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INFORMED SOURCES April 2004

Interim Review – Winsor nails down funding

In the February column, we left Rail Regulator Tom Winsor having given Network Rail, the Strategic Rail Authority and the Department for Transport until 29 February to come up with a proposal that would mitigate the budget-busting increase in track access charges (TAC) in his Interim Review. And, mirabile dictum, the proposals were in by the 27 th.

Tom Winsor then had until 10 March to consider the submission and, come the day and after some brinkmanship described below, the Regulator agreed the funding proposals put forward by Network Rail for the new Control Period (CP3) starting on April 1 and issued a formal notice to train operators and Network Rail on the revised TAC.

Two issues were behind the proposals, the SRA's budget and Chancellor Gordon Brown's golden rule. The SRA's funding is updated every two years under the Comprehensive spending review which looks three years ahead. With the latest CSR underway its budget could not fund the increase in TAC in the next two years.

Spiffing wheeze

So a spiffing wheeze was developed under which Network Rail's revenue in CP3 will come from a combination of TAC (40%) and direct grants from the SRA (60%). But to avoid busting the SRA's budget, TAC will now be held at current levels for the first two years of CP3 (Table 1).

In addition to the new direct grants, the SRA is already committed to paying grants from the 2001 Periodic Review for another three years. During this period, the new and old grants run concurrently, but here comes part 2 of the spiffing wheeze.

Over the five years of CP3 the new grants and TAC will be ‘profiled'. What this means is that while Network Rail will get the full <\#163>21.5 billion revenue from the Interim Review over the five years, in each of the critical first two years there will be a revenue shortfall of around £1.5bn. a year.

Network Rail will cover the difference by increasing its borrowings by £3.14m. Roughly £ 1 billion of this new borrowing, including financing costs, will be paid back over the last three years of CP3. The rest will go onto Network Rail's Regulatory Asset Base (RAB) and earn a return in future control periods, so that Network Rail doesn't suffer.

More on the borrowing, guaranteed to make your blood boil, in a later issue.

Table 1 Network Rail funding breakdown

Table 2

Grants to Network Rail

But once the CSR is out of the way, Network Rail will receive the full amounts determined by the Regulator in a combination of access charges and grant. Track access charges increase by around £1billion a year on current levels and will represent half of Network Rail's funding, the rest coming from direct grants.

Choice –pie chart or, er chart

Table 3 Steady state funding under CP3

While he has accepted the reprofiling of income during the first two years Winsor emphasised that this is conditional on the first issue of bonds under the Network Rail's securitisation programme being completed by December 31 this year.  If this deadline is not met, there will be no reprofiling of 2005/06 income and the reprofiled income in 2004/05 will be paid back (including interest) in the form of increased grants during the remainder of the control period.

Ground rules for grants

With the increase in the proportion of Network Rail's income paid as grants designed to keep funding within the ‘Golden Rule' on public spending, two tests were applied to the Network Rail proposals.

1 The investment test. The annual capital support in the form of grants must not exceed Network Rail's capital investment - defined as renewals and enhancement expenditure.

2 The market body test. Network Rail's annual income from sales (fixed and variable track access charges plus other single till income) must cover at least 50% of operations and maintenance expenditure plus depreciation.

And that really should the last of the Interim Review. A campaign medal for all readers who stuck with this column since the first consultation document on 15 November 2002 is currently being considered.

Continues.........

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