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Beeching in 1963, Serpell in 1983 – is there a 20 year cycle here?
Here's a controversial thought. Tom Winsor is all that stands between the railway and the worst of both worlds.
Consider. In the old world British Rail was a highly cost effective state railway which, through long and bitter experience, had become adept at managing through the swings of the economic cycle.
When the bad times rolled, the mother railway was protected. When the Treasury was more expansive, the money was spent swiftly.
Privatisation was supposed to stop boom and bust. Franchising meant that the passenger subsidy was guaranteed.
In the case of the infrastructure owner, Railtrack's defence against political expediency was the independent Rail Regulator. One of his jobs was to determine how much money Railtrack needed. And what the Regulator determined the Treasury, had to pay.
If it were not so, no one would lend Railtrack any money. Or they would make lending extremely expensive to cover the risk that their borrower might have its income cut.
Of course, circumstances change, so every five years, the Regulator would reviews the infrastructure owner's funding and determine the appropriate level for the next five year Control Period. CP2 started on 1 April 2001 .
As last month's analysis showed, the railway is going through the mother of all financial crises. As we know this is largely down to Railtrack.
Hatfield, in October 2000, pretty well coincided with the publication of the final conclusions of the Regulator's Periodic Review. Even before CP2 began, it was clear more money would be needed.
Now Network Rail has taken over this legacy of serial over-spending. Since in the year now ending, the company will lose £1.8billion (Informed Sources March) Network Rail is indeed living well beyond the roundly £15billion that Rail Regulator Tom Winsor allowed for CP2.
If this burn rate continued, Network Rail would need an extra £10billion over the five years. That is clearly untenable. In a tour de force at the February Fourth Friday Club meeting SRA Chairman Richard Bowker explained with great clarity the scale of the problem.
There are only two sources of income for the railway – the farebox and subsidy from the taxpayer. The return on private sector investment still has to be paid for from this basic pot.
In crude terms, over the 10 Year Transport Plan (2001-2011) the fare box yields £55billion and the Taxpayer £33billion. So, if over the first five years Network Rail really needs £10billion more than the Regulator allowed we have a problem.
However, within the five-year control periods, there is provision for Interim Reviews. And, despite having assured me a year ago that an interim review would not be needed, Network Rail now has the begging bowl out.
Enter Tom Winsor, whose actions are driven by duty when it comes to Network Rail. He has a duty not to make it unduly difficult for any holder of a network licence to finance any activity or proposed activity. And that includes Network Rail.
"The fact that Network Rail is spending at rates Rail Regulator Tom Winsor |
But while what Tom Winsor decides Network Rail deserves, Network Rail gets, Gordon Brown not withstanding, that does not mean forking out the bawbees on demand: there is a vital caveat. In making his determination Tom has to decide how much an efficient network owner would need. I am sure you have spotted the tautology in the case of Network Rail.
In addition to his duties under the Railways Act, the Rail Regulator has been given statutory guidance by the Secretary of State for Transport. This guidance recognises that the Regulator's Statutory duties could lead him to conclusions which might cause the SRA to incur expenditure ‘which is not provided for it its strategy or which is beyond the resources allocated to it'.
Tom Winsor's Boiling Frog Task Force is currently going through Network Rail's claimed cost base like Sherman through Georgia . But even so, there is no way costs can be brought under control quickly.
Which is where things get really interesting, since more money for Network Rail is almost certainly unavoidable. Back to the Guidance, which effectively says that in such an event the Regulator really ought to have a word with the SRA first and let it know the likely damage. He should also give the SRA time to either try and change his mind, change its strategies or get some more money.
Which is where we come to Appendix A of The interim review of track access charges: second consultation paper: the incentive and financial framework. Tucked away on Page 78 of the 112 page document, Appendix A has the eye-catching title Statutory framework for access charges reviews.
| Appendix A was the subject of my five minute introduction at the February Fourth Friday Club and at the end I asked if anyone had read it. Only one hand went up and my old chum Bob Goundry won a Fabulous Frogs calendar for his erudition. |
What appendix A does is lay down the background to and ground rules for the implementation of the Rail Regulator's guidance. So there is lots of ‘see you Jimmie' just to make sure everyone knows who's boss.
