59
Appendix 5	Response from Agencies	62
Appendix 6	Acronyms	69
Performance Audits by the Audit Office of New South Wales	Error! Bookmark not defined.

The Millennium Train Project 1
Executive Summary
Executive Summary
2 The Millennium Train Project
Executive summary
Background On 8 October 1998 the State Rail Authority of New South Wales
(StateRail) signed a contract for the design, build and 15 years
maintenance of 81 new suburban double deck electric passenger cars.
These are now known as the Millennium Train.
On 5December 2002 StateRail formally committed to Stage 2 of the
Contract: another 60 cars and 15 years maintenance. If Stage 3 of the
contract is taken up along with all maintenance options StateRail will
expend approximately $1 billion in capital and operating funds over about
four decades.
The first 4 car Millennium Train set entered into revenue service on the
Sydney suburban rail network on 1 July 2002. As at 10 April 2003 11 of
the 20 sets of 4 cars under Stage 1 of the Contract had been delivered
and entered into service on the network. It is expected that one 4 car set
will be delivered each month.
The Audit Purchasing new trains is a huge, expensive and complex task. We had
previously reported on aspects of the last such major purchase: the
Tangara.
The Millennium Train represents a substantial enhancement of the quality
of the CityRail fleet of Sydney electric suburban passenger trains. There
are still some teething problems, and the train was withdrawn from
service on 10 April 2003 until 1 June 2003, seven weeks approximately,
to undertake further testing. Even so, much about the Millennium Train is
impressive, although time will be needed to tell about its performance.
The net overall increase in the suburban fleet size from the Millennium
Train purchase is 145 cars or 12.7 per cent (1 car is a collision spare).
This is because the purchase of the 200 Millennium Train cars will
allow the retirement of the 56 oldest cars, the Tullochs. It will also
enable 6 car trains to be increased to 8 car trains and provide
additional trains needed to service the Parramatta Rail Link.
In this audit we sought to consider both macro and micro issues. We
looked at the complex issue of value for money. We also looked at how
well the project was managed and if lessons learnt from the Tangara had
been put into practice.
Executive Summary
The Millennium Train Project 3
Audit opinion
StateRail has made significant improvements since the purchase
of the Tangara. It improved measures necessary for handling
contracts dealing with technically complex and innovative
projects, although some other problems have been encountered,
with new lessons to learn.
The design and manufacture of new trains requires a significant
investment in both time and cost. The Millennium Train has
come at a considerably higher price than originally expected. And
it is very late compared to the Government’s original
announcements, as the development/design took longer than
planned.
Since the Millennium Train contract was awarded in 1998 and the
budget set:
§ contract (capital) costs have increased by $114 million or 24
per cent to $588 million
§ total project costs have increased by $98.4 million or 17 per
cent to $658 million.
Value for money is always a contentious point. And the
judgement of it can depend on the prevailing conditions and
constraints. If judged within the existing operational
environment, and the constraints imposed by the existing rail
network, evidence supports a view that the purchase represents
reasonable value for money.
But large long-life purchases should be examined from the
perspectives of both the existing constraints and the long-term.
There are clear signs that parts of Sydney’s transport system are
rapidly approaching, if not having already reached, saturation
point. And if that is the case, it is now time to reconsider whether
the existing service operating and infrastructure arrangements
will continue to serve us well into the future.
Future decisions to purchase new trains, and the type of train and
purchasing arrangements favoured, may have better value for
money options available for consideration if current operating and
infrastructure constraints are altered.
Our report urges that a broader and longer-term framework be
made available and examined in the procurement of transport
infrastructure. We, however, also point to some important issues
for improvement in future acquisition processes under the
existing arrangements.
Executive Summary
4 The Millennium Train Project
Key Findings
We found that:
§ the current service objectives, operating strategies and rail
infrastructure (the vertical, lateral, horizontal and weight limitations of
the lines over which services traverse) impose key
requirements/limitations when considering options for purchasing new
rollingstock. These requirements/limitations and any proposed
changes must be considered in totality to ensure that sub optimal
trade offs do not occur
§ there are capacity problems emerging with the rail system/network.
The wide recognition given to these problems flowing from the 2001
“Christie Report”, as well as a series of highly publicised problems in
recent times, provides an opportunity to correct the underlying causes
and make fundamental/revolutionary as opposed to incremental
changes to the existing rail network
§ the traditional procurement method of competitive tendering and
contracting may give rise to risks of a monopoly market being
created in the Australian passenger rollingstock industry
§ important elements of corporate governance were not always
optimal. For example, key decision makers (the StateRail Board
and/or the then Minister for Transport) were:
ð advised of a potential “risk premium” for the maintenance being
outsourced to the train manufacturer/supplier in exchange for
enhanced performance and to maintain the enhanced features in
the train. But this was not quantified at the time the decision
was taken. Current StateRail estimates indicate that
maintenance costs will be less than the remainder of the electric
fleet for the same levels of availability and reliability
ð not specifically advised that as the estimated and tendered costs
for the project were sufficiently similar a further review of value
for money was not needed
ð not given a risk management plan for the Millennium Train
Executive Summary
The Millennium Train Project 5
ð not timely in approving the tendering for the Millennium Train (it
took 17 months). Accordingly the purchase timetable was
aggressive and created expectations which were not met,
although the Contract never planned for the delivery of the train
prior to the 2000 Sydney Olympics
ð not providing and directing sufficient internal audit resources on
this project, a repeat of the situation that occurred with the
Tangara
§ because governments cannot readily walk away from such projects,
even if difficulties arise, they necessarily carry significant risk for
such projects. Contract provisions designed to share risk with private
sector providers thus need to be robust and enforceable should the
need arise. But as occurred with the Tangara, such financial
penalties for late delivery were available but were not activated.
This was because the contract was in dispute over time and cost
issues
§ the ‘payment upon delivery’ approach for this contract did apparently
manage product risks. However, in turn it also created other risk
exposures for StateRail
§ the 409 days delay in the Millennium Train’s progressive delivery and
entry into service caused discomfort and lack of service quality to
passengers, particularly during peak periods on some lines
§ StateRail’s specification of the Millennium Train represented a
significant improvement on the Tangara but was still not as
performance based a contract as would be preferred. StateRail
advised that:
ð a constraining factor is the readiness and ability of the Australian
rail industry to move further along the contract continuum
ð the specification was forwarded for rail industry comment but
the level of feedback was not comprehensive nor extensive.
§ the restructure of the New South Wales rail authorities in 1996 and a
disruptive purchase environment at StateRail had some effect on the
Millennium Train project
Executive Summary
6 The Millennium Train Project
Summary of recommendations
It is recommended that the Department of Urban and Transport
Planning should:
§ in coordination with rail entities compile as a matter of priority
a long term (meaning at least a 20-30 year horizon) strategic
plan for the Sydney rail network.
It is recommended that the Transport Co-ordination Authority
should:
§ require StateRail to expand the level of public reporting of the
outcomes and results achieved against the CityRail
(Community) Service Agreement in order to increase
accountability, transparency and openness about the rail
network’s performance.
It is recommended that StateRail should:
§ explore the various purchasing options available for obtaining
new trains and identify which option gives the best value for
money
§ continue to assess the benefits and risks of its train
maintenance arrangements to ascertain with greater
confidence which arrangements provide the best value for
money
§ further review the level of specification in performance based
contracts occurring in train purchase tenders and contracts
(an issue also with the Tangara)
§ ensure that the performance standards specified in contracts
are appropriate (an issue also with the Tangara)
§ review the adequacy of liquidated damages included in
contracts and specify more clearly how and when liquidated
damages will be applied in the event of the contractor failing
to perform as specified
§ involve internal audit at crucial stages in major projects and in
on-going risk management reviews (an issue also with the
Tangara)
§ have a standard escrow arrangement for relevant intellectual
property owned by the contractor included in all future major
contracts
Executive Summary
The Millennium Train Project 7
§ further avoid potential for perceived conflicts of interest in the
use of probity advisers by limiting the use of the same
advisers in other review work on the same project
§ more carefully assess the options for responding to risks as
contractual provisions do not necessarily avoid and/or
mitigate risk events to StateRail’s business objectives
§ be mindful of reputation risks that marketing and
communications can create with the public (passengers) and
StateRail employees.
Executive Summary
8 The Millennium Train Project
Response from Agencies
Refer to Appendix 5 for agency responses to the report and StateRail
Authority’s response to the recommendations.
The Millennium Train Project 9
1. Background
1. Introduction
10 The Millennium Train Project
1.1 About CityRail
CityRail and StateRail CityRail is StateRail’s (the State Rail Authority of NSW) operator of
passenger rail service covering the greater Sydney region. StateRail’s
principal objective is to deliver safe, reliable railway passenger services
in NSW in an efficient, effective and financially responsible manner.1
CityRail’s Service
Commitments
CityRail has publicly committed to providing safe, clean, accessible,
reliable and punctual passenger train services.2 The services CityRail
provides comprise suburban, intercity and some regional
passenger/commuter trains in the Sydney, Hunter Valley, Central
Coast, Blue Mountains, Southern Highlands and South Coast areas.
CityRail Fleet at
30 June 2002
CityRail had a fleet (rollingstock) of 1,502 passenger train cars
(carriages) in use at 30 June 2002. This fleet comprised four generic
categories of trains, see Exhibit 1 below.

Exhibit 1: CityRail’s Fleet Generic Categories as at 30 June 2002
Generic Category	Area of Operation	Fleet No. as at 30 June 2002
Suburban – Double Deck Electric	Berowra in the north, Emu Plains and Richmond in the west and Macarthur and Waterfall in the south	1,138
Outer Suburban – Double Deck Electric	Wyong in the north, Springwood in the west and Wollongong/Kiama in the south	80
Intercity – Double Deck Electric	Newcastle in the north, Lithgow in the west and Kiama in the south to Central where service terminates	240
Regional – Single Deck Diesel	Goulburn to Campbelltown and Nowra to Kiama where service terminates although some services go through to Central and Wollongong respectively where service terminates Dungog and Scone to Newcastle where service terminates	44
Total Rollingstock	1,502

Source: StateRail Records
The fleet had a gross (undepreciated) value/cost of roundly $4.0 billion.
1 Transport Administration Act 1988 section 4A (1)
2 CityRail Website Service Commitment Pages as at 29 January 2003
1. Introduction
The Millennium Train Project 11
CityRail Large
Operator
This investment in rollingstock reflects CityRail being the largest rail
service operator within Australia, see Exhibit 2 below.

Exhibit 2: CityRail’s Operations Compared to that Occurring Nationally
2001-02	QLD	SA	VIC	WA	NSW	Total
Millions of Passenger Journeys	47	8	134	30	276	495
Number of Stations	142	84	288	57	306	877
Number of Services Each Weekday (Monday to Friday)	740	242	2,061	750	3,000	6,793
Fleet – Electric & Diesel Cars	443	100	1,108	96	1,502	3,249

Source: Agency 2001-02 Annual Reports and/or Website Pages
1.2 Purchase of a New Suburban Train

Acquisition Genesis

The purchase by CityRail of a new suburban electric passenger train had its genesis in 1995 when the (then):

§ Group General Manager CityRail approved development work
commencing of the Fourth Generation Train
§ Minister for Transport announced that the development of the
Fourth Generation Train was underway.
StateRail Board and
Ministerial Approvals
The StateRail Board and the then Minister for Transport approved in
February and May 1997 respectively the acquisition of a new suburban
electric passenger train. The Board set a budget of $212 million
(1995-96 dollars).
Pre-registration to
Tender
Three train supply companies responded by the closing date of
13 June 1997 to the ‘pre-registration to tender’ request published in
major Australian newspapers:
§ ABB Daimler Benz Transportation (Australia) Limited (trading as
Adtranz)
§ a joint venture between GEC Alstom and Clyde Industries Limited
(trading as Clyde Engineering)
§ A Goninan & Company Limited.
Tenders Called and
Received
On 22 July 1997 these companies were requested to submit tenders for
the design, build and possible maintenance of the Fourth Generation
Train. Three tender offers were received at the closing date of
5 November 1997.
1. Introduction
12 The Millennium Train Project
Execution of Contract The then Minister for Transport and Evans Deakin Industries Limited
(EDIL), whose subsidiary was EDI Rail, trading as Clyde Engineering,
signed on 8 October 1998 the Deed of Agreement (the Contract) for
the design, build and maintenance, for an initial period of 15 years, of
81 double deck electric cars. This was Stage 1 of the Contract.
The value of the Contract Stage 1 (design, build and maintain for 15
years only) was estimated to be $323 million (1997/98 dollars).
However, if all further purchase (an additional 120 cars) and
maintenance (for 35 years) options are taken up then the contract is
worth approximately $1 billion.
StateRail gave a formal commitment to Stage 2 (another 60 cars) of
the Contract on 5 December 2002. On 17 March 2003 the then
Minister for Transport announced in effect that StateRail would
proceed with the Stage 3 purchase option (another 60 cars) of the
Contract.
Train Naming The then Chief Executive of StateRail on 22 April 1999 advised the
project’s steering committee that the new train was to be known as
‘the Millennium Train’. Previous public advising on when the new
train was expected to enter into service had seen it nicknamed ‘The
Olympian’. However, the Contract never intended for such a delivery
timetable.
Entry into Revenue
Service
On 1July 2002 the first non-peak hour revenue service of a 4 car
Millennium Train set occurred. The first non-peak hour and peak hour
revenue services of a 8 car Millennium Train set occurred respectively
on 30 November 2002 and 4 December 2002.

Exhibit 3: Millennium Train 4 Car Set

Source: StateRail
1. Introduction
The Millennium Train Project 13
Detailed Key Events
Chronology
Appendix 2 gives a more detailed chronology of key events, from
June 1995 to 10 April 2003, with the Millennium Train
purchase/project.
1.3 Previous New Train Purchase Review by the
Audit Office
On 19 November 1996 we released a report, number 31, State Rail
Authority: Tangara Contract Finalisation.
We noted in the report that:
The Tangara Project was one of Australia’s largest ever railway
rollingstock projects. The contract was successful in delivering
the train cars significantly within budget and within the agreed
delivery schedule … despite … being … long in duration, large
in cost … and technically complex involving innovative
technology.
and
The Tangara contract was characterised by a formal mediation, a
series of reviews relating to project management, contract
administration and engineering issues, and a finalisation review
conducted by a specially designated committee. The use of
these processes has highlighted the need for effective measures
to handle complex contracts dealing with technically innovative
projects.
The majority of our report was concerned with lessons for the future
management of major projects.
Appendix 4 contains our assessment of how those matters have been
dealt with in this project.

The Millennium Train Project 15
2. Strategic Issues and Challenges
2. Strategic Issues and Challenges
16 The Millennium Train Project
2.1 Introduction
When examining large asset purchases such as this, a key question for
which the community rightly expects an answer is ‘did we get value for
money from the purchase?’
This simple question has complex dimensions depending on the context in
which value for money is defined. The 2001-02 StateRail Annual Report
advised that:
It is one of the most complex passenger rail operations in the world.
We examine relevant key issues in this chapter.
2.2 Infrastructure and Purchasing
Some of the main factors that affect the purchasing of new rollingstock,
be it for fleet additions and/or replacements, are set out below.

Exhibit 4: Key Factors Affecting New Train Purchasing

New Train Purchasing Rail System/Network Timetabled Services Patronage (Peak Hour CBD) Current Fleet Utilisation Level & Age New Lines Opening Rolling Stock Industry Service Provision Agreement Rail Technology & Standards Statutory/Regulatory Requirements Passenger/Crew Wants & Needs

It is apparent that a complex array of issues is involved in making a
decision about such a purchase.

2. Strategic Issues and Challenges
The Millennium Train Project 17
The extent to which options are limited may in turn restrict the value for
money possibilities. We acknowledge that it is rare to have all options
available, owing to circumstances or history. However, the broadest
possible range of options should be considered.
The existing network
limits purchasing
options
In considering the purchase of new rollingstock there were a number of
key requirements/limitations:
§ the Sydney suburban rail network has grown considerably in the one
and half centuries since the first rail line opened in 1855. As the
network grew, variations occurred in infrastructure such as bridges,
tunnels and station/platform configurations.
Consequently there are specific requirements for rollingstock used on
Sydney’s suburban rail lines. If a safe service is to be operated then
the rollingstock must satisfy the most constrained part of the network,
for example tightest curves, shortest platforms, lowest
overpasses/tunnels
§ when in the early 1960s it was decided to increase the passenger
carrying capacity of the Sydney rail network, there was a switch to
double deck trains. The first double deck trains entered service in
1964 and in 1992 the last of the single deck rollingstock was retired.
StateRail advised that the switch to double deck trains at the time was
considered the most cost effective approach as it had minimal effect
on the fixed infrastructure of stations, tunnels and signalling.
Patronage and service timetabling levels make it difficult to revert to
single deck trains in the current mode of operation
§ the past and current land use patterns in Sydney have created a
significant demand to transport commuters relatively long distances by
rail.
These existing network requirements/limitations meant that the range of
options considered was restricted as only certain solutions were viable.
From the options considered, a decision was made to have a purpose built
train with a new design for the Sydney suburban network. This carried
with it a number of cost implications such as design and innovation risk,
prototype and testing costs, and inability to benefit from cost savings
available if ‘off the shelf’ designs and associated equipment/systems
purchasing were possible.
2. Strategic Issues and Challenges
18 The Millennium Train Project
If these network limitations are ‘accepted’ each time new rolling stock is
to be acquired the result may be the most appropriate ‘short-term’ design
but not the one that best meets long-term transport needs.
Changes to the network (that is eliminating or minimising the limitations)
would mean that more options were available to purchase rollingstock.
This could possibly lead to better value for money being obtained through
purchasing new trains ‘off the shelf’ and/or standard trains.
The cost of the network changes required would be substantial and would
need to be carefully assessed to ensure that the total cost of the network
and rollingstock (including maintenance and operation costs for both)
would achieve better value for money.
The capacity of the
network is a problem
The current rail network has capacity problems3 on some lines during
peak hour periods and the temporary solutions4 of incrementally increasing
capacity will be very shortly, if not already, exhausted.
As noted by the Council on the Cost and Quality of Government in 1998,5
approximately 40 per cent of all rail commuter journeys start or end in the
CBD. Currently 20 train movements in both directions is the maximum
number that can occur during peak hour in the City Circle. The downside
of double deck trains is that they have a longer ‘dwell’ time at stations,
particularly in the CBD, because of the time it takes for passengers to
load and unload. The Christie Report6 also advised that some stations in
the CBD were unable to handle more passengers than they currently do.
The 2001-02 StateRail Annual Report advised that:
Almost 50% of all persons travelling to Sydney’s Central Business
District in peak hours travel on CityRail services.
3 Action for Transport 2010 – an Integrated Transport Plan for Sydney Page 3, Department of
Transport, November 1998
4 Double deck trains and only trains in a 6 or 8 car set configuration are allowed to operate during
peak hour on the suburban rail network
5 Transportation – Service Efforts and Accomplishments Report, Council on the Cost and Quality of
Government, 1998
6 Long Term Strategic Plan for Rail – Greater Sydney Metropolitan Mr R Christie, former Acting Chief
Executive of State Rail and Co-ordinator General of Rail, June 2001
2. Strategic Issues and Challenges
The Millennium Train Project 19
The planning to
resolve capacity is
considered not
adequate
There is a plan for improving the network’s capacity, Action for
Transport 2010 – an Integrated Transport Plan for Sydney. Actions
have or are being undertaken to increase the current capacity of the
network, for example:
§ amplification of tracks on the East Hills and Richmond Lines
§ Bondi Junction turnback (train turn around) which will increase
capacity on the Illawarra line
§ Parramatta rail link Stage 1 and 2 which will relieve congestion on the
Main Western and Northern Lines.
However, this plan is a short term plan in infrastructure terms (which are
often projected many years ahead). It does not address the full range of
network (infrastructure) options available and continues to work within the
current network limits.
The Christie Report makes it plain that the limitations of the current
network have to be resolved. Further emphasis is given by a Rail
Infrastructure Corporation (RIC) 2001 working paper:7
Based on current timetabling and infrastructure, the Sydney rail
network has only a few years before capacity constraints become
more problematic for the network as a whole, rather than just the
CBD.
Given the magnitude of the task, and the dollars involved, a truly long term
strategic plan for Sydney rail transport is essential. The Warren Centre
has expressed similar sentiments.8 Currently there is no network plan
beyond 2010.
This limits value for
money considerations
In our view the value for money options available for the Millennium Train
purchase and for future acquisitions are limited by the focus on short term
infrastructure planning.
7 Sydney Passenger Forecasts – Working Paper 1, Rail Infrastructure Corporation, November 2001
8 The Warren Centre for Advanced Engineering, University of Sydney
2. Strategic Issues and Challenges
20 The Millennium Train Project
The suburban rail network in Sydney is and will continue to be very busy.
This is because effectively five railway services are operating using the
same network:
§ long distance (New South Wales regional and interstate) passenger
service
§ intercity passenger service (over 60 minutes)
§ medium/middle distance passenger service (20-60 minutes)
§ short distance passenger service (less than 20 minutes)
§ freight haulage.
Excluding the City Circle and the Eastern Suburbs Line, the Sydney
suburban network is not a metro railway like that found in major capital
cities overseas.
The fact that the network is integrated to provide a wide range of service
options makes it very difficult to introduce fundamental/revolutionary
changes to the network or rollingstock.
The high density development and urban consolidation that is occurring in
Sydney, particularly around railway stations, will place even greater
demands on the capacity of the suburban network.
StateRail expects patronage to grow from 277 million in 2001-02 to
between 370 to 396 million by 2021-22. However, Action for Transport
2010 is contemplating even higher growth.
The Department of Urban and Transport Planning is currently drafting a
document for setting out options and alternative views for increasing the
network’s capacity for consideration by stakeholders. Among these
options is one involving the use of alternative ‘metro-style’ rollingstock on
a proposed new rail line through the CBD.
An opportunity to
make fundamental
changes exists
There does seem to be an opportunity, given the Christie and Warren
Reports and also recently highly publicised problems with the network
infrastructure, to consider seriously fundamental/revolutionary changes as
opposed to continuing with incremental changes to the rail network. Such
an opportunity occurs rarely with infrastructure, and has major long-term
implications for operational limits and costs.
2. Strategic Issues and Challenges
The Millennium Train Project 21
A long term rail network plan, looking ahead some 20-30 years, would
enable the major capital funds required to be planned for. It would also
provide a valuable opportunity to change some of the existing factors that
limit the value for money possibilities both for operations and for fleet
additions and/or replacements.
2.3 Purchasing Process
Another significant component of value for money comes from the
purchasing (procurement) process adopted.
StateRail has followed the traditional purchasing model of competitive
tender and contract (CTC). This model assumes a competitive market
place to ensure a fair and equitable price is paid for goods and services.
The market place for
competition is limited
However, in Australia the market place for passenger rollingstock is small
and there is a limited number of Australian suppliers. StateRail advised
that the international rail industry is not interested in making bids to supply
outright trains to StateRail.
StateRail advised that from a commercial perspective the size of the train
orders by New South Wales, and indeed Australia, are small compared to
orders received overseas. In addition, StateRail advised that the specific
design requirements for its trains that flow from the existing network and
operational factors would necessitate substantial modification of overseas
‘off the shelf’ designs. Most major overseas rail systems consist of single
deck carriages, although the number of systems with double deck trains is
gradually increasing.
StateRail advised that the low volume and high modification factors
combine to make overseas suppliers not interested because it is not
commercially attractive. The required modification factors arise not only
from the network requirements but also from climatic and local customer
requirements.
Purchases occur
about every decade
Under the current CTC arrangements, major suburban train purchasing
occurs infrequently, about every decade.
2. Strategic Issues and Challenges
22 The Millennium Train Project

Exhibit 5: CityRail Suburban Fleet at 30 June 2002 Car Types, Ages & Numbers

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 Age (Years) Tangara 1988-1994 368 Yes C-Set 1986-1987 56 Yes K-Set 1981-1985 160 Yes Tulloch 1964-1968 56 No S-Set 1972-1980 498 No Car Type No. of Cars Commission Year 35 Years Estimated Useful Life Total 1,138 20 Years 5 Months Median Fleet Age Air Conditioned

Source: StateRail Records
There are high costs involved with irregular purchasing of new designs:
§ design costs ($15 to $25 million according to StateRail advice)
§ tendering costs for all parties concerned
§ prototyping of new trains and all the risks that go with this.
The unsuccessful Australian suppliers have a difficult environment when it
comes to maintaining appropriate skills, knowledge and facilities for the 10
years until the next tender is called.
A paper that was put to the StateRail Board meeting of 1 November 2002,
about the development of a strategic procurement plan for rollingstock,
comments on the industry’s ‘fragility’. Appendix 3 contains extracts from
this paper.
There is a risk of the current situation perhaps leading towards a
monopoly market in Australian passenger rollingstock. Monopolies rarely
lead to good value.
Alternative
purchasing methods
need to be explored
There are grounds for considering whether alternative methods of
purchasing may give a better value for money environment. StateRail
should explore whether long term partnership arrangements with various
suppliers may provide a better result all round.
2. Strategic Issues and Challenges
The Millennium Train Project 23
2.4 Train Maintenance
For the first time
maintenance was
included in the
contract
StateRail tried to sustain the Australian rail industry and also create train
supply competition by including maintenance of the Millennium Train in the
contract. This follows the current world trend of transferring
(outsourcing) train maintenance to the private sector, preferably the
manufacturer/supplier.
StateRail considered that it benefited from:
§ cost savings (through competitive tendering)
§ transferring design and product performance risks to the train supplier
in order to minimise whole of life asset costs
§ avoiding the capital costs involved with establishing a specialised
maintenance centre because of the level of technology now used in
trains
§ creating a contestable market for fleet maintenance and acting as
catalyst for internal workplace reform and attendant efficiency gains
§ creating an improved product (with better operational and reliability
performances)
§ having a lower level of direct involvement in the detailed design of the
train (as EDI Rail was required to design to performance
specifications) and hence reduced project management costs.
The StateRail Board was advised on 25 June 1998 that the tendered
maintenance prices were expected to incorporate a ‘risk premium’ when
compared to in-house (Passenger Fleet Maintenance) maintenance costs.
The Board was also advised that this was consistent with the experience
of United Kingdom rail operators who had pioneered train acquisition
through design, build and maintain structures.
It is not apparent that the cost of such a risk premium was estimated or
made known to the StateRail Board and/or the then Minister for
Transport. Nonetheless the decision was taken to include maintenance as
part of the contract, as there were other perceived long term benefits as
outlined above. The Contract requires a superior performance from this
train in both reliability and availability over the rest of the fleet and
penalties apply to the contractor if these contractual performances are not
met.
2. Strategic Issues and Challenges
24 The Millennium Train Project
A Ministerial
direction excluded
maintenance for all
future acquisitions
Representations were made to the then Minister for Transport by the
unions involved in maintaining railway rollingstock about StateRail’s
inclusion of maintenance in future new rollingstock acquisitions. The
unions claimed that:
§ the maintenance work could be performed in-house at competitive
rates
§ StateRail was in danger of losing valuable skills over the longer term
in rollingstock maintenance.
The then Minister for Transport considered the claims and wrote to the
then Secretary of the Labor Council on 22 May 2001 advising:
I have agreed to instruct the SRA to call tenders for Design and
Build only……I note that the existing contract for 81 carriages of
the Millennium train has already been let, but any additional
rollingstock ordered will be on the basis of design and construct
tender only.
The then Acting Chief Executive of StateRail wrote to then Minister on
14 June 2001 to clarify whether this advice to the Labor Council applied to
Millennium Train Contract Stages 2 and 3. Subsequent stages of the
Millennium Train have proceeded on the basis of maintenance being
included. However, the contracts for the new outer suburban electric and
Hunter diesel rail cars excluded maintenance.
Recent StateRail estimates of the Millennium Train indicate that
maintenance costs are slightly less than the remainder of the electric fleet,
and provide for higher levels of availability, reliability and the significant
additional features in the train.
StateRail needs to assess carefully the benefits and risks of its train
maintenance arrangements to resolve a clearer position as to which
arrangements provide the best value for money.
The Millennium Train Project 25
3. Timing, Cost and Quality Outcomes
3. Timing, Cost and Quality Outcomes
26 The Millennium Train Project
3.1 Introduction
Purchasing new trains is costly and time consuming. StateRail/CityRail
publicity material describes the Millennium Train in such terms as “state of
the art” and “innovative”. This is because the train incorporates the latest
computer technology, improved design standards and levels of comfort.
Accordingly the acquisition of the Millennium Train, as indeed does any
other complex piece of plant and equipment, for example submarines, has
significant inherent risks because there are many things that can go
wrong.
This section of the report comments about StateRail’s achievements
(outcomes) in the key performance areas of:
§ delivery and cost
§ meeting its own technical specification.
3.2 Delivery and Costs Achievements at Time of
Our Review
The contract had
explicit financial
incentives…
The Contract for the Millennium Train had explicit financial incentives to
deliver the train on time, if not early, and in accordance with the
performance specification. These incentives included:
§ liquidated damages of $2,000 per day per 4 car set. This was capped
at 5% of the design and build price for a set, and in total for all sets in
a stage. For Stage 1 this was approximately $520,000 for a set and a
$10.5 million in total for the Stage (November 2002 prices).
§ payment not being made for a set until it achieves practical completion
(accepted for service by StateRail). EDI Rail therefore bears the
cost of delay and any under performance because it has to meet
finance costs incurred beyond the contracted delivery date.
…but delivery was
still very late
The first 4 car set achieved practical completion on 28 June 2002. The
originally contracted practical completion date was 4 January 2001. This
was a variance (delay) of 541 days or 18 months approximately.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 27

Exhibit 6: Planned and Actual Practical Completion Date Achievements as at 10 April 2003

700 900 1100 1300 1500 1700 1900 2100 2300 2500 2700 2900 0 5 10 15 20 25 30 35 40 45 50 Trains (4 car Set) Days from Contract Signing 08-10-1998 Contracted Practical Completion Actual Practical Completion Deed’s Estimated Practical Completion Amended Practial Completion pre Deed

Stage 1 Stage 2 Stage 3
Source: StateRail Records
Note: StateRail has only formally committed to Stages 1 & 2 as at 10 April 2003
Prior to EDI Rail lodging a claim for variations (the ‘Stage 1 Resolution
Proposal’) on 16 July 2001, StateRail had authorised two delivery date
variations. These variations amended the contracted practical completion
date to 15 May 2001 due to:
§ moving the crew cab wall (21 days but no cost)
§ changing from a swing to a power operated crew door because of
crew occupational health and safety concerns (110 days and $3.1
million cost).
Therefore practical completion on 28 June 2002 was 409 days or 13.5
months later than the revised delivery date.
Financial penalties for
late delivery are not
applied by StateRail
As we stated in our report on the Tangara Contract Finalisation,9
liquidated damages are generally included in StateRail contracts, but
rarely, if ever, acted upon. This was again the case with the Millennium
Train. StateRail advised that on many occasions it reiterated to EDI Rail
that delays were subject to liquidated damages. However, StateRail did
not apply liquidated damages in this case as the claim (which included a
claim for extension of time) was still being negotiated at the time of the
delivery of the first 4 car sets.
9 The Audit Office of NSW Performance Audit Report: Tangara Contract Finalisation, November 1996,
Page 28
3. Timing, Cost and Quality Outcomes
28 The Millennium Train Project
StateRail took the view that payment upon delivery of each set meant the
finance costs imposed a significant impost on EDI Rail and outweighed
the liquidated damages.
StateRail had varied the payment terms for the Millennium Train following
its experiences with the Tangara. The ‘payment upon delivery’ of each
set saw EDI Rail go significantly into the red on the Contract and having
to be financially subsidised through its parent company, Downer EDI.
A claim was made on
StateRail for
additional time/money
In April 2001 StateRail considered that it was likely EDI Rail would
submit a claim to reduce the liquidated damages. In due course a claim
was made on 16 July 2001 (the earlier mentioned ‘Stage 1 Resolution
Proposal’). This claim was for an extension by StateRail to the delivery
dates, which would reduce or eliminate liquidated damages, and ultimately
increase the train’s price by approving a further variation to the already
amended contract delivery dates.
Following negotiation of this matter, which was delayed while EDI Rail
concentrated on delivering the first 4 car set and compiling/submitting a
tender for the outer suburban train, a commercial settlement was reached
between the parties. EDI Rail had submitted its consolidated (final) claim
on 18 September 2002. On 18 November 2002 a Deed of Release and
Variation (the Deed) was executed between StateRail and EDI Rail.
A grandparent
company guarantee
was required following
the takeover of EDIL
EDIL had told StateRail in December 2000 that its Board had agreed to a
takeover by Downer. This was duly completed in March 200110, when
the shareholders agreed to the Downer and EDI merger. Subsequently
the merged entity was renamed Downer EDI. EDI Rail wrote to
StateRail on 18 May 2001 advising of ‘change of effective control’, at
which time StateRail sought legal and financial advice on this change in
control.
The legal advice was that the parent company guarantee with EDIL11
was still valid. However, it recommended that there be a further (grand)
parent company guarantee sought from the new entity, Downer EDI. On
7 November 2001 StateRail wrote to EDI Rail seeking this guarantee.
However, by then EDI Rail had already lodged its resolution claim.
10 Downer EDI Annual Report 2001
11 EDIL was the holding company for EDI Rail. EDIL was taken over by Downer and the new combined
entity was renamed Downer EDI
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 29
StateRail advised that it was considered unlikely that any earlier approach
to Downer on the parent company guarantee would have progressed,
particularly during the period when shareholders were deciding on the
merger and the application was with the Australian Stock Exchange.
We acknowledge that there would have been little if any likelihood of
obtaining a parent company guarantee from Downer prior to the merger
being finalised. However, this occurred in March 2001, giving a window
of opportunity of four months before EDI Rail’s claim was submitted.
This window was reduced to two months as EDI Rail’s advice to
StateRail about the merger was delayed, despite immediate advice of such
matters being a condition of the Contract.
The importance of the guarantee is pivotal as the following legal advice to
StateRail on the resolution claim illustrates:
EDI Rail is a wholly owned subsidiary of Downer EDI Limited.…
There is no parent company guarantee in place exposing Downer
to any obligation to stand behind EDI Rail, and it is not
inconceivable that Downer might cut loose EDI Rail, reducing it to
the status of a paper company. In that event SRA12 would have to
re-let the contract at what would be undoubtedly be a far greater
cost …
StateRail advised that it considered this situation was, however, very
unlikely as Downer had merged with EDIL to enter the railway market
and to gain the advantage of the long term maintenance contracts that
EDI Rail had established.
Obtaining this guarantee became part of the EDI Rail claim settlement.
StateRail has advised that this was amongst the first items agreed by
Downer in the claim negotiation and that it was not a significant
negotiating issue. Whether the terms of the settlement may have
improved if StateRail had received the guarantee in the available window
before the claim was lodged is uncertain. We believe it would have been
desirable.
12 SRA: State Rail Authority (StateRail)
3. Timing, Cost and Quality Outcomes
30 The Millennium Train Project
It was decided to
negotiate a
commercial
settlement
StateRail undertook a detailed review of EDI Rail’s claims and decided
that some aspects of the claim had merit. EDI Rail had also indicated an
unwillingness to proceed with Stages 2 and 3 of the contract without
substantial restructuring of the contract costs. And there was concern
that EDI Rail may withdraw from the contract altogether.
The StateRail Board on 28 June 2002 approved a commercial settlement
being negotiated with EDI Rail rather than risk an unknown outcome from
arbitration and possible litigation as well as the significant cost of
re-tendering should this result. Non-financial costs would also have been
a factor in this matter as articles began appearing in the print media as
from March 2001 about the Millennium Train’s late delivery.
EDI Rail, in its consolidated claim of 18 September 2002, sought additional
time and ultimately costs under the contract for a range of matters
including:
§ liquidation and insolvency of the sub contractors for the
communications and surveillance system and the bogie anti-roll bar.
Therefore replacement sub contractors had to be found and engaged
§ signal interference testing by RIC had indicated that there were
unacceptable rail return currents, when completing the electrical
circuit, by the Millennium Train. StateRail and RIC have advised that
this was not a safety issue but it had on-time running implications.
StateRail engaged experts from the United Kingdom and Hong Kong
who advised on the results and subsequently RIC endorsed the train
to operate as 4 and 8 car sets without restriction. However, the train
was withdrawn from service on 10 April 2003, for seven weeks
approximately, for further prototype testing of this and other issues
§ instances where train crews and/or track possessions were not
available for commissioning tests
§ performance specifications for bogie wheel unloading (derailment)
and crashworthiness that EDI Rail considered impossible to achieve,
which EDI Rail expended considerable time and effort trying to
achieve
§ extensive negotiation and ongoing revision of crew control driver’s
cab which impacted upon design development
§ innovations and enhancements beyond the contract and tender
amount.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 31
The Millennium
Train’s capital costs
have increased
because of the
settlement…
The effect of the commercial settlement with EDI Rail is that the
Contract (out-turn/capital) cost of the Millennium Train and the total
project cost have increased for all three stages by $114.8 million or 24%
to $588 million, and $98.4 million or 17% to $658 million respectively.

