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INFORMED SOURCES April 2005

Now it's the £6.5billion railway.

Alright you privatisation neo-cons, if this column is irredeemably negative how come it persistently underestimates the cost of the railway to the taxpayer?

On 10 February Transport Secretary Alistair Darling published details of Government spending on the railways for the next four years, up to the end of the current Regulatory Control Period 3 (CP3) on 31 March 2009 . This is the DfT's own table.

Table 1

Notes:

1 This reflects the enhancements that are directly funded on a ‘pay-as-you-go' basis by DfT/SRA, as opposed to those enhancements that are funded through Network Rail

2 Expenditure on Other includes, inter alia, support for Merseyrail, rail pensions, the British Transport Police, research and project development, as well as running costs currently incurred by the SRA

3 The above figures include funds which will be transferred to the Scottish Executive for rail spending in Scotland , details of which were provided by the Minister for Transport in his written Statement to the House on 27 January 2005 .

4 The balance between Network Grant and Government Support to Franchises is not precisely fixed and will be subject to ORR approval. The result of any ORR approval to any increased enhancement expenditure by Network Rail will be to increase their level of borrowing.

If it came out on 10 February, why wasn't it in last month's column? Well, readers have been following my attempts to work out what the railway is really costing the taxpayer (Informed Sources February 2003 and interminably et seq) will have already spotted the odd anomaly.

Private?

Now, we all know that Network Rail is an independent private sector company answerable to its 113 Members and the independent Office of Rail Regulation, but DfT does seem to have its tanks on the Euston piazza. Because in Mr Darling's statement we also got this breakdown of Network Rail's finances.

Table 2

Notes:

¹ Includes performance payments

² DfT analysis based on ORR Interim Review

3 The balance between Network Grant and Access Charges is not precisely fixed and will be subject to ORR approval. The result of any ORR approval to any increased enhancement expenditure by Network Rail will be to increase their level of borrowing.

Once again, those who followed the equally interminable saga of the Rail Regulator's Interim Review – or Access Charge Review 2003 (ACR2003) as ORR prefers to call it – will spot the odd eyebrow raising anomaly. Table 3 shows the ACR2003 settlement brought up to 2004-05 money.

Clearly some explanations are needed. For example, why does Network Rail need even more income that the billions the profligate Regulator gave the company in ACR2003? And why will Network Rail's additional borrowing – on top of current net debt of around £15billion - be double the expected amount in 2005-06? And how does the cost of franchising next year drop to around a billion next year from the £1.7billion in 2003-04?

Table 3; Interim Review regulatory settlement

Questions

So, on 10 February I fired off the first batch of clarification-seeking questions to the DfT press office. Ten days later the first lot of answers came back For once, they were not terribly helpful, generating more supplementaries than light.

What was really bugging me was that doubling of Network Rail's additional borrowing to £3.1 billion and the extra billion or so a year on Network Rail's total funding. With DfT stymied, on 1 March I put these questions to the press offices of ORR and Network Rail

Network Rail replied almost instantly saying that there was a simple explanation and chapter and verse would follow. After which radio silence.

But, within three days, the urbanely efficient David Davies in the ORR Press Office came back with a concise explanation from the Deputy Director of Economic Regulation which enabled me to complete the analysis shown in Table 4. This table uses the established format in SRA's National Rail Trends to categorise Government spending on the railways.

In Table 4, all the figures are official, except for 2004/05 which is all my own work. Well not quite all my own work.

While answering my questions on franchising costs, Paul Latham of the SRA press office pointed out some double counting in the earlier version (Informed Sources February 2005) which added a billion to the total support for 2004/05. It is a sobering thought that an error of £1billion required a correction of only 15% in the bottom line.

Table 4

* Figures for 2004-05 Informed Sources estimates

Deferred income

So, let's run through Table 4 line by line, starting at the top. In ‘Franchising' there is one anomaly and something to be explained. The anomaly is the absence of ScotRail subsidies in Mr Darling's table because these are paid by the Scottish Executive. This has been corrected with a separate line.

What needs explaining is how subsidies to TOCs fall from £1.7bn in 2003/04 to £1.26bn in 2005/06. The answer lies in the stratagem adopted to prevent the ACR2003 settlement wrecking the DfT's budget which had been established under the 2002 Comprehensive Spending Review (CSR)

CSRs are held every two years and determine expenditure for the following three years. Thus CSR 2002 ran from 2003/04 to 2005/06.

Tom Winsor 's ACR2003, which gave Network Rail an extra £7billion, came into effect of April 1 2004 . This threatened the last two years of CSR 2002, which are also the first two years of CSR 2004.

To balance the books Tom agreed that Network Rail would not get the full ACR2003 access charges and grants in the first two years of CP3, leaving Network Rail around £1.5billion a year short. Additional borrowing would make up for this deferred income (the penultimate line of Table 3). This rejigging also saw direct grants to Network Rail go up and track access charges reduced.

