Back in June the Office of Rail Regulation invited me in for an interview with the two Prices, Richard and Alan, unrelated but Chief Executive and Director of Railway Planning & Performance respectively.  They wanted to talk about two aspects of railway funding.

First up was a long-standing but under-used alternative to the standard process for funding infrastructure enhancements. To recap, Network Rail has what is called the Regulatory Asset Base (RAB).  This represents ORR’s assessment of the value of NR’s infrastructure assets. When an enhancement has been completed, its cost is added to the RAB.  

At each Periodic Review, the Regulator determines a percentage annual rate of return and multiplies it by the value of the RAB at the end of the previous Control Period.  The resulting total is added to NR’s income during the new CP.  This return then goes to pay the interest – around £1.5 billion a year - on the borrowing that funded the various enhancements.

So when Government authorises an enhancement, say the Midland Main Line Electrification, it does so on the basis that NR will borrow to pay for the work and that taxpayers yet unborn will stump up through the RAB mechanism to pay the interest on those loans. 

This is why the RAB has become known as the Network Rail Credit Card.  Back in 2004-05, the start of NR’s first Control Period, the RAB stood at £24.3 billion (2012-13 prices).  By April this year it was £41.6 billion.

It is like an interest-only mortgage where the capital never gets paid off.  No wonder politicians love it. 

But Alan Price believes that the RAB has become an ‘unsustainable credit card on which no one makes the minimum payments’.  With NR a Government body from 1 September, and dependant on the Treasury for borrowing to fund enhancements, the days of ‘putting it on the slate’ are numbered.

As an alternative, Alan is promoting an existing, but under-used facility, ORR’s Investment Framework process.  While the cost of an Investment Framework enhancement still goes on the RAB, it is then paid off over 30 years through a ‘facility charge’ added to the franchise’s fixed track access charge.  If this sounds familiar, it is because Chiltern has been using the process to fund its Evergreen route upgrades.

One attraction of the Investment Framework is that it gets round the inherent short-termism of the current franchising scene. As Alan Price explained, ‘If the franchise has two years to run, the incumbent pays two thirtieths and future payments just become a franchise condition under the track access agreement’.  Sounds ideal for Direct Award franchise agreements too.

Holes appearing in electrification budgets

ORR also wanted to talk about its continuing work on setting NR’s income for CP5.  This should have been agreed with ORR’s Final Determination last October, but wasn’t because government had added more enhancements to its wish list for CP5 after the High Level Specification (HLOS) was published in July 2012.

To illustrate the scale of the problem, of the £12.5 billion of enhancements proposed for CP5 only around £6 billion is firm - including Thameslink and Crossrail. While this notionally leaves £6.5 billion, that number is based on rough estimates because NR had still to work up the schemes through its formal GRIP process by the time of the Regulatory Determination.

Such initial estimates have to include allowances for risk, Treasury optimism bias (usually 66%) and various other contingencies which inflate the cost.  ORR needs more precise costings because its concern is that only ‘efficient’ expenditure is authorised in its determination.

To prevent this uncertainty from inflating the funding for CP5, ORR excluded these late schemes from its Final Determination and introduced the Enhancements Cost Adjustment Mechanism (ECAM) process. Under ECAM, only after NR has developed each of the outstanding schemes to GRIP Stage 3, is it submitted to ORR for assessment.

Thus in the case of the Great Western Main line electrification, only £300m of spending has been authorised. Three more tranches are going through ECAM.

Naïve

In my naiveté I had expected that as the GRIP process removed the uncertainties and the associated contingencies, cost estimates would fall, or at least stabilise.  But according to a report in the Sunday Times, NR Chief Executive Mark Carne is understood to have told the Transport Secretary to expect big cost rises on its large CP5 projects, including the GWML electrification up from £1 billion to £1.5 billion.

Subsequently, Informed Sources have confirmed more nasty numbers on the impact of cost overruns on the DfT budget.  In the column I explain how such cost increases arise.

Meanwhile, under ECAM ORR has to consider whether the proposed cost of a scheme represents efficient spending. If it doesn’t ORR can impose a lower cost than the Network Rail proposal.   Industry insiders report that this has already applied to some schemes in the ECAM process. 

ORR also points out that should NR’s aggregate costs for enhancements in CP5 exceed the total funding available, then government will need to consider the way forward.  Which is what is happening now.

RDG invites a spanking

Just about the  dumbest thing you can do if you have pretensions to being the voice of the privatised railway – or what will be left in private hands after 1 September – is to compare today’s subsidy levels favourably with those at the start of privatisation.  As for dragging in British Rail!

But this is exactly what the Rail Delivery Group (RDG) did with a press release in June, claiming ‘Government funding per journey is £2.35, 29% lower than in the first full year of privatisation, and the same or lower than in seven of the last 12 years of BR’.

It was especially dumb because I am sworn to spank anyone trying to justify today’s confusion by denigrating the achievements of Bob Reid’s business-lead railway.  Duty-bound, I fired up a new spreadsheet.

Having worked out RDG’s definition of ‘government funding’ I was able to replicate their support per journey and made the 2012-13 figure lower than six of BR’s last 12 years. 

Then I calculated the support per journey for the last 12 years of the current railway, which gave a very different picture.  Because the much vaunted £2.35 is what we have just managed to get back to after costs when out of control with the collapse of Railtrack.

To check the point I switched to my preferred parameter for ridership of passenger km and calculated the support per passenger km at today’s prices for BR from 1982 and the current railway from 2001. When I plotted these on the same graph, the BR line sloped downwards, before kicking up at the start of the 1990s recession: that for the modern railway looked like a side elevation of Mont Blanc.

RDG’s concept of the ‘last 12 year’ as a way to discredit the state railway provides produced two more numbers.  In its last 12 years BR required total subsidies of £20.5 billion at 2012-13 prices.  As a bit of fun, readers may care to estimate how much of the taxpayers’ money today’s railway has burned through in the last 12 years.  It surprised even me.

And finally

Something I always enjoy are those items where a writer explains a topic in a conversation with an imaginary reader.  I’ve attempted the genre myself this in this month’s column, responding to a claim by DfT that my calculation of the monthly cost per vehicle using DfT’s own figures was ‘misleading and inaccurate’.

It was fun to write, the editor has come up with a really obscure headline and I hope you enjoy it too.

Speaking of which, e-Preview has at least one subscriber within DfT but last month’s issue got blocked by the Gateway on the Government’s IT system.  The explanation was that it ‘may contain unacceptable language, or inappropriate material’.  Readers may care to speculate.

Roger’s blog

It’s been fairly quiet since the last blog.  But I did get to the launch of a new book about the short life of the Wrexham Shropshire & Marylebone Railway.  This is a proper business history with a human face and provides a fascinating insight into the challenges faced by open access operators caught in the labyrinthine internal workings of the privatised industry which was supplied to encourage them.

It was an informal launch in a pub at Marylebone Station, presided over by Adrian Shooter and attended by a lot of chums, including many of those involved in setting up WSR.  After the speeches, few and short, we all went out into the station where one of the ‘Silver Sets’ was in the platform for some photographs. 

Various notables provided messages for the inside cover.  These included former Rail Regulator Chris Bolt declaring that the Moderation of Competition provision in the Railways Act, designed to protect franchise operators, was a ‘mistake’.

Meanwhile by the time you are reading this we will have just got back from a holiday exploring the art galleries along the Kent and East Sussex Coast and getting in some beach combing. I’m waiting on dates for a number of visits and interviews in September, so it won’t be long before the autumn offensive begins.

Roger