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INFORMED SOURCES October 2003

Interim Review highlights renewals cost explosion (continued).

My civil engineering chums challenge some of these ‘questionable' justifications on the grounds that if you are going to have the disruption of a possession for rail renewal in a section, why not do the whole lot so that the section is homogenous and you are not coming back to the bit in the middle at odd intervals. Similarly, why not put in new ballast if you are lifting the track anyway. Nevertheless, the Regulator concludes that Network Rail should be able to save 15%-25% on track renewal expenditure by doing less work.

And for track renewals in general, the Regulator's preliminary view is that since the long term plans do not reflect the benefits of changes currently being introduced – such as increased rail grinding and improved inspection, Network Rail's projected figures do not make the ‘robust and compelling case he is looking for. Much more work will be needed, beyond the period of the Interim Review, to provide robust and reliable forecasts for the volume of track renewal needed from 2006.

Signalling – future uncertain

If anything, evaluating signalling renewals expenditure was a more difficult task than track work for two reasons. In the first two years of CP2 Railtrack and then Network Rail both under-spent the sums allowed. Now, the signalling strategy is changing.

Existing policy is to renew individual interlockings, a legacy of McKinsey's ‘Project Destiny'. In future routes will be renewed – BR style. Route-based renewal has clearly worked on WARM and will be unavoidable on Great Western.

And there is to be a long tern national signalling plan. This will combine renewals due to condition with known enhancements. The result will provide the framework and timetable for the route-based strategy.

These policy changes are reflected in Network Rail's planned expenditure. The March 2003 business Plan forecast spending on signalling renewals increasing from £254 million in the current year to £360 million in 2004/05. On the assumption that the new route-based strategy could be implemented over two years expenditure of £760 million was forecast for 2005/06.

That was a touch optimistic and the June 2003 Business Plan update assumes route based renewal is deferred for a year, cutting the 2005/06 figure by £150 million. However it is now expected that expenditure will again increase in the following years as route based renewal is implemented.

As with track renewals, LEK/Halcrow/TTCI examined signalling renewal schemes across all seven Regions for the years 2003/04-2005/06. A total of 415 renewal items were sampled. Of these 62% were fully justified and 38% partially justified on grounds of extent or scope. However, in many cases partial justification reflected the fact that the schemes had not been fully developed, leaving the extent and scope uncertain.

Overall, looking at the increase in expenditure forecast for 2005/06, the consultants consider the case for increased activity ‘much weaker'. At which point, time for query over the quality of the consultancy work.

LEK/Halcrow/TTCI identified a shortage of resources for the design, manufacture, installation and commissioning of signalling renewals and concluded that it would be premature of Network Rail to implement a new approach to renewing signalling assets in as little as two years time. They also noted that Network Rail is currently scaling back the work that it is commissioning in 2004 / 05 as a result of these shortages.

This so out of synch with the real world, where two out of the ‘big three' signalling companies have little or no new work and staff are being laid off, that it is not even wrong. The problem is not shortage of resources to cope with the work but a shortage of work to occupy design offices and factories. More about this below.

Anyway, the Regulator doubts that Network Rail can have in place either the technology or a delivery strategy for the increase in activity from 2005/06. His preliminary conclusion is that implementation of the new strategy should be delayed, saving £100 million in 2004/05 and £400 million in 2005/06.

But even then, Tom Winsor reckons hat more work is needed on the timing of the new policy. He warns that a follow up interim review may be needed in two years time.

Real stick

So much for renewals. The heavy duty criticism is reserved for maintenance, where Tom Winsor says that compared with track renewals Network Rail's knowledge is ‘poor'.

According to the Regulator, Network Rail's Business Plan is ‘largely reliant' on contractors' estimates of maintenance volumes. Future projections are based upon extrapolation of current short-term plans. He is unable to place ‘much reliance' on these figures.