Exhibit 7: Estimated Contract Out-turn and Total Project Costs Pre Settlement and the Settlement Amount as at 31 December 2002
Contract Out-turn Cost (Estimated)	Total Project Cost (Estimated)
0.0 100.0 200.0 300.0 400.0 500.0 600.0 All Stages Combined Stage 3 Stage 2 Stage 1 Out-turn Cost Pre Settlement Settlement $ Million	0.0 100.0 200.0 300.0 400.0 500.0 600.0 All Stages Combined Stage 3 Stage 2 Stage 1 Total Project Budget Pre Settlement Settlement $ Million

473.2
132.6
129.6
211.0
114.8
35.9
35.9
43.0
559.6
180.0
150.0
229.6
98.4
11.8
39.0
47.6
Source: StateRail Records
Note: The Contract Out-Turn Cost (Capital Cost) and Total Project Cost includes escalation and custom duties
estimates. While the Total Project Cost includes estimates for project management, train introduction and
contingency funds
… but the settlement
had no impact on
maintenance costs
StateRail advised that the Deed had no impact on the maintenance costs
of the Millennium Train. However, because of variations in the technical
specification, for example the powered crew door, maintenance costs
have risen by 1%. The tendered prices for maintenance for Stages 1, 2
and 3 as at June 1998 for 35 years were $233.2 million, $149.2 million and
$145.5 million respectively (overall $527.9 million). These prices are
subject to escalation and foreign exchange adjustment.
The price of the
Millennium Train is
still better than that
paid by others
Exhibit 8 below compares costs of recent train purchases in other
Australian jurisdictions. Caution must be exercised in drawing conclusions
from this comparison of train purchase costs. However, some sense of
the cost implications of different approaches is apparent.
3. Timing, Cost and Quality Outcomes
32 The Millennium Train Project
Exhibit 8: Comparison of Millennium Train Capital Cost with Recent Train Purchases in
Other Australian States

Item	StateRail Pre Deed	StateRail Post Deed	Queensland	Western Australia	Victoria Network A	Victoria Network B
Number of Cars Car Deck Type Capital Cost $ Millions Off the Shelf Crush Load Capacity of Purchase (Seated and Standing Passengers) Average Cost $ per Car Average Cost $ per 4 Car Set Average Cost $ per Passenger	201 Double 554.3 No 53,000 2,757,547 11,030,189 10,458	201 Double 651.8 No 53,000 3,243,005 12,972,020 12,299	90 Single 251.1 No 15,060 2,790,000 11,160,000 16,673	93 Single 254.1 Yes 17,794 2,732,258 10,929,032 14,280	174 Single 332.0 Yes 23,258 1,908,046 7,632,184 14,275	186 Single 330.0 Yes 29,760 1,896,552 7,586,207 14,189

Source: StateRail Records, Parliamentary Hansards and Committee Reports, Ministerial Press Releases and Website Pages.
Notes:
1. Construction of Maintenance Facilities has been excluded
2. The dollar values for other than StateRail are unaudited and should be regarded as indicative only
3. GST has been excluded
On a per passenger cost basis the Millennium Train purchase appears
to be favourable compared to other recent Australian train purchases.
Other factors being equal, cost per:
§ 4 car set basis should be lower for large orders
§ passenger should be lower for double deck cars.
Value for money and
risk management
material was not
provided to key
decision makers
When key decision makers were considering the award of contracts for
the purchase of new Hunter and Outer Suburban trains they were
provided with:
§ value for money comparisons of world wide train purchases
§ risk management plans.
There was no such value for money analysis and/or risk management plan
provided to key decision makers (the StateRail Board and/or the then
Minister for Transport) when the Millennium Train purchase was under
consideration. StateRail advised that the value for money analysis was
not provided because the tendered cost of the Millennium Train was
consistent with the earlier estimated cost.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 33
Since the Deed’s signing, EDI Rail has been achieving practical
completion of 4 car Millennium Train sets in line with the Deed’s revised
dates, that is one 4 car set a month, see Exhibit 6. However, there is
currently a dispute between EDI Rail and a sub contractor. Downer EDI
had launched a takeover bid for this major sub contractor, however, this
has been unsuccessful. There is now a legal process underway to resolve
the contractual differences.
It needs to be borne in mind that aspects relating to comfort and quality of
service for CityRail’s customers would have been affected by:
§ delayed retirement of life expired rollingstock, the Tullochs, and hence
lesser passenger comfort and security
§ overcrowding on trains on some lines not being alleviated in a timely
manner, (refer Section 4.2 Train Loading Standards Compliance).
3.3 Compliance with Technical Requirements
Trains are technically complex pieces of equipment. The Millennium
Train contract contained over 237 pages, approximately 2,500 technical
requirements for the train. There are some 85,000 steps/activities
involved in actually building the train.
Extensive
commissioning tests
were done
StateRail advised that from the time of the arrival in Sydney of the first 4
car Millennium Train set on 30 November 2001, until its notice of practical
completion was given on 28 June 2002, the train operated for 3,000 hours
under commission testing. This included 1,000 hours or 40,000 kilometres
of on track testing. At the time of our review there was still some testing
to be undertaken, for example energy efficiency and 16 car operation, as it
has not yet been possible to perform them or they have been deferred.
The Millennium Train was withdrawn from service on 10 April 2003 to
undertake further prototype testing. The main areas where problems have
occurred are:
§ traction system
§ doors
§ communications system
§ air conditioning
§ signalling interference.
3. Timing, Cost and Quality Outcomes
34 The Millennium Train Project
The Millennium Train returned to service on 2 June 2003 with the first non
peak hour passenger service occurring. The Minister for Transport
Services announced that the Millennium Train would gradually return to
service over the following three weeks.
The entry of the Millennium Train into revenue service shows there has
been some significant project management, engineering and construction
achievements. This in many ways demonstrated the capacity of all those
concerned to produce to world-class standards.
A key factor in EDI Rail winning the Millennium Train contract was EDI
Rail being prepared to guarantee a reliability of one incident13 per 100,000
kilometres travelled per 4 car set. This reliability level was after a two
year settling in period. A contractual service availability level on each
business day of 95% is also required for 4 car Millennium Train sets.
There are financial incentives and penalties through the Contract’s
maintenance payments in respect of service availability and reliability.
The Millennium Train first entered revenue service on 1 July 2002 with
one 4 car set. Up to 10 April 2003 StateRail has accepted another 10 sets
(40 cars) and these have progressively entered into revenue service.
However, the sets have not operated continuously in revenue service, for
example:
§ two of the earlier sets were withdrawn for three months in order to
undertake 8 car set commissioning tests as per the Contract
requirements
§ sets only operated in the off peak period until early December 2002
§ sets were withdrawn for problem rectification.
In the period 1 July 2002 to 10 April 2003, the 11 Millennium Trains 4 car
sets delivered and operating, have in totality travelled in revenue service
only 313,297 kilometres and the cars individually 1,253,187 kilometres all
up.
In performance terms this is limited. Thus while the Millennium Train
appears to have the potential to achieve the capability specified in the
contract, it is not possible to be conclusive at this time.
13 An incident is defined as any equipment failure or defect that results in a service delay of more
than 3 minutes while in revenue service.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 35

Exhibit 9: Average Kilometre Incident Rate of Millennium Train Sets as at 10 April 2003

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Millennium Trains 1-11 Millennium Train 11 Millennium Train 10 Millennium Train 9 Millennium Train 8 Millennium Train 7 Millennium Train 6 Millennium Train 5 Millennium Train 4 Millennium Train 3 Millennium Train 2 Millennium Train 1 Average Distance Between Incidents Kilometres Thousands

4.9
0.3
9.7
2.1
15.9
3.5
6.0
8.2
4.7
4.9
4.3
3.4
Source: The Audit Office Analysis of StateRail Records
Note:
1. This exhibit shows the average incident rate of each Millennium Train 4 car set while in revenue
(timetabled) service from 1 July 2002 to 10 April 2003 and the sets overall. Incidents that occurred
while the Millennium Trains were not in revenue service are excluded.
2. Millennium Train Sets 8 and 11 have had no incidents and the figure recorded is the distance
travelled by the set while in revenue service.
StateRail indicated that it considered the first 4 car set as a prototype and
the first 5 to 10 train sets generally operate to identify and rectify
problems.
StateRail has advised that it is confident that the performance of the
Millennium Train will meet, if not exceed, the specified requirements.
The project steering committee and the StateRail Board are being
provided with information on the Millennium Train’s reliability and
availability. However, this information does not readily show the
Millennium Train’s specified availability and reliability requirements
performance achievements.
Notices of practical
completion are given
detailing defects…
When StateRail accepts a Millennium Train set, StateRail gives a ‘notice
of practical completion’ to EDI Rail. Accompanying the notice are
schedules detailing commissioning tests not performed, test failures and
defects in the set. The following Exhibit compares the notice’s
accompanying schedules for Set 1 and 4.
3. Timing, Cost and Quality Outcomes
36 The Millennium Train Project

Exhibit 10: Sets 1 and 4 Practical Completion Notices Accompanying Schedules
Set 1	Set 4
Date of Practical Completion	28 June 2002	29 November 2002
Schedules Accompanying Notice	No. of Pages	No. of Matters	No. of Pages	No. of Matters
Schedule 1 – commissioning tests not carried out or deferred to a later time	1	18	1	7
Schedule 2 – commissioning tests failed to pass but will be accepted	1	1	1	1
Schedule 3 – defects to be rectified arising from failure to pass commissioning and other tests	19	172	14	192
Schedule 4 – defects which will be accepted	50	465	0	0
Schedule 5 – defects to be rectified	45	545	13	154
Total	116	1,201	29	354

Source: StateRail Records
The number of non compliances with the contract’s specification (that
were previously listed as defects under the notice’s Schedule 4) had gone
from 465 in Set 1 to zero in Set 4.
Many non
conformances
(defects) have been
accepted
This is because under the Deed there were 531 technical non
conformance matters that StateRail agreed would not be treated as
defects. In addition, the Deed listed a further 22 technical non
conformances subject to the results of the testing program.
The overall effect is that the technical specification of the train has been
amended. A paper submitted to the StateRail Board meeting of
29 November 2001 advised that:
… specification omissions or amendments will not allow a deficient
or defective product to be delivered to SRA, but will provide a
Millennium Train which has different properties from those
particularised in the original contract specification.
The Millennium Train was accredited, from safety and operational
aspects, to operate on the suburban rail network by both the former
Department of Transport (DoT) and RIC on 25 June 2002. This
accreditation was given despite the non conformances with the contract’s
technical specification for the train. An example of an accepted non
conformance is the unladen (tare) weight of the initial Millennium Train 4
car set is currently 30 tonnes approximately over the specified weight for
a 4 car set (180 tonnes).
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 37
A 4 car Millennium Train set is the heaviest suburban passenger train in
service. Action is being undertaken to reduce the unladen weight of a 4
car Millennium Train set to 205 tonnes. But even so it will still be the
second heaviest in the CityRail fleet. Only the intercity V sets, at 213
tonnes unladen weight, are heavier.
While many of the non-conformances may be minor, the sheer number of
them raises issues about the process of specifying the train. The following
extract from a report made to StateRail about the resolution claim is
pertinent to this matter:
In system engineering terms, the 4GT14 Specification provided no
“design space” within which the overall system performance could
be optimised. There was no space where all of the specified
requirements could be simultaneously satisfied.
In the administration of the Millennium Train Contract, SRA has
been a party (either wittingly or unwittingly) to design decisions
based on unstated and untested assumptions, for example: “It is
more important to strive to achieve 50% wheel unloading and
50kph crashworthiness, than it is to meet the 180 tonne maximum
weight specified”.
We are strongly of the view that this fundamental issue of
available “design space” should be seriously considered by SRA
when entering into future contracts with similar specification
provisions and Systems assurance requirements as those
contained in the 4GT Contract, in order to prevent another
undesired outcome.
StateRail advised that the accuracy of specifications improves if they are
evolutionary in development. However, with irregular train purchasing this
presents difficulty in developing a specification that is fully achievable
without modification. To reduce this risk, the specification was put to
industry prior to the tender to obtain feedback. Changes were made,
however, the level of feedback was not extensive or comprehensive.
While the Millennium Train contract is far more performance based than
previous contracts it is not as performance based as would be preferred.
The specifications may not have given due weight to the Millennium Train
being a prototype train and therefore unlikely ever to achieve all the
specifications set for it.
14 Fourth Generation Train

The Millennium Train Project 39
4. Other Significant Process and
Performance Matters
4. Other Significant Process and Performance Matters
40 The Millennium Train Project
4.1 Introduction
This section of the report comments upon process and other
performance matters, including:
§ train loading standards compliance
§ the environment in which the purchase occurred
§ restructuring of the New South Wales rail industry
§ intellectual property rights
§ perceived probity audit conflict of interest
§ risk management
§ customer and staff information campaign expenditures.
4.2 Train Loading Standards Compliance
The train loading (crowding) occurring on services on existing lines is a
significant factor in deciding whether to purchase additional rollingstock
for the CityRail fleet.
In fiscal 2001-02 StateRail received approximately $424 million
community service (social program) funding for the rail services
provided. This funding is provided under the CityRail Service
Agreement15 (the Agreement) executed annually between StateRail
and the Transport Co-ordination Authority (formerly the Department of
Transport).
A loading standard
has been specified
Schedule 2 of the Agreement specifies a train loading standard as part
of the determination of the adequacy of services provided:
2. LOAD STANDARDS
2.1 On CityMet16 corridors:
(a) No train to have a load factor of greater than 135% of specified
seating capacity, except by passenger choice.
(b) No passenger to stand on a train for more than 20 minutes,
except by passenger choice.
(c) Any passenger who chooses not to catch a train due to either
excessive load or potential excessive standing time will have a
service which gets to the destination no more than 15 minutes
earlier or later than the original service and meets the set
service standards.
In a practical sense this means 0.35 passengers on average will be
standing for each seated passenger or alternatively 1.35 passengers
per seat.
15 The agreement is made under section 104E of the Transport Administration Act 1988 because
StateRail, in providing appropriate services on behalf of the Government, suffers significant financial
loss in meeting these obligations and accordingly is reimbursed.
16 CityMet” means rail corridors which comprise all stations within the Sydney metropolitan area,
bounded by Berowra, Richmond, Penrith, Macarthur, Waterfall and Cronulla inclusive.
4. Other Significant Process and Performance Matters
The Millennium Train Project 41
Given the competition between work and home that can occur and the
need to connect with other services (train, bus, ferry) some passengers
have little if any choice about the train service they catch.
The former DoT did
not monitor
compliance until
2001-02 …
StateRail advised that:
§ these loading standards had been specified in the Agreement since
the early 1990’s
§ it was not until 2001-02 that train loading information was included
in the reporting schedule compiled by StateRail and submitted to
the former DoT in accord with the Agreement.
… and they have been
exceeded …
The specified loading standards have been exceeded.
Exhibit 11: Train Loads by Line Survey April 2002 One Hour of Peak 07.30-08.30
Hours at Central

Line	Service	Measured at	Number of Trains	Mean Load Factor
Illawarra	Cronulla – City Waterfall – City Sutherland – City Mortdale/Hurstville – City Illawarra Suburban Total	Sydenham Sydenham Sydenham Sydenham Sydenham	4 4 1 4 13	145% 125% 95% 100% 120%
Eastern Suburbs	Bondi Junction – City	Kings Cross	13	75%
East Hills	Campbelltown via Airport East Hills via Airport Macarthur via Sydenham East Hills Suburban Total	Wolli Creek Wolli Creek Sydenham	3 4 4 11	100% 110% 135% 115%
Bankstown	Bankstown – City	Sydenham	6	95%
South	South via Granville – City South via Regents Park – City South Suburban Total	Redfern Redfern Redfern	6 2 8	105% 80% 100%
Inner West	All stations – City	Redfern	4	110%
West	The Heron (Emu Plains – City) Emu Plains, Penrith Fast/Medium – City Penrith, St Marys, Blacktown Slow – City Richmond – City Carlingford – City	Redfern Redfern Redfern Redfern Redfern	1 6 4 2 1	105% 120% 120% 115% 100%
West Suburban Total	Redfern	14	115%
Main North	Hornsby – City Fast Main North Slow Main North Suburban Total	Redfern Redfern Redfern	4 4 8	130% 125% 125%
North Shore	Wyong/Gosford – City Berowra – City Hornsby – City Gordon – City North Shore Total	St Leonards St Leonards St Leonards St Leonards St Leonards	3 2 4 4 13	120% 150% 115% 125% 125%

Source: StateRail Records
Note: This survey was done over two days, 9 and 10 April 2002. The above information is only for one hour of the
peak, 07.30 to 08.30 hours arrival at Central.
4. Other Significant Process and Performance Matters
42 The Millennium Train Project

Exhibit 12: Train Loads Yearly Report 2001-02
Morning Peak	Afternoon Peak	Daily
Services with loading above 135%	7.9%	4.0%	1.4%

Source: CityRail Service Agreement Reporting 4th Quarter 2002
This overcrowding has been occurring for a number of years now on
some lines. For example the Illawarra Line has had overcrowding
since 2000. Since March 2000 articles have periodically appeared in
the print media about train overcrowding. Overcrowding of trains has
also featured in submissions to Independent Pricing and Regulatory
Tribunal about fare determinations since 2000.
Forecasted non-compliance with the specified load standards as from
mid 1998 was one of the reasons for acquiring the Millennium Train.
Loading breaches
have not been publicly
reported
The annual reports or web pages of the former DoT and
StateRail/CityRail have not publicly reported train loading standards
breaches having occurred.
The Agreement does provide for publication of any breaches and a
range of other information, including service provision in accordance
with loading standards.
Public accountability, and pressure for performance improvements, will
be enhanced if such information is made readily available.
4. Other Significant Process and Performance Matters
The Millennium Train Project 43
4.3 The Purchase Environment at StateRail
Changes occurred
during the purchase
which had a disruptive
effect
The Millennium Train purchase (project) is long in duration. In its life
to date, changes have happened in the purchase environment. For
example, at the time of our review (up to 10 April 2003) the:
§ Minister for Transport changed twice
§ composition of project steering committee (Millennium Train
Executive Committee) changed. For example:
ð chief executive officer changed six times
ð chief financial officer changed twice
ð general manager passenger fleet maintenance changed three
times
ð chief operations manager changed once
ð project manager changed three times
ð project has moved around within the StateRail organisational
structure five times since 1996.
The environment in which purchase of the Millennium Train’s occurred
has been a disruptive one. We believe that this has had some effect.
Involvement of
StateRail Internal
Audit
Similarly, StateRail’s internal audit went from being a member of the
project steering committee to that of a ‘watching brief’ status only.
In the period since the signing of the Millennium Train contract until the
time of our review, there have been three formal internal audit
reports/comments in respect of the purchase that we are aware of:
§ review of risk management by a leading accounting firm under the
co-sourced internal audit arrangement (2001)
§ capitalisation of training costs (2002)
§ software model being developed to validate maintenance payments
(2002).
For a project of such magnitude, more internal audit involvement would
be desirable. Our previous audit of the Tangara project highlighted a
similar situation. Providing and directing sufficient internal audit
resources to address major risks (on a potentially billion dollar project)
are an important element of corporate governance that was not optimal
here. StateRail advised that internal audit was regularly given updates
and had discussions with the Project Manager.
4. Other Significant Process and Performance Matters
44 The Millennium Train Project
4.4 New South Wales Rail Industry
Restructure
The restructure of the
rail industry affected
the purchase
On 1 July 1996, through the enactment of the Transport
Administration Amendment (Rail Corporatisation and
Restructuring) Act 1996, the then State Rail Authority of New South
Wales was split into four organisations:
§ Rail Access Corporation
§ Freight Rail Corporation
§ Railway Services Authority, which following corporatisation on
1 July 1998 was renamed Rail Services Australia
§ State Rail Authority of New South Wales.
This had a number of impacts upon the Millennium Train purchase.
Firstly, the engineering and contract administration expertise that
StateRail had in train purchasing was transferred to the then Railway
Services Authority (RSA). The latter’s principal function was to
supply goods and services to the rail industry in New South Wales
while StateRail’s was to operate services.
The Millennium Train purchase was handled by RSA until StateRail
took over the project in August 1997, with the appointment of a project
manager. The Millennium Train had a dedicated project team at the
start of the contract of 10 occupied positions, 4 of which came from
RSA. While in 2002, 7 of the 21 occupied position holders came from
RSA (later RIC).
RSA and its successor, RIC, were public trading enterprises and as
such charged ‘commercial’ rates for its services. The engagement of
the RSA/RIC Rollingstock Consulting Group will cost StateRail
approximately $1.1 million (excluding GST).
StateRail advised that as at 30 April 2003 it had completed negotiations
to get this expertise back and key rollingstock employees were
transferred from RIC to StateRail.
Secondly, the 1995 StateRail Board at its 13 September 1995 meeting
deferred consideration of the paper “Proposed Fleet Acquisition
Program for CityRail” until the 13 October 1995 meeting. At this latter
meeting the then Board decided that the development and procurement
strategy for additional rollingstock be a matter for the 1996 StateRail
Board to consider.
4. Other Significant Process and Performance Matters
The Millennium Train Project 45
At that time, patronage analysis by StateRail showed that there would
be a shortfall of suburban rollingstock beginning from mid 1998. An
additional 24 cars were identified as being required to cater for
patronage growth to 2000, with another 56 cars needed shortly after
2000 to replace the Tullochs as they would be 37 years old. StateRail
described the Tullochs as being: technologically obsolete; in a poor
state; outdated in terms of customer comfort; and approaching life
expired.
Some eleven months later the new StateRail Board at its meeting of
25 September 1996 approved the development of the Millennium Train
specification and tender documentation. However, it was not until the
StateRail Board meeting of 20 February 1997 that approval was given
to tender the purchase of an additional 80 double deck electric cars for
the CityRail fleet.
Overall it took approximately 17 months for the StateRail Board to
make a decision to tender the purchase of the first tranche of what
was to become known as the Millennium Train.
In the rail industry the generally accepted norm is that it takes 4 years
(48 months) to purchase new passenger rollingstock from the time
approval to purchase (proceed) is given to the delivery of the first set.
This is because there is a notable learning curve involved, particularly
where the design is new and innovative. The Millennium Train
purchase had a very aggressive time frame before key decision
makers approved the purchase, and it remained so after approval.
4. Other Significant Process and Performance Matters
46 The Millennium Train Project

Exhibit 13: StateRail’s Timeframes for Purchase of the Millennium Train
Tendering, offer evaluation and place order	First train – receive, test, trial and commission	Total	Cars in service by 2000 Sydney Olympics
Months – Number (Dates)	Months – Number (Dates)	Months Note 1 & 2	Number
StateRail Board Paper September 1995	9 (4/1996-12/1996)	18 (1/1997-6/1998)	27	56
StateRail Board Papers September 1996 & January 1997, & Ministerial Press Release June 1997	10 (4/1997-1/1998)	22 (2/1998-11/1999)	32 + 1	40
StateRail Board Paper July 1997	7 (6/1997-12/1997)	23 (1/1998-11/1999)	30 + 3	24
StateRail Board Paper October 1997	11 (6/1997-4/1998)	23 (5/1998-4/2000)	34 + 3	24
Project Steering Committee February 1998	13 (6/1997-6/1998)	26 (7/1998-8/2000)	39 + 3	8
Contract Unamended	16 (6/1997-9/1998)	27 (10/1998-12/2000)	43 + 3	Not Applicable
Actual	16 (6/1997-9/1998)	46 (10/1998-6/2002)	62 + 3	Not Applicable

Source: StateRail Records
Notes:
1. Months quoted have been treated as whole months, for example April to December 1996 (4/1996-12/1996) is in
total 8 months based upon the start and ending of months in this period
2. The + (plus) number quoted is for the months elapsed between the decision to proceed in late February 1997
and the start of tendering
Public pronouncements made in the middle to latter part of 1997 raised
public (passenger) expectations as to when there would be a new train.
These expectations were unlikely to be met, and were not. It is noted
that the Contract never intended for the train to enter service prior to
the 2000 Sydney Olympics.
The ‘Olympian’ tag created reputation risks. Comments about its
lateness began appearing in the print media from early March 2001.
This was despite there having been further public pronouncements
revising the expected date of entry into service of the Millennium Train.
4. Other Significant Process and Performance Matters
The Millennium Train Project 47
4.5 Intellectual Property Rights
StateRail does not
own the design and
build intellectual
property
StateRail owns all the rights, title and interest in intellectual property
(IP) for the maintenance documentation.17 EDI Rail owns the design
and build IP of the Millennium Train. StateRail has a permanent,
irrevocable, royalty free and non-exclusive licence to use any of the
contract documentation IP.
This split of IP between StateRail and EDI Rail is in accordance with
that specified in the request for tender documentation. StateRail
advised that while it paid for the design and build the associated IP was
of little commercial value. This is because the train was purpose
designed and built to suit the Sydney suburban rail network.
Until the Deed of Release was executed on 18 November 2002, the
Millennium Train did not have an escrow arrangement18 in place. In the
event that EDI Rail had become insolvent or the contract was
terminated, StateRail could have had difficulties in accessing the design
and build IP. There is a small annual fee, approximately $1,000, paid by
SRA for the escrow arrangement.
Escrow rights to protect IP rights are not uncommon but seem not as
yet to be generally accepted rail industry practice. StateRail advised
that the use of an escrow arrangement for IP for rollingstock was still
considered to be fairly novel. However, it agreed that future
acquisitions should look to establishing such arrangements veryearly in
the process.
4.6 Conflict of Interest
StateRail engaged a leading accounting firm as probity auditors. The
probity audit focussed on:
§ confidentiality and conflict of interest
§ transparency
§ accountability
§ value for money.
17 This is specified in Volume 2 Statement of Work Attachment A of the Contract and includes:
technical maintenance plan; recommended spares list;, operating manuals; maintenance manuals;
training materials, software documentation; list of special tools and equipment; all records and data
relating to performance of cars and maintenance facility
18 Under an escrow arrangement the design and build IP material is held in trust by a third party to
be turned over to StateRail only upon fulfilment of a specified condition(s).
4. Other Significant Process and Performance Matters
48 The Millennium Train Project
The probity audit report of 24 July 1998 concluded that the tender
process was conducted in a fair and equitable manner with due regard
to probity.
The same firm was subsequently engaged by StateRail on
20 November 2000 to provide audit services as part of a co-sourced
StateRail internal audit function. One of the internal audit reviews
performed by this firm was the risk management review of the
Millennium Train mentioned earlier (Section 4.3 The Acquisition
Environment at StateRail).
There was some commonality of staff from the firm in the Millennium
Train probity audit and the risk review. StateRail did not consider this to
be a problem as the focus (objectives) of the reviews were different.
However, we do not think this was appropriate, as there may be at the
least the perception of a conflict of interest.
In the absence of formal standards for probity audit, it can be difficult
for agencies to judge what is appropriate. As a guide ICAC’s general
advice19 on conflict of interest situations is useful:
The first step is to recognise what situations could give rise to
potential conflicts of interest. The second step is to make sure that
staff (and contractors) disclose these conflicts. The third step is to
decide how to resolve the conflicts or minimise their potential
impact.
It is our view that to maintain the full benefit of a probity audit,
indisputable independence and absence of conflicts is essential. It is
quite common for probity audit services to be used several times during
the course of a project. They may even be called upon some time
afterwards. Because of this, we consider that probity auditors should
be limited to performing work directly related to the probity audit
function during the currency of a project or specific matter, and not
engaged for other forms of review work related to the same subject
area.
19 Practical Guide to Corruption Prevention, Module 9 Conflicts of Interest Pages 5 and 6, ICAC,
1 June 1996
4. Other Significant Process and Performance Matters
The Millennium Train Project 49
4.7 Risk Management
StateRail was aware of
need for effective risk
management
It is apparent that StateRail was aware of the need to effectively
manage risks associated with the Millennium Train’s purchase and
introduction into service. For example:
§ a risk management study of design, build and maintain was
undertaken by a contractor
§ under the contract, EDI Rail compiled a risk management plan
which was submitted to StateRail and updates were provided
§ the contract provided for 3 purchase orders because of the risk
associated with forecasting increase in demand (patronage)
§ the initial order size was increased from 80 to 81 to mitigate against
the risk of damage to 1 trailer car rendering an entire set
inoperable. The base cost of the collision spare trailer car was
approximately $2 million
§ commercial and technical risks were assessed as part of the tender
evaluation
§ risk analysis of introducing a newtrain into service was undertaken
in December 1999 and then again in 2001 resulting in the train being
introduced in such a way as to limit risk of impacting upon peak and
other services
§ there was an extensive train commissioning testing program and no
payment would be made until the first set was accepted by
StateRail
§ StateRail has engaged various contractors over the project’s life to
review and report on risks, for example contract review from
commercial and technical aspects, the delivery program’s accuracy
and adequacy.
StateRail did enjoy some successes with managing the risks associated
with the Millennium Train.
4. Other Significant Process and Performance Matters
50 The Millennium Train Project
But the contract
was risk averse
However, the contract for the Millennium Train purchase was described
in a paper, submitted to the StateRail Board meeting of
29 November 2001, in the following terms:
… The Contract conditions, in particular the General Conditions, are
extremely risk averse for SRA20 and there is a view that risks were
accepted by the Contractor which it was unable to control …
and
… EDI were originally a support party to a bid led by Alstom.
However, upon consideration of the Contract documentation for
tender, Alstom decided not to proceed …
Certainly StateRail, through contractual provisions, sought to implement
controls to reduce the risk exposures/events it had experienced with the
Tangara. However, as the Guidelines for Managing Risk21 note:
Risks can be transferred unfairly if organisations are not mindful of
the rights and responsibilities of clients, contractors and other
stakeholders. Risk transfer does not reduce overall risk. Spreading
the risk through risk transfer does reduce the level of risk to
individual entities. Where risks are transferred unfairly or
inappropriately, risks may be increased.
Despite the Millennium Train’s contractual provisions, StateRail still had
significant risk exposures because of the importance of the Millennium
Train to CityRail’s operations by retiring the Tullochs and reducing
overcrowding and the ‘fragility’ of the Australian rail industry.
StateRail (the Government) will always bear the risk of a major project
not being completed, as StateRail is not in a position of being able to
simply walk away from the project, unlike the private sector.
4.8 Customer and Staff Information Campaign
Expenditure
As part of the Millennium Train project there was a customer and staff
information campaign (the campaign) with an approved budget of
$745,150. The source of funds for the campaign’s budget was the
Millennium Train’s capital funding allocation.
20 SRA: State Rail Authority (StateRail)
21 Guidelines for Managing Risk in the Australian and New Zealand Public Sector, Standards Australia,
SAA/NZS HB143:1999
4. Other Significant Process and Performance Matters
The Millennium Train Project 51
As at 21 November 2002 an amount of $400,435 had been expended on
the campaign. Exhibit 14 shows the campaign elements budgeted and
actual expenditures.

Exhibit 14: Millennium Train Customer and Staff Information Campaign
Item	Budget $’000	Expenditure $’000	Balance $’000
Mainstream media, the 24-sheet billboards and 30 second TV commercials	545	248	297
Staff and customer commemorative mementos, including public launch,	100	108	(8)
Staff education including road shows	100	44	56
Total	745	400	345

Source: StateRail Records
Overall the campaign’s expenditure was $345,000 under budget primarily
because the television campaign will not be going to air until later in 2003.
StateRail is waiting until the Millennium Train returned to service22 on
2 June 2003 and there are adequate numbers of Millennium Trains
operating on the network. The campaign will include a public education
aspect, addressing amongst other things the features new to Sydney’s
trains such as the surveillance, passenger information systems and traction
interlocking of doors.
It would seem that the Millennium Train has been given a higher
marketing profile than other new trains introduced into service by
StateRail. In view of the Millennium Train’s lateness (from the public’s
perspective), cost escalation and initial teething problems this level of selfpromotion may not be universally well received.
22 The Millennium Train was withdrawn from service for seven weeks approximately during the period
10 April 2003 to 1 June 2003 to undertake further prototype testing, refer Section 3.3 Compliance
with Technical Requirements

The Millennium Train Project 53
Appendices
Appendices
54 The Millennium Train Project
Appendix 1 Audit scope and objectives
Millennium Train Audit
Objectives
The objectives of the Millennium Train Project audit were to:
§ assess the economy, efficiency and effectiveness of StateRail’s
management of the project
§ consider any implication the audit may have for other significant asset
acquisitions not only for StateRail but also for other NSW public sector
agencies.
Audit Criteria The following criteria were applied during the audit (whether):
§ StateRail implemented changes in practice and/or performance in
response to the Tangara Performance Audit Report recommendations
§ StateRail has effectively managed risks associated with the purchase of
new rollingstock, particularly product timing, cost and quality (the latter
includes both safety and reliability)
§ StateRail established and operated effective project management
arrangements for the Millennium Train, that is, the way in which the
project was planned, organised, directed and controlled was consistent
with better practice.
Audit Approach and
Methodology
The audit approach and methodology included:
§ research, review and analysis of relevant literature and researched better
practice on managing major projects
§ review and analysis of StateRail documentation
§ interviews with representatives of StateRail, the former NSW Department
of Transport (now Department of Urban and Transport Planning and/or
Transport Co-ordination Authority) and Rail Infrastructure Corporation
(NSW)
§ discussions with operators, both public and private sector, of rail services
in other major Australian State capital cities
Cost of the audit The cost of the audit was $242,990. This figure includes the estimated cost of
printing the report ($6,500).
Acknowledgement The Audit Office gratefully acknowledges the cooperation and assistance
provided by representatives of: StateRail; Office of the Coordinator General of
Rail; Department of Urban and Transport Planning; Transport Co-ordination
Authority; Rail Infrastructure Corporation (NSW); Queensland Rail; Western
Australia Government Railways Commission; Office of the Director of Public
Transport – Department of Infrastructure, Victoria; operators of public
transport rail services in Melbourne – Connex and National Express Group;
and EDI Rail.
Audit team Ai-Binh Phu, Steve Sullivan (Project Manager) and Stephen Horne (Director)
Appendices
The Millennium Train Project 55
Appendix 2 Chronology of Key Events

Date 16 June 1995

Event Group General Manager, CityRail approves commencement of development for Fourth Generation Train (4GT)

29 September 1995 Report (business case) on the acquisition of 4GT

13 October 1995

StateRail Board notes paper put to it, at 13 September 1995 meeting on development and procurement strategy for additional suburban rollingstock (the

4GT). However, the Board deferred its consideration of the matters until there
was a new Board following NSW rail industry restructure

30 October 1995

Ministerial announcement, in conjunction with delivery of last outer suburban Tangara set, that development underway for 4GT, which is to be available prior

to the 2000 Sydney Olympics
20 February 1996 Value management study of the 4GT undertaken and report provided to StateRail
1 July 1996 NSW rail industry is restructured into 4 separate entities

25 September 1996

StateRail Board approves development of 4GT specification and tender documentation

21 January 1997 Industry presentation held for those parties interested in tendering for 4GT

20 February 1997

StateRail Board approves acquisition of 80 4GT electric cars at a total purchase price of $212 million (1995/96 dollars). The Board also approves that the

acquisition process require tenders to provide for a design, build and
maintenance contract
30 May 1997 Minister for Transport approves calling of public tenders for 4GT project

2 June 1997

The Minister for Transport announces that a new suburban train is being acquired, the delivery of which will commence in late 1999. The new train was

subsequently christened ‘The Olympian’ because it was to be in service for the
2000 Sydney Olympics
4 June 1997 Advertisements placed calling for pre-registration of tenders for 4GT project

13 June 1997

Closing date for the submission of requests by interested parties for pre-registration as a tenderer for 4GT

 

22 July 1997

Request made by StateRail for pre-registered tendering organisations to submit tenders for 4GT

 

8 October 1997

The initial closing date specified for the submission of tenders for 4GT by organisations which were pre-registered to tender

 

5 November 1997

The amended closing date for the submission of tenders for 4GT by organisations which were pre-registered to tender

 

22 January 1998

StateRail Board approves the initial order size be increased from 80 to 81 car to mitigate against the operational risk of collision damage to 1 car rendering an

entire 4 car set inoperable
Appendices
56 The Millennium Train Project

Date 13 March 1998

Event The Interim Tender Evaluation Report recommends that one tender submitted be passed over while further clarification and negotiation be undertaken with the remaining two tenderers. The 4GT Executive Management Committee approved

this proposal on 13 March 1998 and the StateRail Board was informed

25 June 1998

StateRail Board approves, subject to the successful outcome of final negotiations, Evans Deakin Limited trading as Clyde Engineering as the preferred

proponent for the design, build and maintenance of the 4GT
29 June 1998 Budget Committee of Cabinet approves the 4GT project funding

30 June 1998

EDI Ltd announced as the preferred proponent for the design, build and maintenance of the 4GT, subject to the successful outcome of final negotiations

 

31 August 1998

Treasurer gives approval, under the Public Authorities (Financial Arrangements) Act 1987, for StateRail to enter into a contract for the purchase of the 4GT

8 October 1998 Contract for the design, build and maintenance of 81 4GT cars signed between
StateRail and EDI Ltd. This is Stage 1 of the contract. At StateRail’s sole
discretion the contract allows further ordering of 60 4GT cars in each of Stages 2
and 3, that is up to 201 4GT cars
22 April 1999 StateRail Chief Executive Officer informs the 4GT Executive Management
Committee (the project steering committee) that the train is to be referred to as
the ‘Millennium Train’

23 July 1999

EDI Rail , a subsidiary of EDI, briefs StateRail about proposed change in bogie design concept from dual air spring to a single air spring in order to achieve

compliance with StateRail’s specification requirements for the bogie

7 December 2000

Downer Pty Ltd makes announcement that EDI Board has recommended acceptance of Downer take over offer for EDI Ltd

 

8 December 2000

EDI Rail advises StateRail that communications and surveillance systems EDI Rail sub contractor has gone into receivership

 

25 March 2001

Premier announces that StateRail will acquire a further 60 Millennium Train cars, that is exercis e the contract’s Stage 2 purchase order option

 

22 May 2001

Minister for Transport writes to Secretary of the of Labor Council advising that future rollingstock purchases will be on the basis of a design and construct

tender. This flowed from representation by the unions involved in the
maintenance of rollingstock at StateRail

16 July 2001

EDI Rail formally submits a claim covering the design and build of Stage 1 of the Millennium Train, the ‘Stage 1 Resolution Proposal’

 

15 September 2001

EDI Rail advises StateRail that bogie anti-roll bar EDI Rail sub contractor has gone into receivership

 

30 November 2001

First Millennium Train set (4 cars) arrives in Sydney from Newcastle. Commissioning tests of the train subsequently commences

Appendices
The Millennium Train Project 57

Date 4 March 2002

Event RIC advises StateRail that the Millennium Train exceeds electrical emissions specified for non interference with the network signalling system

 

25 June 2002

DoT and RIC formally accredit Millennium Train to operate on the Sydney suburban network

 

28 June 2002

StateRail issues practical notice of completion for 1st set (4 cars) of the Millennium Train

30 June 2002 The Millennium Train is publicly (officially) launched
1 July 2002 First revenue service operation of the Millennium Train (4 cars)

18 November 2002

StateRail and EDI Rail sign a ‘Deed of Release and Variation’ in respect of the Millennium Train. As a result the estimated capital cost of the train and the

project for all the Contract Stages increased significantly

29 November 2002

Practical completion of Set 4 was given which triggered acceptance of 8 car set operation

30 November 2002 First 8 car set Millennium Train enters revenue service
4 December 2002 First 8 car set Millennium Train peak hour revenue service

5 December 2002

StateRail orders another 60 Millennium Train cars from EDI Rail via the contract’s Stage 2 purchase option being exercised/awarded

17 March 2003 The Minister for Transport announces in effect that the contract’s Stage 3
purchase order option, another 60 Millennium Train cars, will proceed

10 April 2003

The Coordinator General of Rail takes the Millennium Train out of service until further prototype testing allows for technical issues surrounding the operations

of the train that are impacting on its reliability to be resolved

2 June 2003

The gradual return to service of Millennium Train 4 car sets over a three week period commences with the first passenger non peak hour service being

operated.
Appendices
58 The Millennium Train Project
Appendix 3 StateRail Board Paper Meeting 1 November 2002
Strategic Procurement Plan for Rollingstock Extracts
Key Issues
StateRail historically purchases rollingstock in large tranches up to 15
years apart from a national passenger rollingstock industry which is
extremely small by international standards.
The industry is fragile in that it has only 2 or 3 companies which can
meet StateRail’s needs.
Recent experience with the Millennium Train demonstrated
difficulties in industry maintaining appropriate skills and knowledge
to successfully develop and deliver new designs after relatively long
periods of inactivity.
Each new train tends to be significantly different to previous designs
and in some cases revolutionary rather than evolutionary.
There is no strategic plan for rollingstock procurement over the next
10-20 years which addresses the needs and constraints of both
StateRail and the industry.
Proposal to Develop a Strategy
It is proposed that a 20 year strategic plan be prepared which
addresses all relevant issues including:
§ Demand;
§ Market needs;
§ Operating requirements;
§ Life cycle costs including operation and maintenance;
§ Re-use of existing rollingstock;
§ Standardisation of components;
§ Industry capacity;
§ Procurement risk;
§ Procurement options;
§ Changing customer service requirements over time;
§ Financing plan/options;
§ Changing technology;
§ Maintenance options;
§ Workforce issues; and
§ Infrastructure capacity.
Appendices
The Millennium Train Project 59

Appendix 4

Assessment of Status and Progress Made on Tangara Performance Audit Report Recommendations

The Tangara audit report recommended that the future arrangements for major capital projects include the
following changes in process and/or performance (features). Below is our short assessment of the status and
progress made by StateRail on these matters in the Millennium Train project.

