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INFORMED SOURCES October 2002

Network Rail – still making policy on the fly

State owned, state directed and state backed – obviously Network Rail is a private company but it needs our money – lots of it

Because Network Rail was rushed into existence back in March to solve the Railtrack administration problem, and keep Stephen Byers out of court, it is not surprising that its management team of railway novices – not meant pejoratively - has been making it up as they go along. Chief Executive Iain Coucher calls it ‘inventing Network Rail'.

Thus, when I interviewed Iain and his Chairman Ian McAllistair shortly after the launch of the company (Informed Sources May), they were adamant that they were planning to get to the end of the current Regulatory Control Period (CP2), which runs for the five years April 2001-March 2006 , with the money the Regulator had provided. They argued that an Interim Review by Rail Regulator Tom Winsor was fraught with uncertainty, so the new business would work with what it had. As I remarked at the time, I was not alone in finding this attitude incomprehensible.

More detail

On 16 August we got the most detailed run-down of Network Rail's plans for when it takes over the railway network – probably some time in October. While the plans are long on motherhood, apple pie and bien pensant platitudes, there was some significant financial information.

And guess what. An Interim Review will be requested as soon as the take-over is completed, with the aim of having the revised funding in place by March 2004 . Another non-surprise is that expenditure levels are now expected to be substantially above those allowed for by the Rail Regulator.

Table 1 shows what the Regulator determined. The original table was in 1998-99 money , which I have corrected for inflation.

Table 1

Network Rail is now budgeting to have spent £13.7 billion of what it calls ‘investment' in operation, maintenance and renewals expenditure during the first three years of CP2 to March 2004. This compares with the Regulator's expected figure of £10.34bn. Note that I have highlighted the mis-use of ‘investment' in this context. Routine tamping, like-for-like renewals and signallers wages are not investment.

When enhancements are included, Network Rail's total projected expenditure between 1 April 2001 and 31 March 2004 rises to £17.2 billion. This is 51% above the £11.4billion the Regulator allowed. Assuming this burn rate is maintained, rail infrastructure will be consuming around £5.7billion a year over the five years of CP2.

Cost increases

Given Railtrack's massive cost over runs all round, we have to treat Network Rail's figures as indicative of trends rather than budgetary certainties, Table 2 shows Railtrack's forecast expenditure, compared with the CP2 settlement, published when its finances were starting to go pear-shaped in May 2001.

Table 2 CP2 expenditure (less WCRM)

Note this table excludes WCRM expenditure which was estimated at £1.75billion at the time. As you will see below, this has been overtaken by events.

What you have to remember when evaluating these figures is that the annual income of the passenger and freight train operators is around £4.2billion. This has to pay for wages and maintenance and around a billion a year in traction and rolling stock lease rentals on top of track access charges.

Thus, if Network Rail is looking to spend £5billion a year compared to the Regulator's expected £3billion or Railtrack's last guess at £3.7billion, the Treasury is going to be seriously interested in the up-coming interim review.

Clearly, the Interim Review is essential. But equally, the Regulator has to obtain value for money for the taxpayer while allowing Network Rail to keep the railway running.

Tom Winsor's term of office expires on 4 July 2004 . Since he does not expect to be reappointed, he owes no one any favours, not least since the Government backed-down on Stephen Byers attempts' to get rid of him and conceded that the Rail Regulator is a GOOD THING after all. So expect an extremely rigorous Interim Review , devoid of an poikilothermic tendencies.

Real world

So much for money. Network Rail says it has produced a ‘detailed and comprehensive business plan' with a clear focus on the operation, maintenance and renewal of Britain 's railway.

But not that detailed. First, there will be an initial ‘eighteen month intensive programme' intended to ‘stabilise the business and analyse the costs and causes of cost overruns within Railtrack'.

At the end of the 18 months Network Rail expects to be able to ‘validate its assumptions about the true state of the rail network, assess the costs of major legacy projects (such as the West Coast Main Line) and produce robust and realistic forecasts of the level of expenditure necessary to meet its output obligations'.

Of course, during the same 18months it will be up to its neck in the Interim Review. Which is a reminder that when Network Rail says it will do things, it really means the existing Railtrack staff. After all the conquistadors didn't mine much gold or silver themselves.

Enhancements

There is encouraging news for those of use who never understood how Special Purpose Vehicles (SPV) would work, in my case even after their progenitor Sir Alastair Morton had explained the concept in words of one syllable. Network Rail will take over Railtrack's legacy projects, some of which are quiet successes, and also start implementing the enhancements identified in the SRA strategic plan.

Hurrah! Indeed, Network Rail will continue to implement ‘many enhancements'. Which seems to be eminently sensible.

But, ‘major enhancements' will be undertaken ‘principally' by SPVs through the design, build, finance and transfer of significant projects to Network Rail at pre-agreed prices. I still don't see how Welwyn Viaduct quadrupling, say, which has operational, safety and technical interfaces with the working railway could be handled as an SPV.

As for the West Coast Route Modernisation (see below) costs will be supported by the SRA through capped loans, and capped additional grants if necessary. I like the ‘if necessary'. Funding of the ‘eventual scope' of the project will be assessed as part of the interim review. Now that should be fun.

Continues.........