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INFORMED SOURCES March 2002

Strategic Plan Valued at £25bn

Don't worry in the numbers in the various plans don't add up – they're not meant to

Readers may have wondered why there was nothing about the Strategic Rail Authority's Strategic Plan in last month's column. Well, it's like this.

Were Informed Sources so naff as to have a mission statement it would probably state ‘To inform, enlighten and amuse'. Since the Strategic Plan is short on useful information and it soon became clear that I did not understand it's relationship to the Government's 10 Year Transport Plan and it is not exactly a barrel of laughs, anything I wrote would have failed on all counts.

So as soon as the February column was on the Editor's screen and I had finished my presentation for the Institute of Railway Operators (thanks for an interesting evening chaps – I learned a lot) I spent a brain stretching couple of days getting my head round the Strategic Plan.

Table 1

Costing the dream

First, I had to fill in the missing information, in particular the lack of numbers with pound signs in front. Immediately complication set in. The plan has a list of ‘Major Priority Investment Projects' and a bar chart of ‘Major projects – Indicative Timescales'. You might think that the bar chart would have the projects in the same order as the list. Oh come on, this is the SRA

So Table 1 combines the two. I have also inserted the missing costs. These should be regarded as only indicative. For example, Thameslink 2000 was definitely £2bn at the last official count. But after I had completed the Table an Informed Source suggested that it was now regarded as a £3bn project.

Similarly, the only price I could find for the Felixstowe-Nuneaton freight upgrade was in a two year old Network Management Statement so I applied a ford Factor of 2 times. And the cost of the East Coast Main Line upgrade is the last quoted figure.

When I asked SRA Chairman Richard Bowker how they could cost the Plan when the ECML, for example, was up in the air, he replied ‘we have made some assumptions, as one always has to do on these kind of things and on the ECML upgrade we are in the process of reviewing what the scope and outputs need to be'.

That sounded ominous. ‘Was the SRA descoping the project to match the funds available', I asked? Bowker denied that this was the case but added that ‘some elements' of the ECML upgrade as perhaps ‘overly ambitious'. ‘It may be that a significant amount of benefit can be achieved by a different approach to the project' he amplified. That still sounds ominous.

Plan v Plan

Now we come to the even more brain stretching bit, how the numbers in the Strategic Plan relate to the numbers in the Government's 10 Year Transport Plan. The short answer is that they don't, but you are not going to get off that lightly.

When I asked Bowker for the cost of the projects in the bar chart in the Strategic plan he said ‘£26bn of the £33.5bn public money (in the 10 year plan) is there to finish off the projects we are already committed to and very importantly to preserve and maintain the services that already exist, particularly for example in the regional networks where the cost of supporting those is significantly higher. We have made provision to continue to support those and talk of Beeching Mk 2 are the result of an extremely active but ultimately misinformed imagination. We will continue to support them and that takes a lot of the public money. The rest is designed to provide the basis for the enhancements in that table. The public sector component of the upgrade and enhancements is about £7.5bn - the difference between 26 and 33.5. On top of that we need to bring in a lot of private sector investment – and the 7.5 levers in around 3:1'.

Table 2

*Announced with Strategic Plan

Source DTLR

Well tha was as clear as mud. Table 2 shows the Rail component of the 10 Year Plan and those who like to check my maths will have noticed that the grand total is £3bn short. This is because £3bn of the subsidy is expected to fund private sector investment, for example through rolling stock rental charges, and thus it has been taken off the grand total to avoid accusations of double counting.

But since Richard Bowker used the figure of £33.5bn, so will I.

Renewals

Now the first thing to note is that the projects in the Table exclude Railtrack's renewals, which also have to be funded, and also the renewal of traction and rolling stock as it becomes life expired. In this sense, we ought to knock Mk 1 stock replacement off the list of commitments since it is really renewal rather than enhancement.

Renewals are paid for through track access charges and rolling stock lease rentals and, where these costs cannot be met through the farebox the SRA provides additional subsidy. For example, it is going to cost more to lease a new electric multiple unit compared with a Mk 1 unit and the extra is no doubt reflected in business plans subsidy profiles.

Similarly, the Rail Regulator in his Periodic Review has funded Railtrack's expected renewals. In the first Control Period, renewals were covered entirely by Track Access Charges paid by the TOCS.

For the new Control Period (CP2) which started in April 2001, the SRA decided to hold track access charges constant and is paying £4bn of the Regulators determination as direct grants to Railtrack over the five years of CP1. Another £1.5bn was subsequently brought forward as direct payments and, most recently, Railtrack was awarded a further £400m over the five years to compensate for the halving of freight track access charges by the Regulator.