Recommendation	Support and Implementation Status	Comments
Allow for the administration of a contract through a project management team structure	Supported Fully implemented	A dedicated project management team was established for the Millennium Train.
Minimise the specification of particular components or design features where this is not necessary	Supported Partially implemented	StateRail’s specification for the Millennium Train was very detailed for a performance based contract. As a result the Millennium Train was over specified and was not sufficiently performance based. Nevertheless, it was a notable improvement on the Tangara contract. Refer Section 3.3 Compliance with Technical Requirements for more detailed comments.
Clearly specify performance standards for complete units, and all major components	Supported Partially implemented	Performance standards specified in some instances were allegedly impossible to achieve, refer Section 3.2 Delivery and Cost Achievements at Time of Our Review for more detailed comments.
Have a reliable and agreed process for measuring performance of components in terms of the contract	Supported Fully Implemented	Reliable and agreed process for measuring performance was established.
Employ risk management techniques to deal with high risk factors such as the use of untested designs and technology	Supported Partially implemented	StateRail is aware of the need to effectively manage risks. However, the Millennium Train was not delivered on time nor within budget. Refer Sections 3.2 Delivery and Cost Achievements at Time of Our Review and 4.7 Risk Management for more detailed comments. Also StateRail does not currently have the “off the shelf” or standard train option and hence a lower risk profile. Refer Section 2.2 Infrastructure and Purchasing.

Appendices
60 The Millennium Train Project

Recommendation	Support and Implementation Status	Comments
Employ design (“value management”) reviews as an essential feature of the design process to reduce costs, minimise waste and maximise functionality	Supported Fully implemented	A value management study was undertaken and a report given in February 1996.
Employ effective arrangements to verify performance of service and control payments	Supported Partially implemented	There was extensive commission testing undertaken and payment is only made for each delivered 4 car Millennium Train set when StateRail is satisfied it has a ‘quality’ product. However, teething problems led to be train being withdrawn from service for further testing.
Monitor contractor inventory levels	Supported Fully Implemented	As payment was only made upon delivery of the Millennium Train set StateRail did not have to worry about this matter as it was of no interest to StateRail. However, a move back to milestone (progress) payments in future purchase contracts will probably necessitate monitoring occurring.
Deal with cost escalations in a simple, agreed manner	Supported Fully implemented now but not originally	Cost escalations were simplified compared to the Tangara. However, as part of the Deed of Release and Settlement executed between StateRail and EDI Rail on 18 November 2002 amendments were made to the contract schedules on the agreed application of the Contract to adjustments of the contract sum for escalation, foreign exchange fluctuations and customduties.
Provide an effective, agreed approach to disputes resolution	Supported Fully implemented	An agreed approach to dispute resolution was laid down in the Millennium Train Contract. Also a dispute was settled without recourse to the Contract’s provisions, refer Section 3.2 Delivery and Cost Achievements at Time of Our Review for more detailed comments.

Appendices
The Millennium Train Project 61

Recommendation	Support and Implementation Status	Comments
Deal with probity concerns in a proactive way	Supported Fully Implemented	A probity auditor was engaged and provided an unqualified opinion about probity, refer Section 4.6 Conflict of Interest for more detailed comments.
Involve internal audit at crucial stages and in on going control reviews.	Supported Partially implemented	There has been limited internal audit involvement with the Millennium Train. They were aware of progress and undertook some work. However, more internal audit involvement is needed. Refer Section 4.3 The Purchase Environment at StateRail for more detailed comments.

Appendices
62 The Millennium Train Project
Appendix 5 Response from Agencies
Response from the StateRail Authority
With reference to your letter of 13 May 2003, StateRail welcomes the
opportunity to comment on the Performance Audit Report of the Millennium
Train Project. The recommendations in the Report are supported in principle
and this represents the direction StateRail is setting itself in the management
of future rollingstock contracts.
Positive Results
StateRail has made many improvements to the procurement of new
rollingstock since the purchase of Tangara. The Millennium Train is a
technically complex train when compared to previous trains, but it is
consistent with the technology being applied elsewhere in the world and in
related industries. It is clear that the Millennium Train is a complex high value
project that requires systems and processes to be well established to allow for
its successful management. StateRail has put in place, with the Millennium
Train Project, significant measures for dealing with such a technically complex
and innovative project. Using the Tangara contract as one of many inputs a
risk management process was integral to the set-up and management of the
Millennium Train project.
The Tangara in the mid-1980’s was the largest rollingstock purchase at that
time. Following the review by the Auditor-General at the time, a number of
recommendations were made. These were supported by StateRail and taken
account of and adopted, where appropriate, in the Millennium Train project.
The main areas of success from the “lessons learnt” in the Tangara project are:
§ The early establishment of a project management team structure;
§ The establishment of a reliable and agreed process for measuring
performance;
§ The establishment of risk management techniques which involved all
aspects of the Contract including the entry of the train into service;
§ Establishment of a formal design review process;
§ Extensive testing and commissioning program;
§ Simplified payment and escalation system;
§ A thorough tendering evaluation and tender reporting system.
The report also acknowledges the good value for money for the Millennium
Train when compared to other Contracts in Australia and overseas.
Appendices
The Millennium Train Project 63
Rollingstock Procurement
StateRail is continuing to examine its procurement methods for new
rollingstock and plans to make further changes arising from experience with
the Millennium Train Project and its upcoming need for replacement of a
significant number of current rollingstock over the next 10 to 20 years.
StateRail historically purchases rollingstock in large tranches up to 15 years
apart from a national passenger rollingstock industry which is extremely small
by international standards. The industry is highly specialised and has only 2
to 3 companies which can meet StateRail’s needs.
In order to capture the progressive industry safety and technology
improvements, each new train tends to be significantly different to previous
designs rather than being an evolutionary change. The current fleet strategy
calls for procurement of approximately 50 cars per year, every year from 2007.
A 20-year strategic rollingstock procurement plan will be prepared which
addresses all relevant issues including:
§ Demand;
§ Market needs;
§ Operating requirements;
§ Life cycle cost including operation and maintenance;
§ Re-use of existing rollingstock;
§ Standardisation of components;
§ Industry capacity;
§ Procurement risk;
§ Procurement options;
§ Changing customer service requirements over time;
§ Financing plan / options;
§ Changing technology;
§ Maintenance options;
§ Workforce issues; and
§ Infrastructure capacity.
Appendices
64 The Millennium Train Project
Summary
StateRail acknowledges that further improvements in a number of areas of
rollingstock project management are appropriate, and hence, significant
resources and time are being established and developed to progress to a new
form of rollingstock procurement. This revised procurement method will build
on from lessons learnt on both Millennium and Tangara and establish a
process that provides greater certainty and better risk allocation for both
StateRail and the rollingstock industry serving StateRail.
The Millennium Train project was clearly a significant step forward from
Tangara. The Millennium Train project came some 10–15 years after the
Tangara contract commenced, and required a high level of management of a
technically complex train being delivered under a contract designed to address
problems identified with the Tangara contract but a contract form not
previously undertaken by StateRail.
StateRail is committed to a continuous improvement process for all such
projects into the future and will use the recommendations from this report to
further enhance its project management processes.
Attached are StateRail’s comments on the recommendations in the Report.
(signed)
Fran McPherson
Acting Chief Exe cutive
Dated: 5 June 2003
Appendices
The Millennium Train Project 65
StateRail’s Response to Recommendations

Recommendations	Supported/ Not Supported	Comment
1. It is recommended that StateRail should: Explore the various purchasing options available for obtaining new trains and identify which option gives the best value for money.	Supported	StateRail is developing a long-term rollingstock procurement and contracting strategy to meet its rollingstock needs over the next 20 years, taking into account the limited number of suppliers in the Australian market place.
2. Continue to assess the benefits and risks of its train maintenance arrangements to ascertain with greater confidence which arrangements provide the best value for money.	Supported	The maintenance costs must be considered in the light of the nature and complexity of the equipment on the train and the performance levels required. StateRail notes the comments relating to in sourced versus out-sourced maintenance. The issue will be subject to review on future contracts.
3. Further review the level of specification in performance based contracts occurring in train purchase tenders and contracts (an issue also with the Tangara).	Supported	StateRail will review future specifications to determine the correct balance between performance and detailed specification.
4. Ensure that the performance standards specified in contracts are appropriate (an issue also with the Tangara).	Supported	Specifications are developed based on previous contract requirements, appropriate standards and operational experience. StateRail will review the performance standards for suitability before inclusion in future contracts.
5. Review the adequacy of liquidated damages included in contracts and specify more clearly how and when liquidated damages will be applied in the event of the contractor failing to perform as specified.	Supported	The trigger for application of liquidated damages depends on the circumstances of the time. This will be reviewed to ensure that it is clear and appropriate to the performance of the Contractor and circumstances at that time.

Appendices
66 The Millennium Train Project

Recommendations	Supported/ Not Supported	Comment
6. Involve internal audit at crucial stages in major projects and in on going risk management reviews (an issue also with the Tangara).	Supported	Internal audit was involved at crucial stages of the Millennium Train Contract and continues to be involved in major projects in StateRail.
7. Have a standard escrow arrangement for relevant intellectual property owned by the contractor included in all future major contracts.	Supported	Escrow arrangement are being implemented on current rollingstock contracts for new trains and StateRail plans to adopt a similar arrangement for the future rollingstock contracts.
8. Further avoid potential for perceived conflicts of interest in the use of probity advisers by limiting the use of the same advisers in other review work on the same project.	Supported	Potential Probity issues is a major assessment in every engagement of professional services. StateRail will ensure that this is clearly understood in any future evaluations with the review of the guidelines on the engagement of probity auditors.
9. More carefully assess the options for responding to risks as contractual provisions do not necessarily avoid and/or mitigate risk events to StateRail’s business objectives.	Supported in principle	StateRail acknowledges the need for risks to be apportioned appropriately to the party that is most able to control the risks. Future contracts will reflect this aspect.
10. Be mindful of reputation risks that inappropriate marketing and communications can create with the public (passengers) and StateRail employees.	Supported in principle	StateRail reviews the appropriateness of marketing and communications at several stages before their implementation. StateRail will ensure that these risks are carefully reviewed in similar situations.

Appendices
The Millennium Train Project 67
Response from the Rail Infrastructure Corporation
Thank you for the opportunity to comment on the Performance Audit of the
Millennium Train project and, in particular, your 28 Day Report tabled the 13
May 2003.
In previous correspondence to your office dated 2 May 2003, RIC raised three
issues. These issues were:
1. The Long-Term Strategic Plan with a Systems Approach
2. The Existing Capacity of the Electrical Network
3. Compatibility with the existing Signalling System
While there have been some minor changes, from the draft report to the final
report, the previous comments from RIC are still considered pertinent.
With regard to the key findings in the report, the second dot point on page
four, raises the issue of the opportunity to make fundamental revolutionary
changes as distinct from incremental changes. While RIC would welcome the
opportunity to undertake revolutionary changes, it also warns that all costs of
these changes need to be considered before a decision is made to implement.
Often a marginal cost for a particular subset of the system is considered, not
the total cost of the system.
In the summary of recommendations on page six, the first dot point talks about
the need for a 20-30 year strategic plan for the Sydney Rail Network. RIC, in
conjunction with the State Rail Authority and the then Departments of
Planning and Transport, have been working with other agencies to produce
such a plan. It is agreed that with the restructure of planning in New South
Wales, that the existing plan probably needs wider distribution within the
community. This is undoubtedly an issue for the new Department of
Infrastructure and Planning.
The Millennium Train has recently been returned to service and monitoring of
the interface with the signalling system is continuing.
Thank you for the opportunity to provide input and to comment on the
Performance Audit of the Millennium Train.
(signed)
Gary Seabury
Acting Chief Executive Officer
Dated: 3 June 2003
Appendices
68 The Millennium Train Project
Response from the Department of Urban and Transport Planning
I refer to your letter concerning the draft Audit Report on the Millennium Train
Project.
The Department has reviewed the draft report and has no comments on its
content. The Department is continuing to prepare a revised long term plan for
rail, in conjunction with the rail entities, as part of a broader approach to
transport planning in Sydney.
As you may be aware, the Minister for Infrastructure and Planning and
Minister for Natural Resources announced in the Parliament last week that the
Department of Urban and Transport Planning and the Department for
Sustainability and Natural Resources are to be merged to form a Department of
Infrastructure, Planning and Natural Resources. This Department will legally
come into being from 1 July 2003. It would be appropriate to change the name
of the Department of Urban and Transport Planning to the Department of
Infrastructure, Planning and Natural Resources throughout your report.
(signed)
Andrew Cappie-Wood
Deputy Director General
Dated: 4 June 2003
Response from the Transport Co-ordination Authority
Thankyou for the copy of your office’s performance audit report on the
Millennium Train included with your letter of 13 May 2003.
I note that extensive consultation has already taken place regarding the
preparation of this report. Issues raised in the report that relate to this
Authority have been considered and it is confirmed that there in no further
response to be made to the 28 day report.
I thankyou for the opportunity to provide a formal response to the report
contents.
(signed)
John Lee
Director General
Dated: 2 June 2003
Appendices
The Millennium Train Project 69
Appendix 6 Acronyms
4GT Fourth Ge neration Train, that is the Millennium Train
the Agreement CityRail Service Agreement
the Campaign Customer and Staff Information Campaign

the Contract

Deed of Agreement for the Millennium Train Contract between the Minister for Transport and EDI

the Deed The Deed of Release and Variation
CBD Sydney Central Business District
CTC Competitive Tender and Contract
DoT Department of Transport NSW

EDIL	Evans Deakin Industries Limited which subsequently became following takeover by Downer, Downer EDI

EDI Rail The rail division of Evans Deakin Industries Limited and then subsequently
Downer EDI following Downer’s takeover of Evans Deakin Industries
Limited and the new merged entity changing it name to Downer EDI
GST Goods and Services Tax
ICAC Independent Commission Against Corruption
IP Intellectual Property
NSW New South Wales
QLD Queensland
RSA Railway Services Authority/Rail Services Australia
RIC Rail Infrastructure Corporation NSW
SA South Australia
SRA State Rail Authority of NSW
StateRail State Rail Authority of NSW
VIC Victoria
WA Western Australia

The Millennium Train Project 71
Performance Audits by
the Audit Office of New South Wales
Performance Audit Reports and Related Publications
72 The Millennium Train Project
Performance Auditing
What are performance audits?
Performance audits are reviews designed to determine
how efficiently and effectively an agency is carrying
out its functions.
Performance audits may review a government program,
all or part of a government agency or consider
particular issues which affect the whole public sector.
Where appropriate, performance audits make
recommendations for improvements relating to those
functions.
Why do we conduct performance audits?
Performance audits provide independent assurance to
Parliament and the public that government funds are
being spent efficiently and effectively, and in
accordance with the law.
They seek to improve the efficiency and effectiveness
of government agencies and ensure that the
community receives value for money from government
services.
Performance audits also assist the accountability
process by holding agencies accountable for their
performance.
What is the legislative basis for Performance Audits?
The legislative basis for performance audits is
contained within the Public Finance and Audit Act
1983, Part 3 Division 2A, (the Act) which
differentiates such work from the Office’s financial
statements audit function.
Performance audits are not entitled to question the
merits of policy objectives of the Government.
Who conducts performance audits?
Performance audits are conducted by specialist
performance auditors who are drawn from a
wide range of professional disciplines.
How do we choose our topics?
Topics for a performance audits are chosen from
a variety of sources including:
§ our own research on emerging issues
§ suggestions from Parliamentarians, agency
Chief Executive Officers (CEO) and
members of the public
§ complaints about waste of public money
§ referrals from Parliament.
Each potential audit topic is considered and
evaluated in terms of possible benefits
including cost savings, impact and
improvements in public administration.
The Audit Office has no jurisdiction over local
government and cannot review issues relating
to council activities.
If you wish to find out what performance audits
are currently in progress just visit our website at
[email protected].
How do we conduct performance audits?
Performance audits are conducted in compliance
with relevant Australian standards for
performance auditing and operate under a
quality management system certified under
international quality standard ISO 9001.
Our policy is to conduct these audits on a
“no surprise” basis.
Operational managers, and where necessary
executive officers, are informed of the progress
with the audit on a continuous basis.
Performance Audit Reports and Related Publications
The Millennium Train Project 73
What are the phases in performance auditing?
Performance audits have three key phases: planning,
fieldwork and report writing.
During the planning phase, the audit team will develop
audit criteria and define the audit field work.
At the completion of field work an exit interview is held
with agency management to discuss all significant
matters arising out of the audit. The basis for the exit
interview is generally a draft performance audit report.
The exit interview serves to ensure that facts
presented in the report are accurate and that
recommendations are appropriate. Following the exit
interview, a formal draft report is provided to the CEO
for comment. The relevant Minister is also provided
with a copy of the draft report. The final report, which
is tabled in Parliament, includes any comment made by
the CEO on the conclusion and the recommendations
of the audit.
Depending on the scope of an audit, performance
audits can take from several months to a year to
complete.
Copies of our performance audit reports can be
obtained from our website or by contacting our
publications unit.
How do we measure an agency’s performance?
During the planning stage of an audit the team
develops the audit criteria. These are standards of
performance against which an agency is assessed.
Criteria may be based on government targets or
benchmarks, comparative data, published guidelines,
agencies corporate objectives or examples of best
practice.
Performance audits look at:
§ processes
§ results
§ costs
§ due process and accountability.
Do we check to see if recommendations have been
implemented?
Every few years we conduct a follow-up audit of past
performance audit reports. These follow-up audits
look at the extent to which recommendations have
been implemented and whether problems have been
addressed.
The Public Accounts Committee (PAC) may
also conduct reviews or hold inquiries into
matters raised in performance audit reports.
Agencies are also required to report actions
taken against each recommendation in their
annual report.
To assist agencies to monitor and report on the
implementation of recommendations, the Audit
Office has prepared a Guide for that purpose.
The Guide, Monitoring and Reporting on
Performance Audits Recommendations, is on
the Internet at www.audit.nsw.gov.au/guidesbp/bpglist.htm
Who audits the auditors?
Our performance audits are subject to internal
and external quality reviews against relevant
Australian and international standards. This
includes ongoing independent certification of
our ISO 9001 quality management system.
The PAC is also responsible for overseeing the
activities of the Audit Office and conducts
reviews of our operations every three years.
Who pays for performance audits?
No fee is charged for performance audits. Our
performance audit services are funded by the
NSW Parliament and from internal sources.
For further information relating to
performance auditing contact:
Tom Jambrich
Assistant Auditor-General
Performance Audit Branch
(02) 9285 0051
email: [email protected]
Performance Audit Reports and Related Publications
74 The Millennium Train Project
Performance Audit Reports
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
64* Key Performance Indicators § Government-wide Framework
§ Defining and Measuring Performance
(Better practice Principles)
§ Legal Aid Commission Case Study
31 August 1999
65 Attorney General’s Department Management of Court Waiting Times 3 September 1999
66 Office of the Protective
Commissioner
Office of the Public Guardian
Complaints and Review Processes 28 September 1999
67 University of Western Sydney Administrative Arrangements 17 November 1999
68 NSW Police Service Enforcement of Street Parking 24 November 1999
69 Roads and Traffic Authority of
NSW
Planning for Road Maintenance 1 December 1999
70 NSW Police Service Staff Rostering, Tasking and Allocation 31 January 2000
71* Academics’ Paid Outside Work § Administrative Procedures
§ Protection of Intellectual Property
§ Minimum Standard Checklists
§ Better Practice Examples
7 February 2000
72 Hospital Emergency Departments Delivering Services to Patients 15 March 2000
73 Department of Education and
Training
Using Computers in Schools for Teaching and
Learning
7 June 2000
74 Ageing and Disability Department Group Homes for people with disabilities in
NSW
27 June 2000
75 NSW Department of Transport Management of Road Passenger Transport
Regulation
6 September 2000
76 Judging Performance from Annual
Reports
Review of Eight Agencies’ Annual Reports 29 November 2000
77* Reporting Performance Better Practice Guide
A guide to preparing performance information
for annual reports
29 November 2000
78 State Rail Authority (CityRail)
State Transit Authority
Fare Evasion on Public Transport 6 December 2000
79 TAFE NSW Review of Administration 6 February 2001
80 Ambulance Service of New South
Wales
Readiness to Respond 7 March 2001
Performance Audit Reports and Related Publications
The Millennium Train Project 75
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
81 Department of Housing Maintenance of Public Housing 11 April 2001
82 Environment Protection Authority Controlling and Reducing Pollution from
Industry
18 April 2001
83 Department of Corrective Services NSW Correctional Industries 13 June 2001
84 Follow-up of Performance Audits Police Response to Calls for Assistance
The Levying and Collection of Land Tax
Coordination of Bushfire Fighting Activities
20 June 2001
85* Internal Financial Reporting Internal Financial Reporting
including a Better Practice Guide
27 June 2001
86 Follow-up of Performance Audits The School Accountability and Improvement
Model (May 1999)
The Management of Court Waiting Times
(September 1999)
14 September 2001
87 E-government Use of the Internet and Related Technologies
to Improve Public Sector Performance
19 September 2001
88* E-government e-ready, e-steady, e-government:
e-government readiness assessment guide
19 September 2001
89 Intellectual Property Management of Intellectual Property 17 October 2001
90* Intellectual Property Better Practice Guide
Management of Intellectual Property
17 October 2001
91 University of New South Wales Educational Testing Centre 21 November 2001
92 Department of Urban Affairs and
Planning
Environmental Impact Assessment of Major
Projects
28 November 2001
93 Department of Information
Technology and Management
Government Property Register 31 January 2002
94 State Debt Recovery Office Collecting Outstanding Fines and Penalties 17 April 2002
95 Roads and Traffic Authority Managing Environmental Issues 29 April 2002
96 NSW Agriculture Managing Animal Disease Emergencies 8 May 2002
97 State Transit Authority
Department of Transport
Bus Maintenance and Bus Contracts 29 May 2002
98 Risk Management Managing Risk in the NSW Public Sector 19 June 2002
99 E-government User-friendliness of Websites 26 June 2002
Performance Audit Reports and Related Publications
76 The Millennium Train Project
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
100 NSW Police
Department of Corrective Services
Managing Sick Leave 23 July 2002
101 Department of Land and Water
Conservation
Regulating the Clearing of Native Vegetation 20 August 2002
102 E-government Electronic Procurement of Hospital Supplies 25 September 2002
103 NSW Public Sector Outsourcing Information Technology 23 October 2002
104 Ministry for the Arts
Department of Community Services
Department of Sport and Recreation
Managing Grants 4 December 2002
105 Department of Health
Including Area Health Services and
Hospitals
Managing Hospital Waste 10 December 2002
106 State Rail Authority CityRail Passenger Security 12 February 2003
107 NSW Agriculture Implementing the Ovine Johne’s Disease
Program
26 February 2003
108 Department of Sustainable Natural
Resources
Environment Protection Authority
Protecting Our Rivers 7 May 2003
109 Department of Education and
Training
Managing Teacher Performance 14 May 2003
110 NSW Police The Police Assistance Line 4 June 2003
111 E-government Roads and Traffic Authority
Delivering Services Online
11 June 2003
112 State Rail Authority The Millennium Train Project June 2003
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tate Rail Authority
The Millennium Train Project
State Library of New South Wales cataloguing-in publication data
New South Wales. Audit Office.
Performance audit: State Rail Authority: the Millennium Train Project / [The Audit Office of New South Wales]
0734721498
1. State Rail Authority – Auditing. 2. CityRail (N.S.W.) – Auditing. 3. Railroads – New South Wales –
Auditing. 4. Railroads – New South Wales – Passenger-cars. I. Title: State Rail Authority: the Millennium
Train Project. II. Title: Millennium Train Project. III. Title: Auditor-General’s report: performance audit: State
Rail Authority: the Millennium Train Project.
354.76709944
© Copyright reserved by The Audit Office of New South Wales. All rights reserved. No part of this publication
may be reproduced without prior consent of The Audit Office of New South Wales.
Foreword
Large asset acquisitions – whether through construction or purchase – can involve
complex issues and significant risks that need to be carefully managed.
While this audit focuses on the Millennium Train, it has significant broader messages and
implications.
The Audit Office previously audited aspects of the last such rail acquisition, the Tangara.
I wanted to see if lessons had been learnt from the Tangara contract and if the
Millennium Train procurement was well handled. I also wanted to address the complex
issue of value-for-money from such a large acquisition.
Each 4-car Millennium Train set has an estimated service operating life of 35 years. If
all purchase and maintenance options under the Millennium Train supply contract are
exercised, a billion dollars of capital and operating funds will be expended over four
decades.
A project of this magnitude provides an ideal case study. The findings of this audit are
not only relevant to StateRail, but provide useful insights for all those involved with
managing major projects and those with interests in such matters.
The audit also highlights how decisions in one area may be linked to broader issues. This
is especially true of public infrastructure. Value-for-money needs to be assessed in the
context of the overall system, not only for individual acquisitions. This requires longerterm thinking and planning.
This report shows how the constraints imposed by Sydney’s current rail infrastructure
impact on achieving best value when buying new rolling stock. The report highlights the
significant issues and challenges that need to be addressed in providing rail public
transport in Sydney in the 21st century.
R J Sendt
Auditor-General
June 2003

Contents
Foreword
Executive Summary 1
1. Background 9
1.1 About CityRail 10
1.2 Purchase of a New Suburban Train 11
1.3 Previous New Train Purchase Review by the Audit Office 13
2. Strategic Issues and Challenges 15
2.1 Introduction 16
2.2 Infrastructure and Purchasing 16
2.3 Purchasing Process 21
2.4 Train Maintenance 23
3. Timing, Cost and Quality Outcomes 25
3.1 Introduction 26
3.2 Delivery and Costs Achievements at Time of Our Review 26
3.3 Compliance with Technical Requirements 33
4. Other Significant Process and Performance Matters 39
4.1 Introduction 40
4.2 Train Loading Standards Compliance 40
4.3 The Purchase Environment at StateRail 43
4.4 New South Wales Rail Industry Restructure 44
4.5 Intellectual Property Rights 47
4.6 Conflict of Interest 47
4.7 Risk Management 49
4.8 Customer and Staff Information Campaign Expenditure 50

Appendices	53
Appendix 1	Audit scope and objectives	54
Appendix 2	Chronology of Key Events	55
Appendix 3 Appendix 4	StateRail Board Paper Meeting 1 November 2002 Assessment of Status and Progress Made on Tangara Performance Audit Report Recommendations	58
59
Appendix 5	Response from Agencies	62
Appendix 6	Acronyms	69
Performance Audits by the Audit Office of New South Wales	Error! Bookmark not defined.

The Millennium Train Project 1
Executive Summary
Executive Summary
2 The Millennium Train Project
Executive summary
Background On 8 October 1998 the State Rail Authority of New South Wales
(StateRail) signed a contract for the design, build and 15 years
maintenance of 81 new suburban double deck electric passenger cars.
These are now known as the Millennium Train.
On 5December 2002 StateRail formally committed to Stage 2 of the
Contract: another 60 cars and 15 years maintenance. If Stage 3 of the
contract is taken up along with all maintenance options StateRail will
expend approximately $1 billion in capital and operating funds over about
four decades.
The first 4 car Millennium Train set entered into revenue service on the
Sydney suburban rail network on 1 July 2002. As at 10 April 2003 11 of
the 20 sets of 4 cars under Stage 1 of the Contract had been delivered
and entered into service on the network. It is expected that one 4 car set
will be delivered each month.
The Audit Purchasing new trains is a huge, expensive and complex task. We had
previously reported on aspects of the last such major purchase: the
Tangara.
The Millennium Train represents a substantial enhancement of the quality
of the CityRail fleet of Sydney electric suburban passenger trains. There
are still some teething problems, and the train was withdrawn from
service on 10 April 2003 until 1 June 2003, seven weeks approximately,
to undertake further testing. Even so, much about the Millennium Train is
impressive, although time will be needed to tell about its performance.
The net overall increase in the suburban fleet size from the Millennium
Train purchase is 145 cars or 12.7 per cent (1 car is a collision spare).
This is because the purchase of the 200 Millennium Train cars will
allow the retirement of the 56 oldest cars, the Tullochs. It will also
enable 6 car trains to be increased to 8 car trains and provide
additional trains needed to service the Parramatta Rail Link.
In this audit we sought to consider both macro and micro issues. We
looked at the complex issue of value for money. We also looked at how
well the project was managed and if lessons learnt from the Tangara had
been put into practice.
Executive Summary
The Millennium Train Project 3
Audit opinion
StateRail has made significant improvements since the purchase
of the Tangara. It improved measures necessary for handling
contracts dealing with technically complex and innovative
projects, although some other problems have been encountered,
with new lessons to learn.
The design and manufacture of new trains requires a significant
investment in both time and cost. The Millennium Train has
come at a considerably higher price than originally expected. And
it is very late compared to the Government’s original
announcements, as the development/design took longer than
planned.
Since the Millennium Train contract was awarded in 1998 and the
budget set:
§ contract (capital) costs have increased by $114 million or 24
per cent to $588 million
§ total project costs have increased by $98.4 million or 17 per
cent to $658 million.
Value for money is always a contentious point. And the
judgement of it can depend on the prevailing conditions and
constraints. If judged within the existing operational
environment, and the constraints imposed by the existing rail
network, evidence supports a view that the purchase represents
reasonable value for money.
But large long-life purchases should be examined from the
perspectives of both the existing constraints and the long-term.
There are clear signs that parts of Sydney’s transport system are
rapidly approaching, if not having already reached, saturation
point. And if that is the case, it is now time to reconsider whether
the existing service operating and infrastructure arrangements
will continue to serve us well into the future.
Future decisions to purchase new trains, and the type of train and
purchasing arrangements favoured, may have better value for
money options available for consideration if current operating and
infrastructure constraints are altered.
Our report urges that a broader and longer-term framework be
made available and examined in the procurement of transport
infrastructure. We, however, also point to some important issues
for improvement in future acquisition processes under the
existing arrangements.
Executive Summary
4 The Millennium Train Project
Key Findings
We found that:
§ the current service objectives, operating strategies and rail
infrastructure (the vertical, lateral, horizontal and weight limitations of
the lines over which services traverse) impose key
requirements/limitations when considering options for purchasing new
rollingstock. These requirements/limitations and any proposed
changes must be considered in totality to ensure that sub optimal
trade offs do not occur
§ there are capacity problems emerging with the rail system/network.
The wide recognition given to these problems flowing from the 2001
“Christie Report”, as well as a series of highly publicised problems in
recent times, provides an opportunity to correct the underlying causes
and make fundamental/revolutionary as opposed to incremental
changes to the existing rail network
§ the traditional procurement method of competitive tendering and
contracting may give rise to risks of a monopoly market being
created in the Australian passenger rollingstock industry
§ important elements of corporate governance were not always
optimal. For example, key decision makers (the StateRail Board
and/or the then Minister for Transport) were:
ð advised of a potential “risk premium” for the maintenance being
outsourced to the train manufacturer/supplier in exchange for
enhanced performance and to maintain the enhanced features in
the train. But this was not quantified at the time the decision
was taken. Current StateRail estimates indicate that
maintenance costs will be less than the remainder of the electric
fleet for the same levels of availability and reliability
ð not specifically advised that as the estimated and tendered costs
for the project were sufficiently similar a further review of value
for money was not needed
ð not given a risk management plan for the Millennium Train
Executive Summary
The Millennium Train Project 5
ð not timely in approving the tendering for the Millennium Train (it
took 17 months). Accordingly the purchase timetable was
aggressive and created expectations which were not met,
although the Contract never planned for the delivery of the train
prior to the 2000 Sydney Olympics
ð not providing and directing sufficient internal audit resources on
this project, a repeat of the situation that occurred with the
Tangara
§ because governments cannot readily walk away from such projects,
even if difficulties arise, they necessarily carry significant risk for
such projects. Contract provisions designed to share risk with private
sector providers thus need to be robust and enforceable should the
need arise. But as occurred with the Tangara, such financial
penalties for late delivery were available but were not activated.
This was because the contract was in dispute over time and cost
issues
§ the ‘payment upon delivery’ approach for this contract did apparently
manage product risks. However, in turn it also created other risk
exposures for StateRail
§ the 409 days delay in the Millennium Train’s progressive delivery and
entry into service caused discomfort and lack of service quality to
passengers, particularly during peak periods on some lines
§ StateRail’s specification of the Millennium Train represented a
significant improvement on the Tangara but was still not as
performance based a contract as would be preferred. StateRail
advised that:
ð a constraining factor is the readiness and ability of the Australian
rail industry to move further along the contract continuum
ð the specification was forwarded for rail industry comment but
the level of feedback was not comprehensive nor extensive.
§ the restructure of the New South Wales rail authorities in 1996 and a
disruptive purchase environment at StateRail had some effect on the
Millennium Train project
Executive Summary
6 The Millennium Train Project
Summary of recommendations
It is recommended that the Department of Urban and Transport
Planning should:
§ in coordination with rail entities compile as a matter of priority
a long term (meaning at least a 20-30 year horizon) strategic
plan for the Sydney rail network.
It is recommended that the Transport Co-ordination Authority
should:
§ require StateRail to expand the level of public reporting of the
outcomes and results achieved against the CityRail
(Community) Service Agreement in order to increase
accountability, transparency and openness about the rail
network’s performance.
It is recommended that StateRail should:
§ explore the various purchasing options available for obtaining
new trains and identify which option gives the best value for
money
§ continue to assess the benefits and risks of its train
maintenance arrangements to ascertain with greater
confidence which arrangements provide the best value for
money
§ further review the level of specification in performance based
contracts occurring in train purchase tenders and contracts
(an issue also with the Tangara)
§ ensure that the performance standards specified in contracts
are appropriate (an issue also with the Tangara)
§ review the adequacy of liquidated damages included in
contracts and specify more clearly how and when liquidated
damages will be applied in the event of the contractor failing
to perform as specified
§ involve internal audit at crucial stages in major projects and in
on-going risk management reviews (an issue also with the
Tangara)
§ have a standard escrow arrangement for relevant intellectual
property owned by the contractor included in all future major
contracts
Executive Summary
The Millennium Train Project 7
§ further avoid potential for perceived conflicts of interest in the
use of probity advisers by limiting the use of the same
advisers in other review work on the same project
§ more carefully assess the options for responding to risks as
contractual provisions do not necessarily avoid and/or
mitigate risk events to StateRail’s business objectives
§ be mindful of reputation risks that marketing and
communications can create with the public (passengers) and
StateRail employees.
Executive Summary
8 The Millennium Train Project
Response from Agencies
Refer to Appendix 5 for agency responses to the report and StateRail
Authority’s response to the recommendations.
The Millennium Train Project 9
1. Background
1. Introduction
10 The Millennium Train Project
1.1 About CityRail
CityRail and StateRail CityRail is StateRail’s (the State Rail Authority of NSW) operator of
passenger rail service covering the greater Sydney region. StateRail’s
principal objective is to deliver safe, reliable railway passenger services
in NSW in an efficient, effective and financially responsible manner.1
CityRail’s Service
Commitments
CityRail has publicly committed to providing safe, clean, accessible,
reliable and punctual passenger train services.2 The services CityRail
provides comprise suburban, intercity and some regional
passenger/commuter trains in the Sydney, Hunter Valley, Central
Coast, Blue Mountains, Southern Highlands and South Coast areas.
CityRail Fleet at
30 June 2002
CityRail had a fleet (rollingstock) of 1,502 passenger train cars
(carriages) in use at 30 June 2002. This fleet comprised four generic
categories of trains, see Exhibit 1 below.

Exhibit 1: CityRail’s Fleet Generic Categories as at 30 June 2002
Generic Category	Area of Operation	Fleet No. as at 30 June 2002
Suburban – Double Deck Electric	Berowra in the north, Emu Plains and Richmond in the west and Macarthur and Waterfall in the south	1,138
Outer Suburban – Double Deck Electric	Wyong in the north, Springwood in the west and Wollongong/Kiama in the south	80
Intercity – Double Deck Electric	Newcastle in the north, Lithgow in the west and Kiama in the south to Central where service terminates	240
Regional – Single Deck Diesel	Goulburn to Campbelltown and Nowra to Kiama where service terminates although some services go through to Central and Wollongong respectively where service terminates Dungog and Scone to Newcastle where service terminates	44
Total Rollingstock	1,502

Source: StateRail Records
The fleet had a gross (undepreciated) value/cost of roundly $4.0 billion.
1 Transport Administration Act 1988 section 4A (1)
2 CityRail Website Service Commitment Pages as at 29 January 2003
1. Introduction
The Millennium Train Project 11
CityRail Large
Operator
This investment in rollingstock reflects CityRail being the largest rail
service operator within Australia, see Exhibit 2 below.

Exhibit 2: CityRail’s Operations Compared to that Occurring Nationally
2001-02	QLD	SA	VIC	WA	NSW	Total
Millions of Passenger Journeys	47	8	134	30	276	495
Number of Stations	142	84	288	57	306	877
Number of Services Each Weekday (Monday to Friday)	740	242	2,061	750	3,000	6,793
Fleet – Electric & Diesel Cars	443	100	1,108	96	1,502	3,249

Source: Agency 2001-02 Annual Reports and/or Website Pages
1.2 Purchase of a New Suburban Train

Acquisition Genesis

The purchase by CityRail of a new suburban electric passenger train had its genesis in 1995 when the (then):

§ Group General Manager CityRail approved development work
commencing of the Fourth Generation Train
§ Minister for Transport announced that the development of the
Fourth Generation Train was underway.
StateRail Board and
Ministerial Approvals
The StateRail Board and the then Minister for Transport approved in
February and May 1997 respectively the acquisition of a new suburban
electric passenger train. The Board set a budget of $212 million
(1995-96 dollars).
Pre-registration to
Tender
Three train supply companies responded by the closing date of
13 June 1997 to the ‘pre-registration to tender’ request published in
major Australian newspapers:
§ ABB Daimler Benz Transportation (Australia) Limited (trading as
Adtranz)
§ a joint venture between GEC Alstom and Clyde Industries Limited
(trading as Clyde Engineering)
§ A Goninan & Company Limited.
Tenders Called and
Received
On 22 July 1997 these companies were requested to submit tenders for
the design, build and possible maintenance of the Fourth Generation
Train. Three tender offers were received at the closing date of
5 November 1997.
1. Introduction
12 The Millennium Train Project
Execution of Contract The then Minister for Transport and Evans Deakin Industries Limited
(EDIL), whose subsidiary was EDI Rail, trading as Clyde Engineering,
signed on 8 October 1998 the Deed of Agreement (the Contract) for
the design, build and maintenance, for an initial period of 15 years, of
81 double deck electric cars. This was Stage 1 of the Contract.
The value of the Contract Stage 1 (design, build and maintain for 15
years only) was estimated to be $323 million (1997/98 dollars).
However, if all further purchase (an additional 120 cars) and
maintenance (for 35 years) options are taken up then the contract is
worth approximately $1 billion.
StateRail gave a formal commitment to Stage 2 (another 60 cars) of
the Contract on 5 December 2002. On 17 March 2003 the then
Minister for Transport announced in effect that StateRail would
proceed with the Stage 3 purchase option (another 60 cars) of the
Contract.
Train Naming The then Chief Executive of StateRail on 22 April 1999 advised the
project’s steering committee that the new train was to be known as
‘the Millennium Train’. Previous public advising on when the new
train was expected to enter into service had seen it nicknamed ‘The
Olympian’. However, the Contract never intended for such a delivery
timetable.
Entry into Revenue
Service
On 1July 2002 the first non-peak hour revenue service of a 4 car
Millennium Train set occurred. The first non-peak hour and peak hour
revenue services of a 8 car Millennium Train set occurred respectively
on 30 November 2002 and 4 December 2002.

