Confusion over rail budget

Regulator warns of threat to available funds

Professor Stephen Glaister, chairman of the Office of Rail and Road (the organisation that holds authority for independent rail regulation), has sounded an alarm after the Government failed to publish the Statement of Funds Available for the industry during the next five-year control period to 2024.

It had been agreed that this would be made available by July 20 2017, but publication has been delayed until this month. Glaister said he was absolutely opposed to changing the process to that of an annualised settlement, which also appals Network Rail Chairman Sir Peter Hendy, who has reflected that Transport for London works on a planning cycle of up to ten years.

The role of the independent economic regulator is a pillar in the structure of industries that have been privatised. It is a mechanism that provides market discipline to ensure there is not an abuse of power by monopoly service providers such as Network Rail and previously Railtrack.

For rail, it provides a structure where fiveyear plans (described as control periods) are used as a mechanism to assess the income requirements of the infrastructure owner, which forms a basis for the calculation of track access charges.

The first of these was Control Period 1 (CP1), in place between 1996 and 2001. The assessment of the income needed by Railtrack to run and maintain the network was far in excess of net receipts for passenger and freight operations. It resulted in revenue support payments being paid to the train operating companies, and track access grants for freight operators.

In the first years of Railtrack’s existence there was a belief that costs could be managed down to meet Government expectations of a reduced need for financial support. Railtrack expenditure trends supported this assessment, as there was an underspend of funds the Regulator had deemed necessary to sustain the network.

As a form of corporate governance, Railtrack was required to develop an annual Network Management Statement setting out project intentions for investment that would reduce costs.

However, two things happened that made that impossible. The first was that the new train operating companies began to strongly market the rail offer to fill spare capacity, and beyond that wanted to run more trains. This was not in the plan that had assumed it was more likely that the managed decline in rail demand that occurred during the BR era would continue, but with improved cost efficiency.

Railtrack was confronted by companies such as Virgin Trains that wanted to enhance services with an improved West Coast timetable, and on the basis of a promise that the route would be upgraded to 140mph operation a fleet of Pendolino rolling stock was acquired. Railtrack was also faced by the proactive approach to delivering a stronger freight presence, as EWS pressed for a restoration of network freight services.

Railtrack was to find that delivering what it had promised - and in some cases what it was contracted to deliver - went far beyond the financial resources generated from its trading results or additional funding provided by shareholders.

It was also constrained by an acute lack of engineering expertise (the decision had been taken that there would be a reliance on contractors to renew and maintain the network). What has been learned since that decision was made is that there has to be a core internal competence to specify and supervise what the contractor is required to deliver - and that was absent.

As a result, there was little understanding of the condition of infrastructure assets, or that a steady decline in the condition of the network was taking place. Budgetary controls were placed on the contractors, who did not always have the necessary understanding to ensure safe operations… as was soon demonstrated.

It came to a head at the Hatfield derailment on October 17 2000, when on one of the primary high-speed routes the condition of the track was found to be woefully deficient.

From that day Railtrack was living on borrowed time, and the inevitable happened in 2001 when the Government placed the company in ‘railway administration’ - a unique statutory status that resulted from someone having the foresight to allow for this in the 1993 Railways Act, to prevent creditors from seeking financial redress by the sequestration of railway assets.

Investigators found after the Hatfield accident that Railtrack had failed to provide effective management of the contractor. Subsequently, following another derailment at Potters Bar on May 10 2002 when a point stretcher bar failed, it was ruled that standards and procedures were seriously inadequate. And again, after the Grayrigg derailment on February 23 2007, that the successor company Network Rail had an incomplete understanding of the stretcher bar design on a set of points that had again failed.

CP2, in place from 2001- 04, was curtailed by a changed relationship which involved establishment of the Office of Rail Regulation to replace a single named individual. This brought new Government procedures for subsequent five-year control periods, where a Statement of Funds Available (SoFA) was to be provided with a High Level Output Specification (HLOS) listing what was expected for the funding.

Although the process required the SoFA and HLOS for CP6 (2019-24) to be published earlier this year, this has not happened - other than a suggestion that the budget for operations, maintenance and renewals should be assessed, leaving the Government more time to decide on how much money can be afforded for enhancement projects.

If a longer- term planning cycle is removed from rail network planning it will have severe effects. For example, it will create uncertainty about the need for skills to deliver a digital operating railway that will feature the widespread use of in-cab signalling and ‘moving block’ technology.

There is also the warning from the delivery of electrification projects. Skills were not in place because of the lengthy gap since earlier main line electrification had taken place, and design teams were seemingly unaware of new standards for overhead line clearances.

You cannot organise railway investment on a short-term basis. A failure to provide a five-year expenditure plan that provides continuity of activity will lead to poor outcomes.

“Skills were not in place because of the lengthy gap since earlier main line electrification had taken place.”