INFORMED SOURCES e-Preview May 2012
With the Periodic Review for Control Period (CP)5 hotting up and publication of the High Level Output Specifications (HLOS) and Statements of Funds Available (SoFA) required by the end of July, I’m afraid Informed Sources is in for a few months of heavy duty financial analysis. I’ll try to keep it as interesting as I can, and include reports on real railway issues. But if we are to see where the industry is going we need to understand its costs and how it’s funded. Not that anyone really understands costs at present.
Command Paper – ORR advice cuts the funding gap.
Statistical mess perpetuated
ORR turns the screw
Study confirms diesel traction fuel savings
£45 million South East smart ticketing.
Who runs the railways
In last month’s run-down on the Government’s long awaited and rapidly dismissed Command Paper, I tried to make sense of the expected cost savings. DfT was recycling the savings claimed by Sir Roy McNulty’s Rail Value for Money Study (RVfM). This meant that I was chasing the same set of numbers differently presented.
But on 15 March, the Office of Rail Regulation published its Advice to Ministers. This is intended to help DfT and the Scottish Ministers formulate their HLOSs (what the Governments want) and SoFAs (what they’re prepared to pay for it).
The advice included an independent set of numbers which has helped put the Command paper expectations in context. Talking of the savings, unless otherwise stated, numbers are per year.
In the Command Paper DfT claimed that the reforms it had identified had the potential to deliver a further £1bn/year by 2019 in addition to those savings already committed or identified for Network Rail and the Train Operators.
DfT claimed this extra billion would close McNulty’s top-estimate of a £3.5bn/year efficiency gap. Since DfT assumes an additional £500 million from the TOCs, the remaining £500m/year must come from Network Rail.
ORR had told McNulty that it had already identified £600 million a year saving from Network Rail in CP5 (2014-2019). In the Advice to Ministers ORR expects a further £400 million from Network Rail.
So £500 million from the TOCs and £400 million from Network Rail gives an extra £900 million a year – near enough to DfT’s claimed £1 billion.
Cuts all round
So, in total, by the last year of CP5, DfT is looking to have taken £1 billion a year out of Network Rail’s costs plus the thick end of £1.2 billion a year from the TOCs and ROSCOs. How does that compare with today’s costs?
Well in 2010-11 Network Rail’s costs were £5.8 billion. But of that, £1.5 billion was down to financing, which can’t be cut.
In other words, ORR and DfT are expecting annual expenditure on running and maintaining the infrastructure cut by a quarter. Similarly, the £1.2 billion/year, to be saved by the TOCs and ROSCOs is also roughly a quarter of total expenditure. Suggestions on where such savings can be made on a postcard to the Transport Secretary.
But can we trust their numbers?
A chart in the RVfM study gladdened my heart. It confirmed what I had been saying for a long time, and has now become received wisdom – that today’s railway consumes a multiple of the subsidy British Rail needed at the peak of the late 1980s economic boom.
That bar chart showed the railways subsidy and revenue from BR to the present day. It was replicated in the Command Paper. But comparing the two versions, something didn’t seem right
So I reverse engineered them and compared the figures, both with each other and with the real world numbers. And this revealed an elementary error by DfT in copying the original McNulty chart, which, in turn contained strange anomalies. I won’t give the game away.
You might ask whether this sort of nit-picking matters. Well I think it does, whether you are considering the respective contributions to the cost of the railway by taxpayers and fare payers or simply trying to get a feel for how the railway is, and has been, funded.
And if the RVfM review and the Command Paper can’t get a simple bar chart right, what confidence can we have in the really important numbers.
ORR’s aspirations for CP5.
Governments may aspire to cost savings, but the Office of Rail Regulation will impose them. So in February I interviewed Richard Price, the Chief Executive of the Office of Rail Regulation, to discuss what he was expecting from the current Periodic Review for CP5.
Our starting point was the Initial Industry Plan (IIP) published last September. This was the first time that all of the industry players had collaborated on this sighting shot for the next Control Period and came up with cost savings of 16% in CP5.
So what did Richard Price think of this offer? He expects ‘at least what’s in the IIP’. And while Operating Maintenance and Renewal (OMR) costs have been reduced ‘very substantially’ since Railtrack came out of Administration they remain too high. In Price’s view Network Rail has ‘further to go’.
Triangulation
But there is more to the Periodic Review than cost cutting. An argument is currently raging over Network Rail’s contribution to the missed performance targets for Long Distance passenger and also freight services, and ORR has issued Improvement Notices.
Network Rail is arguing that the railway has changed significantly since the Long Term Performance Plans for the current Control Period were set. There are more trains, carrying more passengers and running faster, making the railway less able to cope with service perturbations.
So, in fighting its corner Network Rail’s buzzword is ‘triangulation’. Train performance for CP5 cannot be specified in isolation. It must be in equilibrium with the requirements for capacity in the High Level Output Specifications (HLOS) and ORR’s cost reduction targets.
ORR seems to be warming towards ‘triangulation’. Richard Price told me, ‘rising reliability and punctuality is of value to customers, equally we are looking to industry to deliver a high level of performance at lower cost. We need to know how those things balance out’.
Meanwhile, ORR seems to be as puzzled by the VfM Study efficiency gaps as the rest of us. It has begun ‘re-working the McNulty numbers’ to make sure that industry understands what would be needed to deliver them.