Exhibit 3: Millennium Train 4 Car Set

Source: StateRail
1. Introduction
The Millennium Train Project 13
Detailed Key Events
Chronology
Appendix 2 gives a more detailed chronology of key events, from
June 1995 to 10 April 2003, with the Millennium Train
purchase/project.
1.3 Previous New Train Purchase Review by the
Audit Office
On 19 November 1996 we released a report, number 31, State Rail
Authority: Tangara Contract Finalisation.
We noted in the report that:
The Tangara Project was one of Australia’s largest ever railway
rollingstock projects. The contract was successful in delivering
the train cars significantly within budget and within the agreed
delivery schedule … despite … being … long in duration, large
in cost … and technically complex involving innovative
technology.
and
The Tangara contract was characterised by a formal mediation, a
series of reviews relating to project management, contract
administration and engineering issues, and a finalisation review
conducted by a specially designated committee. The use of
these processes has highlighted the need for effective measures
to handle complex contracts dealing with technically innovative
projects.
The majority of our report was concerned with lessons for the future
management of major projects.
Appendix 4 contains our assessment of how those matters have been
dealt with in this project.

The Millennium Train Project 15
2. Strategic Issues and Challenges
2. Strategic Issues and Challenges
16 The Millennium Train Project
2.1 Introduction
When examining large asset purchases such as this, a key question for
which the community rightly expects an answer is ‘did we get value for
money from the purchase?’
This simple question has complex dimensions depending on the context in
which value for money is defined. The 2001-02 StateRail Annual Report
advised that:
It is one of the most complex passenger rail operations in the world.
We examine relevant key issues in this chapter.
2.2 Infrastructure and Purchasing
Some of the main factors that affect the purchasing of new rollingstock,
be it for fleet additions and/or replacements, are set out below.

Exhibit 4: Key Factors Affecting New Train Purchasing

New Train Purchasing Rail System/Network Timetabled Services Patronage (Peak Hour CBD) Current Fleet Utilisation Level & Age New Lines Opening Rolling Stock Industry Service Provision Agreement Rail Technology & Standards Statutory/Regulatory Requirements Passenger/Crew Wants & Needs

It is apparent that a complex array of issues is involved in making a
decision about such a purchase.

2. Strategic Issues and Challenges
The Millennium Train Project 17
The extent to which options are limited may in turn restrict the value for
money possibilities. We acknowledge that it is rare to have all options
available, owing to circumstances or history. However, the broadest
possible range of options should be considered.
The existing network
limits purchasing
options
In considering the purchase of new rollingstock there were a number of
key requirements/limitations:
§ the Sydney suburban rail network has grown considerably in the one
and half centuries since the first rail line opened in 1855. As the
network grew, variations occurred in infrastructure such as bridges,
tunnels and station/platform configurations.
Consequently there are specific requirements for rollingstock used on
Sydney’s suburban rail lines. If a safe service is to be operated then
the rollingstock must satisfy the most constrained part of the network,
for example tightest curves, shortest platforms, lowest
overpasses/tunnels
§ when in the early 1960s it was decided to increase the passenger
carrying capacity of the Sydney rail network, there was a switch to
double deck trains. The first double deck trains entered service in
1964 and in 1992 the last of the single deck rollingstock was retired.
StateRail advised that the switch to double deck trains at the time was
considered the most cost effective approach as it had minimal effect
on the fixed infrastructure of stations, tunnels and signalling.
Patronage and service timetabling levels make it difficult to revert to
single deck trains in the current mode of operation
§ the past and current land use patterns in Sydney have created a
significant demand to transport commuters relatively long distances by
rail.
These existing network requirements/limitations meant that the range of
options considered was restricted as only certain solutions were viable.
From the options considered, a decision was made to have a purpose built
train with a new design for the Sydney suburban network. This carried
with it a number of cost implications such as design and innovation risk,
prototype and testing costs, and inability to benefit from cost savings
available if ‘off the shelf’ designs and associated equipment/systems
purchasing were possible.
2. Strategic Issues and Challenges
18 The Millennium Train Project
If these network limitations are ‘accepted’ each time new rolling stock is
to be acquired the result may be the most appropriate ‘short-term’ design
but not the one that best meets long-term transport needs.
Changes to the network (that is eliminating or minimising the limitations)
would mean that more options were available to purchase rollingstock.
This could possibly lead to better value for money being obtained through
purchasing new trains ‘off the shelf’ and/or standard trains.
The cost of the network changes required would be substantial and would
need to be carefully assessed to ensure that the total cost of the network
and rollingstock (including maintenance and operation costs for both)
would achieve better value for money.
The capacity of the
network is a problem
The current rail network has capacity problems3 on some lines during
peak hour periods and the temporary solutions4 of incrementally increasing
capacity will be very shortly, if not already, exhausted.
As noted by the Council on the Cost and Quality of Government in 1998,5
approximately 40 per cent of all rail commuter journeys start or end in the
CBD. Currently 20 train movements in both directions is the maximum
number that can occur during peak hour in the City Circle. The downside
of double deck trains is that they have a longer ‘dwell’ time at stations,
particularly in the CBD, because of the time it takes for passengers to
load and unload. The Christie Report6 also advised that some stations in
the CBD were unable to handle more passengers than they currently do.
The 2001-02 StateRail Annual Report advised that:
Almost 50% of all persons travelling to Sydney’s Central Business
District in peak hours travel on CityRail services.
3 Action for Transport 2010 – an Integrated Transport Plan for Sydney Page 3, Department of
Transport, November 1998
4 Double deck trains and only trains in a 6 or 8 car set configuration are allowed to operate during
peak hour on the suburban rail network
5 Transportation – Service Efforts and Accomplishments Report, Council on the Cost and Quality of
Government, 1998
6 Long Term Strategic Plan for Rail – Greater Sydney Metropolitan Mr R Christie, former Acting Chief
Executive of State Rail and Co-ordinator General of Rail, June 2001
2. Strategic Issues and Challenges
The Millennium Train Project 19
The planning to
resolve capacity is
considered not
adequate
There is a plan for improving the network’s capacity, Action for
Transport 2010 – an Integrated Transport Plan for Sydney. Actions
have or are being undertaken to increase the current capacity of the
network, for example:
§ amplification of tracks on the East Hills and Richmond Lines
§ Bondi Junction turnback (train turn around) which will increase
capacity on the Illawarra line
§ Parramatta rail link Stage 1 and 2 which will relieve congestion on the
Main Western and Northern Lines.
However, this plan is a short term plan in infrastructure terms (which are
often projected many years ahead). It does not address the full range of
network (infrastructure) options available and continues to work within the
current network limits.
The Christie Report makes it plain that the limitations of the current
network have to be resolved. Further emphasis is given by a Rail
Infrastructure Corporation (RIC) 2001 working paper:7
Based on current timetabling and infrastructure, the Sydney rail
network has only a few years before capacity constraints become
more problematic for the network as a whole, rather than just the
CBD.
Given the magnitude of the task, and the dollars involved, a truly long term
strategic plan for Sydney rail transport is essential. The Warren Centre
has expressed similar sentiments.8 Currently there is no network plan
beyond 2010.
This limits value for
money considerations
In our view the value for money options available for the Millennium Train
purchase and for future acquisitions are limited by the focus on short term
infrastructure planning.
7 Sydney Passenger Forecasts – Working Paper 1, Rail Infrastructure Corporation, November 2001
8 The Warren Centre for Advanced Engineering, University of Sydney
2. Strategic Issues and Challenges
20 The Millennium Train Project
The suburban rail network in Sydney is and will continue to be very busy.
This is because effectively five railway services are operating using the
same network:
§ long distance (New South Wales regional and interstate) passenger
service
§ intercity passenger service (over 60 minutes)
§ medium/middle distance passenger service (20-60 minutes)
§ short distance passenger service (less than 20 minutes)
§ freight haulage.
Excluding the City Circle and the Eastern Suburbs Line, the Sydney
suburban network is not a metro railway like that found in major capital
cities overseas.
The fact that the network is integrated to provide a wide range of service
options makes it very difficult to introduce fundamental/revolutionary
changes to the network or rollingstock.
The high density development and urban consolidation that is occurring in
Sydney, particularly around railway stations, will place even greater
demands on the capacity of the suburban network.
StateRail expects patronage to grow from 277 million in 2001-02 to
between 370 to 396 million by 2021-22. However, Action for Transport
2010 is contemplating even higher growth.
The Department of Urban and Transport Planning is currently drafting a
document for setting out options and alternative views for increasing the
network’s capacity for consideration by stakeholders. Among these
options is one involving the use of alternative ‘metro-style’ rollingstock on
a proposed new rail line through the CBD.
An opportunity to
make fundamental
changes exists
There does seem to be an opportunity, given the Christie and Warren
Reports and also recently highly publicised problems with the network
infrastructure, to consider seriously fundamental/revolutionary changes as
opposed to continuing with incremental changes to the rail network. Such
an opportunity occurs rarely with infrastructure, and has major long-term
implications for operational limits and costs.
2. Strategic Issues and Challenges
The Millennium Train Project 21
A long term rail network plan, looking ahead some 20-30 years, would
enable the major capital funds required to be planned for. It would also
provide a valuable opportunity to change some of the existing factors that
limit the value for money possibilities both for operations and for fleet
additions and/or replacements.
2.3 Purchasing Process
Another significant component of value for money comes from the
purchasing (procurement) process adopted.
StateRail has followed the traditional purchasing model of competitive
tender and contract (CTC). This model assumes a competitive market
place to ensure a fair and equitable price is paid for goods and services.
The market place for
competition is limited
However, in Australia the market place for passenger rollingstock is small
and there is a limited number of Australian suppliers. StateRail advised
that the international rail industry is not interested in making bids to supply
outright trains to StateRail.
StateRail advised that from a commercial perspective the size of the train
orders by New South Wales, and indeed Australia, are small compared to
orders received overseas. In addition, StateRail advised that the specific
design requirements for its trains that flow from the existing network and
operational factors would necessitate substantial modification of overseas
‘off the shelf’ designs. Most major overseas rail systems consist of single
deck carriages, although the number of systems with double deck trains is
gradually increasing.
StateRail advised that the low volume and high modification factors
combine to make overseas suppliers not interested because it is not
commercially attractive. The required modification factors arise not only
from the network requirements but also from climatic and local customer
requirements.
Purchases occur
about every decade
Under the current CTC arrangements, major suburban train purchasing
occurs infrequently, about every decade.
2. Strategic Issues and Challenges
22 The Millennium Train Project

Exhibit 5: CityRail Suburban Fleet at 30 June 2002 Car Types, Ages & Numbers

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 Age (Years) Tangara 1988-1994 368 Yes C-Set 1986-1987 56 Yes K-Set 1981-1985 160 Yes Tulloch 1964-1968 56 No S-Set 1972-1980 498 No Car Type No. of Cars Commission Year 35 Years Estimated Useful Life Total 1,138 20 Years 5 Months Median Fleet Age Air Conditioned

Source: StateRail Records
There are high costs involved with irregular purchasing of new designs:
§ design costs ($15 to $25 million according to StateRail advice)
§ tendering costs for all parties concerned
§ prototyping of new trains and all the risks that go with this.
The unsuccessful Australian suppliers have a difficult environment when it
comes to maintaining appropriate skills, knowledge and facilities for the 10
years until the next tender is called.
A paper that was put to the StateRail Board meeting of 1 November 2002,
about the development of a strategic procurement plan for rollingstock,
comments on the industry’s ‘fragility’. Appendix 3 contains extracts from
this paper.
There is a risk of the current situation perhaps leading towards a
monopoly market in Australian passenger rollingstock. Monopolies rarely
lead to good value.
Alternative
purchasing methods
need to be explored
There are grounds for considering whether alternative methods of
purchasing may give a better value for money environment. StateRail
should explore whether long term partnership arrangements with various
suppliers may provide a better result all round.
2. Strategic Issues and Challenges
The Millennium Train Project 23
2.4 Train Maintenance
For the first time
maintenance was
included in the
contract
StateRail tried to sustain the Australian rail industry and also create train
supply competition by including maintenance of the Millennium Train in the
contract. This follows the current world trend of transferring
(outsourcing) train maintenance to the private sector, preferably the
manufacturer/supplier.
StateRail considered that it benefited from:
§ cost savings (through competitive tendering)
§ transferring design and product performance risks to the train supplier
in order to minimise whole of life asset costs
§ avoiding the capital costs involved with establishing a specialised
maintenance centre because of the level of technology now used in
trains
§ creating a contestable market for fleet maintenance and acting as
catalyst for internal workplace reform and attendant efficiency gains
§ creating an improved product (with better operational and reliability
performances)
§ having a lower level of direct involvement in the detailed design of the
train (as EDI Rail was required to design to performance
specifications) and hence reduced project management costs.
The StateRail Board was advised on 25 June 1998 that the tendered
maintenance prices were expected to incorporate a ‘risk premium’ when
compared to in-house (Passenger Fleet Maintenance) maintenance costs.
The Board was also advised that this was consistent with the experience
of United Kingdom rail operators who had pioneered train acquisition
through design, build and maintain structures.
It is not apparent that the cost of such a risk premium was estimated or
made known to the StateRail Board and/or the then Minister for
Transport. Nonetheless the decision was taken to include maintenance as
part of the contract, as there were other perceived long term benefits as
outlined above. The Contract requires a superior performance from this
train in both reliability and availability over the rest of the fleet and
penalties apply to the contractor if these contractual performances are not
met.
2. Strategic Issues and Challenges
24 The Millennium Train Project
A Ministerial
direction excluded
maintenance for all
future acquisitions
Representations were made to the then Minister for Transport by the
unions involved in maintaining railway rollingstock about StateRail’s
inclusion of maintenance in future new rollingstock acquisitions. The
unions claimed that:
§ the maintenance work could be performed in-house at competitive
rates
§ StateRail was in danger of losing valuable skills over the longer term
in rollingstock maintenance.
The then Minister for Transport considered the claims and wrote to the
then Secretary of the Labor Council on 22 May 2001 advising:
I have agreed to instruct the SRA to call tenders for Design and
Build only……I note that the existing contract for 81 carriages of
the Millennium train has already been let, but any additional
rollingstock ordered will be on the basis of design and construct
tender only.
The then Acting Chief Executive of StateRail wrote to then Minister on
14 June 2001 to clarify whether this advice to the Labor Council applied to
Millennium Train Contract Stages 2 and 3. Subsequent stages of the
Millennium Train have proceeded on the basis of maintenance being
included. However, the contracts for the new outer suburban electric and
Hunter diesel rail cars excluded maintenance.
Recent StateRail estimates of the Millennium Train indicate that
maintenance costs are slightly less than the remainder of the electric fleet,
and provide for higher levels of availability, reliability and the significant
additional features in the train.
StateRail needs to assess carefully the benefits and risks of its train
maintenance arrangements to resolve a clearer position as to which
arrangements provide the best value for money.
The Millennium Train Project 25
3. Timing, Cost and Quality Outcomes
3. Timing, Cost and Quality Outcomes
26 The Millennium Train Project
3.1 Introduction
Purchasing new trains is costly and time consuming. StateRail/CityRail
publicity material describes the Millennium Train in such terms as “state of
the art” and “innovative”. This is because the train incorporates the latest
computer technology, improved design standards and levels of comfort.
Accordingly the acquisition of the Millennium Train, as indeed does any
other complex piece of plant and equipment, for example submarines, has
significant inherent risks because there are many things that can go
wrong.
This section of the report comments about StateRail’s achievements
(outcomes) in the key performance areas of:
§ delivery and cost
§ meeting its own technical specification.
3.2 Delivery and Costs Achievements at Time of
Our Review
The contract had
explicit financial
incentives…
The Contract for the Millennium Train had explicit financial incentives to
deliver the train on time, if not early, and in accordance with the
performance specification. These incentives included:
§ liquidated damages of $2,000 per day per 4 car set. This was capped
at 5% of the design and build price for a set, and in total for all sets in
a stage. For Stage 1 this was approximately $520,000 for a set and a
$10.5 million in total for the Stage (November 2002 prices).
§ payment not being made for a set until it achieves practical completion
(accepted for service by StateRail). EDI Rail therefore bears the
cost of delay and any under performance because it has to meet
finance costs incurred beyond the contracted delivery date.
…but delivery was
still very late
The first 4 car set achieved practical completion on 28 June 2002. The
originally contracted practical completion date was 4 January 2001. This
was a variance (delay) of 541 days or 18 months approximately.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 27

Exhibit 6: Planned and Actual Practical Completion Date Achievements as at 10 April 2003

700 900 1100 1300 1500 1700 1900 2100 2300 2500 2700 2900 0 5 10 15 20 25 30 35 40 45 50 Trains (4 car Set) Days from Contract Signing 08-10-1998 Contracted Practical Completion Actual Practical Completion Deed’s Estimated Practical Completion Amended Practial Completion pre Deed

Stage 1 Stage 2 Stage 3
Source: StateRail Records
Note: StateRail has only formally committed to Stages 1 & 2 as at 10 April 2003
Prior to EDI Rail lodging a claim for variations (the ‘Stage 1 Resolution
Proposal’) on 16 July 2001, StateRail had authorised two delivery date
variations. These variations amended the contracted practical completion
date to 15 May 2001 due to:
§ moving the crew cab wall (21 days but no cost)
§ changing from a swing to a power operated crew door because of
crew occupational health and safety concerns (110 days and $3.1
million cost).
Therefore practical completion on 28 June 2002 was 409 days or 13.5
months later than the revised delivery date.
Financial penalties for
late delivery are not
applied by StateRail
As we stated in our report on the Tangara Contract Finalisation,9
liquidated damages are generally included in StateRail contracts, but
rarely, if ever, acted upon. This was again the case with the Millennium
Train. StateRail advised that on many occasions it reiterated to EDI Rail
that delays were subject to liquidated damages. However, StateRail did
not apply liquidated damages in this case as the claim (which included a
claim for extension of time) was still being negotiated at the time of the
delivery of the first 4 car sets.
9 The Audit Office of NSW Performance Audit Report: Tangara Contract Finalisation, November 1996,
Page 28
3. Timing, Cost and Quality Outcomes
28 The Millennium Train Project
StateRail took the view that payment upon delivery of each set meant the
finance costs imposed a significant impost on EDI Rail and outweighed
the liquidated damages.
StateRail had varied the payment terms for the Millennium Train following
its experiences with the Tangara. The ‘payment upon delivery’ of each
set saw EDI Rail go significantly into the red on the Contract and having
to be financially subsidised through its parent company, Downer EDI.
A claim was made on
StateRail for
additional time/money
In April 2001 StateRail considered that it was likely EDI Rail would
submit a claim to reduce the liquidated damages. In due course a claim
was made on 16 July 2001 (the earlier mentioned ‘Stage 1 Resolution
Proposal’). This claim was for an extension by StateRail to the delivery
dates, which would reduce or eliminate liquidated damages, and ultimately
increase the train’s price by approving a further variation to the already
amended contract delivery dates.
Following negotiation of this matter, which was delayed while EDI Rail
concentrated on delivering the first 4 car set and compiling/submitting a
tender for the outer suburban train, a commercial settlement was reached
between the parties. EDI Rail had submitted its consolidated (final) claim
on 18 September 2002. On 18 November 2002 a Deed of Release and
Variation (the Deed) was executed between StateRail and EDI Rail.
A grandparent
company guarantee
was required following
the takeover of EDIL
EDIL had told StateRail in December 2000 that its Board had agreed to a
takeover by Downer. This was duly completed in March 200110, when
the shareholders agreed to the Downer and EDI merger. Subsequently
the merged entity was renamed Downer EDI. EDI Rail wrote to
StateRail on 18 May 2001 advising of ‘change of effective control’, at
which time StateRail sought legal and financial advice on this change in
control.
The legal advice was that the parent company guarantee with EDIL11
was still valid. However, it recommended that there be a further (grand)
parent company guarantee sought from the new entity, Downer EDI. On
7 November 2001 StateRail wrote to EDI Rail seeking this guarantee.
However, by then EDI Rail had already lodged its resolution claim.
10 Downer EDI Annual Report 2001
11 EDIL was the holding company for EDI Rail. EDIL was taken over by Downer and the new combined
entity was renamed Downer EDI
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 29
StateRail advised that it was considered unlikely that any earlier approach
to Downer on the parent company guarantee would have progressed,
particularly during the period when shareholders were deciding on the
merger and the application was with the Australian Stock Exchange.
We acknowledge that there would have been little if any likelihood of
obtaining a parent company guarantee from Downer prior to the merger
being finalised. However, this occurred in March 2001, giving a window
of opportunity of four months before EDI Rail’s claim was submitted.
This window was reduced to two months as EDI Rail’s advice to
StateRail about the merger was delayed, despite immediate advice of such
matters being a condition of the Contract.
The importance of the guarantee is pivotal as the following legal advice to
StateRail on the resolution claim illustrates:
EDI Rail is a wholly owned subsidiary of Downer EDI Limited.…
There is no parent company guarantee in place exposing Downer
to any obligation to stand behind EDI Rail, and it is not
inconceivable that Downer might cut loose EDI Rail, reducing it to
the status of a paper company. In that event SRA12 would have to
re-let the contract at what would be undoubtedly be a far greater
cost …
StateRail advised that it considered this situation was, however, very
unlikely as Downer had merged with EDIL to enter the railway market
and to gain the advantage of the long term maintenance contracts that
EDI Rail had established.
Obtaining this guarantee became part of the EDI Rail claim settlement.
StateRail has advised that this was amongst the first items agreed by
Downer in the claim negotiation and that it was not a significant
negotiating issue. Whether the terms of the settlement may have
improved if StateRail had received the guarantee in the available window
before the claim was lodged is uncertain. We believe it would have been
desirable.
12 SRA: State Rail Authority (StateRail)
3. Timing, Cost and Quality Outcomes
30 The Millennium Train Project
It was decided to
negotiate a
commercial
settlement
StateRail undertook a detailed review of EDI Rail’s claims and decided
that some aspects of the claim had merit. EDI Rail had also indicated an
unwillingness to proceed with Stages 2 and 3 of the contract without
substantial restructuring of the contract costs. And there was concern
that EDI Rail may withdraw from the contract altogether.
The StateRail Board on 28 June 2002 approved a commercial settlement
being negotiated with EDI Rail rather than risk an unknown outcome from
arbitration and possible litigation as well as the significant cost of
re-tendering should this result. Non-financial costs would also have been
a factor in this matter as articles began appearing in the print media as
from March 2001 about the Millennium Train’s late delivery.
EDI Rail, in its consolidated claim of 18 September 2002, sought additional
time and ultimately costs under the contract for a range of matters
including:
§ liquidation and insolvency of the sub contractors for the
communications and surveillance system and the bogie anti-roll bar.
Therefore replacement sub contractors had to be found and engaged
§ signal interference testing by RIC had indicated that there were
unacceptable rail return currents, when completing the electrical
circuit, by the Millennium Train. StateRail and RIC have advised that
this was not a safety issue but it had on-time running implications.
StateRail engaged experts from the United Kingdom and Hong Kong
who advised on the results and subsequently RIC endorsed the train
to operate as 4 and 8 car sets without restriction. However, the train
was withdrawn from service on 10 April 2003, for seven weeks
approximately, for further prototype testing of this and other issues
§ instances where train crews and/or track possessions were not
available for commissioning tests
§ performance specifications for bogie wheel unloading (derailment)
and crashworthiness that EDI Rail considered impossible to achieve,
which EDI Rail expended considerable time and effort trying to
achieve
§ extensive negotiation and ongoing revision of crew control driver’s
cab which impacted upon design development
§ innovations and enhancements beyond the contract and tender
amount.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 31
The Millennium
Train’s capital costs
have increased
because of the
settlement…
The effect of the commercial settlement with EDI Rail is that the
Contract (out-turn/capital) cost of the Millennium Train and the total
project cost have increased for all three stages by $114.8 million or 24%
to $588 million, and $98.4 million or 17% to $658 million respectively.

Exhibit 7: Estimated Contract Out-turn and Total Project Costs Pre Settlement and the Settlement Amount as at 31 December 2002
Contract Out-turn Cost (Estimated)	Total Project Cost (Estimated)
0.0 100.0 200.0 300.0 400.0 500.0 600.0 All Stages Combined Stage 3 Stage 2 Stage 1 Out-turn Cost Pre Settlement Settlement $ Million	0.0 100.0 200.0 300.0 400.0 500.0 600.0 All Stages Combined Stage 3 Stage 2 Stage 1 Total Project Budget Pre Settlement Settlement $ Million

473.2
132.6
129.6
211.0
114.8
35.9
35.9
43.0
559.6
180.0
150.0
229.6
98.4
11.8
39.0
47.6
Source: StateRail Records
Note: The Contract Out-Turn Cost (Capital Cost) and Total Project Cost includes escalation and custom duties
estimates. While the Total Project Cost includes estimates for project management, train introduction and
contingency funds
… but the settlement
had no impact on
maintenance costs
StateRail advised that the Deed had no impact on the maintenance costs
of the Millennium Train. However, because of variations in the technical
specification, for example the powered crew door, maintenance costs
have risen by 1%. The tendered prices for maintenance for Stages 1, 2
and 3 as at June 1998 for 35 years were $233.2 million, $149.2 million and
$145.5 million respectively (overall $527.9 million). These prices are
subject to escalation and foreign exchange adjustment.
The price of the
Millennium Train is
still better than that
paid by others
Exhibit 8 below compares costs of recent train purchases in other
Australian jurisdictions. Caution must be exercised in drawing conclusions
from this comparison of train purchase costs. However, some sense of
the cost implications of different approaches is apparent.
3. Timing, Cost and Quality Outcomes
32 The Millennium Train Project
Exhibit 8: Comparison of Millennium Train Capital Cost with Recent Train Purchases in
Other Australian States

Item	StateRail Pre Deed	StateRail Post Deed	Queensland	Western Australia	Victoria Network A	Victoria Network B
Number of Cars Car Deck Type Capital Cost $ Millions Off the Shelf Crush Load Capacity of Purchase (Seated and Standing Passengers) Average Cost $ per Car Average Cost $ per 4 Car Set Average Cost $ per Passenger	201 Double 554.3 No 53,000 2,757,547 11,030,189 10,458	201 Double 651.8 No 53,000 3,243,005 12,972,020 12,299	90 Single 251.1 No 15,060 2,790,000 11,160,000 16,673	93 Single 254.1 Yes 17,794 2,732,258 10,929,032 14,280	174 Single 332.0 Yes 23,258 1,908,046 7,632,184 14,275	186 Single 330.0 Yes 29,760 1,896,552 7,586,207 14,189

Source: StateRail Records, Parliamentary Hansards and Committee Reports, Ministerial Press Releases and Website Pages.
Notes:
1. Construction of Maintenance Facilities has been excluded
2. The dollar values for other than StateRail are unaudited and should be regarded as indicative only
3. GST has been excluded
On a per passenger cost basis the Millennium Train purchase appears
to be favourable compared to other recent Australian train purchases.
Other factors being equal, cost per:
§ 4 car set basis should be lower for large orders
§ passenger should be lower for double deck cars.
Value for money and
risk management
material was not
provided to key
decision makers
When key decision makers were considering the award of contracts for
the purchase of new Hunter and Outer Suburban trains they were
provided with:
§ value for money comparisons of world wide train purchases
§ risk management plans.
There was no such value for money analysis and/or risk management plan
provided to key decision makers (the StateRail Board and/or the then
Minister for Transport) when the Millennium Train purchase was under
consideration. StateRail advised that the value for money analysis was
not provided because the tendered cost of the Millennium Train was
consistent with the earlier estimated cost.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 33
Since the Deed’s signing, EDI Rail has been achieving practical
completion of 4 car Millennium Train sets in line with the Deed’s revised
dates, that is one 4 car set a month, see Exhibit 6. However, there is
currently a dispute between EDI Rail and a sub contractor. Downer EDI
had launched a takeover bid for this major sub contractor, however, this
has been unsuccessful. There is now a legal process underway to resolve
the contractual differences.
It needs to be borne in mind that aspects relating to comfort and quality of
service for CityRail’s customers would have been affected by:
§ delayed retirement of life expired rollingstock, the Tullochs, and hence
lesser passenger comfort and security
§ overcrowding on trains on some lines not being alleviated in a timely
manner, (refer Section 4.2 Train Loading Standards Compliance).
3.3 Compliance with Technical Requirements
Trains are technically complex pieces of equipment. The Millennium
Train contract contained over 237 pages, approximately 2,500 technical
requirements for the train. There are some 85,000 steps/activities
involved in actually building the train.
Extensive
commissioning tests
were done
StateRail advised that from the time of the arrival in Sydney of the first 4
car Millennium Train set on 30 November 2001, until its notice of practical
completion was given on 28 June 2002, the train operated for 3,000 hours
under commission testing. This included 1,000 hours or 40,000 kilometres
of on track testing. At the time of our review there was still some testing
to be undertaken, for example energy efficiency and 16 car operation, as it
has not yet been possible to perform them or they have been deferred.
The Millennium Train was withdrawn from service on 10 April 2003 to
undertake further prototype testing. The main areas where problems have
occurred are:
§ traction system
§ doors
§ communications system
§ air conditioning
§ signalling interference.
3. Timing, Cost and Quality Outcomes
34 The Millennium Train Project
The Millennium Train returned to service on 2 June 2003 with the first non
peak hour passenger service occurring. The Minister for Transport
Services announced that the Millennium Train would gradually return to
service over the following three weeks.
The entry of the Millennium Train into revenue service shows there has
been some significant project management, engineering and construction
achievements. This in many ways demonstrated the capacity of all those
concerned to produce to world-class standards.
A key factor in EDI Rail winning the Millennium Train contract was EDI
Rail being prepared to guarantee a reliability of one incident13 per 100,000
kilometres travelled per 4 car set. This reliability level was after a two
year settling in period. A contractual service availability level on each
business day of 95% is also required for 4 car Millennium Train sets.
There are financial incentives and penalties through the Contract’s
maintenance payments in respect of service availability and reliability.
The Millennium Train first entered revenue service on 1 July 2002 with
one 4 car set. Up to 10 April 2003 StateRail has accepted another 10 sets
(40 cars) and these have progressively entered into revenue service.
However, the sets have not operated continuously in revenue service, for
example:
§ two of the earlier sets were withdrawn for three months in order to
undertake 8 car set commissioning tests as per the Contract
requirements
§ sets only operated in the off peak period until early December 2002
§ sets were withdrawn for problem rectification.
In the period 1 July 2002 to 10 April 2003, the 11 Millennium Trains 4 car
sets delivered and operating, have in totality travelled in revenue service
only 313,297 kilometres and the cars individually 1,253,187 kilometres all
up.
In performance terms this is limited. Thus while the Millennium Train
appears to have the potential to achieve the capability specified in the
contract, it is not possible to be conclusive at this time.
13 An incident is defined as any equipment failure or defect that results in a service delay of more
than 3 minutes while in revenue service.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 35

Exhibit 9: Average Kilometre Incident Rate of Millennium Train Sets as at 10 April 2003

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Millennium Trains 1-11 Millennium Train 11 Millennium Train 10 Millennium Train 9 Millennium Train 8 Millennium Train 7 Millennium Train 6 Millennium Train 5 Millennium Train 4 Millennium Train 3 Millennium Train 2 Millennium Train 1 Average Distance Between Incidents Kilometres Thousands

4.9
0.3
9.7
2.1
15.9
3.5
6.0
8.2
4.7
4.9
4.3
3.4
Source: The Audit Office Analysis of StateRail Records
Note:
1. This exhibit shows the average incident rate of each Millennium Train 4 car set while in revenue
(timetabled) service from 1 July 2002 to 10 April 2003 and the sets overall. Incidents that occurred
while the Millennium Trains were not in revenue service are excluded.
2. Millennium Train Sets 8 and 11 have had no incidents and the figure recorded is the distance
travelled by the set while in revenue service.
StateRail indicated that it considered the first 4 car set as a prototype and
the first 5 to 10 train sets generally operate to identify and rectify
problems.
StateRail has advised that it is confident that the performance of the
Millennium Train will meet, if not exceed, the specified requirements.
The project steering committee and the StateRail Board are being
provided with information on the Millennium Train’s reliability and
availability. However, this information does not readily show the
Millennium Train’s specified availability and reliability requirements
performance achievements.
Notices of practical
completion are given
detailing defects…
When StateRail accepts a Millennium Train set, StateRail gives a ‘notice
of practical completion’ to EDI Rail. Accompanying the notice are
schedules detailing commissioning tests not performed, test failures and
defects in the set. The following Exhibit compares the notice’s
accompanying schedules for Set 1 and 4.
3. Timing, Cost and Quality Outcomes
36 The Millennium Train Project

Exhibit 10: Sets 1 and 4 Practical Completion Notices Accompanying Schedules
Set 1	Set 4
Date of Practical Completion	28 June 2002	29 November 2002
Schedules Accompanying Notice	No. of Pages	No. of Matters	No. of Pages	No. of Matters
Schedule 1 – commissioning tests not carried out or deferred to a later time	1	18	1	7
Schedule 2 – commissioning tests failed to pass but will be accepted	1	1	1	1
Schedule 3 – defects to be rectified arising from failure to pass commissioning and other tests	19	172	14	192
Schedule 4 – defects which will be accepted	50	465	0	0
Schedule 5 – defects to be rectified	45	545	13	154
Total	116	1,201	29	354

Source: StateRail Records
The number of non compliances with the contract’s specification (that
were previously listed as defects under the notice’s Schedule 4) had gone
from 465 in Set 1 to zero in Set 4.
Many non
conformances
(defects) have been
accepted
This is because under the Deed there were 531 technical non
conformance matters that StateRail agreed would not be treated as
defects. In addition, the Deed listed a further 22 technical non
conformances subject to the results of the testing program.
The overall effect is that the technical specification of the train has been
amended. A paper submitted to the StateRail Board meeting of
29 November 2001 advised that:
… specification omissions or amendments will not allow a deficient
or defective product to be delivered to SRA, but will provide a
Millennium Train which has different properties from those
particularised in the original contract specification.
The Millennium Train was accredited, from safety and operational
aspects, to operate on the suburban rail network by both the former
Department of Transport (DoT) and RIC on 25 June 2002. This
accreditation was given despite the non conformances with the contract’s
technical specification for the train. An example of an accepted non
conformance is the unladen (tare) weight of the initial Millennium Train 4
car set is currently 30 tonnes approximately over the specified weight for
a 4 car set (180 tonnes).
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 37
A 4 car Millennium Train set is the heaviest suburban passenger train in
service. Action is being undertaken to reduce the unladen weight of a 4
car Millennium Train set to 205 tonnes. But even so it will still be the
second heaviest in the CityRail fleet. Only the intercity V sets, at 213
tonnes unladen weight, are heavier.
While many of the non-conformances may be minor, the sheer number of
them raises issues about the process of specifying the train. The following
extract from a report made to StateRail about the resolution claim is
pertinent to this matter:
In system engineering terms, the 4GT14 Specification provided no
“design space” within which the overall system performance could
be optimised. There was no space where all of the specified
requirements could be simultaneously satisfied.
In the administration of the Millennium Train Contract, SRA has
been a party (either wittingly or unwittingly) to design decisions
based on unstated and untested assumptions, for example: “It is
more important to strive to achieve 50% wheel unloading and
50kph crashworthiness, than it is to meet the 180 tonne maximum
weight specified”.
We are strongly of the view that this fundamental issue of
available “design space” should be seriously considered by SRA
when entering into future contracts with similar specification
provisions and Systems assurance requirements as those
contained in the 4GT Contract, in order to prevent another
undesired outcome.
StateRail advised that the accuracy of specifications improves if they are
evolutionary in development. However, with irregular train purchasing this
presents difficulty in developing a specification that is fully achievable
without modification. To reduce this risk, the specification was put to
industry prior to the tender to obtain feedback. Changes were made,
however, the level of feedback was not extensive or comprehensive.
While the Millennium Train contract is far more performance based than
previous contracts it is not as performance based as would be preferred.
The specifications may not have given due weight to the Millennium Train
being a prototype train and therefore unlikely ever to achieve all the
specifications set for it.
14 Fourth Generation Train

The Millennium Train Project 39
4. Other Significant Process and
Performance Matters
4. Other Significant Process and Performance Matters
40 The Millennium Train Project
4.1 Introduction
This section of the report comments upon process and other
performance matters, including:
§ train loading standards compliance
§ the environment in which the purchase occurred
§ restructuring of the New South Wales rail industry
§ intellectual property rights
§ perceived probity audit conflict of interest
§ risk management
§ customer and staff information campaign expenditures.
4.2 Train Loading Standards Compliance
The train loading (crowding) occurring on services on existing lines is a
significant factor in deciding whether to purchase additional rollingstock
for the CityRail fleet.
In fiscal 2001-02 StateRail received approximately $424 million
community service (social program) funding for the rail services
provided. This funding is provided under the CityRail Service
Agreement15 (the Agreement) executed annually between StateRail
and the Transport Co-ordination Authority (formerly the Department of
Transport).
A loading standard
has been specified
Schedule 2 of the Agreement specifies a train loading standard as part
of the determination of the adequacy of services provided:
2. LOAD STANDARDS
2.1 On CityMet16 corridors:
(a) No train to have a load factor of greater than 135% of specified
seating capacity, except by passenger choice.
(b) No passenger to stand on a train for more than 20 minutes,
except by passenger choice.
(c) Any passenger who chooses not to catch a train due to either
excessive load or potential excessive standing time will have a
service which gets to the destination no more than 15 minutes
earlier or later than the original service and meets the set
service standards.
In a practical sense this means 0.35 passengers on average will be
standing for each seated passenger or alternatively 1.35 passengers
per seat.
15 The agreement is made under section 104E of the Transport Administration Act 1988 because
StateRail, in providing appropriate services on behalf of the Government, suffers significant financial
loss in meeting these obligations and accordingly is reimbursed.
16 CityMet” means rail corridors which comprise all stations within the Sydney metropolitan area,
bounded by Berowra, Richmond, Penrith, Macarthur, Waterfall and Cronulla inclusive.
4. Other Significant Process and Performance Matters
The Millennium Train Project 41
Given the competition between work and home that can occur and the
need to connect with other services (train, bus, ferry) some passengers
have little if any choice about the train service they catch.
The former DoT did
not monitor
compliance until
2001-02 …
StateRail advised that:
§ these loading standards had been specified in the Agreement since
the early 1990’s
§ it was not until 2001-02 that train loading information was included
in the reporting schedule compiled by StateRail and submitted to
the former DoT in accord with the Agreement.
… and they have been
exceeded …
The specified loading standards have been exceeded.
Exhibit 11: Train Loads by Line Survey April 2002 One Hour of Peak 07.30-08.30
Hours at Central