Hence the fall in subsidies. But from April 1 2006 , Network Rail has to be paid in full and, in Table 4, you can see that franchise payments go up by £500million and direct grants to Network Rail increase by £1 billion, restoring the missing £1.5billion a year.

Anomaly alert

These figures align with Network Rail's borrowing to cover its deferred income. But according to the DfT (Table 2), in 2005/06 the company is borrowing not £1.5billion but £3.1billion. While DfT and Network Rail had struggled with this question, ORR was swift to elucidate.

ORR believes that the DfT figures are, indeed, consistent with its  ACR2003 settlement, including the reprofiling of revenues agreed between ORR and the Government in March 2004. However, Table 3 excludes a key assumption in that settlement

In a normal Periodic Review of Access Charges, ORR adds the cost of renewals and enhancements to Network Rail's Regulatory Asset Base where they are amortised over time based on a rate of return decided by ORR and funded through the company's revenue .  However, the final conclusions of ACR2003 assumed that Network Rail would fund approximately 50% of its renewals and enhancements programme through additional borrowing.

But this supplementary funding was not included in the 'gross revenue requirement' quoted by ORR. Hence the anomaly.

Working from the numbers in the DfT statement, ORR comments ‘in practice this means that in 2005/06 Network Rail will borrow approximately £1.6bn to fund reprofiled grants and a further £1.5bn to fund the difference between ORR's allowance for amortisation (included in access charges) and Network Rail's   expected expenditure on renewals and enhancements'. Given that Network Rail is expected to underspend on renewals and enhancements by around £800 million in the current financial year, the amount it will have to borrow in 2005/06 is debatable.

How do I justify including this additional borrowing in state support for the Railway? Well, it represents income Network Rail should have received under ACR2003, but has being deferred. Thus, as a fellow searcher after truth, John Stittle of the University of Essex so elegantly describes it, the borrowings represent ‘implicit subsidies'.

CTRL

But not all is cloudy. In the past, support for the construction of the Channel tunnel Rail Link has been lumped under the heading ‘DfT (mainly CTRL)', but as you can see in Table 1 and Table 4, it is now accounted separately.

According to, DfT these payments ‘primarily reflect what Government is contracted to pay under its PPP contract with London & Continental Railways'. The timing of the grants is specified in the contract but is ‘partly dependent on construction progress'.

DfT explains that the lower figure in 2003/04 ‘reflects the completion of CTRL Section 1 in September 2003'. Grant payments for CTRL Section 2 started in 2004/05 and my figure shown in Table 5 for that year may be an underestimate.

As the Table shows, CTRL grants peak in the next two financial years. While my new convention is to exclude CTRL funding from rants about the unsustainable cost of the railways to the tax payer, it brings the total spend in the coming year to £7.86bn.

Uzbekistan

To put these total into context, the £6.47 billion support for the operational railway in 2005/06 is roughly the Gross Domestic Product of El Salvador. Add in the CTRL funding and we are talking about the GDPs of Bulgaria, Uzbekistan or Latvia and Lithuania combined.

Does Table 4 matter? I believe it does. With an election imminent, if the industry does not have a handle on its true costs, politicians will weasel to the railways' disadvantage.

And after the election the appointment of Dr Mike Mitchell as DfT's first Director General Rail suggests that the government will be seeking a substantial reduction in spending on the railways in the next Regulatory Control Period stating in April 2009.

Table 4 is the writing on the wall. Mene, mene, tekel uphasim indeed. And, as usual, here's a graph to reinforce the message.

TOC performance – perhaps ownership does matter

National Express TOCs may have the silliest names and lairiest liveries, but the operation's not bad.

  Here's a sneak preview of TOC Public Performance Measurement (PPM) figures for Period 11. As the spaghetti western title nearly goes, it's a case of the good, the not bad and the ugly.

At the top, the three star performers have one thing in common – a dedicated route, with a captive fleet. With simple operation and minimal TOC-on-TOC delays 90% plus PPM is not as exceptional as it looks.

At the bottom, the TOCs with PPMs under 80% are nearly all long distance operators. With its new, more operationally convenient timetable, SWT is climbing out of the remedial class. Southern would like a new timetable too.

In the middle, Midland Main Line, Thameslink and Silverlink all beat their MAAs by 7%. The improvement by MML and Thameslink highlights the interdependence of operators on a common route.

Thameslink benefited from the St Pancras blockade which excluded 5000 delay minutes from the Southern. This reduced TOC-on-TOC delays, which supported MMLs highly successful performance drive.

In contrast, ScotRail, First Great Western and Virgin West Coast all fell below their MAAs , by 4.9% in the case of VWC.

And then there's the question of ownership, invariably ignored when the SRA published the quarterly PPM figures. In the 80-90% band, all those TOCs above 85% are owned by National Express. First Group owns two of the three franchises with deteriorating performance and has a top MAA of 83% at FGW Link

Thus far I have assumed that it's TOC management, not ownership, that determines performance. With five National Express franchises in the top seven that assumption is being reconsidered.

Continues.........

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