Network Rail underperformed by nearly £500m in first financial year of CP5
Network Rail overspent on what it delivered in 2014-15 but delivered less than what was expected during the first year of the new control period (CP5), according to ORR’s annual efficiency and financial assessment report.
NR has financially underperformed in many areas and failed to meet ORR targets laid down under the 2013 Periodic Review (PR13). Total income was £61m above target at £6.446bn (PR13, £6.385bn) but this was more than offset by a £148m increase in total expenditure of £10.228bn (PR13, £10.080bn) – though this was less than the last year of the previous control period CP4 (2013-14, £11.401bn).
NR’s Regulatory Asset Base (RAB) increased to £53.029bn in 2014-15 (PR13, £51.793bn; 2013-14, £50.077bn), reflecting inflation and expenditure on enhancements and renewals. Net debt likewise increased to £36.505bn (PR13, £35.393bn, 2013-14, £32,300bn), up 13% on the previous year.
NR breached PR13 expenditure guidelines in five out of eight categories by the following amounts: renewals (£324m); schedule 4 & 8 costs (£91m); network operations, including signalling (£44m); maintenance (£43m); and electric traction & industry costs (£41m). In the three other areas, NR expenditure was less than expected by: finance costs (£251m); support costs (£72m); and enhancements (£64m).
Renewals and enhancements represent the two largest categories of expenditure, respectively accounting for 29% and 28% of NR’s total costs.
The £324m figure for renewals expenditure excluded £615m deferred to other years in CP5 and the £195m rolled over from CP4.(When factored in the revised figure more than doubles to £744m).
The £64m enhancements underspend is a bit more difficult to unravel; it comprised the £207m PR13 underspend (for CP5 projects), less £143m rolled over on uncompleted CP4 work. The £207m was made up as follows: a £565m underspend on several projects, including the Edinburgh-Glasgow (£109m) and North West (£63m) electrifications; plus an additional £122m underspend on committed funds. However, these amounts were partially offset by a £58m overspend on ThamesLink London Bridge, and a further £422m overspend on other projects, including the East West Rail (£109m) and the Northern Hub (£77m) schemes.
(These figures do not include the £349m of the enhancement work scheduled for 2014-15 but deferred to other years in CP5).
The £143m carried over from CP4 included expenditure on the Swindon – Kemble redoubling and the Sheffield Tram Train project.
Further analysis and adjustments were made by ORR to present a more balanced account (by including deferrals but excluding CP4 overruns). Since NR only bears a 25% risk in accordance with ORR RAB policy, ORR also discounted the renewals and enhancements expenditure by 75%, leaving NR with a total financial underperformance of £485m for 2014-15. The main components of this revised final figure being: renewals (£186m); Schedule 8 payments (£105m); maintenance (£79m); and enhancements (£47m).
Since its reclassification as a government body in September 2014, NR has stopped issuing its own debt and now borrows from the DfT at a commercial rate. Borrowing is capped at £30.175bn for the duration of CP5, and NR drew £6.450bn in 2014-15. Over one third (£2.378bn) was used in bond repayments, the rest went mainly on capital expenditure. £12.824bn (35%) of total NR debt has to be repaid over the next five years.
For the first time ORR has been able to present data on a ‘route’ basis. NR has ten ‘routes’ upon which it has started devolving more operational responsibility. Basically these are the main lines radiating from London: LNW, LNE, East Midlands, Anglia, Kent, Sussex, Wessex and Western; plus Scotland and Wales. They revealed widespread regional variations, especially in expenditure on signalling and civil engineering renewals.
ORR expects a shortage in skilled technical staff during CP5. At least 7,000 new workers will have to be recruited to replace those reaching retirement age. The figures may be low, but ORR says they represent up to one third of the workforce in some key sectors.