Line	Service	Measured at	Number of Trains	Mean Load Factor
Illawarra	Cronulla – City Waterfall – City Sutherland – City Mortdale/Hurstville – City Illawarra Suburban Total	Sydenham Sydenham Sydenham Sydenham Sydenham	4 4 1 4 13	145% 125% 95% 100% 120%
Eastern Suburbs	Bondi Junction – City	Kings Cross	13	75%
East Hills	Campbelltown via Airport East Hills via Airport Macarthur via Sydenham East Hills Suburban Total	Wolli Creek Wolli Creek Sydenham	3 4 4 11	100% 110% 135% 115%
Bankstown	Bankstown – City	Sydenham	6	95%
South	South via Granville – City South via Regents Park – City South Suburban Total	Redfern Redfern Redfern	6 2 8	105% 80% 100%
Inner West	All stations – City	Redfern	4	110%
West	The Heron (Emu Plains – City) Emu Plains, Penrith Fast/Medium – City Penrith, St Marys, Blacktown Slow – City Richmond – City Carlingford – City	Redfern Redfern Redfern Redfern Redfern	1 6 4 2 1	105% 120% 120% 115% 100%
West Suburban Total	Redfern	14	115%
Main North	Hornsby – City Fast Main North Slow Main North Suburban Total	Redfern Redfern Redfern	4 4 8	130% 125% 125%
North Shore	Wyong/Gosford – City Berowra – City Hornsby – City Gordon – City North Shore Total	St Leonards St Leonards St Leonards St Leonards St Leonards	3 2 4 4 13	120% 150% 115% 125% 125%

Source: StateRail Records
Note: This survey was done over two days, 9 and 10 April 2002. The above information is only for one hour of the
peak, 07.30 to 08.30 hours arrival at Central.
4. Other Significant Process and Performance Matters
42 The Millennium Train Project

Exhibit 12: Train Loads Yearly Report 2001-02
Morning Peak	Afternoon Peak	Daily
Services with loading above 135%	7.9%	4.0%	1.4%

Source: CityRail Service Agreement Reporting 4th Quarter 2002
This overcrowding has been occurring for a number of years now on
some lines. For example the Illawarra Line has had overcrowding
since 2000. Since March 2000 articles have periodically appeared in
the print media about train overcrowding. Overcrowding of trains has
also featured in submissions to Independent Pricing and Regulatory
Tribunal about fare determinations since 2000.
Forecasted non-compliance with the specified load standards as from
mid 1998 was one of the reasons for acquiring the Millennium Train.
Loading breaches
have not been publicly
reported
The annual reports or web pages of the former DoT and
StateRail/CityRail have not publicly reported train loading standards
breaches having occurred.
The Agreement does provide for publication of any breaches and a
range of other information, including service provision in accordance
with loading standards.
Public accountability, and pressure for performance improvements, will
be enhanced if such information is made readily available.
4. Other Significant Process and Performance Matters
The Millennium Train Project 43
4.3 The Purchase Environment at StateRail
Changes occurred
during the purchase
which had a disruptive
effect
The Millennium Train purchase (project) is long in duration. In its life
to date, changes have happened in the purchase environment. For
example, at the time of our review (up to 10 April 2003) the:
§ Minister for Transport changed twice
§ composition of project steering committee (Millennium Train
Executive Committee) changed. For example:
ð chief executive officer changed six times
ð chief financial officer changed twice
ð general manager passenger fleet maintenance changed three
times
ð chief operations manager changed once
ð project manager changed three times
ð project has moved around within the StateRail organisational
structure five times since 1996.
The environment in which purchase of the Millennium Train’s occurred
has been a disruptive one. We believe that this has had some effect.
Involvement of
StateRail Internal
Audit
Similarly, StateRail’s internal audit went from being a member of the
project steering committee to that of a ‘watching brief’ status only.
In the period since the signing of the Millennium Train contract until the
time of our review, there have been three formal internal audit
reports/comments in respect of the purchase that we are aware of:
§ review of risk management by a leading accounting firm under the
co-sourced internal audit arrangement (2001)
§ capitalisation of training costs (2002)
§ software model being developed to validate maintenance payments
(2002).
For a project of such magnitude, more internal audit involvement would
be desirable. Our previous audit of the Tangara project highlighted a
similar situation. Providing and directing sufficient internal audit
resources to address major risks (on a potentially billion dollar project)
are an important element of corporate governance that was not optimal
here. StateRail advised that internal audit was regularly given updates
and had discussions with the Project Manager.
4. Other Significant Process and Performance Matters
44 The Millennium Train Project
4.4 New South Wales Rail Industry
Restructure
The restructure of the
rail industry affected
the purchase
On 1 July 1996, through the enactment of the Transport
Administration Amendment (Rail Corporatisation and
Restructuring) Act 1996, the then State Rail Authority of New South
Wales was split into four organisations:
§ Rail Access Corporation
§ Freight Rail Corporation
§ Railway Services Authority, which following corporatisation on
1 July 1998 was renamed Rail Services Australia
§ State Rail Authority of New South Wales.
This had a number of impacts upon the Millennium Train purchase.
Firstly, the engineering and contract administration expertise that
StateRail had in train purchasing was transferred to the then Railway
Services Authority (RSA). The latter’s principal function was to
supply goods and services to the rail industry in New South Wales
while StateRail’s was to operate services.
The Millennium Train purchase was handled by RSA until StateRail
took over the project in August 1997, with the appointment of a project
manager. The Millennium Train had a dedicated project team at the
start of the contract of 10 occupied positions, 4 of which came from
RSA. While in 2002, 7 of the 21 occupied position holders came from
RSA (later RIC).
RSA and its successor, RIC, were public trading enterprises and as
such charged ‘commercial’ rates for its services. The engagement of
the RSA/RIC Rollingstock Consulting Group will cost StateRail
approximately $1.1 million (excluding GST).
StateRail advised that as at 30 April 2003 it had completed negotiations
to get this expertise back and key rollingstock employees were
transferred from RIC to StateRail.
Secondly, the 1995 StateRail Board at its 13 September 1995 meeting
deferred consideration of the paper “Proposed Fleet Acquisition
Program for CityRail” until the 13 October 1995 meeting. At this latter
meeting the then Board decided that the development and procurement
strategy for additional rollingstock be a matter for the 1996 StateRail
Board to consider.
4. Other Significant Process and Performance Matters
The Millennium Train Project 45
At that time, patronage analysis by StateRail showed that there would
be a shortfall of suburban rollingstock beginning from mid 1998. An
additional 24 cars were identified as being required to cater for
patronage growth to 2000, with another 56 cars needed shortly after
2000 to replace the Tullochs as they would be 37 years old. StateRail
described the Tullochs as being: technologically obsolete; in a poor
state; outdated in terms of customer comfort; and approaching life
expired.
Some eleven months later the new StateRail Board at its meeting of
25 September 1996 approved the development of the Millennium Train
specification and tender documentation. However, it was not until the
StateRail Board meeting of 20 February 1997 that approval was given
to tender the purchase of an additional 80 double deck electric cars for
the CityRail fleet.
Overall it took approximately 17 months for the StateRail Board to
make a decision to tender the purchase of the first tranche of what
was to become known as the Millennium Train.
In the rail industry the generally accepted norm is that it takes 4 years
(48 months) to purchase new passenger rollingstock from the time
approval to purchase (proceed) is given to the delivery of the first set.
This is because there is a notable learning curve involved, particularly
where the design is new and innovative. The Millennium Train
purchase had a very aggressive time frame before key decision
makers approved the purchase, and it remained so after approval.
4. Other Significant Process and Performance Matters
46 The Millennium Train Project

Exhibit 13: StateRail’s Timeframes for Purchase of the Millennium Train
Tendering, offer evaluation and place order	First train – receive, test, trial and commission	Total	Cars in service by 2000 Sydney Olympics
Months – Number (Dates)	Months – Number (Dates)	Months Note 1 & 2	Number
StateRail Board Paper September 1995	9 (4/1996-12/1996)	18 (1/1997-6/1998)	27	56
StateRail Board Papers September 1996 & January 1997, & Ministerial Press Release June 1997	10 (4/1997-1/1998)	22 (2/1998-11/1999)	32 + 1	40
StateRail Board Paper July 1997	7 (6/1997-12/1997)	23 (1/1998-11/1999)	30 + 3	24
StateRail Board Paper October 1997	11 (6/1997-4/1998)	23 (5/1998-4/2000)	34 + 3	24
Project Steering Committee February 1998	13 (6/1997-6/1998)	26 (7/1998-8/2000)	39 + 3	8
Contract Unamended	16 (6/1997-9/1998)	27 (10/1998-12/2000)	43 + 3	Not Applicable
Actual	16 (6/1997-9/1998)	46 (10/1998-6/2002)	62 + 3	Not Applicable

Source: StateRail Records
Notes:
1. Months quoted have been treated as whole months, for example April to December 1996 (4/1996-12/1996) is in
total 8 months based upon the start and ending of months in this period
2. The + (plus) number quoted is for the months elapsed between the decision to proceed in late February 1997
and the start of tendering
Public pronouncements made in the middle to latter part of 1997 raised
public (passenger) expectations as to when there would be a new train.
These expectations were unlikely to be met, and were not. It is noted
that the Contract never intended for the train to enter service prior to
the 2000 Sydney Olympics.
The ‘Olympian’ tag created reputation risks. Comments about its
lateness began appearing in the print media from early March 2001.
This was despite there having been further public pronouncements
revising the expected date of entry into service of the Millennium Train.
4. Other Significant Process and Performance Matters
The Millennium Train Project 47
4.5 Intellectual Property Rights
StateRail does not
own the design and
build intellectual
property
StateRail owns all the rights, title and interest in intellectual property
(IP) for the maintenance documentation.17 EDI Rail owns the design
and build IP of the Millennium Train. StateRail has a permanent,
irrevocable, royalty free and non-exclusive licence to use any of the
contract documentation IP.
This split of IP between StateRail and EDI Rail is in accordance with
that specified in the request for tender documentation. StateRail
advised that while it paid for the design and build the associated IP was
of little commercial value. This is because the train was purpose
designed and built to suit the Sydney suburban rail network.
Until the Deed of Release was executed on 18 November 2002, the
Millennium Train did not have an escrow arrangement18 in place. In the
event that EDI Rail had become insolvent or the contract was
terminated, StateRail could have had difficulties in accessing the design
and build IP. There is a small annual fee, approximately $1,000, paid by
SRA for the escrow arrangement.
Escrow rights to protect IP rights are not uncommon but seem not as
yet to be generally accepted rail industry practice. StateRail advised
that the use of an escrow arrangement for IP for rollingstock was still
considered to be fairly novel. However, it agreed that future
acquisitions should look to establishing such arrangements veryearly in
the process.
4.6 Conflict of Interest
StateRail engaged a leading accounting firm as probity auditors. The
probity audit focussed on:
§ confidentiality and conflict of interest
§ transparency
§ accountability
§ value for money.
17 This is specified in Volume 2 Statement of Work Attachment A of the Contract and includes:
technical maintenance plan; recommended spares list;, operating manuals; maintenance manuals;
training materials, software documentation; list of special tools and equipment; all records and data
relating to performance of cars and maintenance facility
18 Under an escrow arrangement the design and build IP material is held in trust by a third party to
be turned over to StateRail only upon fulfilment of a specified condition(s).
4. Other Significant Process and Performance Matters
48 The Millennium Train Project
The probity audit report of 24 July 1998 concluded that the tender
process was conducted in a fair and equitable manner with due regard
to probity.
The same firm was subsequently engaged by StateRail on
20 November 2000 to provide audit services as part of a co-sourced
StateRail internal audit function. One of the internal audit reviews
performed by this firm was the risk management review of the
Millennium Train mentioned earlier (Section 4.3 The Acquisition
Environment at StateRail).
There was some commonality of staff from the firm in the Millennium
Train probity audit and the risk review. StateRail did not consider this to
be a problem as the focus (objectives) of the reviews were different.
However, we do not think this was appropriate, as there may be at the
least the perception of a conflict of interest.
In the absence of formal standards for probity audit, it can be difficult
for agencies to judge what is appropriate. As a guide ICAC’s general
advice19 on conflict of interest situations is useful:
The first step is to recognise what situations could give rise to
potential conflicts of interest. The second step is to make sure that
staff (and contractors) disclose these conflicts. The third step is to
decide how to resolve the conflicts or minimise their potential
impact.
It is our view that to maintain the full benefit of a probity audit,
indisputable independence and absence of conflicts is essential. It is
quite common for probity audit services to be used several times during
the course of a project. They may even be called upon some time
afterwards. Because of this, we consider that probity auditors should
be limited to performing work directly related to the probity audit
function during the currency of a project or specific matter, and not
engaged for other forms of review work related to the same subject
area.
19 Practical Guide to Corruption Prevention, Module 9 Conflicts of Interest Pages 5 and 6, ICAC,
1 June 1996
4. Other Significant Process and Performance Matters
The Millennium Train Project 49
4.7 Risk Management
StateRail was aware of
need for effective risk
management
It is apparent that StateRail was aware of the need to effectively
manage risks associated with the Millennium Train’s purchase and
introduction into service. For example:
§ a risk management study of design, build and maintain was
undertaken by a contractor
§ under the contract, EDI Rail compiled a risk management plan
which was submitted to StateRail and updates were provided
§ the contract provided for 3 purchase orders because of the risk
associated with forecasting increase in demand (patronage)
§ the initial order size was increased from 80 to 81 to mitigate against
the risk of damage to 1 trailer car rendering an entire set
inoperable. The base cost of the collision spare trailer car was
approximately $2 million
§ commercial and technical risks were assessed as part of the tender
evaluation
§ risk analysis of introducing a newtrain into service was undertaken
in December 1999 and then again in 2001 resulting in the train being
introduced in such a way as to limit risk of impacting upon peak and
other services
§ there was an extensive train commissioning testing program and no
payment would be made until the first set was accepted by
StateRail
§ StateRail has engaged various contractors over the project’s life to
review and report on risks, for example contract review from
commercial and technical aspects, the delivery program’s accuracy
and adequacy.
StateRail did enjoy some successes with managing the risks associated
with the Millennium Train.
4. Other Significant Process and Performance Matters
50 The Millennium Train Project
But the contract
was risk averse
However, the contract for the Millennium Train purchase was described
in a paper, submitted to the StateRail Board meeting of
29 November 2001, in the following terms:
… The Contract conditions, in particular the General Conditions, are
extremely risk averse for SRA20 and there is a view that risks were
accepted by the Contractor which it was unable to control …
and
… EDI were originally a support party to a bid led by Alstom.
However, upon consideration of the Contract documentation for
tender, Alstom decided not to proceed …
Certainly StateRail, through contractual provisions, sought to implement
controls to reduce the risk exposures/events it had experienced with the
Tangara. However, as the Guidelines for Managing Risk21 note:
Risks can be transferred unfairly if organisations are not mindful of
the rights and responsibilities of clients, contractors and other
stakeholders. Risk transfer does not reduce overall risk. Spreading
the risk through risk transfer does reduce the level of risk to
individual entities. Where risks are transferred unfairly or
inappropriately, risks may be increased.
Despite the Millennium Train’s contractual provisions, StateRail still had
significant risk exposures because of the importance of the Millennium
Train to CityRail’s operations by retiring the Tullochs and reducing
overcrowding and the ‘fragility’ of the Australian rail industry.
StateRail (the Government) will always bear the risk of a major project
not being completed, as StateRail is not in a position of being able to
simply walk away from the project, unlike the private sector.
4.8 Customer and Staff Information Campaign
Expenditure
As part of the Millennium Train project there was a customer and staff
information campaign (the campaign) with an approved budget of
$745,150. The source of funds for the campaign’s budget was the
Millennium Train’s capital funding allocation.
20 SRA: State Rail Authority (StateRail)
21 Guidelines for Managing Risk in the Australian and New Zealand Public Sector, Standards Australia,
SAA/NZS HB143:1999
4. Other Significant Process and Performance Matters
The Millennium Train Project 51
As at 21 November 2002 an amount of $400,435 had been expended on
the campaign. Exhibit 14 shows the campaign elements budgeted and
actual expenditures.

Exhibit 14: Millennium Train Customer and Staff Information Campaign
Item	Budget $’000	Expenditure $’000	Balance $’000
Mainstream media, the 24-sheet billboards and 30 second TV commercials	545	248	297
Staff and customer commemorative mementos, including public launch,	100	108	(8)
Staff education including road shows	100	44	56
Total	745	400	345

Source: StateRail Records
Overall the campaign’s expenditure was $345,000 under budget primarily
because the television campaign will not be going to air until later in 2003.
StateRail is waiting until the Millennium Train returned to service22 on
2 June 2003 and there are adequate numbers of Millennium Trains
operating on the network. The campaign will include a public education
aspect, addressing amongst other things the features new to Sydney’s
trains such as the surveillance, passenger information systems and traction
interlocking of doors.
It would seem that the Millennium Train has been given a higher
marketing profile than other new trains introduced into service by
StateRail. In view of the Millennium Train’s lateness (from the public’s
perspective), cost escalation and initial teething problems this level of selfpromotion may not be universally well received.
22 The Millennium Train was withdrawn from service for seven weeks approximately during the period
10 April 2003 to 1 June 2003 to undertake further prototype testing, refer Section 3.3 Compliance
with Technical Requirements

The Millennium Train Project 53
Appendices
Appendices
54 The Millennium Train Project
Appendix 1 Audit scope and objectives
Millennium Train Audit
Objectives
The objectives of the Millennium Train Project audit were to:
§ assess the economy, efficiency and effectiveness of StateRail’s
management of the project
§ consider any implication the audit may have for other significant asset
acquisitions not only for StateRail but also for other NSW public sector
agencies.
Audit Criteria The following criteria were applied during the audit (whether):
§ StateRail implemented changes in practice and/or performance in
response to the Tangara Performance Audit Report recommendations
§ StateRail has effectively managed risks associated with the purchase of
new rollingstock, particularly product timing, cost and quality (the latter
includes both safety and reliability)
§ StateRail established and operated effective project management
arrangements for the Millennium Train, that is, the way in which the
project was planned, organised, directed and controlled was consistent
with better practice.
Audit Approach and
Methodology
The audit approach and methodology included:
§ research, review and analysis of relevant literature and researched better
practice on managing major projects
§ review and analysis of StateRail documentation
§ interviews with representatives of StateRail, the former NSW Department
of Transport (now Department of Urban and Transport Planning and/or
Transport Co-ordination Authority) and Rail Infrastructure Corporation
(NSW)
§ discussions with operators, both public and private sector, of rail services
in other major Australian State capital cities
Cost of the audit The cost of the audit was $242,990. This figure includes the estimated cost of
printing the report ($6,500).
Acknowledgement The Audit Office gratefully acknowledges the cooperation and assistance
provided by representatives of: StateRail; Office of the Coordinator General of
Rail; Department of Urban and Transport Planning; Transport Co-ordination
Authority; Rail Infrastructure Corporation (NSW); Queensland Rail; Western
Australia Government Railways Commission; Office of the Director of Public
Transport – Department of Infrastructure, Victoria; operators of public
transport rail services in Melbourne – Connex and National Express Group;
and EDI Rail.
Audit team Ai-Binh Phu, Steve Sullivan (Project Manager) and Stephen Horne (Director)
Appendices
The Millennium Train Project 55
Appendix 2 Chronology of Key Events

Date 16 June 1995

Event Group General Manager, CityRail approves commencement of development for Fourth Generation Train (4GT)

29 September 1995 Report (business case) on the acquisition of 4GT

13 October 1995

StateRail Board notes paper put to it, at 13 September 1995 meeting on development and procurement strategy for additional suburban rollingstock (the

4GT). However, the Board deferred its consideration of the matters until there
was a new Board following NSW rail industry restructure

30 October 1995

Ministerial announcement, in conjunction with delivery of last outer suburban Tangara set, that development underway for 4GT, which is to be available prior

to the 2000 Sydney Olympics
20 February 1996 Value management study of the 4GT undertaken and report provided to StateRail
1 July 1996 NSW rail industry is restructured into 4 separate entities

25 September 1996

StateRail Board approves development of 4GT specification and tender documentation

21 January 1997 Industry presentation held for those parties interested in tendering for 4GT

20 February 1997

StateRail Board approves acquisition of 80 4GT electric cars at a total purchase price of $212 million (1995/96 dollars). The Board also approves that the

acquisition process require tenders to provide for a design, build and
maintenance contract
30 May 1997 Minister for Transport approves calling of public tenders for 4GT project

2 June 1997

The Minister for Transport announces that a new suburban train is being acquired, the delivery of which will commence in late 1999. The new train was

subsequently christened ‘The Olympian’ because it was to be in service for the
2000 Sydney Olympics
4 June 1997 Advertisements placed calling for pre-registration of tenders for 4GT project

13 June 1997

Closing date for the submission of requests by interested parties for pre-registration as a tenderer for 4GT

 

22 July 1997

Request made by StateRail for pre-registered tendering organisations to submit tenders for 4GT

 

8 October 1997

The initial closing date specified for the submission of tenders for 4GT by organisations which were pre-registered to tender

 

5 November 1997

The amended closing date for the submission of tenders for 4GT by organisations which were pre-registered to tender

 

22 January 1998

StateRail Board approves the initial order size be increased from 80 to 81 car to mitigate against the operational risk of collision damage to 1 car rendering an

entire 4 car set inoperable
Appendices
56 The Millennium Train Project

Date 13 March 1998

Event The Interim Tender Evaluation Report recommends that one tender submitted be passed over while further clarification and negotiation be undertaken with the remaining two tenderers. The 4GT Executive Management Committee approved

this proposal on 13 March 1998 and the StateRail Board was informed

25 June 1998

StateRail Board approves, subject to the successful outcome of final negotiations, Evans Deakin Limited trading as Clyde Engineering as the preferred

proponent for the design, build and maintenance of the 4GT
29 June 1998 Budget Committee of Cabinet approves the 4GT project funding

30 June 1998

EDI Ltd announced as the preferred proponent for the design, build and maintenance of the 4GT, subject to the successful outcome of final negotiations

 

31 August 1998

Treasurer gives approval, under the Public Authorities (Financial Arrangements) Act 1987, for StateRail to enter into a contract for the purchase of the 4GT

8 October 1998 Contract for the design, build and maintenance of 81 4GT cars signed between
StateRail and EDI Ltd. This is Stage 1 of the contract. At StateRail’s sole
discretion the contract allows further ordering of 60 4GT cars in each of Stages 2
and 3, that is up to 201 4GT cars
22 April 1999 StateRail Chief Executive Officer informs the 4GT Executive Management
Committee (the project steering committee) that the train is to be referred to as
the ‘Millennium Train’

23 July 1999

EDI Rail , a subsidiary of EDI, briefs StateRail about proposed change in bogie design concept from dual air spring to a single air spring in order to achieve

compliance with StateRail’s specification requirements for the bogie

7 December 2000

Downer Pty Ltd makes announcement that EDI Board has recommended acceptance of Downer take over offer for EDI Ltd

 

8 December 2000

EDI Rail advises StateRail that communications and surveillance systems EDI Rail sub contractor has gone into receivership

 

25 March 2001

Premier announces that StateRail will acquire a further 60 Millennium Train cars, that is exercis e the contract’s Stage 2 purchase order option

 

22 May 2001

Minister for Transport writes to Secretary of the of Labor Council advising that future rollingstock purchases will be on the basis of a design and construct

tender. This flowed from representation by the unions involved in the
maintenance of rollingstock at StateRail

16 July 2001

EDI Rail formally submits a claim covering the design and build of Stage 1 of the Millennium Train, the ‘Stage 1 Resolution Proposal’

 

15 September 2001

EDI Rail advises StateRail that bogie anti-roll bar EDI Rail sub contractor has gone into receivership

 

30 November 2001

First Millennium Train set (4 cars) arrives in Sydney from Newcastle. Commissioning tests of the train subsequently commences

Appendices
The Millennium Train Project 57

Date 4 March 2002

Event RIC advises StateRail that the Millennium Train exceeds electrical emissions specified for non interference with the network signalling system

 

25 June 2002

DoT and RIC formally accredit Millennium Train to operate on the Sydney suburban network

 

28 June 2002

StateRail issues practical notice of completion for 1st set (4 cars) of the Millennium Train

30 June 2002 The Millennium Train is publicly (officially) launched
1 July 2002 First revenue service operation of the Millennium Train (4 cars)

18 November 2002

StateRail and EDI Rail sign a ‘Deed of Release and Variation’ in respect of the Millennium Train. As a result the estimated capital cost of the train and the

project for all the Contract Stages increased significantly

29 November 2002

Practical completion of Set 4 was given which triggered acceptance of 8 car set operation

30 November 2002 First 8 car set Millennium Train enters revenue service
4 December 2002 First 8 car set Millennium Train peak hour revenue service

5 December 2002

StateRail orders another 60 Millennium Train cars from EDI Rail via the contract’s Stage 2 purchase option being exercised/awarded

17 March 2003 The Minister for Transport announces in effect that the contract’s Stage 3
purchase order option, another 60 Millennium Train cars, will proceed

10 April 2003

The Coordinator General of Rail takes the Millennium Train out of service until further prototype testing allows for technical issues surrounding the operations

of the train that are impacting on its reliability to be resolved

2 June 2003

The gradual return to service of Millennium Train 4 car sets over a three week period commences with the first passenger non peak hour service being

operated.
Appendices
58 The Millennium Train Project
Appendix 3 StateRail Board Paper Meeting 1 November 2002
Strategic Procurement Plan for Rollingstock Extracts
Key Issues
StateRail historically purchases rollingstock in large tranches up to 15
years apart from a national passenger rollingstock industry which is
extremely small by international standards.
The industry is fragile in that it has only 2 or 3 companies which can
meet StateRail’s needs.
Recent experience with the Millennium Train demonstrated
difficulties in industry maintaining appropriate skills and knowledge
to successfully develop and deliver new designs after relatively long
periods of inactivity.
Each new train tends to be significantly different to previous designs
and in some cases revolutionary rather than evolutionary.
There is no strategic plan for rollingstock procurement over the next
10-20 years which addresses the needs and constraints of both
StateRail and the industry.
Proposal to Develop a Strategy
It is proposed that a 20 year strategic plan be prepared which
addresses all relevant issues including:
§ Demand;
§ Market needs;
§ Operating requirements;
§ Life cycle costs including operation and maintenance;
§ Re-use of existing rollingstock;
§ Standardisation of components;
§ Industry capacity;
§ Procurement risk;
§ Procurement options;
§ Changing customer service requirements over time;
§ Financing plan/options;
§ Changing technology;
§ Maintenance options;
§ Workforce issues; and
§ Infrastructure capacity.
Appendices
The Millennium Train Project 59

Appendix 4

Assessment of Status and Progress Made on Tangara Performance Audit Report Recommendations

The Tangara audit report recommended that the future arrangements for major capital projects include the
following changes in process and/or performance (features). Below is our short assessment of the status and
progress made by StateRail on these matters in the Millennium Train project.

Recommendation	Support and Implementation Status	Comments
Allow for the administration of a contract through a project management team structure	Supported Fully implemented	A dedicated project management team was established for the Millennium Train.
Minimise the specification of particular components or design features where this is not necessary	Supported Partially implemented	StateRail’s specification for the Millennium Train was very detailed for a performance based contract. As a result the Millennium Train was over specified and was not sufficiently performance based. Nevertheless, it was a notable improvement on the Tangara contract. Refer Section 3.3 Compliance with Technical Requirements for more detailed comments.
Clearly specify performance standards for complete units, and all major components	Supported Partially implemented	Performance standards specified in some instances were allegedly impossible to achieve, refer Section 3.2 Delivery and Cost Achievements at Time of Our Review for more detailed comments.
Have a reliable and agreed process for measuring performance of components in terms of the contract	Supported Fully Implemented	Reliable and agreed process for measuring performance was established.
Employ risk management techniques to deal with high risk factors such as the use of untested designs and technology	Supported Partially implemented	StateRail is aware of the need to effectively manage risks. However, the Millennium Train was not delivered on time nor within budget. Refer Sections 3.2 Delivery and Cost Achievements at Time of Our Review and 4.7 Risk Management for more detailed comments. Also StateRail does not currently have the “off the shelf” or standard train option and hence a lower risk profile. Refer Section 2.2 Infrastructure and Purchasing.

Appendices
60 The Millennium Train Project

Recommendation	Support and Implementation Status	Comments
Employ design (“value management”) reviews as an essential feature of the design process to reduce costs, minimise waste and maximise functionality	Supported Fully implemented	A value management study was undertaken and a report given in February 1996.
Employ effective arrangements to verify performance of service and control payments	Supported Partially implemented	There was extensive commission testing undertaken and payment is only made for each delivered 4 car Millennium Train set when StateRail is satisfied it has a ‘quality’ product. However, teething problems led to be train being withdrawn from service for further testing.
Monitor contractor inventory levels	Supported Fully Implemented	As payment was only made upon delivery of the Millennium Train set StateRail did not have to worry about this matter as it was of no interest to StateRail. However, a move back to milestone (progress) payments in future purchase contracts will probably necessitate monitoring occurring.
Deal with cost escalations in a simple, agreed manner	Supported Fully implemented now but not originally	Cost escalations were simplified compared to the Tangara. However, as part of the Deed of Release and Settlement executed between StateRail and EDI Rail on 18 November 2002 amendments were made to the contract schedules on the agreed application of the Contract to adjustments of the contract sum for escalation, foreign exchange fluctuations and customduties.
Provide an effective, agreed approach to disputes resolution	Supported Fully implemented	An agreed approach to dispute resolution was laid down in the Millennium Train Contract. Also a dispute was settled without recourse to the Contract’s provisions, refer Section 3.2 Delivery and Cost Achievements at Time of Our Review for more detailed comments.

Appendices
The Millennium Train Project 61

Recommendation	Support and Implementation Status	Comments
Deal with probity concerns in a proactive way	Supported Fully Implemented	A probity auditor was engaged and provided an unqualified opinion about probity, refer Section 4.6 Conflict of Interest for more detailed comments.
Involve internal audit at crucial stages and in on going control reviews.	Supported Partially implemented	There has been limited internal audit involvement with the Millennium Train. They were aware of progress and undertook some work. However, more internal audit involvement is needed. Refer Section 4.3 The Purchase Environment at StateRail for more detailed comments.

Appendices
62 The Millennium Train Project
Appendix 5 Response from Agencies
Response from the StateRail Authority
With reference to your letter of 13 May 2003, StateRail welcomes the
opportunity to comment on the Performance Audit Report of the Millennium
Train Project. The recommendations in the Report are supported in principle
and this represents the direction StateRail is setting itself in the management
of future rollingstock contracts.
Positive Results
StateRail has made many improvements to the procurement of new
rollingstock since the purchase of Tangara. The Millennium Train is a
technically complex train when compared to previous trains, but it is
consistent with the technology being applied elsewhere in the world and in
related industries. It is clear that the Millennium Train is a complex high value
project that requires systems and processes to be well established to allow for
its successful management. StateRail has put in place, with the Millennium
Train Project, significant measures for dealing with such a technically complex
and innovative project. Using the Tangara contract as one of many inputs a
risk management process was integral to the set-up and management of the
Millennium Train project.
The Tangara in the mid-1980’s was the largest rollingstock purchase at that
time. Following the review by the Auditor-General at the time, a number of
recommendations were made. These were supported by StateRail and taken
account of and adopted, where appropriate, in the Millennium Train project.
The main areas of success from the “lessons learnt” in the Tangara project are:
§ The early establishment of a project management team structure;
§ The establishment of a reliable and agreed process for measuring
performance;
§ The establishment of risk management techniques which involved all
aspects of the Contract including the entry of the train into service;
§ Establishment of a formal design review process;
§ Extensive testing and commissioning program;
§ Simplified payment and escalation system;
§ A thorough tendering evaluation and tender reporting system.
The report also acknowledges the good value for money for the Millennium
Train when compared to other Contracts in Australia and overseas.
Appendices
The Millennium Train Project 63
Rollingstock Procurement
StateRail is continuing to examine its procurement methods for new
rollingstock and plans to make further changes arising from experience with
the Millennium Train Project and its upcoming need for replacement of a
significant number of current rollingstock over the next 10 to 20 years.
StateRail historically purchases rollingstock in large tranches up to 15 years
apart from a national passenger rollingstock industry which is extremely small
by international standards. The industry is highly specialised and has only 2
to 3 companies which can meet StateRail’s needs.
In order to capture the progressive industry safety and technology
improvements, each new train tends to be significantly different to previous
designs rather than being an evolutionary change. The current fleet strategy
calls for procurement of approximately 50 cars per year, every year from 2007.
A 20-year strategic rollingstock procurement plan will be prepared which
addresses all relevant issues including:
§ Demand;
§ Market needs;
§ Operating requirements;
§ Life cycle cost including operation and maintenance;
§ Re-use of existing rollingstock;
§ Standardisation of components;
§ Industry capacity;
§ Procurement risk;
§ Procurement options;
§ Changing customer service requirements over time;
§ Financing plan / options;
§ Changing technology;
§ Maintenance options;
§ Workforce issues; and
§ Infrastructure capacity.
Appendices
64 The Millennium Train Project
Summary
StateRail acknowledges that further improvements in a number of areas of
rollingstock project management are appropriate, and hence, significant
resources and time are being established and developed to progress to a new
form of rollingstock procurement. This revised procurement method will build
on from lessons learnt on both Millennium and Tangara and establish a
process that provides greater certainty and better risk allocation for both
StateRail and the rollingstock industry serving StateRail.
The Millennium Train project was clearly a significant step forward from
Tangara. The Millennium Train project came some 10–15 years after the
Tangara contract commenced, and required a high level of management of a
technically complex train being delivered under a contract designed to address
problems identified with the Tangara contract but a contract form not
previously undertaken by StateRail.
StateRail is committed to a continuous improvement process for all such
projects into the future and will use the recommendations from this report to
further enhance its project management processes.
Attached are StateRail’s comments on the recommendations in the Report.
(signed)
Fran McPherson
Acting Chief Exe cutive
Dated: 5 June 2003
Appendices
The Millennium Train Project 65
StateRail’s Response to Recommendations

Recommendations	Supported/ Not Supported	Comment
1. It is recommended that StateRail should: Explore the various purchasing options available for obtaining new trains and identify which option gives the best value for money.	Supported	StateRail is developing a long-term rollingstock procurement and contracting strategy to meet its rollingstock needs over the next 20 years, taking into account the limited number of suppliers in the Australian market place.
2. Continue to assess the benefits and risks of its train maintenance arrangements to ascertain with greater confidence which arrangements provide the best value for money.	Supported	The maintenance costs must be considered in the light of the nature and complexity of the equipment on the train and the performance levels required. StateRail notes the comments relating to in sourced versus out-sourced maintenance. The issue will be subject to review on future contracts.
3. Further review the level of specification in performance based contracts occurring in train purchase tenders and contracts (an issue also with the Tangara).	Supported	StateRail will review future specifications to determine the correct balance between performance and detailed specification.
4. Ensure that the performance standards specified in contracts are appropriate (an issue also with the Tangara).	Supported	Specifications are developed based on previous contract requirements, appropriate standards and operational experience. StateRail will review the performance standards for suitability before inclusion in future contracts.
5. Review the adequacy of liquidated damages included in contracts and specify more clearly how and when liquidated damages will be applied in the event of the contractor failing to perform as specified.	Supported	The trigger for application of liquidated damages depends on the circumstances of the time. This will be reviewed to ensure that it is clear and appropriate to the performance of the Contractor and circumstances at that time.

Appendices
66 The Millennium Train Project

Recommendations	Supported/ Not Supported	Comment
6. Involve internal audit at crucial stages in major projects and in on going risk management reviews (an issue also with the Tangara).	Supported	Internal audit was involved at crucial stages of the Millennium Train Contract and continues to be involved in major projects in StateRail.
7. Have a standard escrow arrangement for relevant intellectual property owned by the contractor included in all future major contracts.	Supported	Escrow arrangement are being implemented on current rollingstock contracts for new trains and StateRail plans to adopt a similar arrangement for the future rollingstock contracts.
8. Further avoid potential for perceived conflicts of interest in the use of probity advisers by limiting the use of the same advisers in other review work on the same project.	Supported	Potential Probity issues is a major assessment in every engagement of professional services. StateRail will ensure that this is clearly understood in any future evaluations with the review of the guidelines on the engagement of probity auditors.
9. More carefully assess the options for responding to risks as contractual provisions do not necessarily avoid and/or mitigate risk events to StateRail’s business objectives.	Supported in principle	StateRail acknowledges the need for risks to be apportioned appropriately to the party that is most able to control the risks. Future contracts will reflect this aspect.
10. Be mindful of reputation risks that inappropriate marketing and communications can create with the public (passengers) and StateRail employees.	Supported in principle	StateRail reviews the appropriateness of marketing and communications at several stages before their implementation. StateRail will ensure that these risks are carefully reviewed in similar situations.

