Network Rail underspends by £348m, but more spent on renewals

Network Rail underspent by £348 million of its net budget in 201516, according to the Office of Rail and Road (ORR). This includes £22m saved in financing costs, largely due to lower than expected inflation.

Pressures on the budget highlighted by ORR include higher Schedule 4 costs relating to the seven-week closure of Lamington Viaduct (circa £10m), higher vegetation management due to work brought forward from Control Period 6 (£2m), and the effect of over-optimistic pay award assumptions (£3m).

ORR also highlighted £21m higher enhancement costs, and included recognition of £48m underperformance in relation to a £15m increase in the cost of the Rolling Programme of Electrification, and £30m underperformance on the Edinburgh-Glasgow Improvement Programme (EGIP) because of higher costs such as contractors. This was offset by timing differences in the delivery of the work (£27m), including £14m on EGIP.

However, ORR said volumes that have not been delivered will be delivered at a later date, including £26m on renewals and £27m on enhancements.

ORR, taking this into account, said NR underperformed against its own budget by £8m on renewals (adjusted to £2m in line with the 25% sharing mechanism) and £48m on enhancements (adjusted to £12m in line with the 25% sharing mechanism. NR generally retains a quarter of any over/underperformance of renewals and enhancement costs). ORR said NR had also not delivered all of its planning efficiency initiatives.

Compared with its forecast at the start of Control Period 5, NR has spent more than planned on the renewals and enhancements work it delivered in the first two years of the period. It is also planning to spend more in the remainder of CP5, which means there is pressure on its borrowing from the Department for Transport.

NR agreed to borrow from the DfT instead of issuing bonds, following its classification to the public sector. The amount of borrowing available from DfT is limited to £3.3 billion across Control Period 5 for Scotland.

The ORR said there is financial headroom for £0.3bn in NR’s latest business plan, which means NR thinks it will not need that amount of the borrowing facility. The main financial risks include the cost of renewals and enhancements, delivery of efficiency initiatives, and interest rate movements.

Network Rail’s attributable debt for Scotland at March 31 2016 was £3,606m (£140m better than budget). Its Regulatory Asset Base (RAB) is £5,644m, which is £475m lower than ORR’s determination.