HLOS, SoFA and NR funding

As Network Rail’s economic regulator, the Office of Rail and Road (ORR) conducts a review of NR’s charges every five years. In order to calculate these charges, which train operators pay, ORR must work out how much money NR needs to operate, maintain, renew and enhance its network.

Governments in London and Scotland pay a considerable proportion of NR’s funding as direct grants, and can specify what they want NR to deliver. This is the High Level Output Specification (HLOS), and the money the Government is prepared to pay is the Statement of Funds Available (SoFA).

Each HLOS follows from advice received from the rail industry. Scotland published the advice it received in February. The DfT kept its advice secret.

When ORR receives each Government’s funding statements this autumn, it will review what they are asking for and calculate whether it can be delivered for the money on offer. It will review NR’s business plans (to be published in December) for the five years from 2019-24 to assess the strength of these plans and their costs.

ORR decides how much NR needs. Once it’s accounted for Government money and NR’s’ third-party income (for example, from renting property such as viaduct arches), it decides how much train operators should pay. ORR expects to have its draft determination of access charges next June and its final determination in October 2018.

ORR said last November that it would be assessing NR on a regional basis, in line with the company’s devolution plans. It must also cope with NR’s reclassification as a public body, which means it can no longer borrow money to fund enhancements.

In the past, Government has used this ability to allow it to announce rail upgrades knowing that the bill will land elsewhere. With NR’s’ reclassification, Government must directly fund upgrades, find third-party investors, or decide that they should be funded by train operators through access charges, which could have an effect on fares or the money the operators pay Government.