Return to Archive -by date - by topic.
Having bottled in 2000 and 2002 will the Government really take hard decisions to cut the railway's costs when the next Review starts?
Remember how we all sniggered when Tom monotonously kept on reminding Mr Darling that he must not break his commitments to protect the interests of private investors made to Parliament on 19 January this year. I mean, who expects a Government to keep an inconvenient promise?
But when Mr Darling published the White Paper it did indeed confirm that the Interim Review determination of Network Rail's expenditure between now and March 31 2009 will be respected to protect the interests of private sector investors. And there is a powerful incentive to stick to this commitment. If it were not kept, ‘Tom would come back and haunt me again' Mr Darling explained.
There is, however, one get-out clause: the White Paper warns that ‘if there were an increase in railway costs which was so large as to trigger an interim review', the Government would define new outputs. This seems unlikely but we should watch that the Office of Rail Regulation's (ORR) planned interim review of signalling costs does not get hijacked.
Central to the white paper is a ‘new' process for Periodic Reviews. Unfortunately for the taxpayer it is the same process that the Government could have applied during the Rail Regulator's 1999 Periodic Review – which increased Track Access Charges from April 2001, an again in the 2003 Periodic Review requested by Network Rail.
In both of these Reviews Tom Winsor is clear that he asked the government early on whether it wished to change the specified level of rail services which determined costs. This was, after all, one of his duties. And it is what the Water Regulator did over funding for environmental improvements in 1989 and 1994.
According to Tom there was ‘radio silence' on the issue. Tasked with this charge at the White Paper press conference Alistair Darling demurred. ‘I don't think it is actually true that we didn't say exactly what it was we wanted' he said.
Now that is a pretty convoluted sentence. To understand it we have to go back to the summer of 2003, when, late in the Interim Review Process the SRA produced a Statement of Network Outputs (SNO) (Informed Sources October 2003)
SRA proposed cutting Network Rail's costs through lower maintenance standards on secondary and freight lines. This option was rejected by the Regulator.
A second version was prepared aimed at freezing Network Rail's expenditure. According to Mr Winsor, this would have required a 25% cut in the size of the Network, a 25% cut in train services on the remaining network, an 80 per cent cut in renewals, burgeoning speed restrictions and year on year fares increases of 6%.
All parties concerned in the Interim Review, including the DfT and Treasury, knew about this procrustean proposal and accepted that such a radical prescription was politically unacceptable. SRA was told not to present the document to ORR formally and radio silence was maintained.
So Mr Darling's weaselling is sort-of true. In line with his double negatives, it is what the Government didn't let SRA say that told the Regulator that the Government would pay the cost of the Interim Review.
Of course, radio silence also left the Government free to blame the unelected Regulator for the outcome of its pusillanimity. For example the White paper bewails ‘a regulatory system and contractual structure which do not give the government direct control of the level of public funding for the railways'. Total tosh, of course.
What has happened to date is that the ORR in carrying out reviews of access charges has had to determine both Network Rail's outputs for the operation of the rail network, and for its maintenance and renewal (OMR), and the price that should be paid for them, in the light of its statutory duties. The Government has then had to deal with the consequences for the other parts of the rail budget and wider transport expenditure programmes, as well as, if necessary, for other government spending plans.
Extract from ‘The future of rail' White Paper on the role of Government
Not that the Government is against Regulation. Oh no. According to the White paper, ‘One of the benefits of independent economic regulation of the railway industry is that it protects the rights of investors by ensuring that the railway receives an appropriate level of funding for the outputs it is required to deliver. This benefit must be retained'.
How will the Government apply its ‘new' direct control to the next Periodic Review? First, it will have to determine how much money will be available for rail during the new Control Period (CP4) ‘bearing in mind the resources available within its fixed transport budget'. Given that CP4 starts on 1 April 2009 and allowing two years for an Interim Review, the ‘proposed funding levels' will need to be determined during the second half of 2006. Conveniently, the next Comprehensive Spending Review (CSR), which will cover the three years to 2009-2010, is due in mid 2006. Next, Government will discuss privately with the ORR ‘options for what the railways might deliver'. Then, probably early in 2007 and amid a blizzard of lobbying and closure scare stories, ORR will come back with the expected cost for each option.
Having chosen its preferred option Government will published it as formal guidance to ORR. On the basis of this Statement of Required Outputs, ORR will determine, ‘precisely and definitively', Network Rail's income ‘over the years that (the Review) covers'. What if the Review throws up costs which differ significantly from those forecast at the start of the process? Then Government would be able to revise its Statement of Required Outputs. Radio silence will no longer be an option. |
Finally, when the review is completed, (say December 2008) the statement of required outputs on which it was based will become the ‘Statement of Reasonable Requirements' for the purposes of Network Rail's licence. It thus becomes binding on Network Rail and the ORR is be obliged to enforce it.
Well that sounds straightforward, until you remembers the TOCs and the Franchise owners. Where do they fit into the iteration?
Supposing that to get costs down the Government decides to change the frequency or stopping pattern of some services. As we know from the West Coast and Cross Country experience, changing one service pattern can mean rewriting the timetable for all TOCs and FOCs on a route.
But the train operators' business plans for what could be recently let seven year franchises are based on the existing timetable. Change service frequencies and you might wreck income forecasts or leave an operator leasing too many trains, or even the wrong type of train, or even not having a service to run at all.
So how does the DfT make franchises flexible enough to cope with the new process? Do we, perhaps, have to align franchise terms with control periods?
Nor is the White Paper clear on the length of future control periods. Could the current five year review cycle be changed? In the 1980s BR tended to be given three year financial targets and I could see the Treasury and DfT wanting to align Review periods with the three year CSR rounds.
But then what happens to franchises? All the White Paper says is that franchise contracts will be aligned with the government's ‘binding arrangements' with Network Rail and that changes to one may require changes to the other. ORR may have to act as arbitrator in this event.
If the new process is to work, replacement franchises will have to be made more flexible – with the DfT, as franchisor, having the right to tell TOCs to cut back or stop running services and give up access rights. Will anyone take revenue risk under this new regime?
So the new process is best described as ‘status quo plus'. The Government becomes an informed customer since it has to specify what it wants within the funding available. And ORR not only prices these aspiration, but when a deal has been brokered enforces both delivery by Network Rail and payment by the state. It also monitors performance for the Government
According to the White Paper this new arrangement ‘will also ensure that the Government is better placed to make choices between operational and infrastructure priorities'. Hmm, I'll come back to that when I have worked out a credible scenario involving such a choice.
Also vague is what happens if, during the control period, Network Rail and the train companies can improve efficiency and reduce costs. The White Paper says that the money saved ‘will be available for further investment'.
Now the TOCs don't own anything and under the new scheme of things will own even less so what do they invest in? Will profit sharing, as in the most recent franchises, be extended? Network Rail is already committed to ploughing ‘profits' back – after directors bonuses have been paid, of course.
That assumes an upside. The downside is that if costs were to increase to an extent which triggered an interim review the resulting re-specification would cover outputs for both track and train. In other words it doesn't matter whether Network Rail or the TOCs screw up, everyone gets purged.
As the White Paper puts it ‘This will reinforce Network Rail's accountability to the industry through its membership structure, as if it fails to deliver on cost control it will be the whole industry which feels the effects'. Now that really should encourage new entrants to the franchise market. ]
Overall, it is clear is that the size and scope of the future railway depends critically on progress with getting costs back to acceptable levels over the next 30 months. Only if Network Rail is beating its efficiency targets handsomely when the next review starts, then cuts on the scale of the ‘doomsday SNO' will be avoided.