Appendices
The Millennium Train Project 67
Response from the Rail Infrastructure Corporation
Thank you for the opportunity to comment on the Performance Audit of the
Millennium Train project and, in particular, your 28 Day Report tabled the 13
May 2003.
In previous correspondence to your office dated 2 May 2003, RIC raised three
issues. These issues were:
1. The Long-Term Strategic Plan with a Systems Approach
2. The Existing Capacity of the Electrical Network
3. Compatibility with the existing Signalling System
While there have been some minor changes, from the draft report to the final
report, the previous comments from RIC are still considered pertinent.
With regard to the key findings in the report, the second dot point on page
four, raises the issue of the opportunity to make fundamental revolutionary
changes as distinct from incremental changes. While RIC would welcome the
opportunity to undertake revolutionary changes, it also warns that all costs of
these changes need to be considered before a decision is made to implement.
Often a marginal cost for a particular subset of the system is considered, not
the total cost of the system.
In the summary of recommendations on page six, the first dot point talks about
the need for a 20-30 year strategic plan for the Sydney Rail Network. RIC, in
conjunction with the State Rail Authority and the then Departments of
Planning and Transport, have been working with other agencies to produce
such a plan. It is agreed that with the restructure of planning in New South
Wales, that the existing plan probably needs wider distribution within the
community. This is undoubtedly an issue for the new Department of
Infrastructure and Planning.
The Millennium Train has recently been returned to service and monitoring of
the interface with the signalling system is continuing.
Thank you for the opportunity to provide input and to comment on the
Performance Audit of the Millennium Train.
(signed)
Gary Seabury
Acting Chief Executive Officer
Dated: 3 June 2003
Appendices
68 The Millennium Train Project
Response from the Department of Urban and Transport Planning
I refer to your letter concerning the draft Audit Report on the Millennium Train
Project.
The Department has reviewed the draft report and has no comments on its
content. The Department is continuing to prepare a revised long term plan for
rail, in conjunction with the rail entities, as part of a broader approach to
transport planning in Sydney.
As you may be aware, the Minister for Infrastructure and Planning and
Minister for Natural Resources announced in the Parliament last week that the
Department of Urban and Transport Planning and the Department for
Sustainability and Natural Resources are to be merged to form a Department of
Infrastructure, Planning and Natural Resources. This Department will legally
come into being from 1 July 2003. It would be appropriate to change the name
of the Department of Urban and Transport Planning to the Department of
Infrastructure, Planning and Natural Resources throughout your report.
(signed)
Andrew Cappie-Wood
Deputy Director General
Dated: 4 June 2003
Response from the Transport Co-ordination Authority
Thankyou for the copy of your office’s performance audit report on the
Millennium Train included with your letter of 13 May 2003.
I note that extensive consultation has already taken place regarding the
preparation of this report. Issues raised in the report that relate to this
Authority have been considered and it is confirmed that there in no further
response to be made to the 28 day report.
I thankyou for the opportunity to provide a formal response to the report
contents.
(signed)
John Lee
Director General
Dated: 2 June 2003
Appendices
The Millennium Train Project 69
Appendix 6 Acronyms
4GT Fourth Ge neration Train, that is the Millennium Train
the Agreement CityRail Service Agreement
the Campaign Customer and Staff Information Campaign

the Contract

Deed of Agreement for the Millennium Train Contract between the Minister for Transport and EDI

the Deed The Deed of Release and Variation
CBD Sydney Central Business District
CTC Competitive Tender and Contract
DoT Department of Transport NSW

EDIL	Evans Deakin Industries Limited which subsequently became following takeover by Downer, Downer EDI

EDI Rail The rail division of Evans Deakin Industries Limited and then subsequently
Downer EDI following Downer’s takeover of Evans Deakin Industries
Limited and the new merged entity changing it name to Downer EDI
GST Goods and Services Tax
ICAC Independent Commission Against Corruption
IP Intellectual Property
NSW New South Wales
QLD Queensland
RSA Railway Services Authority/Rail Services Australia
RIC Rail Infrastructure Corporation NSW
SA South Australia
SRA State Rail Authority of NSW
StateRail State Rail Authority of NSW
VIC Victoria
WA Western Australia

The Millennium Train Project 71
Performance Audits by
the Audit Office of New South Wales
Performance Audit Reports and Related Publications
72 The Millennium Train Project
Performance Auditing
What are performance audits?
Performance audits are reviews designed to determine
how efficiently and effectively an agency is carrying
out its functions.
Performance audits may review a government program,
all or part of a government agency or consider
particular issues which affect the whole public sector.
Where appropriate, performance audits make
recommendations for improvements relating to those
functions.
Why do we conduct performance audits?
Performance audits provide independent assurance to
Parliament and the public that government funds are
being spent efficiently and effectively, and in
accordance with the law.
They seek to improve the efficiency and effectiveness
of government agencies and ensure that the
community receives value for money from government
services.
Performance audits also assist the accountability
process by holding agencies accountable for their
performance.
What is the legislative basis for Performance Audits?
The legislative basis for performance audits is
contained within the Public Finance and Audit Act
1983, Part 3 Division 2A, (the Act) which
differentiates such work from the Office’s financial
statements audit function.
Performance audits are not entitled to question the
merits of policy objectives of the Government.
Who conducts performance audits?
Performance audits are conducted by specialist
performance auditors who are drawn from a
wide range of professional disciplines.
How do we choose our topics?
Topics for a performance audits are chosen from
a variety of sources including:
§ our own research on emerging issues
§ suggestions from Parliamentarians, agency
Chief Executive Officers (CEO) and
members of the public
§ complaints about waste of public money
§ referrals from Parliament.
Each potential audit topic is considered and
evaluated in terms of possible benefits
including cost savings, impact and
improvements in public administration.
The Audit Office has no jurisdiction over local
government and cannot review issues relating
to council activities.
If you wish to find out what performance audits
are currently in progress just visit our website at
[email protected].
How do we conduct performance audits?
Performance audits are conducted in compliance
with relevant Australian standards for
performance auditing and operate under a
quality management system certified under
international quality standard ISO 9001.
Our policy is to conduct these audits on a
“no surprise” basis.
Operational managers, and where necessary
executive officers, are informed of the progress
with the audit on a continuous basis.
Performance Audit Reports and Related Publications
The Millennium Train Project 73
What are the phases in performance auditing?
Performance audits have three key phases: planning,
fieldwork and report writing.
During the planning phase, the audit team will develop
audit criteria and define the audit field work.
At the completion of field work an exit interview is held
with agency management to discuss all significant
matters arising out of the audit. The basis for the exit
interview is generally a draft performance audit report.
The exit interview serves to ensure that facts
presented in the report are accurate and that
recommendations are appropriate. Following the exit
interview, a formal draft report is provided to the CEO
for comment. The relevant Minister is also provided
with a copy of the draft report. The final report, which
is tabled in Parliament, includes any comment made by
the CEO on the conclusion and the recommendations
of the audit.
Depending on the scope of an audit, performance
audits can take from several months to a year to
complete.
Copies of our performance audit reports can be
obtained from our website or by contacting our
publications unit.
How do we measure an agency’s performance?
During the planning stage of an audit the team
develops the audit criteria. These are standards of
performance against which an agency is assessed.
Criteria may be based on government targets or
benchmarks, comparative data, published guidelines,
agencies corporate objectives or examples of best
practice.
Performance audits look at:
§ processes
§ results
§ costs
§ due process and accountability.
Do we check to see if recommendations have been
implemented?
Every few years we conduct a follow-up audit of past
performance audit reports. These follow-up audits
look at the extent to which recommendations have
been implemented and whether problems have been
addressed.
The Public Accounts Committee (PAC) may
also conduct reviews or hold inquiries into
matters raised in performance audit reports.
Agencies are also required to report actions
taken against each recommendation in their
annual report.
To assist agencies to monitor and report on the
implementation of recommendations, the Audit
Office has prepared a Guide for that purpose.
The Guide, Monitoring and Reporting on
Performance Audits Recommendations, is on
the Internet at www.audit.nsw.gov.au/guidesbp/bpglist.htm
Who audits the auditors?
Our performance audits are subject to internal
and external quality reviews against relevant
Australian and international standards. This
includes ongoing independent certification of
our ISO 9001 quality management system.
The PAC is also responsible for overseeing the
activities of the Audit Office and conducts
reviews of our operations every three years.
Who pays for performance audits?
No fee is charged for performance audits. Our
performance audit services are funded by the
NSW Parliament and from internal sources.
For further information relating to
performance auditing contact:
Tom Jambrich
Assistant Auditor-General
Performance Audit Branch
(02) 9285 0051
email: [email protected]
Performance Audit Reports and Related Publications
74 The Millennium Train Project
Performance Audit Reports
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
64* Key Performance Indicators § Government-wide Framework
§ Defining and Measuring Performance
(Better practice Principles)
§ Legal Aid Commission Case Study
31 August 1999
65 Attorney General’s Department Management of Court Waiting Times 3 September 1999
66 Office of the Protective
Commissioner
Office of the Public Guardian
Complaints and Review Processes 28 September 1999
67 University of Western Sydney Administrative Arrangements 17 November 1999
68 NSW Police Service Enforcement of Street Parking 24 November 1999
69 Roads and Traffic Authority of
NSW
Planning for Road Maintenance 1 December 1999
70 NSW Police Service Staff Rostering, Tasking and Allocation 31 January 2000
71* Academics’ Paid Outside Work § Administrative Procedures
§ Protection of Intellectual Property
§ Minimum Standard Checklists
§ Better Practice Examples
7 February 2000
72 Hospital Emergency Departments Delivering Services to Patients 15 March 2000
73 Department of Education and
Training
Using Computers in Schools for Teaching and
Learning
7 June 2000
74 Ageing and Disability Department Group Homes for people with disabilities in
NSW
27 June 2000
75 NSW Department of Transport Management of Road Passenger Transport
Regulation
6 September 2000
76 Judging Performance from Annual
Reports
Review of Eight Agencies’ Annual Reports 29 November 2000
77* Reporting Performance Better Practice Guide
A guide to preparing performance information
for annual reports
29 November 2000
78 State Rail Authority (CityRail)
State Transit Authority
Fare Evasion on Public Transport 6 December 2000
79 TAFE NSW Review of Administration 6 February 2001
80 Ambulance Service of New South
Wales
Readiness to Respond 7 March 2001
Performance Audit Reports and Related Publications
The Millennium Train Project 75
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
81 Department of Housing Maintenance of Public Housing 11 April 2001
82 Environment Protection Authority Controlling and Reducing Pollution from
Industry
18 April 2001
83 Department of Corrective Services NSW Correctional Industries 13 June 2001
84 Follow-up of Performance Audits Police Response to Calls for Assistance
The Levying and Collection of Land Tax
Coordination of Bushfire Fighting Activities
20 June 2001
85* Internal Financial Reporting Internal Financial Reporting
including a Better Practice Guide
27 June 2001
86 Follow-up of Performance Audits The School Accountability and Improvement
Model (May 1999)
The Management of Court Waiting Times
(September 1999)
14 September 2001
87 E-government Use of the Internet and Related Technologies
to Improve Public Sector Performance
19 September 2001
88* E-government e-ready, e-steady, e-government:
e-government readiness assessment guide
19 September 2001
89 Intellectual Property Management of Intellectual Property 17 October 2001
90* Intellectual Property Better Practice Guide
Management of Intellectual Property
17 October 2001
91 University of New South Wales Educational Testing Centre 21 November 2001
92 Department of Urban Affairs and
Planning
Environmental Impact Assessment of Major
Projects
28 November 2001
93 Department of Information
Technology and Management
Government Property Register 31 January 2002
94 State Debt Recovery Office Collecting Outstanding Fines and Penalties 17 April 2002
95 Roads and Traffic Authority Managing Environmental Issues 29 April 2002
96 NSW Agriculture Managing Animal Disease Emergencies 8 May 2002
97 State Transit Authority
Department of Transport
Bus Maintenance and Bus Contracts 29 May 2002
98 Risk Management Managing Risk in the NSW Public Sector 19 June 2002
99 E-government User-friendliness of Websites 26 June 2002
Performance Audit Reports and Related Publications
76 The Millennium Train Project
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
100 NSW Police
Department of Corrective Services
Managing Sick Leave 23 July 2002
101 Department of Land and Water
Conservation
Regulating the Clearing of Native Vegetation 20 August 2002
102 E-government Electronic Procurement of Hospital Supplies 25 September 2002
103 NSW Public Sector Outsourcing Information Technology 23 October 2002
104 Ministry for the Arts
Department of Community Services
Department of Sport and Recreation
Managing Grants 4 December 2002
105 Department of Health
Including Area Health Services and
Hospitals
Managing Hospital Waste 10 December 2002
106 State Rail Authority CityRail Passenger Security 12 February 2003
107 NSW Agriculture Implementing the Ovine Johne’s Disease
Program
26 February 2003
108 Department of Sustainable Natural
Resources
Environment Protection Authority
Protecting Our Rivers 7 May 2003
109 Department of Education and
Training
Managing Teacher Performance 14 May 2003
110 NSW Police The Police Assistance Line 4 June 2003
111 E-government Roads and Traffic Authority
Delivering Services Online
11 June 2003
112 State Rail Authority The Millennium Train Project June 2003
* Better Practice Guides
Performance Audits on our website
A list of performance audits tabled or published since March 1997, as well as those currently in progress, can be
found on our website www.audit.nsw.gov.au
If you have any problems accessing these Reports, or are seeking older Reports, please contact our Governance and
Communications Section on 9285 0155.

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State Rail Authority
The Millennium Train Project
State Library of New South Wales cataloguing-in publication data
New South Wales. Audit Office.
Performance audit: State Rail Authority: the Millennium Train Project / [The Audit Office of New South Wales]
0734721498
1. State Rail Authority – Auditing. 2. CityRail (N.S.W.) – Auditing. 3. Railroads – New South Wales –
Auditing. 4. Railroads – New South Wales – Passenger-cars. I. Title: State Rail Authority: the Millennium
Train Project. II. Title: Millennium Train Project. III. Title: Auditor-General’s report: performance audit: State
Rail Authority: the Millennium Train Project.
354.76709944
© Copyright reserved by The Audit Office of New South Wales. All rights reserved. No part of this publication
may be reproduced without prior consent of The Audit Office of New South Wales.
Foreword
Large asset acquisitions – whether through construction or purchase – can involve
complex issues and significant risks that need to be carefully managed.
While this audit focuses on the Millennium Train, it has significant broader messages and
implications.
The Audit Office previously audited aspects of the last such rail acquisition, the Tangara.
I wanted to see if lessons had been learnt from the Tangara contract and if the
Millennium Train procurement was well handled. I also wanted to address the complex
issue of value-for-money from such a large acquisition.
Each 4-car Millennium Train set has an estimated service operating life of 35 years. If
all purchase and maintenance options under the Millennium Train supply contract are
exercised, a billion dollars of capital and operating funds will be expended over four
decades.
A project of this magnitude provides an ideal case study. The findings of this audit are
not only relevant to StateRail, but provide useful insights for all those involved with
managing major projects and those with interests in such matters.
The audit also highlights how decisions in one area may be linked to broader issues. This
is especially true of public infrastructure. Value-for-money needs to be assessed in the
context of the overall system, not only for individual acquisitions. This requires longerterm thinking and planning.
This report shows how the constraints imposed by Sydney’s current rail infrastructure
impact on achieving best value when buying new rolling stock. The report highlights the
significant issues and challenges that need to be addressed in providing rail public
transport in Sydney in the 21st century.
R J Sendt
Auditor-General
June 2003

Contents
Foreword
Executive Summary 1
1. Background 9
1.1 About CityRail 10
1.2 Purchase of a New Suburban Train 11
1.3 Previous New Train Purchase Review by the Audit Office 13
2. Strategic Issues and Challenges 15
2.1 Introduction 16
2.2 Infrastructure and Purchasing 16
2.3 Purchasing Process 21
2.4 Train Maintenance 23
3. Timing, Cost and Quality Outcomes 25
3.1 Introduction 26
3.2 Delivery and Costs Achievements at Time of Our Review 26
3.3 Compliance with Technical Requirements 33
4. Other Significant Process and Performance Matters 39
4.1 Introduction 40
4.2 Train Loading Standards Compliance 40
4.3 The Purchase Environment at StateRail 43
4.4 New South Wales Rail Industry Restructure 44
4.5 Intellectual Property Rights 47
4.6 Conflict of Interest 47
4.7 Risk Management 49
4.8 Customer and Staff Information Campaign Expenditure 50

Appendices	53
Appendix 1	Audit scope and objectives	54
Appendix 2	Chronology of Key Events	55
Appendix 3 Appendix 4	StateRail Board Paper Meeting 1 November 2002 Assessment of Status and Progress Made on Tangara Performance Audit Report Recommendations	58
59
Appendix 5	Response from Agencies	62
Appendix 6	Acronyms	69
Performance Audits by the Audit Office of New South Wales	Error! Bookmark not defined.

The Millennium Train Project 1
Executive Summary
Executive Summary
2 The Millennium Train Project
Executive summary
Background On 8 October 1998 the State Rail Authority of New South Wales
(StateRail) signed a contract for the design, build and 15 years
maintenance of 81 new suburban double deck electric passenger cars.
These are now known as the Millennium Train.
On 5December 2002 StateRail formally committed to Stage 2 of the
Contract: another 60 cars and 15 years maintenance. If Stage 3 of the
contract is taken up along with all maintenance options StateRail will
expend approximately $1 billion in capital and operating funds over about
four decades.
The first 4 car Millennium Train set entered into revenue service on the
Sydney suburban rail network on 1 July 2002. As at 10 April 2003 11 of
the 20 sets of 4 cars under Stage 1 of the Contract had been delivered
and entered into service on the network. It is expected that one 4 car set
will be delivered each month.
The Audit Purchasing new trains is a huge, expensive and complex task. We had
previously reported on aspects of the last such major purchase: the
Tangara.
The Millennium Train represents a substantial enhancement of the quality
of the CityRail fleet of Sydney electric suburban passenger trains. There
are still some teething problems, and the train was withdrawn from
service on 10 April 2003 until 1 June 2003, seven weeks approximately,
to undertake further testing. Even so, much about the Millennium Train is
impressive, although time will be needed to tell about its performance.
The net overall increase in the suburban fleet size from the Millennium
Train purchase is 145 cars or 12.7 per cent (1 car is a collision spare).
This is because the purchase of the 200 Millennium Train cars will
allow the retirement of the 56 oldest cars, the Tullochs. It will also
enable 6 car trains to be increased to 8 car trains and provide
additional trains needed to service the Parramatta Rail Link.
In this audit we sought to consider both macro and micro issues. We
looked at the complex issue of value for money. We also looked at how
well the project was managed and if lessons learnt from the Tangara had
been put into practice.
Executive Summary
The Millennium Train Project 3
Audit opinion
StateRail has made significant improvements since the purchase
of the Tangara. It improved measures necessary for handling
contracts dealing with technically complex and innovative
projects, although some other problems have been encountered,
with new lessons to learn.
The design and manufacture of new trains requires a significant
investment in both time and cost. The Millennium Train has
come at a considerably higher price than originally expected. And
it is very late compared to the Government’s original
announcements, as the development/design took longer than
planned.
Since the Millennium Train contract was awarded in 1998 and the
budget set:
§ contract (capital) costs have increased by $114 million or 24
per cent to $588 million
§ total project costs have increased by $98.4 million or 17 per
cent to $658 million.
Value for money is always a contentious point. And the
judgement of it can depend on the prevailing conditions and
constraints. If judged within the existing operational
environment, and the constraints imposed by the existing rail
network, evidence supports a view that the purchase represents
reasonable value for money.
But large long-life purchases should be examined from the
perspectives of both the existing constraints and the long-term.
There are clear signs that parts of Sydney’s transport system are
rapidly approaching, if not having already reached, saturation
point. And if that is the case, it is now time to reconsider whether
the existing service operating and infrastructure arrangements
will continue to serve us well into the future.
Future decisions to purchase new trains, and the type of train and
purchasing arrangements favoured, may have better value for
money options available for consideration if current operating and
infrastructure constraints are altered.
Our report urges that a broader and longer-term framework be
made available and examined in the procurement of transport
infrastructure. We, however, also point to some important issues
for improvement in future acquisition processes under the
existing arrangements.
Executive Summary
4 The Millennium Train Project
Key Findings
We found that:
§ the current service objectives, operating strategies and rail
infrastructure (the vertical, lateral, horizontal and weight limitations of
the lines over which services traverse) impose key
requirements/limitations when considering options for purchasing new
rollingstock. These requirements/limitations and any proposed
changes must be considered in totality to ensure that sub optimal
trade offs do not occur
§ there are capacity problems emerging with the rail system/network.
The wide recognition given to these problems flowing from the 2001
“Christie Report”, as well as a series of highly publicised problems in
recent times, provides an opportunity to correct the underlying causes
and make fundamental/revolutionary as opposed to incremental
changes to the existing rail network
§ the traditional procurement method of competitive tendering and
contracting may give rise to risks of a monopoly market being
created in the Australian passenger rollingstock industry
§ important elements of corporate governance were not always
optimal. For example, key decision makers (the StateRail Board
and/or the then Minister for Transport) were:
ð advised of a potential “risk premium” for the maintenance being
outsourced to the train manufacturer/supplier in exchange for
enhanced performance and to maintain the enhanced features in
the train. But this was not quantified at the time the decision
was taken. Current StateRail estimates indicate that
maintenance costs will be less than the remainder of the electric
fleet for the same levels of availability and reliability
ð not specifically advised that as the estimated and tendered costs
for the project were sufficiently similar a further review of value
for money was not needed
ð not given a risk management plan for the Millennium Train
Executive Summary
The Millennium Train Project 5
ð not timely in approving the tendering for the Millennium Train (it
took 17 months). Accordingly the purchase timetable was
aggressive and created expectations which were not met,
although the Contract never planned for the delivery of the train
prior to the 2000 Sydney Olympics
ð not providing and directing sufficient internal audit resources on
this project, a repeat of the situation that occurred with the
Tangara
§ because governments cannot readily walk away from such projects,
even if difficulties arise, they necessarily carry significant risk for
such projects. Contract provisions designed to share risk with private
sector providers thus need to be robust and enforceable should the
need arise. But as occurred with the Tangara, such financial
penalties for late delivery were available but were not activated.
This was because the contract was in dispute over time and cost
issues
§ the ‘payment upon delivery’ approach for this contract did apparently
manage product risks. However, in turn it also created other risk
exposures for StateRail
§ the 409 days delay in the Millennium Train’s progressive delivery and
entry into service caused discomfort and lack of service quality to
passengers, particularly during peak periods on some lines
§ StateRail’s specification of the Millennium Train represented a
significant improvement on the Tangara but was still not as
performance based a contract as would be preferred. StateRail
advised that:
ð a constraining factor is the readiness and ability of the Australian
rail industry to move further along the contract continuum
ð the specification was forwarded for rail industry comment but
the level of feedback was not comprehensive nor extensive.
§ the restructure of the New South Wales rail authorities in 1996 and a
disruptive purchase environment at StateRail had some effect on the
Millennium Train project
Executive Summary
6 The Millennium Train Project
Summary of recommendations
It is recommended that the Department of Urban and Transport
Planning should:
§ in coordination with rail entities compile as a matter of priority
a long term (meaning at least a 20-30 year horizon) strategic
plan for the Sydney rail network.
It is recommended that the Transport Co-ordination Authority
should:
§ require StateRail to expand the level of public reporting of the
outcomes and results achieved against the CityRail
(Community) Service Agreement in order to increase
accountability, transparency and openness about the rail
network’s performance.
It is recommended that StateRail should:
§ explore the various purchasing options available for obtaining
new trains and identify which option gives the best value for
money
§ continue to assess the benefits and risks of its train
maintenance arrangements to ascertain with greater
confidence which arrangements provide the best value for
money
§ further review the level of specification in performance based
contracts occurring in train purchase tenders and contracts
(an issue also with the Tangara)
§ ensure that the performance standards specified in contracts
are appropriate (an issue also with the Tangara)
§ review the adequacy of liquidated damages included in
contracts and specify more clearly how and when liquidated
damages will be applied in the event of the contractor failing
to perform as specified
§ involve internal audit at crucial stages in major projects and in
on-going risk management reviews (an issue also with the
Tangara)
§ have a standard escrow arrangement for relevant intellectual
property owned by the contractor included in all future major
contracts
Executive Summary
The Millennium Train Project 7
§ further avoid potential for perceived conflicts of interest in the
use of probity advisers by limiting the use of the same
advisers in other review work on the same project
§ more carefully assess the options for responding to risks as
contractual provisions do not necessarily avoid and/or
mitigate risk events to StateRail’s business objectives
§ be mindful of reputation risks that marketing and
communications can create with the public (passengers) and
StateRail employees.
Executive Summary
8 The Millennium Train Project
Response from Agencies
Refer to Appendix 5 for agency responses to the report and StateRail
Authority’s response to the recommendations.
The Millennium Train Project 9
1. Background
1. Introduction
10 The Millennium Train Project
1.1 About CityRail
CityRail and StateRail CityRail is StateRail’s (the State Rail Authority of NSW) operator of
passenger rail service covering the greater Sydney region. StateRail’s
principal objective is to deliver safe, reliable railway passenger services
in NSW in an efficient, effective and financially responsible manner.1
CityRail’s Service
Commitments
CityRail has publicly committed to providing safe, clean, accessible,
reliable and punctual passenger train services.2 The services CityRail
provides comprise suburban, intercity and some regional
passenger/commuter trains in the Sydney, Hunter Valley, Central
Coast, Blue Mountains, Southern Highlands and South Coast areas.
CityRail Fleet at
30 June 2002
CityRail had a fleet (rollingstock) of 1,502 passenger train cars
(carriages) in use at 30 June 2002. This fleet comprised four generic
categories of trains, see Exhibit 1 below.

Exhibit 1: CityRail’s Fleet Generic Categories as at 30 June 2002
Generic Category	Area of Operation	Fleet No. as at 30 June 2002
Suburban – Double Deck Electric	Berowra in the north, Emu Plains and Richmond in the west and Macarthur and Waterfall in the south	1,138
Outer Suburban – Double Deck Electric	Wyong in the north, Springwood in the west and Wollongong/Kiama in the south	80
Intercity – Double Deck Electric	Newcastle in the north, Lithgow in the west and Kiama in the south to Central where service terminates	240
Regional – Single Deck Diesel	Goulburn to Campbelltown and Nowra to Kiama where service terminates although some services go through to Central and Wollongong respectively where service terminates Dungog and Scone to Newcastle where service terminates	44
Total Rollingstock	1,502

Source: StateRail Records
The fleet had a gross (undepreciated) value/cost of roundly $4.0 billion.
1 Transport Administration Act 1988 section 4A (1)
2 CityRail Website Service Commitment Pages as at 29 January 2003
1. Introduction
The Millennium Train Project 11
CityRail Large
Operator
This investment in rollingstock reflects CityRail being the largest rail
service operator within Australia, see Exhibit 2 below.

Exhibit 2: CityRail’s Operations Compared to that Occurring Nationally
2001-02	QLD	SA	VIC	WA	NSW	Total
Millions of Passenger Journeys	47	8	134	30	276	495
Number of Stations	142	84	288	57	306	877
Number of Services Each Weekday (Monday to Friday)	740	242	2,061	750	3,000	6,793
Fleet – Electric & Diesel Cars	443	100	1,108	96	1,502	3,249

Source: Agency 2001-02 Annual Reports and/or Website Pages
1.2 Purchase of a New Suburban Train

Acquisition Genesis

The purchase by CityRail of a new suburban electric passenger train had its genesis in 1995 when the (then):

§ Group General Manager CityRail approved development work
commencing of the Fourth Generation Train
§ Minister for Transport announced that the development of the
Fourth Generation Train was underway.
StateRail Board and
Ministerial Approvals
The StateRail Board and the then Minister for Transport approved in
February and May 1997 respectively the acquisition of a new suburban
electric passenger train. The Board set a budget of $212 million
(1995-96 dollars).
Pre-registration to
Tender
Three train supply companies responded by the closing date of
13 June 1997 to the ‘pre-registration to tender’ request published in
major Australian newspapers:
§ ABB Daimler Benz Transportation (Australia) Limited (trading as
Adtranz)
§ a joint venture between GEC Alstom and Clyde Industries Limited
(trading as Clyde Engineering)
§ A Goninan & Company Limited.
Tenders Called and
Received
On 22 July 1997 these companies were requested to submit tenders for
the design, build and possible maintenance of the Fourth Generation
Train. Three tender offers were received at the closing date of
5 November 1997.
1. Introduction
12 The Millennium Train Project
Execution of Contract The then Minister for Transport and Evans Deakin Industries Limited
(EDIL), whose subsidiary was EDI Rail, trading as Clyde Engineering,
signed on 8 October 1998 the Deed of Agreement (the Contract) for
the design, build and maintenance, for an initial period of 15 years, of
81 double deck electric cars. This was Stage 1 of the Contract.
The value of the Contract Stage 1 (design, build and maintain for 15
years only) was estimated to be $323 million (1997/98 dollars).
However, if all further purchase (an additional 120 cars) and
maintenance (for 35 years) options are taken up then the contract is
worth approximately $1 billion.
StateRail gave a formal commitment to Stage 2 (another 60 cars) of
the Contract on 5 December 2002. On 17 March 2003 the then
Minister for Transport announced in effect that StateRail would
proceed with the Stage 3 purchase option (another 60 cars) of the
Contract.
Train Naming The then Chief Executive of StateRail on 22 April 1999 advised the
project’s steering committee that the new train was to be known as
‘the Millennium Train’. Previous public advising on when the new
train was expected to enter into service had seen it nicknamed ‘The
Olympian’. However, the Contract never intended for such a delivery
timetable.
Entry into Revenue
Service
On 1July 2002 the first non-peak hour revenue service of a 4 car
Millennium Train set occurred. The first non-peak hour and peak hour
revenue services of a 8 car Millennium Train set occurred respectively
on 30 November 2002 and 4 December 2002.

Exhibit 3: Millennium Train 4 Car Set

Source: StateRail
1. Introduction
The Millennium Train Project 13
Detailed Key Events
Chronology
Appendix 2 gives a more detailed chronology of key events, from
June 1995 to 10 April 2003, with the Millennium Train
purchase/project.
1.3 Previous New Train Purchase Review by the
Audit Office
On 19 November 1996 we released a report, number 31, State Rail
Authority: Tangara Contract Finalisation.
We noted in the report that:
The Tangara Project was one of Australia’s largest ever railway
rollingstock projects. The contract was successful in delivering
the train cars significantly within budget and within the agreed
delivery schedule … despite … being … long in duration, large
in cost … and technically complex involving innovative
technology.
and
The Tangara contract was characterised by a formal mediation, a
series of reviews relating to project management, contract
administration and engineering issues, and a finalisation review
conducted by a specially designated committee. The use of
these processes has highlighted the need for effective measures
to handle complex contracts dealing with technically innovative
projects.
The majority of our report was concerned with lessons for the future
management of major projects.
Appendix 4 contains our assessment of how those matters have been
dealt with in this project.

The Millennium Train Project 15
2. Strategic Issues and Challenges
2. Strategic Issues and Challenges
16 The Millennium Train Project
2.1 Introduction
When examining large asset purchases such as this, a key question for
which the community rightly expects an answer is ‘did we get value for
money from the purchase?’
This simple question has complex dimensions depending on the context in
which value for money is defined. The 2001-02 StateRail Annual Report
advised that:
It is one of the most complex passenger rail operations in the world.
We examine relevant key issues in this chapter.
2.2 Infrastructure and Purchasing
Some of the main factors that affect the purchasing of new rollingstock,
be it for fleet additions and/or replacements, are set out below.

Exhibit 4: Key Factors Affecting New Train Purchasing

New Train Purchasing Rail System/Network Timetabled Services Patronage (Peak Hour CBD) Current Fleet Utilisation Level & Age New Lines Opening Rolling Stock Industry Service Provision Agreement Rail Technology & Standards Statutory/Regulatory Requirements Passenger/Crew Wants & Needs

It is apparent that a complex array of issues is involved in making a
decision about such a purchase.

2. Strategic Issues and Challenges
The Millennium Train Project 17
The extent to which options are limited may in turn restrict the value for
money possibilities. We acknowledge that it is rare to have all options
available, owing to circumstances or history. However, the broadest
possible range of options should be considered.
The existing network
limits purchasing
options
In considering the purchase of new rollingstock there were a number of
key requirements/limitations:
§ the Sydney suburban rail network has grown considerably in the one
and half centuries since the first rail line opened in 1855. As the
network grew, variations occurred in infrastructure such as bridges,
tunnels and station/platform configurations.
Consequently there are specific requirements for rollingstock used on
Sydney’s suburban rail lines. If a safe service is to be operated then
the rollingstock must satisfy the most constrained part of the network,
for example tightest curves, shortest platforms, lowest
overpasses/tunnels
§ when in the early 1960s it was decided to increase the passenger
carrying capacity of the Sydney rail network, there was a switch to
double deck trains. The first double deck trains entered service in
1964 and in 1992 the last of the single deck rollingstock was retired.
StateRail advised that the switch to double deck trains at the time was
considered the most cost effective approach as it had minimal effect
on the fixed infrastructure of stations, tunnels and signalling.
Patronage and service timetabling levels make it difficult to revert to
single deck trains in the current mode of operation
§ the past and current land use patterns in Sydney have created a
significant demand to transport commuters relatively long distances by
rail.
These existing network requirements/limitations meant that the range of
options considered was restricted as only certain solutions were viable.
From the options considered, a decision was made to have a purpose built
train with a new design for the Sydney suburban network. This carried
with it a number of cost implications such as design and innovation risk,
prototype and testing costs, and inability to benefit from cost savings
available if ‘off the shelf’ designs and associated equipment/systems
purchasing were possible.
2. Strategic Issues and Challenges
18 The Millennium Train Project
If these network limitations are ‘accepted’ each time new rolling stock is
to be acquired the result may be the most appropriate ‘short-term’ design
but not the one that best meets long-term transport needs.
Changes to the network (that is eliminating or minimising the limitations)
would mean that more options were available to purchase rollingstock.
This could possibly lead to better value for money being obtained through
purchasing new trains ‘off the shelf’ and/or standard trains.
The cost of the network changes required would be substantial and would
need to be carefully assessed to ensure that the total cost of the network
and rollingstock (including maintenance and operation costs for both)
would achieve better value for money.
The capacity of the
network is a problem
The current rail network has capacity problems3 on some lines during
peak hour periods and the temporary solutions4 of incrementally increasing
capacity will be very shortly, if not already, exhausted.
As noted by the Council on the Cost and Quality of Government in 1998,5
approximately 40 per cent of all rail commuter journeys start or end in the
CBD. Currently 20 train movements in both directions is the maximum
number that can occur during peak hour in the City Circle. The downside
of double deck trains is that they have a longer ‘dwell’ time at stations,
particularly in the CBD, because of the time it takes for passengers to
load and unload. The Christie Report6 also advised that some stations in
the CBD were unable to handle more passengers than they currently do.
The 2001-02 StateRail Annual Report advised that:
Almost 50% of all persons travelling to Sydney’s Central Business
District in peak hours travel on CityRail services.
3 Action for Transport 2010 – an Integrated Transport Plan for Sydney Page 3, Department of
Transport, November 1998
4 Double deck trains and only trains in a 6 or 8 car set configuration are allowed to operate during
peak hour on the suburban rail network
5 Transportation – Service Efforts and Accomplishments Report, Council on the Cost and Quality of
Government, 1998
6 Long Term Strategic Plan for Rail – Greater Sydney Metropolitan Mr R Christie, former Acting Chief
Executive of State Rail and Co-ordinator General of Rail, June 2001
2. Strategic Issues and Challenges
The Millennium Train Project 19
The planning to
resolve capacity is
considered not
adequate
There is a plan for improving the network’s capacity, Action for
Transport 2010 – an Integrated Transport Plan for Sydney. Actions
have or are being undertaken to increase the current capacity of the
network, for example:
§ amplification of tracks on the East Hills and Richmond Lines
§ Bondi Junction turnback (train turn around) which will increase
capacity on the Illawarra line
§ Parramatta rail link Stage 1 and 2 which will relieve congestion on the
Main Western and Northern Lines.
However, this plan is a short term plan in infrastructure terms (which are
often projected many years ahead). It does not address the full range of
network (infrastructure) options available and continues to work within the
current network limits.
The Christie Report makes it plain that the limitations of the current
network have to be resolved. Further emphasis is given by a Rail
Infrastructure Corporation (RIC) 2001 working paper:7
Based on current timetabling and infrastructure, the Sydney rail
network has only a few years before capacity constraints become
more problematic for the network as a whole, rather than just the
CBD.
Given the magnitude of the task, and the dollars involved, a truly long term
strategic plan for Sydney rail transport is essential. The Warren Centre
has expressed similar sentiments.8 Currently there is no network plan
beyond 2010.
This limits value for
money considerations
In our view the value for money options available for the Millennium Train
purchase and for future acquisitions are limited by the focus on short term
infrastructure planning.
7 Sydney Passenger Forecasts – Working Paper 1, Rail Infrastructure Corporation, November 2001
8 The Warren Centre for Advanced Engineering, University of Sydney
2. Strategic Issues and Challenges
20 The Millennium Train Project
The suburban rail network in Sydney is and will continue to be very busy.
This is because effectively five railway services are operating using the
same network:
§ long distance (New South Wales regional and interstate) passenger
service
§ intercity passenger service (over 60 minutes)
§ medium/middle distance passenger service (20-60 minutes)
§ short distance passenger service (less than 20 minutes)
§ freight haulage.
Excluding the City Circle and the Eastern Suburbs Line, the Sydney
suburban network is not a metro railway like that found in major capital
cities overseas.
The fact that the network is integrated to provide a wide range of service
options makes it very difficult to introduce fundamental/revolutionary
changes to the network or rollingstock.
The high density development and urban consolidation that is occurring in
Sydney, particularly around railway stations, will place even greater
demands on the capacity of the suburban network.
StateRail expects patronage to grow from 277 million in 2001-02 to
between 370 to 396 million by 2021-22. However, Action for Transport
2010 is contemplating even higher growth.
The Department of Urban and Transport Planning is currently drafting a
document for setting out options and alternative views for increasing the
network’s capacity for consideration by stakeholders. Among these
options is one involving the use of alternative ‘metro-style’ rollingstock on
a proposed new rail line through the CBD.
An opportunity to
make fundamental
changes exists
There does seem to be an opportunity, given the Christie and Warren
Reports and also recently highly publicised problems with the network
infrastructure, to consider seriously fundamental/revolutionary changes as
opposed to continuing with incremental changes to the rail network. Such
an opportunity occurs rarely with infrastructure, and has major long-term
implications for operational limits and costs.
2. Strategic Issues and Challenges
The Millennium Train Project 21
A long term rail network plan, looking ahead some 20-30 years, would
enable the major capital funds required to be planned for. It would also
provide a valuable opportunity to change some of the existing factors that
limit the value for money possibilities both for operations and for fleet
additions and/or replacements.
2.3 Purchasing Process
Another significant component of value for money comes from the
purchasing (procurement) process adopted.
StateRail has followed the traditional purchasing model of competitive
tender and contract (CTC). This model assumes a competitive market
place to ensure a fair and equitable price is paid for goods and services.
The market place for
competition is limited
However, in Australia the market place for passenger rollingstock is small
and there is a limited number of Australian suppliers. StateRail advised
that the international rail industry is not interested in making bids to supply
outright trains to StateRail.
StateRail advised that from a commercial perspective the size of the train
orders by New South Wales, and indeed Australia, are small compared to
orders received overseas. In addition, StateRail advised that the specific
design requirements for its trains that flow from the existing network and
operational factors would necessitate substantial modification of overseas
‘off the shelf’ designs. Most major overseas rail systems consist of single
deck carriages, although the number of systems with double deck trains is
gradually increasing.
StateRail advised that the low volume and high modification factors
combine to make overseas suppliers not interested because it is not
commercially attractive. The required modification factors arise not only
from the network requirements but also from climatic and local customer
requirements.
Purchases occur
about every decade
Under the current CTC arrangements, major suburban train purchasing
occurs infrequently, about every decade.
2. Strategic Issues and Challenges
22 The Millennium Train Project

Exhibit 5: CityRail Suburban Fleet at 30 June 2002 Car Types, Ages & Numbers

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 Age (Years) Tangara 1988-1994 368 Yes C-Set 1986-1987 56 Yes K-Set 1981-1985 160 Yes Tulloch 1964-1968 56 No S-Set 1972-1980 498 No Car Type No. of Cars Commission Year 35 Years Estimated Useful Life Total 1,138 20 Years 5 Months Median Fleet Age Air Conditioned

