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INFORMED SOURCES November 2006

Railway funding becoming even more opaque

Large chunks of the taxpayers money are disappearing into the glens and valleys

A merchant banker once told me that the most sought after new recruits were women engineering graduates from Hong Kong . When it comes to keeping track of how much the railway is costing Modern Railways readers have to make do with a bloke from Rugby College of Engineering Technology with an HNC.

But at least my engineering training taught me the value of being approximately right as opposed to precisely wrong. And it is in this spirit that I return to the increasingly opaque subject of public funding for the railways.

What should concern us all is the way DfT Rail is finding ways of taking money going into National Rail off it's books. That and the tendency to refer to all and any expenditure as ‘investment'.

To digress briefly, when the Silverlink franchise was extended in August the first sentence of the DfT Rail press release read, ‘ The Department for Transport today confirmed that Silverlink's train franchise will be extended from 15 October 2006 to 11 November 2007 . There will be an investment of £97 million in services'.

Of course, they meant subsidy. According to Informed Sources the original, and truthful ‘S' word was changed to the ‘I' word at Ministerial request just before the announcement was made.

Weasels

This underlines the fact that we are dealing with a pack of weasels when it comes to railway funding, but then you all knew that anyway. Thus when the Government published a new set of figures on funding for the railways earlier this year I ran a precautionary check against my long standing data base. Surprise, surprise, I couldn't reconcile the figures.

So what I did was combine my data base with the DfT figures in a single table. This proved to be a highly effective weasel trap and I print it below.

For clarity, I have shown the DfT figures in red. And the notes are those provided for the DfT figures.

As you will see, the Table covers the five years of the current Regulatory Control Period (CP3), which ends on 31 March 2009 , plus the last year of CP2. This helps illustrate the effect of the Rail Regulator's 2003 Access Charge Review which established Network Rail's funding.

Table 1 Support for the Railway

All figures £ million

Ford 2004-05 prices

DfT (in red) cash prices

* Informed Sources estimate

Notes to DfT figures shown in red

1) Figures include funding of the Scottish franchise. On 1 April 2005 , the Scottish Executive took over the DfT's responsibility for providing grant to fund that franchise.

2) Figure includes £700 million paid directly to Train Operating Companies that was subsequently deemed to be in respect of capital investment undertaken by Network Rail.

3) Responsibility for the payment of Freight Grants transferred from the SRA to Logistics Division in DfT on 26 June 2005 . The figure in this table shows spending by the SRA prior to that transfer.

4) From 2006-07 onwards responsibility for paying grants to Network Rail for the rail network in Scotland has been transferred to Scottish Ministers. Spending plans in this table from 2006-07 onwards are in respect of the English and Welsh elements of the railway.

5) From 2006-07, responsibility for making payments for franchised rail services in Wales transferred to the Welsh Assembly Government. Spending plans in this table from 2006-07 onwards in respect of direct support for passenger rail services are in respect of services operating in England .

Expediency

Bedevilling this type of analysis is the changing structure of Network Rail's funding. Or, in the first two years of the Control Period, partial funding.

To reduce the impact of his increased access charges on Government finances, Rail Regulator Tom Winsor agreed that in the first two years of CP3 (2004-05 and 2005-06) Network Rail would not receive its full grant. Instead Network Rail would borrow to cover the difference – roughly £1.5 billion a year - with access charges ‘profiled' over the rest of the Control Period to make up the difference. Thus, I always include Network Rail's borrowings in these two years to give the true value of the support needed by the railway.

However, from the current year (2006-07) the shortfall has virtually disappeared. But my total is still around £1 billion more than DfT's own estimate.

Devolution

Time to read the notes. With devolution, franchising support for Scotland and Wales comes off Central Government's books. Also the Scottish Parliament takes over responsibility for Network Rail's grants. These are shown separately in my figures.

Responsibility for freight grants, what there are of them, has been transferred to another Division within DfT and thus do not appear in the DfT Rail budget. Also in there somewhere, is the Minimum Usage Charge to Eurotunnel, which ends from 30 November this year.

If you add up these lost millions, the correlation between ‘my' and DfT Rail's totals for 2007-08 is close. Understanding this year is important for two reasons.

First, it marks the start of what can be called the new ‘steady state railway', with the Channel Tunnel Rail Link completed. Second it is the year in which we have the Treasury's Comprehensive Spending Review (CSR) and DfT Rail publishes the High Level Output Specification (HLOS) with the associated Statement of Funds Available (SoFA) as part of the current Periodic Review.

So the starting point for the SoFA will be the £5billion a year railway, less the cost savings the Office of Rail Regulation reckons Network Rail can achieve, less any premium payments in the East and West Midlands and New Cross Country franchises and a renegotiated Virgin West Coast, less any cuts the CSR imposes in the Transport Budget.

Meanwhile, at the Railfreight Group's Annual Policy Meeting in September, Mark Lambirth, DfT Rail's Director of Rail Strategy & Finance showed this chart of cash flow in the industry. The totals are around £10 billion on each side, which correlates with my £5billion railway.

Chart 1

Railway industry funding and expenditure

Source: DfT Rail

Note that the ‘HLOS' category is the additional spending needed to meet the reliability and capacity targets yet to be specified. And the incremental OMR (Operations Maintenance & Renewal) is the cost to Network Rail of its freight traffic.

Note, too, that Freight Track Access Charges ( TAC ) matches the incremental OMR. As this column has reported the Office of Rail Regulation thinks that Freight TAC are too low. But Network Rail already has some of the highest charges in Europe at Euros3.3/train km. France is Euros 0.9, Italy is around Euros 2.0 and Germany Euros 2.5. These figures come from a study sponsored by the European conference of Transport Ministers.

Something else Mr Lambirth said caught my attention. Infrastructure costs are coming down. If Network Rail can meet the 31% saving required by Tom Winsor for CP3 it will offset the 50% increase which occurred under Railtrack.

According to Mark this would mean that ‘we've got back to where BR was and that doesn't feel quite good enough'. As my boiling frogs work showed, many costs, especially new projects went up by, typically, a multiple of three rather than 50%. And, of course, the railway is busier now.

A lightning spreadsheet comparing 1989-90 with today showed that a meaningful analysis would take up a lot of time to no practical use. And Mark confirmed that what he was really saying was that, in infrastructure cost terms we are back to where we were when Railtrack was floated 10 years ago.

But the railway still soaks up five times the taxpayer's money compared with the peak of the last economic cycle

Continues.........