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INFORMED SOURCES June 2007

An insatiable demand for cash.

Network Rail's business plan suggests that it views the IKEA question with equanimity

As reported in last month's news pages, Network Rail spun its latest Business Plan, covering the remaining two years of the current Control Period, as a ‘£2.4bn expansion programme'. Chief Executive John Armitt commented that, with demand growing, ‘today's news outlines Network Rail's response to those demands'.

Being an old grump, I skipped all the warm cuddly stuff and went straight to the cold numbers at the back of the glossy publication. And what the figures show is worrying.

In its Advice to Ministers (Informed Sources April 2007), the Office of Rail Regulation assumed that Network Rail's Operations, Maintenance and Renewals (OMR) expenditure would fall throughout the five year Control Period 4 (CP4) starting in April 2009. ORR's advice is intended to help DfT Rail align the High Level Output Specification (HLOS) with the Statement of Funds Available (SoFA).

With only a couple of months to go before the HLOS and SoFA must be published, Network Rail's expected costs and efficiencies for CP4 are still pretty vague. But since DfT Rail has to start somewhere, ORR covers all eventualities with just two scenarios.

Combining high efficiency with low levels of activity gives the minimum spend on OMR. Low efficiency with high levels of activity gives the maximum expenditure. Any other mix of efficiency and activity falls within these extremes

Under the high efficiency/low activity scenario ORR predicts that OMR expenditure could fall to around £3.9bn in 2009-10, the first year of CP4. At the other extreme the low efficiency/high activity scenario would see around £4.3bn spent on OME.

Table 1

Source: Network Rail

Now look at Table 1 taken from the boring end of the Network Rail business plan. This shows total income, including variable track access charges rising by 4.9% over the last three years (2006-07 to 2008-09) of the current Control Period. Excluding variable charges the increase is 3.6%, highlighting the impact on costs of running a growing railway. Network Rail is budgeting for an increase of 4.7% on OMR.

Now, even though there is a slight fall in OMR in 2008-09, meeting ORR's most generous forecast of spend for 2009-10 would mean a cut of £1 billion or 20% in a year. Such an abrupt cut-back is clearly impossible. But even with all those premia being paid by new franchises, DfT Rail must be looking for serious savings from the infrastructure provider.

Wisely

Fortunately, there are those within Network Rail who are worried by this approaching precipice. Not least the man responsible for spending the money wisely, Chief Engineer Andrew McNaughton.

Addressing the Railway Forum's Sustainability Seminar on 17 April Mr McNaughton said that m aking the railway sustainable means making it cheaper to run as well as delivering a far better service to passengers and freight customers. ‘It is no blind use if the alternatives - however carbon unfriendly or any other politically correct statement goes – are just so much cheaper that the railway is not attractive', he declared

On the subject of cost he added ‘It's no good to say we have to cut the cost in the next five years by 31%. I reckon nothing less than two-thirds is enough'. The 31% represents the target set by the Rail Regulator at the post-Hatfield access Charge Review. Officially Network Rail does not think that same again for CP4 is feasible.

In hock

Another source of concern is Network Rail's rising debt and the associated interest burden (Table 2). Note that in the current financial year (2007-08) interest tops £1bn for the first time, equivalent to the total subsidy for the state railway at the peak of the last economic cycle in 1990. And at that time enhancements were also running at a high level.

Debt will reach nearly £22bn by the end of CP3. Note, too, that the negative cash flow in each of the last two years of the Control Period is just under £1.5bn.

Table 2

Network Rail projected cash flow

Source: Network Rail

Table 3 completes the numbers with the profit and loss account. Network Rail is now dependent on grant for around 40% of its income.

Table 3

Network Rail projected profit and loss account

Source: Network Rail

No wonder the Network Rail Board chose to spin enhancements. And don't forget that in this privatised railway the taxpayer stands ‘unconditionally' behind that debt.

Two wins, a correction and an honour

Incipient IEPSOS (IEP Specification Overload Syndrome) caused me to quote an incorrect figure for the mass of the B5000 bogie last month. The power bogie used under Voyagers and Meridians weighs 4.7 tonnes not 6 tonnes as stated.

On the plus front, following our editorial suggestion for a media Railway Emergency Pack (Railtalk April 2007), I put the idea to Len Porter, Chief Executive of the Rail Safety & Standards Board. The concept was considered the Board and is now being developed.

Informed Sources ‘Free the Selhurst 13' campaign has also borne fruit. Thameslink will be getting all the Class 319s and Bombardier has an order for another 48 Electrostar vehicles. FCC reckons the campaign was helpful in moving DfT Rail along.