Rising costs plunge Network Rail into crisis

Network Rail is running out of money. It can’t afford its enhancement programme because costs have increased beyond initial estimates. No longer can it borrow private money and public money from its owner, the Department for Transport, is subject to annual limits.

A quick look at the figures shows how deep are NR’s problems. When it published is Strategic Business Plan for 2014-2019 (Control Period 5, CP5), NR reckoned on enhancement projects worth £12.4 billion. Of this around 30% was allocated to electrification schemes, equating to around £3.7bn. Once projects that were to be funded separately (such as Thameslink, Crossrail, some parts of the Edinburgh-Glasgow Improvement Programme and Borders Rail) were taken from the £12.4bn, it left £7.8bn.

Regulator ORR cut NR’s £7.8bn to £7bn by applying efficiency assumptions and by cutting risk allowances. Electrification’s £3.7bn was now around £3.3bn on this basis although this figure is not specified within ORR’s final determination of NR’s costs for CP5 because the regulator realised that NR’s plans were not fully developed and thus costs for individual projects could not be determined.

To determine these costs, NR and ORR use a process called ECAM (Enhancement Cost Adjustment Mechanism) to come to an efficient cost against which NR’s performance can be measured. Two electrification projects have gone through ECAM and the results are shocking.

NR had estimated for its Strategic Business Plan that Great Western and Midland Main Line electrifications would cost £1.3bn. After ECAM, that figure stood at £2.8bn, of which £2.2bn was allocated to 2014-2019 (the final stages of Midland electrification had already slipped into the 2019-24 control period).

Take that £2.2bn from the £3.3bn leaves change of just over £1bn. For this, NR’s Strategic Business Plan contains electrification projects for Trans-Pennine (£239m), Cardiff Valleys (£305m) and rolling programme for Scotland valued at £171m. There are other projects but the trio mentioned total £715m. That’s the price before ECAM, a mechanism that broadly doubled the price of GW and MML wiring. So make that £715m a more realistic £1.4bn and that’s NR’s enhancement programme bust.

So what to do? What to drop? TP is as good as gone already but that still leaves NR short. So Wales or Scotland? Politics comes into play now. Railway funding is devolved in Scotland, taking it our of the hands of Westminster ministers. That leaves Wales looking vulnerable but that might be short-sighted. Stringing wires above the Welsh Valley lines to allow electric trains to run will release diesel units for use elsewhere and it’s very likely that, apart from Pacers, they will be needed elsewhere. So perhaps ditching Wales is not such a good idea.

Eyes then turn to the Midland Main Line project. It’s already slipped into 2019-24 and the long-distance operator, East Midlands Trains, has a partially modernised inter-city fleet. Its Class 222s have a decent life ahead of them but EMT’s High Speed Trains are reaching the end of their lives. Aided by stock being released from Great Western as a result of its electrification, it could be possible to add a few more years to HSTs but the line needs a more credible answer that’s yet to be found. DfT needs to decide its approach before bidders to replace EMT draw up their plans next year for a 2017 takeover.

Cancelling – ok, Network Rail, postponing – MML electrification would release the team currently working from Derby to help other wiring projects, making them more likely to run to time. Of course, this would not ease the MML’s congestion problems but perhaps it’s time to call a short-term halt to predict and provide. After all, High Speed 2 will release a good deal of long-distance capacity from MML when it opens to the East Midlands and South Yorkshire around 2033.

Of course, NR could try to extract more money from DfT but with the Chancellor of the Exchequer having just said that he wants savings from DfT of just over £500m this year, it is very unlikely that the Treasury will release more money for DfT to pass to NR. The infrastructure owner can no longer borrow from the private markets. Its loan agreement with the DfT contained a buffer to cope with the risks that both knew where in ORR’s tough final determination but it did not allow for ECAM.

Nor did it allow for another ORR adjustment process, this time relating to civils spending on such things as bridges, embankments, cuttings, structures and tunnels. Once again, when it came to assessing NR’s CP5 spending plans, ORR found that for civils they were not sufficiently developed to allow robust spending estimates to be produced. ORR is expected to reveal its figures at the end of June before confirming them by the end of September. There’s scope to blow another hole in NR’s finances.

The process of setting NR’s spending and income for CP5 – the periodic review –  took several years’ work by ORR and an army of consultants. Yet within months of its decisions taking effect, NR was having to talk to its DfT paymasters as its finances unravelled. If those finances become much worse then NR will have little option but to ask for an interim review. This would be humiliating for ORR because it would very publicly reveal the flaws in its original review.

ORR is now investigating NR’s enhancement performance having revealed that NR has already missed 30% of its CP5 targets. ORR will look at four areas; project delivery including managing and estimating costs, project delivery, managing major projects such as Great Western Route Modernisation and management of the CP5 investment portfolio. ORR has already commented that common failings “seem to be happening because each project is starting from a ‘blank piece of paper’ with little central guidance”.

That may be so but ORR has just spent years crawling all over NR’s plans before announcing that they were deliverable.

DfT cannot escape this mess. Its 2012 High Level Output Specification massively upped the number of electrification projects, not least with its Electric Spine plan. It was the first of four strategic priorities to provide an electric freight route between Southampton and the Midlands. A large part of this top priority is MML electrification but it also extends over the Bletchley-Bedford route and then over the currently disused route to Bicester. Will DfT now agree that its top priority be dumped?

This article was first published in RAIL 777 in June just days before the DfT announced that it was ‘pausing’ electrification projects for the Midland Main Line and North Trans-Pennine route.

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Philip Haigh

Freelance railway writer, former deputy editor at RAIL magazine - news, views and analysis of today's railway.

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