Network Rail underspend puts enhancements at risk

Network Rail underspent by more than £700m in 2015-16, and some major enhancement schemes may not be completed in time or within budget, according to ORR’s latest annual monitor.

In England & Wales, total NR expenditure was £4.190bn, £718m less than the budgeted £4.907bn. Financing costs were £221m lower than expected (due to lower inflation), and capital expenditure (capex) renewals and enhancements were £291m and £199m less respectively.

“The scale of these variances suggests that the budget for 2015-16 was probably too optimistic,” notes ORR: “Compared to its forecast at the start of CP5, Network Rail has spent more on the renewals and enhancements work it delivered in 2014-15 and 2015-16 than it expected. It is also planning to spend more in the remainder of CP5. This means there is pressure on its borrowing facility with the DfT.”

The Great Western Main Line (GWML) electrification is the most high-profile project at risk warns ORR:

“Network Rail has made improvements to its productivity rate. However it still faces a substantial challenge to maintain consistent progress with all the activities needed to commission the overhead electrification system, particularly around complex locations and areas where local consents are needed. In addition there is the schedule risk around the successful testing and commissioning of the novel ‘series 1’ overhead line system between Tilehurst and Didcot in time for IEP testing on 30 September 2016.

“The achievement of this milestone will be the clearest indicator of whether or not there is confidence around Network Rail’s ability to meet the re-planned regulated outputs for the first stage of route electrification to Swindon (Wootton Bassett) by December 2017.”

For England & Wales as a whole, work to the value of £981 was not done in 2015-16 and will have to be undertaken in subsequent years. This will consist of £677m in capital expenditure renewals, £266m in capital expenditure enhancements, and £38m in Schedule 4 and Schedule 8 payments for track possessions and delays.

The capex renewals shortfall was attributed to supply chain issues, delays in programmes, contractor performance, more work than expected to maintain NR assets in an appropriate condition, and in some areas, lower volumes of work than expected (increasing unit rates). It was also affected by severe weather.

The capex enhancements shortfall was attributed to less work being delivered, though there was a £95m overspend on Crossrail. The figure also masked wide regional variations: the Western and Wales network ‘routes’ showed overspends of £63m and £53m respectively, mainly due to the Great Western and Welsh Valleys electrification projects.

Since reclassification as a public sector body from 1 September 2014, Network Rail can only borrow from the government. The amount of new borrowing available from the DfT – following the Hendy Review which increased it by £0.7bn – has been fixed at £30.9bn (for Great Britain) over CP5 (2014-19).

The net debt (for England & Wales) was £36.572bn at 31 March 2016. This was higher than the PR13 determination of £35.591bn largely due to £700m of additional investment being undertaken at the end of the previous control period (CP4).

Income & Expenditure for England & Wales 2015-16
(£m) Budget Actual Variance
Turnover   5,895   5,933   38
Schedule 4     -228     -229    -1
Schedule 8    – 124     -105   19
Operations    -477     -489 -12
Support    -928     -877   51
Maintenance -1,045 -1,134 -89
Capex – renewals -3,060 -2,769 291
Capex- enhancements -3,445 -3,246 199
Financing costs -1,495 -1,274 221
-4,907 -4,190 718

In Scotland – for which ORR issued a separate report – the total Network Rail underspend was £10m for 2015-16. Financing costs and capex renewals were £22m and £18m less than budgeted due to lower inflation and lower work volumes respectively. However capex enhancements were £21m greater than budgeted largely due to higher costs associated with EGIP (the Edinburgh-Glasgow Improvement Programme).

“We have concerns regarding the ability of key projects to meet their obligations and regulatory milestones. Edinburgh Glasgow Improvement Programme (EGIP) Key Output 1 (electrification of Edinburgh to Glasgow) looks unlikely to complete its key obligation by December 2016, whilst projects currently in development, including Highland Mainline and Aberdeen to Inverness, are making slow progress,” says ORR.

“Some aspects of the Edinburgh Glasgow Improvement Programme (EGIP) are progressing to plan, including the new station at Edinburgh Gateway. There are however significant challenges to the achievement of Key Output 1 obligation (introduction of the first electric services by December 2016 and the overall KO1 regulatory milestone of March 2017). Amongst these is the need for Network Rail to demonstrate infrastructure compliance with relevant international engineering specifications and its obligations under the Electricity at Work Regulations 1989. This is an issue that has been common to a number of electrification projects across Great Britain in this Control Period.

“In the CP5 Final Determination we established an assumed efficient price for EGIP of £490m. Estimated costs have since risen, in large part due to the additional compliance scope requirements, the complicated interface with the Buchanan Galleries project and additional linespeed works to achieve journey time improvements. ”

The news has alarmed Transport Scotland. Transport Minister Humza Yousaf said:

“Network Rail has informed Transport Scotland that the Edinburgh-Glasgow line will not be running electric services until July 2017. This is seven months later than scheduled and seven months later than they advised ministers two months ago.  This will also increase the cost of the project beyond the previous £742 million estimate. Network Rail’s cost estimates for a number of other major projects which are at earlier stages of delivery have also increased.  Moreover, progress on other projects has also been slower than expected . . .
“In the case of EGIP, there is evidence of poor management of contractors; and across the programme there are systemic issues including poor planning and cost estimation and a failure to properly incorporate well established regulations into their project plans.”

Income & Expenditure for Scotland 2015-16
(£m) Budget Actual Variance
Turnover  668   667   -1
Schedule 4   -21   -28   -7
Schedule 8     -3     -1    2
Operations   -45   -49   -4
Support -102   -98     4
Maintenance -110 -114   -4
Capex – renewals -326 -308   18
Capex- enhancements -260 -281  -21
Financing costs -148 -126   22
-348 -338   10

Asset disposals: ORR says Network Rail has not yet made any decision. “During September to December, the Network Rail Board and DfT will be considering whether or not to move into the next phase of work in terms of progressing any potential disposals. . . Under its network licence, Network Rail will need ORR’s specific consent for disposing of certain assets and ORR will be considering the regulatory implications of all these issues at the appropriate time.”

ORR: Network Rail Monitor (England & Wales) 2015-16

ORR: Network Rail Monitor (Scotland) 2015-16

 

 

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