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INFORMED SOURCES February 2004

Winsor bounced on RAB

Sir Alastair Morton's Special Purpose Vehicle couldn't move under its own power

Just before Christmas the Strategic Rail Authority stopped work on the 2004 Strategic Plan, due to be published in January. This was no great loss since as you all know that it has been an albatross round the SRAs neck from the start.

In 2002, incoming SRA Chairman Richard Bowker made his first tactical error and instead of insisting that outgoing Chairman Sir Alastair Morton published the first Strategic Review before he left, took on Sir Alastair's gallimaufry.

Come January 2003, the boiling frogs were biting and the revised Strategic Plan was notable more for the excisions than the contents. Neither of the earlier plans included the costs of projects, but a plan published in January 2004 would have been even more meaningless because no one knows how much the railway will have to spend strategically until funding of the Interim Review is finalised and the Chancellor publishes his Comprehensive Spending Review (CSR) in July.

So, quite sensibly, publication of SP04 has been deferred until after the CSR. But when it does come out I expect it to be a new formula lo-cal, fat-free SP04 Lite. Because what most observers seem to have missed is that Sir Alastair's original vision of funding projects through privately financed Special Purpose Vehicles has evaporated.

For example, the Southern Power Up-grade had the ‘Glass Elevator' project, which would mysteriously take up all the costs in a neat financial package which was off the Government's balance sheet. ‘Chocolate Factory' might have been a more apt code name for a sticky mess in which everyone gets dirty.

Late request

From the start of the access charges review SRA had been telling the ORR that it would be setting up separate bilateral agreements to cover the enhancements in Table 1. As a result they would be outside Network Rail's Regulatory asset Base (RAB). In setting Network Rail's access charges then Regulator includes an amount to pay the return on the RAB which is also used to calculate amortisation costs.

But on 14 November, four weeks before publication of the final conclusions, the SRA told the Regulator that it had ‘encountered a number of problems' in setting up the separate deals, mainly because of budgetary constraints. And on 2 December ORR received a proposal from the SRA for transition project costs of £1,067million to be added to the RAB (Table 1).

Hang on, you may think, the costs in Table 1 only add up to around £700 million. Ah yes, but the SRA included a contingency allowance of 50%

Now given the way the Regulator's hard men have gone through the last project to be added to the RAB – the WCRM, being asked to accept a 50% contingency at five minutes to midnight did not go down well at ORR. Adding the transition projects themselves to the RAB is not the problem. But before doing so the Regulator would like the chance to go through Network Rail's expenditure forecasts to check that the projects are being delivered at efficient cost.

A week later the Regulator received an SRA report on the cost estimates for the Southern Region power Up-grade, plus details of scope, programme and risks. He was not impressed. In particular, there was no independent check of unit costs or the technical sufficiency of the proposals.

Given the ‘apparent' lack of robustess in the estimates, the very high contingency levels and the risk allocation which gives Network Rail little incentive to minimise costs, the Regulator said that normally he would not have touched the proposal with a bargepole.

Well, what he really said was in normal circumstances he would have been very reluctant to add the estimated costs of these projects to the RAB, as to do so would be inconsistent with his duty to promote efficiency and economy. But then the SRA played their ‘gotcha'.

If the transition projects don't go on the RAB, they claimed, there is a high risk that they will not be funded at all and grind to a halt. The Regulator described this scenario as ‘highly undesirable', particularly given that the HSE requires the Southern Power Up-grade to be implemented by the end of 2004 under the Mk 1 replacement regulations. Also the CTRL blockade works, already delayed, need to start in September.

So, ‘with reluctance', Mr Winsor concluded that there was ‘no alternative' to adding the transition projects to the RAB so that they could meet the required timescales, with Network Rail borrowing to finance them. However, he jibbed at taking on board the SRA's 50% contingency and the projects go into the RAB at forecast cost.

Any over or underspend will be reflected in an adjustment to the RAB at the next Periodic Review in 2009. Network Rail will have to borrow to cover any overspend.

Who blinked

In writing this I have a niggling suspicion that the Regulator blinked first, for once. Because the Mk 1 replacement deadline is an entirely arbitrary date.

It came about because when franchising started in 1995, the then Office of Passenger Rail Franchising overlooked British Rail's commitment under the Hidden Inquiry recommendations to replace all Mk 1 stock by the end of the Century. Instead it decided unilaterally that the Mk 1 fleets were fit for purpose for the first seven year franchise terms.

As the HSE later conceded, this somehow slipped under its radar and the 1999 Railway Safety Act was the result. Thus what would have been a seven or eight year programme under BR has been compressed into four years and we know that Mk 1 stock is going to run into 2005.

As the article elsewhere in this issue makes clear, some heroic efforts are being made by Network Rail to meet the deadline, while SRA has been driving down the cost and scope. But if the ‘Glass Elevator' lies in shards at the bottom of the lift shaft and the cost of the upgrade goes into the RAB, might we not be able to afford something more than the perpetuation of the 1500A railway?

Table 1

Transition project Expenditure £ millions

Continues.........

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