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INFORMED SOURCES September 2007

HLOS – modest enhancements despite soaring income

It looks as though the HLOS and SoFA will balance first time – thanks to an increasing ridership and higher fares

Though I hate to admit it, by mid afternoon on the day after the White Paper containing the HLOS and SoFA was released, I was beginning to despair that I would ever get my head round the figures. What I was trying to do, for your delectation, was reconcile the SoFA with the Office of Rail Regulation's (ORR) ‘Advice to Ministers' and Network Rail's ‘Initial Strategic Business Plan' (ISBP), both of which have been analysed in detail in this column and provide the reference for the Government's spending plans.

My starting point was Table 1 from the White Paper. Note, for a start, that the money is in ‘nominal' pounds which assumes annual inflation of 2.75%. DfT Rail calls this ‘money of the day', but to those of us working at the spreadface it is an abomination, not to say a snare and a delusion.

Bringing the past up to today's values adds meaning (how could I live well on £5.50 a week in 1957?), but applying an entirely arbitrary nominal inflation rate ( the Treasury's RPI target is 2.5%) distorts future comparisons.

For example, in the White Paper Thameslink is quoted as a £5.5billion project in nominal money when the whole West Coast Route Modernisation cost only (!) £8.6 billion. But Thameslink's current construction cost is quoted at £3.55bn.

Table 1

In the analysis that follows I have de-inflated the White Paper numbers to current prices where I think it helps compression. And also be aware that since the Scottish Ministers provided much less financial detail than DfT Rail in their eight page document, much of the analysis which follows is for England and Wales only.

Table 2

Total UK funds available £ million nominal and real

Source: DfT Rail and Scottish Ministers plus Informed Sources analysis.

Table 2 shows my assessment of the total funding to be made available for England , Wales and Scotland compared with 2008/09 the last year of the current Control Period (CP3). I have shown both the official nominal and my de-inflated figures so that you can see the difference between the two.

Table 3

Network Rail ‘baseline' finance ( England and Wales )

Source: ORR

Network Rail

While the HLOS specifies continuing improvements in safety and performance, the dominant issue is capacity.

To arrive at the funding required for CP4 DfT Rail has taken the ‘ Baseline Case' in Network Rail's Initial Strategic Business Plan and added on the cost of the capacity enhancements in the HLOS. Network Rail defines ‘Baseline' as ‘the efficient minimum cost to maintain a non-degrading infrastructure which would not accommodate substantial growth'.

Table 3 shows previous estimates of Network Rail's Baseline costs for Control Period 4. The ORR Estimates give a spread of the likely cost.

ORR's ‘ligh' assumes that Network Rail carries out a high volume of work with low efficiency. The ‘low' estimate is based on low volume/ high efficiency. The Network Rail figure is taken from the company's Initial Strategic Business Plan provided to ORR as part of the current Periodic Review.

More efficient

DfT Rail says that it has revised Network Rail's Baseline estimate ‘to reflect an assumed efficiency gain of 5% a year'. The result is claimed to be ‘towards the lower end' of ORR's range of possible outcomes.

Table 4 tries to put this claim into meaningful numbers. This involves de-inflating the DfT estimate and then bringing the new total for CP4 back from 2009/10 prices (money of the day, remember) to the 2005/06 prices used by ORR and Network Rail.

Phew! But the result confirms that the SoFA reflects the estimates for Baseline spending for England and Wales in CP4. It equates to a 17% reduction on the current CP3, is 13% below Network Rail's ISBP and, indeed, just falls into the lower third of ORR's range.

As a double check, ORRs range equates to annual efficiency savings between 2% and 8%. So, once again, DfT's 5% is at the right end of the range.

Table 4

Comparison of Network Rail funding requirements ( England & Wales

£millions at 2005-06 prices

Source ORR/DfT

To go with the ‘Baseline', Network Rail also produced the confusingly named ‘Base Case'. This included the capacity needed to accommodate a ‘reasonable projection' of growth in passenger and freight demand while, at the same time, delivering sustained good performance ‘at or above the level Network Rail planned to achieve by the end of CP3'.

Table 5

Source: Network Rail

Table 5 shows the cost of the additional enhancements covered by the Network Rail Base Case. According to DfT, the enhancements in the HLOS for CP4 have a total cost of £6.9bn (Nominal).