His lack of confidence stems from three factors:

** There is no evidence that Network Rail has undertaken a meaningful assessment of the value for money it is receiving from its ‘contractor-driven' maintenance spending;

**Network Rail's repeated assertions that the quality of work being achieved is not always to the levels and standards that are required which must be causing inefficient spending on repeated maintenance activities;

** The lack of ‘real evidence' that long-term maintenance plans are being reduced to reflect plans for increased levels of better quality renewals.

Well yes, but this is a function of history and Tom Winsor concedes that something is being done about it. The combined impact of the New Maintenance Policy and bringing three areas in-house should lead to cost savings ‘in the coming months'. Better knowledge of what is happening on site will reduce the amount of maintenance work needed. The scale of these savings should be identified in the Draft conclusions.

Table 5 summarises how much could be saved by doing less work. Now we move on to cutting the cost of that work.

Table 5: The Regulator's emerging conclusions on possible savings from Network Rail's March 2003 business plan resulting from reduced activity levels

Note : all figures in this table exclude possible savings on the West Coast route modernisation project.

Benchmarking

ORR's second approach to identifying cost savings was benchmarking costs. The Periodic Review estimated cost savings in CP2 of 17% but Network Rail's Business Plan implies a 30-40% increase in unit costs over the same period. The Regulator concludes that Network Rail has greater scope to improve efficiency and at a faster rate than presently planned.

LEK benchmarked performance between the seven Network Rail Regions. This showed what the Regulator describes as ‘very significant differences' in the costs of common activities, including operating expenditure. Note in Table 6 that the magnitude of the estimated savings is similar across all the maintenance activities studied.

Table 6 : L.E.K.'s estimates of potential cost savings

Source : L.E.K.

Consultants Accenture separately analysed Network Rail's procurement arrangements. The study identified seven main areas where the company ‘falls well short' of best practice.

These include the inability to specify and quantify accurately the work needing to be done by contractors. This is then compounded by changes to standards, scope and specifications after a contract has been let, plus job cancellations and adjustments. And Accenture confirms what we all knew – that risk allocation is a powerful cost inflator as those involved in a scheme duplicate contingency and mitigation costs.

Interestingly Accenture suggest that a return to centralised procurement, BR-style, could reduce costs. Readers who remember this column's trenchant critiques of BR procurement in the 1980s may think this a golden age too far – or an indication of how desperate the situation has become.

Management of suppliers, or rather the lack of, is also criticised. ‘Insufficient effort is going into helping contractors improve the quality of work and lower costs over time', says Accenture. Talk about déjà vu.

Overall, Accenture estimates that correcting these shortcomings should give costs savings of around 18%

Summarising this work, the Regulator reckons that adopting internal best practice across all regions would show savings of 11-21%. External bench marking suggests possible cost reductions of 18-20% across all expenditure.

In total, the Regulator considers that Network Rail should be able to achieve efficiency savings on OMR of 30%. But, he warns, this is a ‘conservative' estimate sing Regional benchmarking alone could justify almost two thirds of the savings.

30% off

This 30% saving on £6 billion backs Tom Winsor 's expectation that Network Rail's annual OMR costs will be down to £4billion in the final year of CP3 (2008/09) (Informed Sources September). But it will be 40% up on Railtrack's total OMR Spend in 1999/2000 of £2.8 billion which was in turn 50% above BR's spend a decade earlier.

Since the Railtrack figure already included most of the factors which drove up costs in the 1990s, the Regulator is hopefully right to believe that a 30% cut is a starting point for efficiency savings rather than an objective. Even getting down to £3.5 billion would still be double BR's in a really good year. The big question is whether the Regulatory Board which replaces Tom Winson on 5 July next year will have the ability or will to maintain the downward pressure.

Meanwhile, 30% savings cannot be implemented overnight which means that Network Rail will still need to spend substantially more in the next two years that the £3 billion a year allowed in CP2. Cutting back the scope of work and deferring expenditure will help but it is likely that the Treasury will have to find an extra £1.5billion in 2004/05 for the railway just to stand still.

Which brings us to the SRA's role in the Interim Review.

Continues.........

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