Thus, during the 10 year plan, which conveniently covers CP2 and CP3, finance will have to be raised to fund enhancements as well as renewals. Railtrack is still developing a five year financial plan to take the company out of administration and is likely to go back to the Regulator for an interim review which will require more public funding. However, I reckon that a fair guesstimate for routine renewals of infrastructure is around £12-14bn over the period of the Plan.

£40bn plus

So if you add renewals to the enhancements and upgrades in the Strategic Plan, the Railway Industry is looking to spend over £40billion during the 10 year plan. Say £4bn a year and you have the total annual income of the passenger ands freight railway, before grants and subsidies of around £1.5bn a year. Already, doubts are being expressed, notably by the Railway Forum, about the ability of this turnover to support the forecast levels of expenditure.

Table 3

*Upgrades which may be covered by SPV and may include new trains

Source:Informed Sources Analysis

Where is the money expected to come from? Well, as Richard Bowker explained, £26bn of the public money for railways in the 10 year plan would ‘finish off' existing projects and cover subsidies, particularly to the regional franchises.

Here we go again

At current subsidy levels the Regional franchises alone would require around 9bn of subsidy over the 10 years. The SRA hopes that competition for the provincial franchises, notable the new Northern franchises will bring new efficiencies and cut subsidy.

This really made my jaw drop. The reason why Prism, MTL, Northern Western and Arriva have run into problems is that there was dot.com bubble style bidding for the last franchises with grossly optimistic forecasts of cost savings.

When I pointed out to Richard Bowker that this talk of competition suggested that, like the Bourbons the SRA had forgotten nothing and learnt nothing since the first bidding round, he claimed at that this time bidders would be happy with the deal. Yes, but, I was there the first time round and all the successful bidders were delighted with their deals.

But I digress. Back to where the money comes from' Richard Bowker told me that the public sector component of the upgrades and enhancement in the plan was £7.5bn. This is confirmed by my breakdown in Table 3

But he also identified this £7.5bn as the difference between the total public expenditure and the £26bn which he had already described as the SRA's budget for subsidies and completion of existing projects. He added that this £7.5bn would ‘lever in' £16bn private sector investment in infrastructure plus £7bn for new trains.

But as already explained, public sector investment has nothing to do with new trains, since these are funded by the Rolling Stock Companies and paid for on the ‘never never', as my mother used to describe hire purchase, through a mixture of revenue and subsidy over 20 or 20 years.

Bowker's figure of £7bn for the new trains equates train operating companies ROSCO forecasts of 8000 vehicles over the next 10 years, of which 5,000 would be renewal and 3,000 capacity enhancement and growth builds. As already noted, except for the Mk 1 stock replacements, the £7bn of new trains' does not appear in the SRA's list of committed enhancements. In table 1 I have included known new rolling stock for current upgrades.

Note too, that the £16bn of infrastructure ‘levered in', is similar to my estimate of renewals and the £16bn of funding that Railtrack was expected to raise over the 10 years of the Plan.

My theory is that two unrelated sums of £7.5bn are causing confusion. There is the £7.5bn in Table 3 which has little leverage effect and essentially covers state support funding for the West Coast Route Modernisation and the Channel Tunnel Rail Link. And another £7.5bn is in the subsidy total and pays the return on train rentals and renewals funded through access charges.

Table 4

Railway funding 2001-2010 (£bn)

*Renewals funded during the 10 year period by <\#163> 7<\#225>5bn within subsidy

Table 4 is my attempt to make it all add up. That it doesn't quite is down to two factors. First, the SRA tell me that the Strategic Plan was not created within the same definitions as the 10 Year Plan so there is no point in trying to compare the breakdowns. Second, the big enhancement projects in Table 1 will be funded as SPVs which are based on 20 year deals or longer so that the subsidies, grants and projects in the Strategic Plan are not self contained within the 10 year period.

Big money

But there is one issue I ought to flag up. That £35bn of private sector money will have to be raised during the 10 years and 11 of those 120 months have already gone. Funding the Strategic Plan is going to mean raising £300million a month or so every month between now and the end of the Plan.

Every month that passes increases the monthly sum to be raised and it is hard to see how SPVs can sensibly be launched until Railtrack is out of administration. Richard Bowker is going to need all his city contacts to achieve a burn rate of that magnitude.

Continues.........