ORR warning: Network Rail will enter CP6 in worse financial state
Network Rail expenditure was £287m over budget and the organisation underperformed by £679m during 2015/16 (the second CP5 year), reports ORR. Its annual efficiency and finance assessment also found NR to be 8.0% less efficient than in 2013/14, the last year of the last control period, CP4 (2009-2014).
NR’s performance for CP5 (2014-19) was laid down by the 2013 Periodic Review (PR13) as determined by the ORR.
Total NR expenditure in 2015/16 was £10.814bn, £287m up on ORR’s PR13 £10.527bn determination, and £479m higher than actual expenditure in 2014/15. Network Rail had a £953m work backlog – made up of £579m renewals, £340m enhancements and £34m in Schedule 4 payments – that will now have to be completed later.
Cumulatively, NR had a £1.758bn backlog over the first two CP5 years, which included £1,004m in renewals, £684m in enhancements and £42m in Schedule 4 payments. NR estimates the total amount of deferrals at the end of control period in 2019 will be £3.1bn.
Total renewals expenditure in 2015/16 was £3.077bn (PR13: £2.724bn), or £353m over budget; whereas total (PR13) enhancement expenditure was £2.990bn (PR13: £3.151bn), or £161m below budget.
“The renewals figure is largely due to supply chain issues, delays in programmes, contractor performance, more work than expected to keep its assets in an appropriate condition, in some areas lower volumes of work than expected so higher unit rates, and the effect of severe weather. It has also not delivered the majority of its planned efficiency initiatives,” says ORR.
As for enhancements: “Network Rail has spent less than the adjusted determination, it has also delivered less than expected.”
This is not the complete story, however. ORR is keen to distinguish between over/under spending and over/under performance. The former simply refers to the actual expenditure at a given point in time, whereas the latter takes into account time-related factors, e.g. deferrals or work brought forward.
“Our assessment of financial performance compares Network Rail’s income and expenditure to the PR13 determination. If Network Rail can demonstrate that it has spent less whilst delivering its outputs then it has financially outperformed. Network Rail needs to show that it has not spent less by non-delivery of outputs or by simply deferring work or working in an unsafe or unsustainable way. If it spends more it is underperforming unless it has brought forward work.”
Adjusting for these factors produces a renewals underperformance of £932m (£579m deferrals plus £353m budget excess); and an enhancements underperformance of £179m (£340 deferrals less the £161m budget underspend).
The enhancement results were further complicated by the November 2015 Hendy Review, configured after the PR13 determination and resulting in a revised baseline for enhancement expenditure in England and Wales.
Efficiency also declined: This is measured by comparing the actual expenditure on core business activities (but not enhancements) with that of the last CP4 year (2013/14) as adjusted for inflation and other factors. Core expenditure for 2015/16 came to £5.177bn. It comprised: total operations expenditure £538m; support costs £394m; network maintenance £1,248m; renewals £3,077m; less £80m rollover costs from CP4. This compared to £4.792bn for 2013/14, a deficiency of £385m, or -8.0%.
“For the control period to date Network Rail reported a decline in efficiency on its core business (i.e. excluding enhancements) of -8.0%, compared to our PR13 determination assumption of a 10.1% efficiency improvement. In other words, costs have risen but we expected them to fall. By the end of CP5 it is currently forecasting efficiency of 3.5% (i.e. it will exit CP5 3.5% more efficient than it started CP5) compared to our PR13 assumption of 19.4%. We estimate that the cost of Network Rail not delivering as much efficiency as we expected is around £3.9bn and is largely driven by higher renewal costs. . .
“Network Rail will be in a worse position financially at the start of the next control period than we expected, increasing the financial pressure on CP6,” warns the ORR.
For the first time, ORR presented its findings on a route basis. The analysis showed wide variations in performance and size between the ten regional areas. The ORR says the results have not been normalised (to reflect regional characteristics and other factors) and should be used as a rough but useful guide.
London North Western (LNW) is the largest route and has nearly 7,000 track kilometres, whereas Sussex is the smallest with around 1,000 track kilometres. Sussex also had the highest maintenance and renewals cost (c. £250,000 per track kilometre) while Scotland had the lowest (c. £100,000 per track kilometre), marginally lower than Wales.
All routes spent more on network operations than the PR13 assumptions: Sussex was the worst offender (by 67%), followed by East Midlands (by 44%), while Wessex showed the lowest increase (7%).
All routes spent more on maintenance than the PR13 assumptions, apart from Scotland (1% down); the highest increases were Kent (up 19%) and Anglia (up 18%). Likewise, the same pattern was true for renewals, the only exceptions being Scotland (down 11%) and Western (down 6%); whereas LNW recorded the highest increase (up 35%) followed by Wessex (up 29%) and East Midlands (up 24%).
Compared to the PR13 determination, NR net debt was exceeded by£456m, £40.178bn (PR13: £39.722bn), likewise the RAB (Regulatory Asset Base) by £1.440bn to £57.177bn (PR13: £55.737bn).