Our latest article on PR18, the five-yearly periodic review of Network Rail, looks at the ORR's draft determination for England and Wales and Scotland; what role the ORR will have in overseeing enhancement projects; and how the ORR will assess Network Rail's efficiency and financial performance


Draft Determination

The draft determination is a key document in the periodic review process.  It sets out the ORR's decisions on what Network Rail should deliver in respect of its role in operating, maintaining and renewing its network in the next Control Period (CP6, running from April 2019 to March 2024); and how the funding available from the Government and other sources should best be used to support this.

It is in effect the ORR's review of and response to Network Rail's Strategic Business Plan (see our article, Network Rail's Strategic Business Plan) which was published in February.  This was actually a collection of separate plans, one for each geographic route, plus the new Freight and National Passenger Operators (FNPO) 'route' and the System Operator function.  This reflects the way that Network Rail is now organised internally, divided into routes, which was a recommendation of the Shaw Report.

The key change from previous periodic reviews is that now that Network Rail has been reclassified as a public sector body, its funding is fixed.  This means that the ORR has to be satisfied that what Network Rail proposes to do in CP6 will fit within the funding it has been given.

Overall, the ORR is happy with Network Rail's Strategic Business Plan but wants Network Rail to make a small number of significant updates as follows.

Efficieny and R&D

Network Rail's plans set out some efficiency savings but the ORR think they can go further.  The ORR thinks there is potential in England and Wales to save an extra £586 million by efficiency savings, forecasting a 10% efficiency improvement rather than Network Rail's 8% forecast.  In Scotland, it thinks Network Rail can make a £73 million saving in efficiencies.

The ORR also thinks Network Rail have set aside too much money for R&D and want the spending on this reduced from around £440 million (£400 for England and Wales, £41 million for Scotland) to £100 million, with the extra £309 million saved in England and Wales to be invested in renewals instead.  Interestingly, the DfT's response to the ORR's draft determination disagrees with this and wants more money allocated to R&D, given the critical importance of research and development to the future of the rail network.

The case of the extra £300 million 

The ORR also thinks that Network Rail will get more income in CP6 than they have budgeted for.  The ORR calculates Network Rail should get an extra £64 million from their property portfolio – and Network Rail had also omitted the income they will get from the Crossrail supplemental access charge, around £250-£300 million.  Unsurprisingly, the Government have picked up on this in their response and make it clear that if they had known about this before they published their Statement of Funds Available (SoFA), the level of Government grant would have been reduced by a corresponding amount.  The Government stress that it is 'highly likely' that they may have a legitimate need to reallocate this funding from Network Rail to other areas of transport spending, so in the meantime Network Rail should programme on the basis of this funding being used for 'contingent renewals' which could be cancelled if the Government needs the money for something else.

More money for safety and asset sustainability

The ORR wants the extra money it identifies from efficiency savings, R&D and property income (amounting to around £1bn) to be spent on safety and asset sustainability in England and Wales.  It is concerned about the deferral of renewal work from both CP4 and CP5 and the detrimental effect this is having on long-term asset condition and wants Network Rail to prioritise earthworks, drainage, track and structures in particular.  Scotland's position on asset sustainability is better and there is no need to re-prioritise expenditure here.

Assessing Network Rail's efficiency and financial performance

Alongside (and as part of) the draft determination, the ORR published its response to its January consultation on its approach to assessing Network Rail's efficiency and financial performance.  We briefly reported on this in our May update.  There was broad agreement from the nine respondents with the ORR's approach.  The ORR will therefore assess Network Rail's efficiency as well as its financial performance.  It will look at the efficiency of each route as well as the company as a whole.  Each route will need to have a well-documented plan for how it intends to deliver efficiency improvements and clear tracking of progress in delivering this plan.  Routes will be required to report their financial performance measure on their performance scorecards.

The ORR's role in enhancements

As a brief reminder of the background, the enhancements programme in CP5 had cost overruns and delays and so the Government appointed Dame Colette Bowe to examine enhancements planning and Sir Peter Hendy to look at re-planning the programme to stick within the agreed budget.

The clear message from the Bowe Report was that the roles and responsibilities of the DfT, ORR and Network Rail needed to be much more clearly defined, particularly the ORR's role.  We now have a Memorandum of Understanding between the DfT and Network Rail stating the roles and responsibilities of each for government-funded rail projects.  The ORR has now published this document setting out what it sees as its role and responsibilities.  To be clear, this covers only government-funded enhancements that are delivered by Network Rail, not Market-Led Proposals (see our article Time to Invest in Rail) or enhancements delivered by other parties, such as Crossrail and HS2.

For England and Wales, the ORR will monitor Network Rail's delivery of enhancements, but not the cost efficiency or specific milestones (milestones will not be regulated outputs).

In Scotland, on the other hand, milestones will be regulatory requirements and the ORR will hold Network Rail to account for their efficient delivery.

Next steps

The draft determination, and the ORR's views on their roles and responsibilities for enhancements, were open for consultation from June to 31 August 2018.  The ORR will look at the comments and publish their final determination in October 2018. 

Over the remainder of the PR18 process the Government want the ORR to focus in particular on:

  • Network Rail's readiness for CP6 – the Government wants to avoid a repeat of the opening months of CP5, where stasis and lack of progress had a knock-on effect for the rest of the period, leading to many projects being rescheduled.
  • Efficiency - there needs to be a sustainable recovery in efficiency during CP6
  • Train performance, which continues to be far below expectations.

Looking further ahead, the DfT think there should be a more comprehensive review of Schedules 4 and 8 in the next Periodic Review.

Comment

The ORR's draft determination is more or less what we expected and it is clear that everyone wants to avoid a repeat of CP5's slow start.  In the short term, the ORR wants more money spending on making sure the condition of the rail infrastructure is up to standard and sustainable.  In the longer term, we should see the routes taking more of a leading role in planning both renewals and enhancements that benefit the local area, which should hopefully translate into efficiencies on the ground.

Key contacts

Paul Hirst

Paul Hirst

Partner, Head of Transport
United Kingdom

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Bruce Kilpatrick

Bruce Kilpatrick

Partner, Head of Competition
London

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Anna Sweeney

Anna Sweeney

Senior Knowledge Lawyer, Projects & Infrastructure
Leeds

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