Then, six pages in, we get this agenda for Tom Winsor's meeting with the SRA and the Government in the likely event that ‘although (track access) charges should be set on the basis that Network Rail will be operating to the greatest competence and efficiency which can reasonably be demanded of it, the amount allowed in the SRA's existing budget would be insufficient'.
What the three parties will have to decide is the scope for:
(a) changes to the profile of the annual volumes of maintenance and renewal, with some work deferred to later years;
(b) changes to the profile of the charges to be paid for maintenance, renewal and amortisation, with payment deferred until later years. The temporary gap would be covered by increasing Network Rail's borrowings
(c) reductions in what Network Rail is required to deliver. This could range from line closures or cuts in the quality or capability of the network, effectively reducing capacity, to less intensive operation.
(d) additional funding from Government to SRA;
(e) A combination of these four options.
Yet more déjà vu. Let's unpick this time-bomb carefully.
Option (a) assume that thee Regulator concludes that Network Rail's maintenance and renewal expenditure, currently ‘running at unprecedented levels', reflects ‘unjustifiable and major inefficiencies'. Paying these prices means that each job bleeds Richard Bowker's precious funds unnecessarily.
‘Until Network Rail has got better control over the legacy it has inherited from Railtrack, the most appropriate thing to do may be to reduce the level Tom Winsor |
To prevent this waste Network Rail could be instructed to cut back its expected work programme until it has achieved the ‘significantly improved levels of asset knowledge and efficiency and economy of network operations' that Tom is looking for. But the Regulator would have to demonstrate that the deferment of work would be consistent with his statutory duties including those relating to long-term sustainability.
In other words, any short term cut-backs to protect the SRA's budget must not prejudice the long term performance of the railway. Which leads to the next option
What if the Regulator concludes that the planned maintenance and renewal expenditure is essential to the long-term sustainability of the network, but still too much for the SRA's budget?
Under Option (b) Network Rail does the planned maintenance and renewal work but doesn't get all the additional money it needs straight away. Instead it increases its borrowings to cover the gap between what Tom says it needs for this work and Richard can afford to pay.
These loans are repaid through higher access charges (or network grants) later in the Control Period. However, the Treasury would still have to back the additional borrowing.
Under Option (c), Network Rail doesn't get the extra money, but is allowed to cut back the ‘extent, quality or capability of the network, or the intensity of its use' to match the funding available. This is the doomsday scenario, the nuclear option
For ‘extent' read line closures. For ‘quality' read ride standards and line speed reductions. For ‘capability' read lower maximum axle loads; And for ‘intensity of use' read simplified signaling and perhaps singling of lightly used routes.
This has massive consequences.
Such reductions would affect the underlying access contracts which are the subject of the access charges in the interim review. If an operator can run fewer trains the access charges are reduced – but perhaps the savings to Network Rail might be greater. Freight and open access passenger contracts could also be affected.
Tom Winsor would thus have to accept a lower level of performance from Network Rail under the changed access contracts than at present. His overall requirements for Network Rail stewardship of the railway might also have to be modified
Were contracts between franchised TOCs and Network Rail be changed, the SRA would have to downgrade train operators' obligations in their franchise agreements. SRA could do this through a combination of statutory changes to Passenger Service Requirements and negotiation.
Franchisees would then have to negotiate reductions in the corresponding obligations in their contracts with Network Rail. Since Network Rail is legally a private company, it would have to agree to the reductions in Operations Maintenance and Renewal that were being imposed.
Finally, open access passenger and freight operators would have to be persuaded by SRA to negotiate a reduction of Network Rail's obligations in their access agreements. This would not go down well with the hard-nosed freight operators.
Supposing the first three options come under the politically ‘too difficult category'. Or that things are so dire that they don't save enough money. Then, under Option (d) the SRA ha to seeks additional funding from the Department of Transport under Schedule 14 to the Transport Act 2000.
What seems more likely is that we will get a mix of all four options, with Option (e) represent the usual political expediency. Here the big concern, at least for readers of this magazine, is that there is no one who will fight and scheme to protect the basic railway.