Source: StateRail Records
There are high costs involved with irregular purchasing of new designs:
§ design costs ($15 to $25 million according to StateRail advice)
§ tendering costs for all parties concerned
§ prototyping of new trains and all the risks that go with this.
The unsuccessful Australian suppliers have a difficult environment when it
comes to maintaining appropriate skills, knowledge and facilities for the 10
years until the next tender is called.
A paper that was put to the StateRail Board meeting of 1 November 2002,
about the development of a strategic procurement plan for rollingstock,
comments on the industry’s ‘fragility’. Appendix 3 contains extracts from
this paper.
There is a risk of the current situation perhaps leading towards a
monopoly market in Australian passenger rollingstock. Monopolies rarely
lead to good value.
Alternative
purchasing methods
need to be explored
There are grounds for considering whether alternative methods of
purchasing may give a better value for money environment. StateRail
should explore whether long term partnership arrangements with various
suppliers may provide a better result all round.
2. Strategic Issues and Challenges
The Millennium Train Project 23
2.4 Train Maintenance
For the first time
maintenance was
included in the
contract
StateRail tried to sustain the Australian rail industry and also create train
supply competition by including maintenance of the Millennium Train in the
contract. This follows the current world trend of transferring
(outsourcing) train maintenance to the private sector, preferably the
manufacturer/supplier.
StateRail considered that it benefited from:
§ cost savings (through competitive tendering)
§ transferring design and product performance risks to the train supplier
in order to minimise whole of life asset costs
§ avoiding the capital costs involved with establishing a specialised
maintenance centre because of the level of technology now used in
trains
§ creating a contestable market for fleet maintenance and acting as
catalyst for internal workplace reform and attendant efficiency gains
§ creating an improved product (with better operational and reliability
performances)
§ having a lower level of direct involvement in the detailed design of the
train (as EDI Rail was required to design to performance
specifications) and hence reduced project management costs.
The StateRail Board was advised on 25 June 1998 that the tendered
maintenance prices were expected to incorporate a ‘risk premium’ when
compared to in-house (Passenger Fleet Maintenance) maintenance costs.
The Board was also advised that this was consistent with the experience
of United Kingdom rail operators who had pioneered train acquisition
through design, build and maintain structures.
It is not apparent that the cost of such a risk premium was estimated or
made known to the StateRail Board and/or the then Minister for
Transport. Nonetheless the decision was taken to include maintenance as
part of the contract, as there were other perceived long term benefits as
outlined above. The Contract requires a superior performance from this
train in both reliability and availability over the rest of the fleet and
penalties apply to the contractor if these contractual performances are not
met.
2. Strategic Issues and Challenges
24 The Millennium Train Project
A Ministerial
direction excluded
maintenance for all
future acquisitions
Representations were made to the then Minister for Transport by the
unions involved in maintaining railway rollingstock about StateRail’s
inclusion of maintenance in future new rollingstock acquisitions. The
unions claimed that:
§ the maintenance work could be performed in-house at competitive
rates
§ StateRail was in danger of losing valuable skills over the longer term
in rollingstock maintenance.
The then Minister for Transport considered the claims and wrote to the
then Secretary of the Labor Council on 22 May 2001 advising:
I have agreed to instruct the SRA to call tenders for Design and
Build only……I note that the existing contract for 81 carriages of
the Millennium train has already been let, but any additional
rollingstock ordered will be on the basis of design and construct
tender only.
The then Acting Chief Executive of StateRail wrote to then Minister on
14 June 2001 to clarify whether this advice to the Labor Council applied to
Millennium Train Contract Stages 2 and 3. Subsequent stages of the
Millennium Train have proceeded on the basis of maintenance being
included. However, the contracts for the new outer suburban electric and
Hunter diesel rail cars excluded maintenance.
Recent StateRail estimates of the Millennium Train indicate that
maintenance costs are slightly less than the remainder of the electric fleet,
and provide for higher levels of availability, reliability and the significant
additional features in the train.
StateRail needs to assess carefully the benefits and risks of its train
maintenance arrangements to resolve a clearer position as to which
arrangements provide the best value for money.
The Millennium Train Project 25
3. Timing, Cost and Quality Outcomes
3. Timing, Cost and Quality Outcomes
26 The Millennium Train Project
3.1 Introduction
Purchasing new trains is costly and time consuming. StateRail/CityRail
publicity material describes the Millennium Train in such terms as “state of
the art” and “innovative”. This is because the train incorporates the latest
computer technology, improved design standards and levels of comfort.
Accordingly the acquisition of the Millennium Train, as indeed does any
other complex piece of plant and equipment, for example submarines, has
significant inherent risks because there are many things that can go
wrong.
This section of the report comments about StateRail’s achievements
(outcomes) in the key performance areas of:
§ delivery and cost
§ meeting its own technical specification.
3.2 Delivery and Costs Achievements at Time of
Our Review
The contract had
explicit financial
incentives…
The Contract for the Millennium Train had explicit financial incentives to
deliver the train on time, if not early, and in accordance with the
performance specification. These incentives included:
§ liquidated damages of $2,000 per day per 4 car set. This was capped
at 5% of the design and build price for a set, and in total for all sets in
a stage. For Stage 1 this was approximately $520,000 for a set and a
$10.5 million in total for the Stage (November 2002 prices).
§ payment not being made for a set until it achieves practical completion
(accepted for service by StateRail). EDI Rail therefore bears the
cost of delay and any under performance because it has to meet
finance costs incurred beyond the contracted delivery date.
…but delivery was
still very late
The first 4 car set achieved practical completion on 28 June 2002. The
originally contracted practical completion date was 4 January 2001. This
was a variance (delay) of 541 days or 18 months approximately.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 27

Exhibit 6: Planned and Actual Practical Completion Date Achievements as at 10 April 2003

700 900 1100 1300 1500 1700 1900 2100 2300 2500 2700 2900 0 5 10 15 20 25 30 35 40 45 50 Trains (4 car Set) Days from Contract Signing 08-10-1998 Contracted Practical Completion Actual Practical Completion Deed’s Estimated Practical Completion Amended Practial Completion pre Deed

Stage 1 Stage 2 Stage 3
Source: StateRail Records
Note: StateRail has only formally committed to Stages 1 & 2 as at 10 April 2003
Prior to EDI Rail lodging a claim for variations (the ‘Stage 1 Resolution
Proposal’) on 16 July 2001, StateRail had authorised two delivery date
variations. These variations amended the contracted practical completion
date to 15 May 2001 due to:
§ moving the crew cab wall (21 days but no cost)
§ changing from a swing to a power operated crew door because of
crew occupational health and safety concerns (110 days and $3.1
million cost).
Therefore practical completion on 28 June 2002 was 409 days or 13.5
months later than the revised delivery date.
Financial penalties for
late delivery are not
applied by StateRail
As we stated in our report on the Tangara Contract Finalisation,9
liquidated damages are generally included in StateRail contracts, but
rarely, if ever, acted upon. This was again the case with the Millennium
Train. StateRail advised that on many occasions it reiterated to EDI Rail
that delays were subject to liquidated damages. However, StateRail did
not apply liquidated damages in this case as the claim (which included a
claim for extension of time) was still being negotiated at the time of the
delivery of the first 4 car sets.
9 The Audit Office of NSW Performance Audit Report: Tangara Contract Finalisation, November 1996,
Page 28
3. Timing, Cost and Quality Outcomes
28 The Millennium Train Project
StateRail took the view that payment upon delivery of each set meant the
finance costs imposed a significant impost on EDI Rail and outweighed
the liquidated damages.
StateRail had varied the payment terms for the Millennium Train following
its experiences with the Tangara. The ‘payment upon delivery’ of each
set saw EDI Rail go significantly into the red on the Contract and having
to be financially subsidised through its parent company, Downer EDI.
A claim was made on
StateRail for
additional time/money
In April 2001 StateRail considered that it was likely EDI Rail would
submit a claim to reduce the liquidated damages. In due course a claim
was made on 16 July 2001 (the earlier mentioned ‘Stage 1 Resolution
Proposal’). This claim was for an extension by StateRail to the delivery
dates, which would reduce or eliminate liquidated damages, and ultimately
increase the train’s price by approving a further variation to the already
amended contract delivery dates.
Following negotiation of this matter, which was delayed while EDI Rail
concentrated on delivering the first 4 car set and compiling/submitting a
tender for the outer suburban train, a commercial settlement was reached
between the parties. EDI Rail had submitted its consolidated (final) claim
on 18 September 2002. On 18 November 2002 a Deed of Release and
Variation (the Deed) was executed between StateRail and EDI Rail.
A grandparent
company guarantee
was required following
the takeover of EDIL
EDIL had told StateRail in December 2000 that its Board had agreed to a
takeover by Downer. This was duly completed in March 200110, when
the shareholders agreed to the Downer and EDI merger. Subsequently
the merged entity was renamed Downer EDI. EDI Rail wrote to
StateRail on 18 May 2001 advising of ‘change of effective control’, at
which time StateRail sought legal and financial advice on this change in
control.
The legal advice was that the parent company guarantee with EDIL11
was still valid. However, it recommended that there be a further (grand)
parent company guarantee sought from the new entity, Downer EDI. On
7 November 2001 StateRail wrote to EDI Rail seeking this guarantee.
However, by then EDI Rail had already lodged its resolution claim.
10 Downer EDI Annual Report 2001
11 EDIL was the holding company for EDI Rail. EDIL was taken over by Downer and the new combined
entity was renamed Downer EDI
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 29
StateRail advised that it was considered unlikely that any earlier approach
to Downer on the parent company guarantee would have progressed,
particularly during the period when shareholders were deciding on the
merger and the application was with the Australian Stock Exchange.
We acknowledge that there would have been little if any likelihood of
obtaining a parent company guarantee from Downer prior to the merger
being finalised. However, this occurred in March 2001, giving a window
of opportunity of four months before EDI Rail’s claim was submitted.
This window was reduced to two months as EDI Rail’s advice to
StateRail about the merger was delayed, despite immediate advice of such
matters being a condition of the Contract.
The importance of the guarantee is pivotal as the following legal advice to
StateRail on the resolution claim illustrates:
EDI Rail is a wholly owned subsidiary of Downer EDI Limited.…
There is no parent company guarantee in place exposing Downer
to any obligation to stand behind EDI Rail, and it is not
inconceivable that Downer might cut loose EDI Rail, reducing it to
the status of a paper company. In that event SRA12 would have to
re-let the contract at what would be undoubtedly be a far greater
cost …
StateRail advised that it considered this situation was, however, very
unlikely as Downer had merged with EDIL to enter the railway market
and to gain the advantage of the long term maintenance contracts that
EDI Rail had established.
Obtaining this guarantee became part of the EDI Rail claim settlement.
StateRail has advised that this was amongst the first items agreed by
Downer in the claim negotiation and that it was not a significant
negotiating issue. Whether the terms of the settlement may have
improved if StateRail had received the guarantee in the available window
before the claim was lodged is uncertain. We believe it would have been
desirable.
12 SRA: State Rail Authority (StateRail)
3. Timing, Cost and Quality Outcomes
30 The Millennium Train Project
It was decided to
negotiate a
commercial
settlement
StateRail undertook a detailed review of EDI Rail’s claims and decided
that some aspects of the claim had merit. EDI Rail had also indicated an
unwillingness to proceed with Stages 2 and 3 of the contract without
substantial restructuring of the contract costs. And there was concern
that EDI Rail may withdraw from the contract altogether.
The StateRail Board on 28 June 2002 approved a commercial settlement
being negotiated with EDI Rail rather than risk an unknown outcome from
arbitration and possible litigation as well as the significant cost of
re-tendering should this result. Non-financial costs would also have been
a factor in this matter as articles began appearing in the print media as
from March 2001 about the Millennium Train’s late delivery.
EDI Rail, in its consolidated claim of 18 September 2002, sought additional
time and ultimately costs under the contract for a range of matters
including:
§ liquidation and insolvency of the sub contractors for the
communications and surveillance system and the bogie anti-roll bar.
Therefore replacement sub contractors had to be found and engaged
§ signal interference testing by RIC had indicated that there were
unacceptable rail return currents, when completing the electrical
circuit, by the Millennium Train. StateRail and RIC have advised that
this was not a safety issue but it had on-time running implications.
StateRail engaged experts from the United Kingdom and Hong Kong
who advised on the results and subsequently RIC endorsed the train
to operate as 4 and 8 car sets without restriction. However, the train
was withdrawn from service on 10 April 2003, for seven weeks
approximately, for further prototype testing of this and other issues
§ instances where train crews and/or track possessions were not
available for commissioning tests
§ performance specifications for bogie wheel unloading (derailment)
and crashworthiness that EDI Rail considered impossible to achieve,
which EDI Rail expended considerable time and effort trying to
achieve
§ extensive negotiation and ongoing revision of crew control driver’s
cab which impacted upon design development
§ innovations and enhancements beyond the contract and tender
amount.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 31
The Millennium
Train’s capital costs
have increased
because of the
settlement…
The effect of the commercial settlement with EDI Rail is that the
Contract (out-turn/capital) cost of the Millennium Train and the total
project cost have increased for all three stages by $114.8 million or 24%
to $588 million, and $98.4 million or 17% to $658 million respectively.

Exhibit 7: Estimated Contract Out-turn and Total Project Costs Pre Settlement and the Settlement Amount as at 31 December 2002
Contract Out-turn Cost (Estimated)	Total Project Cost (Estimated)
0.0 100.0 200.0 300.0 400.0 500.0 600.0 All Stages Combined Stage 3 Stage 2 Stage 1 Out-turn Cost Pre Settlement Settlement $ Million	0.0 100.0 200.0 300.0 400.0 500.0 600.0 All Stages Combined Stage 3 Stage 2 Stage 1 Total Project Budget Pre Settlement Settlement $ Million

473.2
132.6
129.6
211.0
114.8
35.9
35.9
43.0
559.6
180.0
150.0
229.6
98.4
11.8
39.0
47.6
Source: StateRail Records
Note: The Contract Out-Turn Cost (Capital Cost) and Total Project Cost includes escalation and custom duties
estimates. While the Total Project Cost includes estimates for project management, train introduction and
contingency funds
… but the settlement
had no impact on
maintenance costs
StateRail advised that the Deed had no impact on the maintenance costs
of the Millennium Train. However, because of variations in the technical
specification, for example the powered crew door, maintenance costs
have risen by 1%. The tendered prices for maintenance for Stages 1, 2
and 3 as at June 1998 for 35 years were $233.2 million, $149.2 million and
$145.5 million respectively (overall $527.9 million). These prices are
subject to escalation and foreign exchange adjustment.
The price of the
Millennium Train is
still better than that
paid by others
Exhibit 8 below compares costs of recent train purchases in other
Australian jurisdictions. Caution must be exercised in drawing conclusions
from this comparison of train purchase costs. However, some sense of
the cost implications of different approaches is apparent.
3. Timing, Cost and Quality Outcomes
32 The Millennium Train Project
Exhibit 8: Comparison of Millennium Train Capital Cost with Recent Train Purchases in
Other Australian States

Item	StateRail Pre Deed	StateRail Post Deed	Queensland	Western Australia	Victoria Network A	Victoria Network B
Number of Cars Car Deck Type Capital Cost $ Millions Off the Shelf Crush Load Capacity of Purchase (Seated and Standing Passengers) Average Cost $ per Car Average Cost $ per 4 Car Set Average Cost $ per Passenger	201 Double 554.3 No 53,000 2,757,547 11,030,189 10,458	201 Double 651.8 No 53,000 3,243,005 12,972,020 12,299	90 Single 251.1 No 15,060 2,790,000 11,160,000 16,673	93 Single 254.1 Yes 17,794 2,732,258 10,929,032 14,280	174 Single 332.0 Yes 23,258 1,908,046 7,632,184 14,275	186 Single 330.0 Yes 29,760 1,896,552 7,586,207 14,189

Source: StateRail Records, Parliamentary Hansards and Committee Reports, Ministerial Press Releases and Website Pages.
Notes:
1. Construction of Maintenance Facilities has been excluded
2. The dollar values for other than StateRail are unaudited and should be regarded as indicative only
3. GST has been excluded
On a per passenger cost basis the Millennium Train purchase appears
to be favourable compared to other recent Australian train purchases.
Other factors being equal, cost per:
§ 4 car set basis should be lower for large orders
§ passenger should be lower for double deck cars.
Value for money and
risk management
material was not
provided to key
decision makers
When key decision makers were considering the award of contracts for
the purchase of new Hunter and Outer Suburban trains they were
provided with:
§ value for money comparisons of world wide train purchases
§ risk management plans.
There was no such value for money analysis and/or risk management plan
provided to key decision makers (the StateRail Board and/or the then
Minister for Transport) when the Millennium Train purchase was under
consideration. StateRail advised that the value for money analysis was
not provided because the tendered cost of the Millennium Train was
consistent with the earlier estimated cost.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 33
Since the Deed’s signing, EDI Rail has been achieving practical
completion of 4 car Millennium Train sets in line with the Deed’s revised
dates, that is one 4 car set a month, see Exhibit 6. However, there is
currently a dispute between EDI Rail and a sub contractor. Downer EDI
had launched a takeover bid for this major sub contractor, however, this
has been unsuccessful. There is now a legal process underway to resolve
the contractual differences.
It needs to be borne in mind that aspects relating to comfort and quality of
service for CityRail’s customers would have been affected by:
§ delayed retirement of life expired rollingstock, the Tullochs, and hence
lesser passenger comfort and security
§ overcrowding on trains on some lines not being alleviated in a timely
manner, (refer Section 4.2 Train Loading Standards Compliance).
3.3 Compliance with Technical Requirements
Trains are technically complex pieces of equipment. The Millennium
Train contract contained over 237 pages, approximately 2,500 technical
requirements for the train. There are some 85,000 steps/activities
involved in actually building the train.
Extensive
commissioning tests
were done
StateRail advised that from the time of the arrival in Sydney of the first 4
car Millennium Train set on 30 November 2001, until its notice of practical
completion was given on 28 June 2002, the train operated for 3,000 hours
under commission testing. This included 1,000 hours or 40,000 kilometres
of on track testing. At the time of our review there was still some testing
to be undertaken, for example energy efficiency and 16 car operation, as it
has not yet been possible to perform them or they have been deferred.
The Millennium Train was withdrawn from service on 10 April 2003 to
undertake further prototype testing. The main areas where problems have
occurred are:
§ traction system
§ doors
§ communications system
§ air conditioning
§ signalling interference.
3. Timing, Cost and Quality Outcomes
34 The Millennium Train Project
The Millennium Train returned to service on 2 June 2003 with the first non
peak hour passenger service occurring. The Minister for Transport
Services announced that the Millennium Train would gradually return to
service over the following three weeks.
The entry of the Millennium Train into revenue service shows there has
been some significant project management, engineering and construction
achievements. This in many ways demonstrated the capacity of all those
concerned to produce to world-class standards.
A key factor in EDI Rail winning the Millennium Train contract was EDI
Rail being prepared to guarantee a reliability of one incident13 per 100,000
kilometres travelled per 4 car set. This reliability level was after a two
year settling in period. A contractual service availability level on each
business day of 95% is also required for 4 car Millennium Train sets.
There are financial incentives and penalties through the Contract’s
maintenance payments in respect of service availability and reliability.
The Millennium Train first entered revenue service on 1 July 2002 with
one 4 car set. Up to 10 April 2003 StateRail has accepted another 10 sets
(40 cars) and these have progressively entered into revenue service.
However, the sets have not operated continuously in revenue service, for
example:
§ two of the earlier sets were withdrawn for three months in order to
undertake 8 car set commissioning tests as per the Contract
requirements
§ sets only operated in the off peak period until early December 2002
§ sets were withdrawn for problem rectification.
In the period 1 July 2002 to 10 April 2003, the 11 Millennium Trains 4 car
sets delivered and operating, have in totality travelled in revenue service
only 313,297 kilometres and the cars individually 1,253,187 kilometres all
up.
In performance terms this is limited. Thus while the Millennium Train
appears to have the potential to achieve the capability specified in the
contract, it is not possible to be conclusive at this time.
13 An incident is defined as any equipment failure or defect that results in a service delay of more
than 3 minutes while in revenue service.
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 35

Exhibit 9: Average Kilometre Incident Rate of Millennium Train Sets as at 10 April 2003

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Millennium Trains 1-11 Millennium Train 11 Millennium Train 10 Millennium Train 9 Millennium Train 8 Millennium Train 7 Millennium Train 6 Millennium Train 5 Millennium Train 4 Millennium Train 3 Millennium Train 2 Millennium Train 1 Average Distance Between Incidents Kilometres Thousands

4.9
0.3
9.7
2.1
15.9
3.5
6.0
8.2
4.7
4.9
4.3
3.4
Source: The Audit Office Analysis of StateRail Records
Note:
1. This exhibit shows the average incident rate of each Millennium Train 4 car set while in revenue
(timetabled) service from 1 July 2002 to 10 April 2003 and the sets overall. Incidents that occurred
while the Millennium Trains were not in revenue service are excluded.
2. Millennium Train Sets 8 and 11 have had no incidents and the figure recorded is the distance
travelled by the set while in revenue service.
StateRail indicated that it considered the first 4 car set as a prototype and
the first 5 to 10 train sets generally operate to identify and rectify
problems.
StateRail has advised that it is confident that the performance of the
Millennium Train will meet, if not exceed, the specified requirements.
The project steering committee and the StateRail Board are being
provided with information on the Millennium Train’s reliability and
availability. However, this information does not readily show the
Millennium Train’s specified availability and reliability requirements
performance achievements.
Notices of practical
completion are given
detailing defects…
When StateRail accepts a Millennium Train set, StateRail gives a ‘notice
of practical completion’ to EDI Rail. Accompanying the notice are
schedules detailing commissioning tests not performed, test failures and
defects in the set. The following Exhibit compares the notice’s
accompanying schedules for Set 1 and 4.
3. Timing, Cost and Quality Outcomes
36 The Millennium Train Project

Exhibit 10: Sets 1 and 4 Practical Completion Notices Accompanying Schedules
Set 1	Set 4
Date of Practical Completion	28 June 2002	29 November 2002
Schedules Accompanying Notice	No. of Pages	No. of Matters	No. of Pages	No. of Matters
Schedule 1 – commissioning tests not carried out or deferred to a later time	1	18	1	7
Schedule 2 – commissioning tests failed to pass but will be accepted	1	1	1	1
Schedule 3 – defects to be rectified arising from failure to pass commissioning and other tests	19	172	14	192
Schedule 4 – defects which will be accepted	50	465	0	0
Schedule 5 – defects to be rectified	45	545	13	154
Total	116	1,201	29	354

Source: StateRail Records
The number of non compliances with the contract’s specification (that
were previously listed as defects under the notice’s Schedule 4) had gone
from 465 in Set 1 to zero in Set 4.
Many non
conformances
(defects) have been
accepted
This is because under the Deed there were 531 technical non
conformance matters that StateRail agreed would not be treated as
defects. In addition, the Deed listed a further 22 technical non
conformances subject to the results of the testing program.
The overall effect is that the technical specification of the train has been
amended. A paper submitted to the StateRail Board meeting of
29 November 2001 advised that:
… specification omissions or amendments will not allow a deficient
or defective product to be delivered to SRA, but will provide a
Millennium Train which has different properties from those
particularised in the original contract specification.
The Millennium Train was accredited, from safety and operational
aspects, to operate on the suburban rail network by both the former
Department of Transport (DoT) and RIC on 25 June 2002. This
accreditation was given despite the non conformances with the contract’s
technical specification for the train. An example of an accepted non
conformance is the unladen (tare) weight of the initial Millennium Train 4
car set is currently 30 tonnes approximately over the specified weight for
a 4 car set (180 tonnes).
3. Timing, Cost and Quality Outcomes
The Millennium Train Project 37
A 4 car Millennium Train set is the heaviest suburban passenger train in
service. Action is being undertaken to reduce the unladen weight of a 4
car Millennium Train set to 205 tonnes. But even so it will still be the
second heaviest in the CityRail fleet. Only the intercity V sets, at 213
tonnes unladen weight, are heavier.
While many of the non-conformances may be minor, the sheer number of
them raises issues about the process of specifying the train. The following
extract from a report made to StateRail about the resolution claim is
pertinent to this matter:
In system engineering terms, the 4GT14 Specification provided no
“design space” within which the overall system performance could
be optimised. There was no space where all of the specified
requirements could be simultaneously satisfied.
In the administration of the Millennium Train Contract, SRA has
been a party (either wittingly or unwittingly) to design decisions
based on unstated and untested assumptions, for example: “It is
more important to strive to achieve 50% wheel unloading and
50kph crashworthiness, than it is to meet the 180 tonne maximum
weight specified”.
We are strongly of the view that this fundamental issue of
available “design space” should be seriously considered by SRA
when entering into future contracts with similar specification
provisions and Systems assurance requirements as those
contained in the 4GT Contract, in order to prevent another
undesired outcome.
StateRail advised that the accuracy of specifications improves if they are
evolutionary in development. However, with irregular train purchasing this
presents difficulty in developing a specification that is fully achievable
without modification. To reduce this risk, the specification was put to
industry prior to the tender to obtain feedback. Changes were made,
however, the level of feedback was not extensive or comprehensive.
While the Millennium Train contract is far more performance based than
previous contracts it is not as performance based as would be preferred.
The specifications may not have given due weight to the Millennium Train
being a prototype train and therefore unlikely ever to achieve all the
specifications set for it.
14 Fourth Generation Train

The Millennium Train Project 39
4. Other Significant Process and
Performance Matters
4. Other Significant Process and Performance Matters
40 The Millennium Train Project
4.1 Introduction
This section of the report comments upon process and other
performance matters, including:
§ train loading standards compliance
§ the environment in which the purchase occurred
§ restructuring of the New South Wales rail industry
§ intellectual property rights
§ perceived probity audit conflict of interest
§ risk management
§ customer and staff information campaign expenditures.
4.2 Train Loading Standards Compliance
The train loading (crowding) occurring on services on existing lines is a
significant factor in deciding whether to purchase additional rollingstock
for the CityRail fleet.
In fiscal 2001-02 StateRail received approximately $424 million
community service (social program) funding for the rail services
provided. This funding is provided under the CityRail Service
Agreement15 (the Agreement) executed annually between StateRail
and the Transport Co-ordination Authority (formerly the Department of
Transport).
A loading standard
has been specified
Schedule 2 of the Agreement specifies a train loading standard as part
of the determination of the adequacy of services provided:
2. LOAD STANDARDS
2.1 On CityMet16 corridors:
(a) No train to have a load factor of greater than 135% of specified
seating capacity, except by passenger choice.
(b) No passenger to stand on a train for more than 20 minutes,
except by passenger choice.
(c) Any passenger who chooses not to catch a train due to either
excessive load or potential excessive standing time will have a
service which gets to the destination no more than 15 minutes
earlier or later than the original service and meets the set
service standards.
In a practical sense this means 0.35 passengers on average will be
standing for each seated passenger or alternatively 1.35 passengers
per seat.
15 The agreement is made under section 104E of the Transport Administration Act 1988 because
StateRail, in providing appropriate services on behalf of the Government, suffers significant financial
loss in meeting these obligations and accordingly is reimbursed.
16 CityMet” means rail corridors which comprise all stations within the Sydney metropolitan area,
bounded by Berowra, Richmond, Penrith, Macarthur, Waterfall and Cronulla inclusive.
4. Other Significant Process and Performance Matters
The Millennium Train Project 41
Given the competition between work and home that can occur and the
need to connect with other services (train, bus, ferry) some passengers
have little if any choice about the train service they catch.
The former DoT did
not monitor
compliance until
2001-02 …
StateRail advised that:
§ these loading standards had been specified in the Agreement since
the early 1990’s
§ it was not until 2001-02 that train loading information was included
in the reporting schedule compiled by StateRail and submitted to
the former DoT in accord with the Agreement.
… and they have been
exceeded …
The specified loading standards have been exceeded.
Exhibit 11: Train Loads by Line Survey April 2002 One Hour of Peak 07.30-08.30
Hours at Central

Line	Service	Measured at	Number of Trains	Mean Load Factor
Illawarra	Cronulla – City Waterfall – City Sutherland – City Mortdale/Hurstville – City Illawarra Suburban Total	Sydenham Sydenham Sydenham Sydenham Sydenham	4 4 1 4 13	145% 125% 95% 100% 120%
Eastern Suburbs	Bondi Junction – City	Kings Cross	13	75%
East Hills	Campbelltown via Airport East Hills via Airport Macarthur via Sydenham East Hills Suburban Total	Wolli Creek Wolli Creek Sydenham	3 4 4 11	100% 110% 135% 115%
Bankstown	Bankstown – City	Sydenham	6	95%
South	South via Granville – City South via Regents Park – City South Suburban Total	Redfern Redfern Redfern	6 2 8	105% 80% 100%
Inner West	All stations – City	Redfern	4	110%
West	The Heron (Emu Plains – City) Emu Plains, Penrith Fast/Medium – City Penrith, St Marys, Blacktown Slow – City Richmond – City Carlingford – City	Redfern Redfern Redfern Redfern Redfern	1 6 4 2 1	105% 120% 120% 115% 100%
West Suburban Total	Redfern	14	115%
Main North	Hornsby – City Fast Main North Slow Main North Suburban Total	Redfern Redfern Redfern	4 4 8	130% 125% 125%
North Shore	Wyong/Gosford – City Berowra – City Hornsby – City Gordon – City North Shore Total	St Leonards St Leonards St Leonards St Leonards St Leonards	3 2 4 4 13	120% 150% 115% 125% 125%

Source: StateRail Records
Note: This survey was done over two days, 9 and 10 April 2002. The above information is only for one hour of the
peak, 07.30 to 08.30 hours arrival at Central.
4. Other Significant Process and Performance Matters
42 The Millennium Train Project

Exhibit 12: Train Loads Yearly Report 2001-02
Morning Peak	Afternoon Peak	Daily
Services with loading above 135%	7.9%	4.0%	1.4%

Source: CityRail Service Agreement Reporting 4th Quarter 2002
This overcrowding has been occurring for a number of years now on
some lines. For example the Illawarra Line has had overcrowding
since 2000. Since March 2000 articles have periodically appeared in
the print media about train overcrowding. Overcrowding of trains has
also featured in submissions to Independent Pricing and Regulatory
Tribunal about fare determinations since 2000.
Forecasted non-compliance with the specified load standards as from
mid 1998 was one of the reasons for acquiring the Millennium Train.
Loading breaches
have not been publicly
reported
The annual reports or web pages of the former DoT and
StateRail/CityRail have not publicly reported train loading standards
breaches having occurred.
The Agreement does provide for publication of any breaches and a
range of other information, including service provision in accordance
with loading standards.
Public accountability, and pressure for performance improvements, will
be enhanced if such information is made readily available.
4. Other Significant Process and Performance Matters
The Millennium Train Project 43
4.3 The Purchase Environment at StateRail
Changes occurred
during the purchase
which had a disruptive
effect
The Millennium Train purchase (project) is long in duration. In its life
to date, changes have happened in the purchase environment. For
example, at the time of our review (up to 10 April 2003) the:
§ Minister for Transport changed twice
§ composition of project steering committee (Millennium Train
Executive Committee) changed. For example:
ð chief executive officer changed six times
ð chief financial officer changed twice
ð general manager passenger fleet maintenance changed three
times
ð chief operations manager changed once
ð project manager changed three times
ð project has moved around within the StateRail organisational
structure five times since 1996.
The environment in which purchase of the Millennium Train’s occurred
has been a disruptive one. We believe that this has had some effect.
Involvement of
StateRail Internal
Audit
Similarly, StateRail’s internal audit went from being a member of the
project steering committee to that of a ‘watching brief’ status only.
In the period since the signing of the Millennium Train contract until the
time of our review, there have been three formal internal audit
reports/comments in respect of the purchase that we are aware of:
§ review of risk management by a leading accounting firm under the
co-sourced internal audit arrangement (2001)
§ capitalisation of training costs (2002)
§ software model being developed to validate maintenance payments
(2002).
For a project of such magnitude, more internal audit involvement would
be desirable. Our previous audit of the Tangara project highlighted a
similar situation. Providing and directing sufficient internal audit
resources to address major risks (on a potentially billion dollar project)
are an important element of corporate governance that was not optimal
here. StateRail advised that internal audit was regularly given updates
and had discussions with the Project Manager.
4. Other Significant Process and Performance Matters
44 The Millennium Train Project
4.4 New South Wales Rail Industry
Restructure
The restructure of the
rail industry affected
the purchase
On 1 July 1996, through the enactment of the Transport
Administration Amendment (Rail Corporatisation and
Restructuring) Act 1996, the then State Rail Authority of New South
Wales was split into four organisations:
§ Rail Access Corporation
§ Freight Rail Corporation
§ Railway Services Authority, which following corporatisation on
1 July 1998 was renamed Rail Services Australia
§ State Rail Authority of New South Wales.
This had a number of impacts upon the Millennium Train purchase.
Firstly, the engineering and contract administration expertise that
StateRail had in train purchasing was transferred to the then Railway
Services Authority (RSA). The latter’s principal function was to
supply goods and services to the rail industry in New South Wales
while StateRail’s was to operate services.
The Millennium Train purchase was handled by RSA until StateRail
took over the project in August 1997, with the appointment of a project
manager. The Millennium Train had a dedicated project team at the
start of the contract of 10 occupied positions, 4 of which came from
RSA. While in 2002, 7 of the 21 occupied position holders came from
RSA (later RIC).
RSA and its successor, RIC, were public trading enterprises and as
such charged ‘commercial’ rates for its services. The engagement of
the RSA/RIC Rollingstock Consulting Group will cost StateRail
approximately $1.1 million (excluding GST).
StateRail advised that as at 30 April 2003 it had completed negotiations
to get this expertise back and key rollingstock employees were
transferred from RIC to StateRail.
Secondly, the 1995 StateRail Board at its 13 September 1995 meeting
deferred consideration of the paper “Proposed Fleet Acquisition
Program for CityRail” until the 13 October 1995 meeting. At this latter
meeting the then Board decided that the development and procurement
strategy for additional rollingstock be a matter for the 1996 StateRail
Board to consider.
4. Other Significant Process and Performance Matters
The Millennium Train Project 45
At that time, patronage analysis by StateRail showed that there would
be a shortfall of suburban rollingstock beginning from mid 1998. An
additional 24 cars were identified as being required to cater for
patronage growth to 2000, with another 56 cars needed shortly after
2000 to replace the Tullochs as they would be 37 years old. StateRail
described the Tullochs as being: technologically obsolete; in a poor
state; outdated in terms of customer comfort; and approaching life
expired.
Some eleven months later the new StateRail Board at its meeting of
25 September 1996 approved the development of the Millennium Train
specification and tender documentation. However, it was not until the
StateRail Board meeting of 20 February 1997 that approval was given
to tender the purchase of an additional 80 double deck electric cars for
the CityRail fleet.
Overall it took approximately 17 months for the StateRail Board to
make a decision to tender the purchase of the first tranche of what
was to become known as the Millennium Train.
In the rail industry the generally accepted norm is that it takes 4 years
(48 months) to purchase new passenger rollingstock from the time
approval to purchase (proceed) is given to the delivery of the first set.
This is because there is a notable learning curve involved, particularly
where the design is new and innovative. The Millennium Train
purchase had a very aggressive time frame before key decision
makers approved the purchase, and it remained so after approval.
4. Other Significant Process and Performance Matters
46 The Millennium Train Project

Exhibit 13: StateRail’s Timeframes for Purchase of the Millennium Train
Tendering, offer evaluation and place order	First train – receive, test, trial and commission	Total	Cars in service by 2000 Sydney Olympics
Months – Number (Dates)	Months – Number (Dates)	Months Note 1 & 2	Number
StateRail Board Paper September 1995	9 (4/1996-12/1996)	18 (1/1997-6/1998)	27	56
StateRail Board Papers September 1996 & January 1997, & Ministerial Press Release June 1997	10 (4/1997-1/1998)	22 (2/1998-11/1999)	32 + 1	40
StateRail Board Paper July 1997	7 (6/1997-12/1997)	23 (1/1998-11/1999)	30 + 3	24
StateRail Board Paper October 1997	11 (6/1997-4/1998)	23 (5/1998-4/2000)	34 + 3	24
Project Steering Committee February 1998	13 (6/1997-6/1998)	26 (7/1998-8/2000)	39 + 3	8
Contract Unamended	16 (6/1997-9/1998)	27 (10/1998-12/2000)	43 + 3	Not Applicable
Actual	16 (6/1997-9/1998)	46 (10/1998-6/2002)	62 + 3	Not Applicable

Source: StateRail Records
Notes:
1. Months quoted have been treated as whole months, for example April to December 1996 (4/1996-12/1996) is in
total 8 months based upon the start and ending of months in this period
2. The + (plus) number quoted is for the months elapsed between the decision to proceed in late February 1997
and the start of tendering
Public pronouncements made in the middle to latter part of 1997 raised
public (passenger) expectations as to when there would be a new train.
These expectations were unlikely to be met, and were not. It is noted
that the Contract never intended for the train to enter service prior to
the 2000 Sydney Olympics.
The ‘Olympian’ tag created reputation risks. Comments about its
lateness began appearing in the print media from early March 2001.
This was despite there having been further public pronouncements
revising the expected date of entry into service of the Millennium Train.
4. Other Significant Process and Performance Matters
The Millennium Train Project 47
4.5 Intellectual Property Rights
StateRail does not
own the design and
build intellectual
property
StateRail owns all the rights, title and interest in intellectual property
(IP) for the maintenance documentation.17 EDI Rail owns the design
and build IP of the Millennium Train. StateRail has a permanent,
irrevocable, royalty free and non-exclusive licence to use any of the
contract documentation IP.
This split of IP between StateRail and EDI Rail is in accordance with
that specified in the request for tender documentation. StateRail
advised that while it paid for the design and build the associated IP was
of little commercial value. This is because the train was purpose
designed and built to suit the Sydney suburban rail network.
Until the Deed of Release was executed on 18 November 2002, the
Millennium Train did not have an escrow arrangement18 in place. In the
event that EDI Rail had become insolvent or the contract was
terminated, StateRail could have had difficulties in accessing the design
and build IP. There is a small annual fee, approximately $1,000, paid by
SRA for the escrow arrangement.
Escrow rights to protect IP rights are not uncommon but seem not as
yet to be generally accepted rail industry practice. StateRail advised
that the use of an escrow arrangement for IP for rollingstock was still
considered to be fairly novel. However, it agreed that future
acquisitions should look to establishing such arrangements veryearly in
the process.
4.6 Conflict of Interest
StateRail engaged a leading accounting firm as probity auditors. The
probity audit focussed on:
§ confidentiality and conflict of interest
§ transparency
§ accountability
§ value for money.
17 This is specified in Volume 2 Statement of Work Attachment A of the Contract and includes:
technical maintenance plan; recommended spares list;, operating manuals; maintenance manuals;
training materials, software documentation; list of special tools and equipment; all records and data
relating to performance of cars and maintenance facility
18 Under an escrow arrangement the design and build IP material is held in trust by a third party to
be turned over to StateRail only upon fulfilment of a specified condition(s).
4. Other Significant Process and Performance Matters
48 The Millennium Train Project
The probity audit report of 24 July 1998 concluded that the tender
process was conducted in a fair and equitable manner with due regard
to probity.
The same firm was subsequently engaged by StateRail on
20 November 2000 to provide audit services as part of a co-sourced
StateRail internal audit function. One of the internal audit reviews
performed by this firm was the risk management review of the
Millennium Train mentioned earlier (Section 4.3 The Acquisition
Environment at StateRail).
There was some commonality of staff from the firm in the Millennium
Train probity audit and the risk review. StateRail did not consider this to
be a problem as the focus (objectives) of the reviews were different.
However, we do not think this was appropriate, as there may be at the
least the perception of a conflict of interest.
In the absence of formal standards for probity audit, it can be difficult
for agencies to judge what is appropriate. As a guide ICAC’s general
advice19 on conflict of interest situations is useful:
The first step is to recognise what situations could give rise to
potential conflicts of interest. The second step is to make sure that
staff (and contractors) disclose these conflicts. The third step is to
decide how to resolve the conflicts or minimise their potential
impact.
It is our view that to maintain the full benefit of a probity audit,
indisputable independence and absence of conflicts is essential. It is
quite common for probity audit services to be used several times during
the course of a project. They may even be called upon some time
afterwards. Because of this, we consider that probity auditors should
be limited to performing work directly related to the probity audit
function during the currency of a project or specific matter, and not
engaged for other forms of review work related to the same subject
area.
19 Practical Guide to Corruption Prevention, Module 9 Conflicts of Interest Pages 5 and 6, ICAC,
1 June 1996
4. Other Significant Process and Performance Matters
The Millennium Train Project 49
4.7 Risk Management
StateRail was aware of
need for effective risk
management
It is apparent that StateRail was aware of the need to effectively
manage risks associated with the Millennium Train’s purchase and
introduction into service. For example:
§ a risk management study of design, build and maintain was
undertaken by a contractor
§ under the contract, EDI Rail compiled a risk management plan
which was submitted to StateRail and updates were provided
§ the contract provided for 3 purchase orders because of the risk
associated with forecasting increase in demand (patronage)
§ the initial order size was increased from 80 to 81 to mitigate against
the risk of damage to 1 trailer car rendering an entire set
inoperable. The base cost of the collision spare trailer car was
approximately $2 million
§ commercial and technical risks were assessed as part of the tender
evaluation
§ risk analysis of introducing a newtrain into service was undertaken
in December 1999 and then again in 2001 resulting in the train being
introduced in such a way as to limit risk of impacting upon peak and
other services
§ there was an extensive train commissioning testing program and no
payment would be made until the first set was accepted by
StateRail
§ StateRail has engaged various contractors over the project’s life to
review and report on risks, for example contract review from
commercial and technical aspects, the delivery program’s accuracy
and adequacy.
StateRail did enjoy some successes with managing the risks associated
with the Millennium Train.
4. Other Significant Process and Performance Matters
50 The Millennium Train Project
But the contract
was risk averse
However, the contract for the Millennium Train purchase was described
in a paper, submitted to the StateRail Board meeting of
29 November 2001, in the following terms:
… The Contract conditions, in particular the General Conditions, are
extremely risk averse for SRA20 and there is a view that risks were
accepted by the Contractor which it was unable to control …
and
… EDI were originally a support party to a bid led by Alstom.
However, upon consideration of the Contract documentation for
tender, Alstom decided not to proceed …
Certainly StateRail, through contractual provisions, sought to implement
controls to reduce the risk exposures/events it had experienced with the
Tangara. However, as the Guidelines for Managing Risk21 note:
Risks can be transferred unfairly if organisations are not mindful of
the rights and responsibilities of clients, contractors and other
stakeholders. Risk transfer does not reduce overall risk. Spreading
the risk through risk transfer does reduce the level of risk to
individual entities. Where risks are transferred unfairly or
inappropriately, risks may be increased.
Despite the Millennium Train’s contractual provisions, StateRail still had
significant risk exposures because of the importance of the Millennium
Train to CityRail’s operations by retiring the Tullochs and reducing
overcrowding and the ‘fragility’ of the Australian rail industry.
StateRail (the Government) will always bear the risk of a major project
not being completed, as StateRail is not in a position of being able to
simply walk away from the project, unlike the private sector.
4.8 Customer and Staff Information Campaign
Expenditure
As part of the Millennium Train project there was a customer and staff
information campaign (the campaign) with an approved budget of
$745,150. The source of funds for the campaign’s budget was the
Millennium Train’s capital funding allocation.
20 SRA: State Rail Authority (StateRail)
21 Guidelines for Managing Risk in the Australian and New Zealand Public Sector, Standards Australia,
SAA/NZS HB143:1999
4. Other Significant Process and Performance Matters
The Millennium Train Project 51
As at 21 November 2002 an amount of $400,435 had been expended on
the campaign. Exhibit 14 shows the campaign elements budgeted and
actual expenditures.