Network Rail said that enhancements in the ISBP included freight capacity constraints, such as the links to the south east ports, plus a number of large development projects including ‘Thameslink, Waterloo and Birmingham New Street stations'.

In its advice to Ministers ORR estimated that its ‘low' and ‘high' levels of incremental enhancements would increase the total net revenue requirements to £16.89bn and £19.78bgn respectively. So, once again the figures in Table 4 are pretty close.

Overall, it looks as though the gap between the aspirations in the HLOS and the money in the SoFA is manageable. Yes, Network Rail will have get more efficient faster, but new Chief Executive Iain Coucher is the man for that.

Enhancements

As far as I can see, the only potential major problem is the difference in the cost estimates for the enhancements. In the classic bargaining position, DfT Rail reckons ‘the job is worth £6.5 billion, tops' (de-inflated) while contractor Network Rail sucks its teeth and reckons ‘it's nearer £7.9 bn, squire'. I suspect that the affordability of DfT Rails modest pack of enhancements, is where ORR Chief Executive Bill Emery is going to earn his pay.

Enhancements in the HLOS

Infrastructure enhancements in England and Wales to be funded during CP4 will cost £6.9bn (nominal). Thameslink, is to go ahead in two phases, separated by the 2012 Olympics.

Phase 1 will step up the existing routes to 16 trains/hour, with 12 car formations by December 2011. The, from December 2015 Phase 2, will add Great Northern services to the Thameslink Network with an increase to 24 trains/hour.

Construction work is now costed at £3.55billion including optimism bias and compensation. New trains and inflation increases the nominal cost to £5.5 billion. DfT Rail will manage the programme.

Flagships

There is funding for only two other ‘flagship' infrastructure projects in England and Wales . The remodelling at Reading will get £428 million and the Government will contribute £128m towards the rebuilding of Birmingham New Street . As a blip on the early warning radar can I flag up that in the case of Reading DfT Rail expects a ‘Regulatory protocol' to be established for Network Rail ‘that sets out governance arrangements for delivery of this programme'.

A further £150m is ‘earmarked' for the modernisation of 150 medium sized stations that are ‘run down or lack basic facilities'. In her statement to the House of Commons announcing the White Paper Transport Secretary Kelly quoted Dartmouth as one of the stations to benefit.

Freight

Freight looks to do well out of the HLOS and SoFA. EWS Chief Executive Keith Heller described the White Paper as not only setting the strategy but showing a commitment to providing enhancements needed to enable a 30% growth in rail freight by 2014.

Fuelling this warm reception was the announcement that The government ‘is proposing to work with the industry in developing a Strategic Freight Network ( SFN )'. This ‘would provide an enhanced core trunk network capable of accommodating more and longer freight trains, with selective ability to handle wagons with higher axle loads and greater loading gauge'.

Of particular note is the reference to ‘a route capable of accommodating European-sized rolling stock running directly from the Continent to the main conurbations outside London ', albeit in the ;longer term.

One role of the SFN will be to route freight trains away from congested sections of the network. In addition to upgrading alternative routes and resolving passenger/freight conflicts, Reading is a classic example, the White Paper also talks of ‘the selective safeguarding of disused alignments to facilitate potential future increases in freight capacity'.

At this stage the SFN is work in progress. It is likely to emerge as a synthesis of Network Rail's Freight Route Utilisation Strategy and the Operators' own list of priority enhancements.

Jam today

While this may sound like jam tomorrow, the £200 million allocated to the SFN in the SoFA is additional to Transport Innovation Fund ( TIF ) money. And the day after the White Paper was published, TIF funding to enhance Gospel Oak – Barking to W10 gauge was announced.

Predictably it excluded electrification which would benefit all those container trains from the East Coast ports. I have asked whether passive provision will be made.

Four more TIF schemes awaiting approval are listed in the White Paper. These are:

Southampton-West Coast Main line gauge enhancement.

Nuneaton-Peterborough gauge and capacity enhancements. p

Gauge and capacity enhancements on the routes serving Hull and Immingham'

Gauge clearance and reopening of the Olive mount chord giving W10 clearance from the port of Liverpool to the WCML.

Continues.........