Diesel traction fuel savings
When the Department for Transport announced that it was commissioning a study into improving the fuel efficiency of diesel traction, I had a mini-grump. What was the Government doing spending my money on research into an area where industry and its suppliers were getting on nicely, thank you.
On the other hand, the work was being done by one of my icons of internal combustion, the consultants Ricardo. And in response to my grump Ricardo promised to brief me when the report was published.
So in mid March I had an all-too-short afternoon at their Shoreham-by-Sea facility, discovering what’s going on at the cutting edge of piston engine technology. It was fascinating, so much so that the purpose of the visit was a bit of an anticlimax.
Their 160 page report is the sort of comprehensive study you would expect from Ricardo. It has generated a number of technology packages to improve the fuel consumption of DMUs and the Class 66 freight loco.
The base DMU package features a new turbocharger and modified exhaust manifold for existing engines. The fuel savings pay back the investment in three to five years. More extensive upgrades have progressively longer pay-back periods.
For example, replacing the hydraulic transmission with a mechanical gear-box pays back in 11-13 years. This Package explains my grumpy reaction to the research contract. Five years ago, Bombardier adopted the ZF mechanical box for the Class 172 Turbostar. SWT, with Porterbrook and ZF is already retrofitting a Class 158 for trial running.
Ricardo also had a look at the ubiquitous General Motors Class 66 freight locomotive. Here, a £100 000 package could save a claimed £53m a year in fuel costs across the fleet. Pay-back on this upgrade is calculated at 10 months.
Ricardo found that idling was responsible for up to 41% of fuel burned in the freight duty cycle. A stop/start system would be combined with a 30kW diesel generator to provide ‘hotel power’, such as cab heating and air conditioning when the main engine was shut down.
So now we have the free-market test of DfT’s initiative. Will DMU and loco owners and operators invest in these theoretical savings? We shall see.
South East smart cards
Smart ticketing has become the Government’s get-out-of jail card when it comes to overcrowded commuter services. It is a weasel-rich environment, to judge by a DfT presentation on the £45 million the Chancellor made available in last year’s Autumn Statement to develop smartcard-based flexible ticketing in
It’s a complex story, including national,
For a classic weasel, how about this from the Command Paper? ‘While we reject the idea of using demand management to price people off the railways, we need to look seriously at the possibility of rewarding passengers who do not travel on the most crowded trains, and asking those passengers who drive the need for capacity enhancements by travelling at the busiest times to pay more over time for their journey by comparison’
So we are not pricing you off, but we will be charging you more to travel in the peak. In the column, I give some thought to how this policy would translate into season ticket pricing. But, according to Informed Sources DfT hasn’t worked that out yet and is simply going for a carnet system to start with.
Bringing all this together is the ITSO smartcard. ITSO Ltd was set up DfT in 1998 as a company limited by guarantee, owned and operated by its members but sponsored by DfT.
After 10 years DfT subjected ITSO to a Commercial Review which recommended increased Departmental involvement and resourcing to safeguard DfT’s already significant financial investment. And in 2009 the ITSO members voted to give DfT control of their Board.
In line with another recommendation, a Chief Executive Officer was appointed in January 2010. A two year business plan followed. This was due to be secured by an extra £6 million from DfT which would also help fund some additional senior managers.
But in 2011 DfT decided not to implement the review findings after all and the £6 million funding was withdrawn. The day before the Command Paper, with its heavy reliance on smart ticketing, was published the new
So smart cards seem to be following the old adage, ‘no situation is so dire that government intervention cannot make it worse’.
‘Sea of blue’ update
Judging by the response from readers, many of you enjoyed my update of ‘Who runs the railway’? As I expected, there were some errors. And for those of the John Major persuasion, it is all bad news, because I wrongly categorised two old-BR railwaymen.
So, apologies to Rob Brighouse. MD of Chiltern. Not only was he a BR management trainee, but an engineer too.
And I received a charming e-mail from David Simpson, MD of ScotRail, pointing out that he was not a Railtrack Management Trainee, as I claimed, but joined the BR Operations Scheme in 1986.
So, out of 19 Train Operating Companies, 17 are run by either old-BR managers, new
Roger’s blog
As you have read above, performance targets are going to be a major factor in the current Periodic Review. So on my way to the March Fourth Friday Club I dropped in at Network Rail’s king’s Place offices, up the road from the Cross, for a briefing on the latest analysis from Managing Director Network Operations Robin Gisby. More on that in future issues.
That was my first visit to the new Kings Cross which kicked off one of those ‘feel-good’ railway days. Having had my spirits lifted by the superb architecture, it was onto the Victoria Line to Highbury & Islington to take London Overground to Shoreditch where the FFC was being held in a redundant station beside the line out of
Ten years ago I was an occasional user of the North London Line where trains appeared as and when. Now, it’s a high frequency urban railway any city would be proud of. So it was appropriate that the FFC speaker was Howard Smith, Head of Rail at TfL and yet another BR trainee running today’s railway.
Last week I went to a seminar at which David Johnson, the founder of Laserail, launched his new company which extends basic gauging to simulation from track to overhead line. More on that to come.
May, of course, sees the return of Infrarail. I plan to be there on the opening day, so if you are exhibiting lock up the biscuits!
Otherwise, May is pretty quiet at the moment and one thing I must get round to is updating the comparison of rolling stock reliability under the old 5 min delay system versus the new 3 min MTIN in the January reliability survey. At that time we hadn’t had the full 13 periods with the new system so the new Moving Annual Averages were a bit volatile. Now we have comparable figures plus some startling improvements.
Roger