Exhibit 14: Millennium Train Customer and Staff Information Campaign
Item	Budget $’000	Expenditure $’000	Balance $’000
Mainstream media, the 24-sheet billboards and 30 second TV commercials	545	248	297
Staff and customer commemorative mementos, including public launch,	100	108	(8)
Staff education including road shows	100	44	56
Total	745	400	345

Source: StateRail Records
Overall the campaign’s expenditure was $345,000 under budget primarily
because the television campaign will not be going to air until later in 2003.
StateRail is waiting until the Millennium Train returned to service22 on
2 June 2003 and there are adequate numbers of Millennium Trains
operating on the network. The campaign will include a public education
aspect, addressing amongst other things the features new to Sydney’s
trains such as the surveillance, passenger information systems and traction
interlocking of doors.
It would seem that the Millennium Train has been given a higher
marketing profile than other new trains introduced into service by
StateRail. In view of the Millennium Train’s lateness (from the public’s
perspective), cost escalation and initial teething problems this level of selfpromotion may not be universally well received.
22 The Millennium Train was withdrawn from service for seven weeks approximately during the period
10 April 2003 to 1 June 2003 to undertake further prototype testing, refer Section 3.3 Compliance
with Technical Requirements

The Millennium Train Project 53
Appendices
Appendices
54 The Millennium Train Project
Appendix 1 Audit scope and objectives
Millennium Train Audit
Objectives
The objectives of the Millennium Train Project audit were to:
§ assess the economy, efficiency and effectiveness of StateRail’s
management of the project
§ consider any implication the audit may have for other significant asset
acquisitions not only for StateRail but also for other NSW public sector
agencies.
Audit Criteria The following criteria were applied during the audit (whether):
§ StateRail implemented changes in practice and/or performance in
response to the Tangara Performance Audit Report recommendations
§ StateRail has effectively managed risks associated with the purchase of
new rollingstock, particularly product timing, cost and quality (the latter
includes both safety and reliability)
§ StateRail established and operated effective project management
arrangements for the Millennium Train, that is, the way in which the
project was planned, organised, directed and controlled was consistent
with better practice.
Audit Approach and
Methodology
The audit approach and methodology included:
§ research, review and analysis of relevant literature and researched better
practice on managing major projects
§ review and analysis of StateRail documentation
§ interviews with representatives of StateRail, the former NSW Department
of Transport (now Department of Urban and Transport Planning and/or
Transport Co-ordination Authority) and Rail Infrastructure Corporation
(NSW)
§ discussions with operators, both public and private sector, of rail services
in other major Australian State capital cities
Cost of the audit The cost of the audit was $242,990. This figure includes the estimated cost of
printing the report ($6,500).
Acknowledgement The Audit Office gratefully acknowledges the cooperation and assistance
provided by representatives of: StateRail; Office of the Coordinator General of
Rail; Department of Urban and Transport Planning; Transport Co-ordination
Authority; Rail Infrastructure Corporation (NSW); Queensland Rail; Western
Australia Government Railways Commission; Office of the Director of Public
Transport – Department of Infrastructure, Victoria; operators of public
transport rail services in Melbourne – Connex and National Express Group;
and EDI Rail.
Audit team Ai-Binh Phu, Steve Sullivan (Project Manager) and Stephen Horne (Director)
Appendices
The Millennium Train Project 55
Appendix 2 Chronology of Key Events

Date 16 June 1995

Event Group General Manager, CityRail approves commencement of development for Fourth Generation Train (4GT)

29 September 1995 Report (business case) on the acquisition of 4GT

13 October 1995

StateRail Board notes paper put to it, at 13 September 1995 meeting on development and procurement strategy for additional suburban rollingstock (the

4GT). However, the Board deferred its consideration of the matters until there
was a new Board following NSW rail industry restructure

30 October 1995

Ministerial announcement, in conjunction with delivery of last outer suburban Tangara set, that development underway for 4GT, which is to be available prior

to the 2000 Sydney Olympics
20 February 1996 Value management study of the 4GT undertaken and report provided to StateRail
1 July 1996 NSW rail industry is restructured into 4 separate entities

25 September 1996

StateRail Board approves development of 4GT specification and tender documentation

21 January 1997 Industry presentation held for those parties interested in tendering for 4GT

20 February 1997

StateRail Board approves acquisition of 80 4GT electric cars at a total purchase price of $212 million (1995/96 dollars). The Board also approves that the

acquisition process require tenders to provide for a design, build and
maintenance contract
30 May 1997 Minister for Transport approves calling of public tenders for 4GT project

2 June 1997

The Minister for Transport announces that a new suburban train is being acquired, the delivery of which will commence in late 1999. The new train was

subsequently christened ‘The Olympian’ because it was to be in service for the
2000 Sydney Olympics
4 June 1997 Advertisements placed calling for pre-registration of tenders for 4GT project

13 June 1997

Closing date for the submission of requests by interested parties for pre-registration as a tenderer for 4GT

 

22 July 1997

Request made by StateRail for pre-registered tendering organisations to submit tenders for 4GT

 

8 October 1997

The initial closing date specified for the submission of tenders for 4GT by organisations which were pre-registered to tender

 

5 November 1997

The amended closing date for the submission of tenders for 4GT by organisations which were pre-registered to tender

 

22 January 1998

StateRail Board approves the initial order size be increased from 80 to 81 car to mitigate against the operational risk of collision damage to 1 car rendering an

entire 4 car set inoperable
Appendices
56 The Millennium Train Project

Date 13 March 1998

Event The Interim Tender Evaluation Report recommends that one tender submitted be passed over while further clarification and negotiation be undertaken with the remaining two tenderers. The 4GT Executive Management Committee approved

this proposal on 13 March 1998 and the StateRail Board was informed

25 June 1998

StateRail Board approves, subject to the successful outcome of final negotiations, Evans Deakin Limited trading as Clyde Engineering as the preferred

proponent for the design, build and maintenance of the 4GT
29 June 1998 Budget Committee of Cabinet approves the 4GT project funding

30 June 1998

EDI Ltd announced as the preferred proponent for the design, build and maintenance of the 4GT, subject to the successful outcome of final negotiations

 

31 August 1998

Treasurer gives approval, under the Public Authorities (Financial Arrangements) Act 1987, for StateRail to enter into a contract for the purchase of the 4GT

8 October 1998 Contract for the design, build and maintenance of 81 4GT cars signed between
StateRail and EDI Ltd. This is Stage 1 of the contract. At StateRail’s sole
discretion the contract allows further ordering of 60 4GT cars in each of Stages 2
and 3, that is up to 201 4GT cars
22 April 1999 StateRail Chief Executive Officer informs the 4GT Executive Management
Committee (the project steering committee) that the train is to be referred to as
the ‘Millennium Train’

23 July 1999

EDI Rail , a subsidiary of EDI, briefs StateRail about proposed change in bogie design concept from dual air spring to a single air spring in order to achieve

compliance with StateRail’s specification requirements for the bogie

7 December 2000

Downer Pty Ltd makes announcement that EDI Board has recommended acceptance of Downer take over offer for EDI Ltd

 

8 December 2000

EDI Rail advises StateRail that communications and surveillance systems EDI Rail sub contractor has gone into receivership

 

25 March 2001

Premier announces that StateRail will acquire a further 60 Millennium Train cars, that is exercis e the contract’s Stage 2 purchase order option

 

22 May 2001

Minister for Transport writes to Secretary of the of Labor Council advising that future rollingstock purchases will be on the basis of a design and construct

tender. This flowed from representation by the unions involved in the
maintenance of rollingstock at StateRail

16 July 2001

EDI Rail formally submits a claim covering the design and build of Stage 1 of the Millennium Train, the ‘Stage 1 Resolution Proposal’

 

15 September 2001

EDI Rail advises StateRail that bogie anti-roll bar EDI Rail sub contractor has gone into receivership

 

30 November 2001

First Millennium Train set (4 cars) arrives in Sydney from Newcastle. Commissioning tests of the train subsequently commences

Appendices
The Millennium Train Project 57

Date 4 March 2002

Event RIC advises StateRail that the Millennium Train exceeds electrical emissions specified for non interference with the network signalling system

 

25 June 2002

DoT and RIC formally accredit Millennium Train to operate on the Sydney suburban network

 

28 June 2002

StateRail issues practical notice of completion for 1st set (4 cars) of the Millennium Train

30 June 2002 The Millennium Train is publicly (officially) launched
1 July 2002 First revenue service operation of the Millennium Train (4 cars)

18 November 2002

StateRail and EDI Rail sign a ‘Deed of Release and Variation’ in respect of the Millennium Train. As a result the estimated capital cost of the train and the

project for all the Contract Stages increased significantly

29 November 2002

Practical completion of Set 4 was given which triggered acceptance of 8 car set operation

30 November 2002 First 8 car set Millennium Train enters revenue service
4 December 2002 First 8 car set Millennium Train peak hour revenue service

5 December 2002

StateRail orders another 60 Millennium Train cars from EDI Rail via the contract’s Stage 2 purchase option being exercised/awarded

17 March 2003 The Minister for Transport announces in effect that the contract’s Stage 3
purchase order option, another 60 Millennium Train cars, will proceed

10 April 2003

The Coordinator General of Rail takes the Millennium Train out of service until further prototype testing allows for technical issues surrounding the operations

of the train that are impacting on its reliability to be resolved

2 June 2003

The gradual return to service of Millennium Train 4 car sets over a three week period commences with the first passenger non peak hour service being

operated.
Appendices
58 The Millennium Train Project
Appendix 3 StateRail Board Paper Meeting 1 November 2002
Strategic Procurement Plan for Rollingstock Extracts
Key Issues
StateRail historically purchases rollingstock in large tranches up to 15
years apart from a national passenger rollingstock industry which is
extremely small by international standards.
The industry is fragile in that it has only 2 or 3 companies which can
meet StateRail’s needs.
Recent experience with the Millennium Train demonstrated
difficulties in industry maintaining appropriate skills and knowledge
to successfully develop and deliver new designs after relatively long
periods of inactivity.
Each new train tends to be significantly different to previous designs
and in some cases revolutionary rather than evolutionary.
There is no strategic plan for rollingstock procurement over the next
10-20 years which addresses the needs and constraints of both
StateRail and the industry.
Proposal to Develop a Strategy
It is proposed that a 20 year strategic plan be prepared which
addresses all relevant issues including:
§ Demand;
§ Market needs;
§ Operating requirements;
§ Life cycle costs including operation and maintenance;
§ Re-use of existing rollingstock;
§ Standardisation of components;
§ Industry capacity;
§ Procurement risk;
§ Procurement options;
§ Changing customer service requirements over time;
§ Financing plan/options;
§ Changing technology;
§ Maintenance options;
§ Workforce issues; and
§ Infrastructure capacity.
Appendices
The Millennium Train Project 59

Appendix 4

Assessment of Status and Progress Made on Tangara Performance Audit Report Recommendations

The Tangara audit report recommended that the future arrangements for major capital projects include the
following changes in process and/or performance (features). Below is our short assessment of the status and
progress made by StateRail on these matters in the Millennium Train project.

Recommendation	Support and Implementation Status	Comments
Allow for the administration of a contract through a project management team structure	Supported Fully implemented	A dedicated project management team was established for the Millennium Train.
Minimise the specification of particular components or design features where this is not necessary	Supported Partially implemented	StateRail’s specification for the Millennium Train was very detailed for a performance based contract. As a result the Millennium Train was over specified and was not sufficiently performance based. Nevertheless, it was a notable improvement on the Tangara contract. Refer Section 3.3 Compliance with Technical Requirements for more detailed comments.
Clearly specify performance standards for complete units, and all major components	Supported Partially implemented	Performance standards specified in some instances were allegedly impossible to achieve, refer Section 3.2 Delivery and Cost Achievements at Time of Our Review for more detailed comments.
Have a reliable and agreed process for measuring performance of components in terms of the contract	Supported Fully Implemented	Reliable and agreed process for measuring performance was established.
Employ risk management techniques to deal with high risk factors such as the use of untested designs and technology	Supported Partially implemented	StateRail is aware of the need to effectively manage risks. However, the Millennium Train was not delivered on time nor within budget. Refer Sections 3.2 Delivery and Cost Achievements at Time of Our Review and 4.7 Risk Management for more detailed comments. Also StateRail does not currently have the “off the shelf” or standard train option and hence a lower risk profile. Refer Section 2.2 Infrastructure and Purchasing.

Appendices
60 The Millennium Train Project

Recommendation	Support and Implementation Status	Comments
Employ design (“value management”) reviews as an essential feature of the design process to reduce costs, minimise waste and maximise functionality	Supported Fully implemented	A value management study was undertaken and a report given in February 1996.
Employ effective arrangements to verify performance of service and control payments	Supported Partially implemented	There was extensive commission testing undertaken and payment is only made for each delivered 4 car Millennium Train set when StateRail is satisfied it has a ‘quality’ product. However, teething problems led to be train being withdrawn from service for further testing.
Monitor contractor inventory levels	Supported Fully Implemented	As payment was only made upon delivery of the Millennium Train set StateRail did not have to worry about this matter as it was of no interest to StateRail. However, a move back to milestone (progress) payments in future purchase contracts will probably necessitate monitoring occurring.
Deal with cost escalations in a simple, agreed manner	Supported Fully implemented now but not originally	Cost escalations were simplified compared to the Tangara. However, as part of the Deed of Release and Settlement executed between StateRail and EDI Rail on 18 November 2002 amendments were made to the contract schedules on the agreed application of the Contract to adjustments of the contract sum for escalation, foreign exchange fluctuations and customduties.
Provide an effective, agreed approach to disputes resolution	Supported Fully implemented	An agreed approach to dispute resolution was laid down in the Millennium Train Contract. Also a dispute was settled without recourse to the Contract’s provisions, refer Section 3.2 Delivery and Cost Achievements at Time of Our Review for more detailed comments.

Appendices
The Millennium Train Project 61

Recommendation	Support and Implementation Status	Comments
Deal with probity concerns in a proactive way	Supported Fully Implemented	A probity auditor was engaged and provided an unqualified opinion about probity, refer Section 4.6 Conflict of Interest for more detailed comments.
Involve internal audit at crucial stages and in on going control reviews.	Supported Partially implemented	There has been limited internal audit involvement with the Millennium Train. They were aware of progress and undertook some work. However, more internal audit involvement is needed. Refer Section 4.3 The Purchase Environment at StateRail for more detailed comments.

Appendices
62 The Millennium Train Project
Appendix 5 Response from Agencies
Response from the StateRail Authority
With reference to your letter of 13 May 2003, StateRail welcomes the
opportunity to comment on the Performance Audit Report of the Millennium
Train Project. The recommendations in the Report are supported in principle
and this represents the direction StateRail is setting itself in the management
of future rollingstock contracts.
Positive Results
StateRail has made many improvements to the procurement of new
rollingstock since the purchase of Tangara. The Millennium Train is a
technically complex train when compared to previous trains, but it is
consistent with the technology being applied elsewhere in the world and in
related industries. It is clear that the Millennium Train is a complex high value
project that requires systems and processes to be well established to allow for
its successful management. StateRail has put in place, with the Millennium
Train Project, significant measures for dealing with such a technically complex
and innovative project. Using the Tangara contract as one of many inputs a
risk management process was integral to the set-up and management of the
Millennium Train project.
The Tangara in the mid-1980’s was the largest rollingstock purchase at that
time. Following the review by the Auditor-General at the time, a number of
recommendations were made. These were supported by StateRail and taken
account of and adopted, where appropriate, in the Millennium Train project.
The main areas of success from the “lessons learnt” in the Tangara project are:
§ The early establishment of a project management team structure;
§ The establishment of a reliable and agreed process for measuring
performance;
§ The establishment of risk management techniques which involved all
aspects of the Contract including the entry of the train into service;
§ Establishment of a formal design review process;
§ Extensive testing and commissioning program;
§ Simplified payment and escalation system;
§ A thorough tendering evaluation and tender reporting system.
The report also acknowledges the good value for money for the Millennium
Train when compared to other Contracts in Australia and overseas.
Appendices
The Millennium Train Project 63
Rollingstock Procurement
StateRail is continuing to examine its procurement methods for new
rollingstock and plans to make further changes arising from experience with
the Millennium Train Project and its upcoming need for replacement of a
significant number of current rollingstock over the next 10 to 20 years.
StateRail historically purchases rollingstock in large tranches up to 15 years
apart from a national passenger rollingstock industry which is extremely small
by international standards. The industry is highly specialised and has only 2
to 3 companies which can meet StateRail’s needs.
In order to capture the progressive industry safety and technology
improvements, each new train tends to be significantly different to previous
designs rather than being an evolutionary change. The current fleet strategy
calls for procurement of approximately 50 cars per year, every year from 2007.
A 20-year strategic rollingstock procurement plan will be prepared which
addresses all relevant issues including:
§ Demand;
§ Market needs;
§ Operating requirements;
§ Life cycle cost including operation and maintenance;
§ Re-use of existing rollingstock;
§ Standardisation of components;
§ Industry capacity;
§ Procurement risk;
§ Procurement options;
§ Changing customer service requirements over time;
§ Financing plan / options;
§ Changing technology;
§ Maintenance options;
§ Workforce issues; and
§ Infrastructure capacity.
Appendices
64 The Millennium Train Project
Summary
StateRail acknowledges that further improvements in a number of areas of
rollingstock project management are appropriate, and hence, significant
resources and time are being established and developed to progress to a new
form of rollingstock procurement. This revised procurement method will build
on from lessons learnt on both Millennium and Tangara and establish a
process that provides greater certainty and better risk allocation for both
StateRail and the rollingstock industry serving StateRail.
The Millennium Train project was clearly a significant step forward from
Tangara. The Millennium Train project came some 10–15 years after the
Tangara contract commenced, and required a high level of management of a
technically complex train being delivered under a contract designed to address
problems identified with the Tangara contract but a contract form not
previously undertaken by StateRail.
StateRail is committed to a continuous improvement process for all such
projects into the future and will use the recommendations from this report to
further enhance its project management processes.
Attached are StateRail’s comments on the recommendations in the Report.
(signed)
Fran McPherson
Acting Chief Exe cutive
Dated: 5 June 2003
Appendices
The Millennium Train Project 65
StateRail’s Response to Recommendations

Recommendations	Supported/ Not Supported	Comment
1. It is recommended that StateRail should: Explore the various purchasing options available for obtaining new trains and identify which option gives the best value for money.	Supported	StateRail is developing a long-term rollingstock procurement and contracting strategy to meet its rollingstock needs over the next 20 years, taking into account the limited number of suppliers in the Australian market place.
2. Continue to assess the benefits and risks of its train maintenance arrangements to ascertain with greater confidence which arrangements provide the best value for money.	Supported	The maintenance costs must be considered in the light of the nature and complexity of the equipment on the train and the performance levels required. StateRail notes the comments relating to in sourced versus out-sourced maintenance. The issue will be subject to review on future contracts.
3. Further review the level of specification in performance based contracts occurring in train purchase tenders and contracts (an issue also with the Tangara).	Supported	StateRail will review future specifications to determine the correct balance between performance and detailed specification.
4. Ensure that the performance standards specified in contracts are appropriate (an issue also with the Tangara).	Supported	Specifications are developed based on previous contract requirements, appropriate standards and operational experience. StateRail will review the performance standards for suitability before inclusion in future contracts.
5. Review the adequacy of liquidated damages included in contracts and specify more clearly how and when liquidated damages will be applied in the event of the contractor failing to perform as specified.	Supported	The trigger for application of liquidated damages depends on the circumstances of the time. This will be reviewed to ensure that it is clear and appropriate to the performance of the Contractor and circumstances at that time.

Appendices
66 The Millennium Train Project

Recommendations	Supported/ Not Supported	Comment
6. Involve internal audit at crucial stages in major projects and in on going risk management reviews (an issue also with the Tangara).	Supported	Internal audit was involved at crucial stages of the Millennium Train Contract and continues to be involved in major projects in StateRail.
7. Have a standard escrow arrangement for relevant intellectual property owned by the contractor included in all future major contracts.	Supported	Escrow arrangement are being implemented on current rollingstock contracts for new trains and StateRail plans to adopt a similar arrangement for the future rollingstock contracts.
8. Further avoid potential for perceived conflicts of interest in the use of probity advisers by limiting the use of the same advisers in other review work on the same project.	Supported	Potential Probity issues is a major assessment in every engagement of professional services. StateRail will ensure that this is clearly understood in any future evaluations with the review of the guidelines on the engagement of probity auditors.
9. More carefully assess the options for responding to risks as contractual provisions do not necessarily avoid and/or mitigate risk events to StateRail’s business objectives.	Supported in principle	StateRail acknowledges the need for risks to be apportioned appropriately to the party that is most able to control the risks. Future contracts will reflect this aspect.
10. Be mindful of reputation risks that inappropriate marketing and communications can create with the public (passengers) and StateRail employees.	Supported in principle	StateRail reviews the appropriateness of marketing and communications at several stages before their implementation. StateRail will ensure that these risks are carefully reviewed in similar situations.

Appendices
The Millennium Train Project 67
Response from the Rail Infrastructure Corporation
Thank you for the opportunity to comment on the Performance Audit of the
Millennium Train project and, in particular, your 28 Day Report tabled the 13
May 2003.
In previous correspondence to your office dated 2 May 2003, RIC raised three
issues. These issues were:
1. The Long-Term Strategic Plan with a Systems Approach
2. The Existing Capacity of the Electrical Network
3. Compatibility with the existing Signalling System
While there have been some minor changes, from the draft report to the final
report, the previous comments from RIC are still considered pertinent.
With regard to the key findings in the report, the second dot point on page
four, raises the issue of the opportunity to make fundamental revolutionary
changes as distinct from incremental changes. While RIC would welcome the
opportunity to undertake revolutionary changes, it also warns that all costs of
these changes need to be considered before a decision is made to implement.
Often a marginal cost for a particular subset of the system is considered, not
the total cost of the system.
In the summary of recommendations on page six, the first dot point talks about
the need for a 20-30 year strategic plan for the Sydney Rail Network. RIC, in
conjunction with the State Rail Authority and the then Departments of
Planning and Transport, have been working with other agencies to produce
such a plan. It is agreed that with the restructure of planning in New South
Wales, that the existing plan probably needs wider distribution within the
community. This is undoubtedly an issue for the new Department of
Infrastructure and Planning.
The Millennium Train has recently been returned to service and monitoring of
the interface with the signalling system is continuing.
Thank you for the opportunity to provide input and to comment on the
Performance Audit of the Millennium Train.
(signed)
Gary Seabury
Acting Chief Executive Officer
Dated: 3 June 2003
Appendices
68 The Millennium Train Project
Response from the Department of Urban and Transport Planning
I refer to your letter concerning the draft Audit Report on the Millennium Train
Project.
The Department has reviewed the draft report and has no comments on its
content. The Department is continuing to prepare a revised long term plan for
rail, in conjunction with the rail entities, as part of a broader approach to
transport planning in Sydney.
As you may be aware, the Minister for Infrastructure and Planning and
Minister for Natural Resources announced in the Parliament last week that the
Department of Urban and Transport Planning and the Department for
Sustainability and Natural Resources are to be merged to form a Department of
Infrastructure, Planning and Natural Resources. This Department will legally
come into being from 1 July 2003. It would be appropriate to change the name
of the Department of Urban and Transport Planning to the Department of
Infrastructure, Planning and Natural Resources throughout your report.
(signed)
Andrew Cappie-Wood
Deputy Director General
Dated: 4 June 2003
Response from the Transport Co-ordination Authority
Thankyou for the copy of your office’s performance audit report on the
Millennium Train included with your letter of 13 May 2003.
I note that extensive consultation has already taken place regarding the
preparation of this report. Issues raised in the report that relate to this
Authority have been considered and it is confirmed that there in no further
response to be made to the 28 day report.
I thankyou for the opportunity to provide a formal response to the report
contents.
(signed)
John Lee
Director General
Dated: 2 June 2003
Appendices
The Millennium Train Project 69
Appendix 6 Acronyms
4GT Fourth Ge neration Train, that is the Millennium Train
the Agreement CityRail Service Agreement
the Campaign Customer and Staff Information Campaign

the Contract

Deed of Agreement for the Millennium Train Contract between the Minister for Transport and EDI

the Deed The Deed of Release and Variation
CBD Sydney Central Business District
CTC Competitive Tender and Contract
DoT Department of Transport NSW

EDIL	Evans Deakin Industries Limited which subsequently became following takeover by Downer, Downer EDI

EDI Rail The rail division of Evans Deakin Industries Limited and then subsequently
Downer EDI following Downer’s takeover of Evans Deakin Industries
Limited and the new merged entity changing it name to Downer EDI
GST Goods and Services Tax
ICAC Independent Commission Against Corruption
IP Intellectual Property
NSW New South Wales
QLD Queensland
RSA Railway Services Authority/Rail Services Australia
RIC Rail Infrastructure Corporation NSW
SA South Australia
SRA State Rail Authority of NSW
StateRail State Rail Authority of NSW
VIC Victoria
WA Western Australia

The Millennium Train Project 71
Performance Audits by
the Audit Office of New South Wales
Performance Audit Reports and Related Publications
72 The Millennium Train Project
Performance Auditing
What are performance audits?
Performance audits are reviews designed to determine
how efficiently and effectively an agency is carrying
out its functions.
Performance audits may review a government program,
all or part of a government agency or consider
particular issues which affect the whole public sector.
Where appropriate, performance audits make
recommendations for improvements relating to those
functions.
Why do we conduct performance audits?
Performance audits provide independent assurance to
Parliament and the public that government funds are
being spent efficiently and effectively, and in
accordance with the law.
They seek to improve the efficiency and effectiveness
of government agencies and ensure that the
community receives value for money from government
services.
Performance audits also assist the accountability
process by holding agencies accountable for their
performance.
What is the legislative basis for Performance Audits?
The legislative basis for performance audits is
contained within the Public Finance and Audit Act
1983, Part 3 Division 2A, (the Act) which
differentiates such work from the Office’s financial
statements audit function.
Performance audits are not entitled to question the
merits of policy objectives of the Government.
Who conducts performance audits?
Performance audits are conducted by specialist
performance auditors who are drawn from a
wide range of professional disciplines.
How do we choose our topics?
Topics for a performance audits are chosen from
a variety of sources including:
§ our own research on emerging issues
§ suggestions from Parliamentarians, agency
Chief Executive Officers (CEO) and
members of the public
§ complaints about waste of public money
§ referrals from Parliament.
Each potential audit topic is considered and
evaluated in terms of possible benefits
including cost savings, impact and
improvements in public administration.
The Audit Office has no jurisdiction over local
government and cannot review issues relating
to council activities.
If you wish to find out what performance audits
are currently in progress just visit our website at
[email protected].
How do we conduct performance audits?
Performance audits are conducted in compliance
with relevant Australian standards for
performance auditing and operate under a
quality management system certified under
international quality standard ISO 9001.
Our policy is to conduct these audits on a
“no surprise” basis.
Operational managers, and where necessary
executive officers, are informed of the progress
with the audit on a continuous basis.
Performance Audit Reports and Related Publications
The Millennium Train Project 73
What are the phases in performance auditing?
Performance audits have three key phases: planning,
fieldwork and report writing.
During the planning phase, the audit team will develop
audit criteria and define the audit field work.
At the completion of field work an exit interview is held
with agency management to discuss all significant
matters arising out of the audit. The basis for the exit
interview is generally a draft performance audit report.
The exit interview serves to ensure that facts
presented in the report are accurate and that
recommendations are appropriate. Following the exit
interview, a formal draft report is provided to the CEO
for comment. The relevant Minister is also provided
with a copy of the draft report. The final report, which
is tabled in Parliament, includes any comment made by
the CEO on the conclusion and the recommendations
of the audit.
Depending on the scope of an audit, performance
audits can take from several months to a year to
complete.
Copies of our performance audit reports can be
obtained from our website or by contacting our
publications unit.
How do we measure an agency’s performance?
During the planning stage of an audit the team
develops the audit criteria. These are standards of
performance against which an agency is assessed.
Criteria may be based on government targets or
benchmarks, comparative data, published guidelines,
agencies corporate objectives or examples of best
practice.
Performance audits look at:
§ processes
§ results
§ costs
§ due process and accountability.
Do we check to see if recommendations have been
implemented?
Every few years we conduct a follow-up audit of past
performance audit reports. These follow-up audits
look at the extent to which recommendations have
been implemented and whether problems have been
addressed.
The Public Accounts Committee (PAC) may
also conduct reviews or hold inquiries into
matters raised in performance audit reports.
Agencies are also required to report actions
taken against each recommendation in their
annual report.
To assist agencies to monitor and report on the
implementation of recommendations, the Audit
Office has prepared a Guide for that purpose.
The Guide, Monitoring and Reporting on
Performance Audits Recommendations, is on
the Internet at www.audit.nsw.gov.au/guidesbp/bpglist.htm
Who audits the auditors?
Our performance audits are subject to internal
and external quality reviews against relevant
Australian and international standards. This
includes ongoing independent certification of
our ISO 9001 quality management system.
The PAC is also responsible for overseeing the
activities of the Audit Office and conducts
reviews of our operations every three years.
Who pays for performance audits?
No fee is charged for performance audits. Our
performance audit services are funded by the
NSW Parliament and from internal sources.
For further information relating to
performance auditing contact:
Tom Jambrich
Assistant Auditor-General
Performance Audit Branch
(02) 9285 0051
email: [email protected]
Performance Audit Reports and Related Publications
74 The Millennium Train Project
Performance Audit Reports
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
64* Key Performance Indicators § Government-wide Framework
§ Defining and Measuring Performance
(Better practice Principles)
§ Legal Aid Commission Case Study
31 August 1999
65 Attorney General’s Department Management of Court Waiting Times 3 September 1999
66 Office of the Protective
Commissioner
Office of the Public Guardian
Complaints and Review Processes 28 September 1999
67 University of Western Sydney Administrative Arrangements 17 November 1999
68 NSW Police Service Enforcement of Street Parking 24 November 1999
69 Roads and Traffic Authority of
NSW
Planning for Road Maintenance 1 December 1999
70 NSW Police Service Staff Rostering, Tasking and Allocation 31 January 2000
71* Academics’ Paid Outside Work § Administrative Procedures
§ Protection of Intellectual Property
§ Minimum Standard Checklists
§ Better Practice Examples
7 February 2000
72 Hospital Emergency Departments Delivering Services to Patients 15 March 2000
73 Department of Education and
Training
Using Computers in Schools for Teaching and
Learning
7 June 2000
74 Ageing and Disability Department Group Homes for people with disabilities in
NSW
27 June 2000
75 NSW Department of Transport Management of Road Passenger Transport
Regulation
6 September 2000
76 Judging Performance from Annual
Reports
Review of Eight Agencies’ Annual Reports 29 November 2000
77* Reporting Performance Better Practice Guide
A guide to preparing performance information
for annual reports
29 November 2000
78 State Rail Authority (CityRail)
State Transit Authority
Fare Evasion on Public Transport 6 December 2000
79 TAFE NSW Review of Administration 6 February 2001
80 Ambulance Service of New South
Wales
Readiness to Respond 7 March 2001
Performance Audit Reports and Related Publications
The Millennium Train Project 75
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
81 Department of Housing Maintenance of Public Housing 11 April 2001
82 Environment Protection Authority Controlling and Reducing Pollution from
Industry
18 April 2001
83 Department of Corrective Services NSW Correctional Industries 13 June 2001
84 Follow-up of Performance Audits Police Response to Calls for Assistance
The Levying and Collection of Land Tax
Coordination of Bushfire Fighting Activities
20 June 2001
85* Internal Financial Reporting Internal Financial Reporting
including a Better Practice Guide
27 June 2001
86 Follow-up of Performance Audits The School Accountability and Improvement
Model (May 1999)
The Management of Court Waiting Times
(September 1999)
14 September 2001
87 E-government Use of the Internet and Related Technologies
to Improve Public Sector Performance
19 September 2001
88* E-government e-ready, e-steady, e-government:
e-government readiness assessment guide
19 September 2001
89 Intellectual Property Management of Intellectual Property 17 October 2001
90* Intellectual Property Better Practice Guide
Management of Intellectual Property
17 October 2001
91 University of New South Wales Educational Testing Centre 21 November 2001
92 Department of Urban Affairs and
Planning
Environmental Impact Assessment of Major
Projects
28 November 2001
93 Department of Information
Technology and Management
Government Property Register 31 January 2002
94 State Debt Recovery Office Collecting Outstanding Fines and Penalties 17 April 2002
95 Roads and Traffic Authority Managing Environmental Issues 29 April 2002
96 NSW Agriculture Managing Animal Disease Emergencies 8 May 2002
97 State Transit Authority
Department of Transport
Bus Maintenance and Bus Contracts 29 May 2002
98 Risk Management Managing Risk in the NSW Public Sector 19 June 2002
99 E-government User-friendliness of Websites 26 June 2002
Performance Audit Reports and Related Publications
76 The Millennium Train Project
No. Agency or Issue Examined Title of Performance Audit Report
or Publication
Date Tabled in
Parliament or
Published
100 NSW Police
Department of Corrective Services
Managing Sick Leave 23 July 2002
101 Department of Land and Water
Conservation
Regulating the Clearing of Native Vegetation 20 August 2002
102 E-government Electronic Procurement of Hospital Supplies 25 September 2002
103 NSW Public Sector Outsourcing Information Technology 23 October 2002
104 Ministry for the Arts
Department of Community Services
Department of Sport and Recreation
Managing Grants 4 December 2002
105 Department of Health
Including Area Health Services and
Hospitals
Managing Hospital Waste 10 December 2002
106 State Rail Authority CityRail Passenger Security 12 February 2003
107 NSW Agriculture Implementing the Ovine Johne’s Disease
Program
26 February 2003
108 Department of Sustainable Natural
Resources
Environment Protection Authority
Protecting Our Rivers 7 May 2003
109 Department of Education and
Training
Managing Teacher Performance 14 May 2003
110 NSW Police The Police Assistance Line 4 June 2003
111 E-government Roads and Traffic Authority
Delivering Services Online
11 June 2003
112 State Rail Authority The Millennium Train Project June 2003
* Better Practice Guides
Performance Audits on our website
A list of performance audits tabled or published since March 1997, as well as those currently in progress, can be
found on our website www.audit.nsw.gov.au
If you have any problems accessing these Reports, or are seeking older Reports, please contact our Governance and
Communications Section on 9285 0155.

For further information please contact:
The Audit Office of New South Wales
THE AUDIT OFFICE
MISSION
Assisting Parliament improve
the accountability and
performance of the State
Street Address Postal Address
Level 11
234 Sussex Street GPO Box 12
SYDNEY NSW 2000 SYDNEY NSW 2001
Australia Australia

Telephone	(02) 9285 0155
Facsimile	(02) 9285 0100
Internet e-mail	www.audit.nsw.gov.au [email protected]

 

Office Hours

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Contact Officer	Stephen Horne
Director Performance Audit

+612 9285 0078
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