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INFORMED SOURCES October 2005

How much should the railway cost?

How about £1.5billion less?

After a figures-free Informed Sources over the Summer, it's time to ask the ultimate question – how much should a halfway decent railway cost the taxpayer? Let's start with the upper and lower limits.

At the peak of the last economic cycle, British Rail cost £1billion at 2005 prices. And, as our old friend Table 1 shows, when the fudge over track access charges in the 2003 Interim Review ends next year support will total £5.33billion falling to £4.57 billion in 2007-08, the last year of the current Control Period.

So the answer lies somewhere between the two and thanks to Graham Dalton, Director of Projects in the new DfT Rail, we know roughly where. During a presentation to the Railway Engineer's Forum on 14 June he suggested that the Treasury was looking to reduce the subsidy for the railways to something between £3 billion and £3.5 billion.

Table 1

Source: RBI analysis using official data

Later on in this column is an analysis of the Periodic Review just starting. And compared with previous reviews it will take into account the cost of franchised train operators as well as Network Rail's income.

Central to the Review is the High Level Output Statement (HLOS) and, according to Mr Dalton, the message in the HLOS will be ‘there's a budget set for rail and we've all got to work within it'. That budget will presumably be in the £3-3.5 billion range which would ‘calm them (the Treasury) down'.

Assuming the lower figure quoted by Mr Dalton, to calm down the Chancellor annual support for the railway will have to be reduced by about £1.5 billion a year over the next Control Period (CP4) which runs from April 2009 to March 2014. Where will the savings come from?

Now, because the HLOS covers the whole industry, the cost reductions must come from Network Rail and the TOCs. And some will produce a multiple benefit.

At one extreme, if you close a line, you save the subsidy to the operator, the lease rentals for the rolling stock and the cost of maintenance and renewal. In other cases the savings could come from more efficiency or lower subsidy through increase revenue from higher fares and, hopefully, ridership growth.

Raising a wet finger to the breeze, I reckon that the savings could be split two thirds Network Rail, one third from the TOCs. In which case the Periodic Review will need to take a further £1 billion from Network Rail's budget.

Chart 1 shows the income determined for Railtrack and then Network Rail in the three control periods since the privatisation of Railtrack in 1996, plus the projected reduction needed to cut costs by £1billion.

As you can see, in the post privation euphoria, when BR was assumed to be, in John Major's words ‘deeply inefficient, it was assumed that track access charges would fall reflecting a steady reduction in maintenance costs. When this was proved to be an illusion the Regulator increased the income during CP2, but it was too late.

CP3 shows what Hatfield cost the railway and also Network Rail's drive to get costs back under control. My projection for CP4, shown in grey, takes out £1 billion over five years.

Risking information overload I have added the red trend line which may, or may not, be a red herring. It could suggest that if Hatfield had not happened, and costs had kept rising in line with increasing traffic, then we could have been looking at a similar end result to my downwards project.

This chart highlights the supertanker syndrome faced by DfT and the Tresaury, it takes time to cust railway costs. Assuming even the projected rapid reduction were to be possible, Network Rail's total income for CP4 would be £18.8 billion compared with £22.6 billion for CP3.

And there is still the question of how cut subsidy to the franchised passenger railway by £500 million between 2009 and 2014. Not to mention the overriding question of what sort of railway we will get for £3 billion a year.

Continues.........