Rail 506: Pretence of a ‘private’ NR costs rail industry dear

The Treasury was infuriated by Tom Winsor’s largesse towards Network Rail, now on course for a big underspend. CHRISTIAN WOLMAR asks: is there a better way to fix NR’s spending?

The sums involved for investment in the rail industry are so massive that it is easy to confuse millions with billions. Network Rail had a budget of £6.7bn for the current year. That is a staggering £ 1 ?2 bn a month and it’s no surprise the company is heading for an underspend, of around £800m.

Now that is pretty massive, especially as it all comes out of the investment heading, which is supposed to be £4.2bn. The rest, £2.5bn, is for operating costs and maintenance, money which IS all being spent. So £800m on £4.2bn is about a fifth, a pretty hefty percentage, and it begs a big question about how to assess what Britain’s railways need to spend on investment. The expenditure for NR was set by the former Rail Regulator, Tom Winsor, in his interim review published in late 2003. His generosity towards the company caused consternation in the Treasury at the time, as he increased the amount it was allowed from the £15bn he had previously allocated for a five-year period to £22bn for 2004-09, a rise of 50%. Winsor argued this sum was absolutely essential or otherwise there would have to be cuts. In many speeches, he warned politicians that if they tried to restrict the budget to lower than what he had determined, there would be “cuts in services, reductions in the size of the network, cutbacks in renewals and so higher maintenance and poorer performance through increased speed restrictions.”

But the network has not fallen apart. Quite the opposite. NR seems to be meeting its targets for reducing delays, and punctuality is improving. No-one has noticed the lack of this £800m. (Remember, these are huge sums
– £200m could build four major hospitals). So, now it seems that NR did not need all that money. In a way it is hardly surprising that NR could not spend it all. Though I have never tried it myself, getting through £ 1 ? 2 bn a month must be pretty hard work, especially in an industry where only four years ago – before Hatfield – Railtrack, its ill-fated predecessor, was spending at just over a third of that rate. So was Winsor too generous? No, not at all, according to Iain Coucher, NR’s deputy chief executive. He says: “The railway definitely needs the money but for a variety of reasons there is going to be an underspend this year.” First of all, he says, the final settlement by Winsor came quite late which delayed the process of ramping up spending. Secondly, once the budget was known, there were a lot of contracts which had come up for renegotiation and NR decided not to be rushed into them, ensuring it obtained value for money.

And finally there is a lot of cost uncertainty about the West Coast modernisation and the Southern power upgrade.

Of the £800m underspend, about 40% relates to these two major projects, a further £200m will be carried into next year and £120m is extra efficiency above the target of
7%. And there are several other smaller items such as holding back on signalling contracts because the prices have been coming back as unaffordable, or delays in local authorities providing match funding for schemes.

Next year, the company will be in a much better position, Coucher promises. The scope of work for the first six months of the next financial year, starting in April, has already been determined and even much of the programme for 2006/07 is known.

However, while no one can doubt that NR has a better grip on the engineering processes than its predecessor, this huge underspend begs an important question about how its budget is determined. Quite simply, is it feasible for a regulator – or, as it is now, a committee, sitting in Holborn – to determine what NR can spend in six or seven years from when the decision is made?

The new regulator, Chris Bolt, is trying to get to grips with how NR spends its money but is having some difficulty pinning it down. In particular, is the company underspending because it is reining in the contractors or because it is inefficient?

In the White Paper, The Future of Rail, the government made clear it wanted tighter rules of governance over NR, but not only is the company resisting this, there are also limits on what ministers can do. If they interfere too much, they will be seen to be running NR, and immediately its debts will go on to the government balance sheet. And as we all know, sadly, avoiding this situation is paramount, even more important to ministers than having a properly functioning railway. The current system of assessing what NR needs makes little sense either. One of the occasions on which I managed to make Tom Winsor lose his rag was when I asked him precisely this: “Why should a lawyer with no experience of running a railway be able to determine what the industry needed, especially so far in advance?” He blustered out angrily that he had advisers and consultants, and could rely on a large body of knowledge to enable him to make a decision.

Sure, Tom, but it is a crazy way to run a railway. The other privatised industries are less complex, although similar questions have arisen in water and electricity generation. Basically, he undertook two access charge reviews and on both occasions the amount allocated to Railtrack/NR went up by 50%.

The decisions were backed by enormously complex documents but ultimately the whole process is carried out at one step removed from the coalface and there is, undoubtedly, a large amount of guesswork or dodgy assumptions. It is not only this humble column that questions this system. The key question is how you get a better system of governance of NR to look after the billions of taxpayers money that are going into the company. The Treasury has begun to focus its formidable collective brain on this question. Incensed at how much money Winsor screwed out of them – as they see it – the mandarins are not entirely happy at the way NR is structured. Since it has no shareholders or equity at risk, it is very difficult to ensure the company is being efficient or actually needs the money it has being allocated. There are measures such as an Efficiency Index and an assessment of unit costs, but since the latter vary from job to job by as much as a factor of 2.5, it is not an easy task to ensure the company is getting or providing value for money.

Certainly, the stakeholders do not exercise sufficient say over the company. As the House of Commons Transport Committee put it in its report on The Future of Rail published last April: “Network Rail did not convince us that the members of the company [the stakeholders] were exercising an effective control of the company.”

However, finding an alternative way of determining NR’s budget would not be easy. The most obvious action would be to do away with NR’s pretence of being a private company and take it back straight on to the government’s books, thus saving large amounts of interest for a start, and simply allow a process of negotiation between government and what, in effect, would become a new British Rail. (A very senior industry figure recently told me: “You won’t catch me saying this in public, and I will deny I ever said this to you, but there is no doubt Network Rail is a public company.”)

While this may make sense from the taxpayers’ point of view, I can hear the moan of railway managers saying “oh, please, anything but that.” They would, rightly, dread a return to the disadvantage of this system, the constant parsimony on the part of government and the inability to plan investment in the face of annuality.

Well, the only way around that would be a three or even five-year rolling budget which had absolute guarantees from government and would allow for the planning that BR never had. (BR did have a similar system of three-year allocations towards the end but the money was never guaranteed.)

There are, too, long-term doubts about the financeability of NR. The debt that is mounting will need servicing, and is there really any prospect that the industry will generate £20bn to pay it back? It is being increasingly recognised that the whole pretence of NR being in the private sector is costing a lot of money and has led to a situation where it cannot be adequately policed. Of course, the major barrier to any solution is its growing debt but there may be some financial wizardry which could keep that off the government’s balance sheet, while effectively taking NR openly back inhouse rather than in the covert way it is now.

The key questions are – how does the government ensure that NR works in the best interest of the railway, both short-term and long-term? And is there any alternative to straightforward renationalisation, a concept that is treated in Whitehall rather like Dracula faced with a cross?

Is this all fanciful speculation? Not at all. The question of whether NR is an interim solution is already being asked within the Treasury and other corridors of Whitehall. There was some exasperation that NR, having only been so recently created, escaped the scrutiny of the rail review a year ago. It may not escape change next time the politicians become exasperated with the railway, which will probably be soon after the election.

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