Memorandum by Railtrack (RI 20)
The history of the railway before privatisation
was one of low investment, low subsidy by international standards
and long term decline. Investment in the UK railway has historically
been less than half the levels of other major European countries.
This lack of investment has been reflected in
the differences between the relative market shares of the road
and rail network in our major European competitors and those in
this country. In 1997, rail passenger traffic took an average
of seven per cent of the transport market in Europe compared with
only 4.9 per cent in the UK; for freight traffic the relative
levels were 14.7 per cent in Europe and ten per cent in the UK.
The lack of investment between 1970 and 1995 caused our passenger
railway to decline in contrast to the growth of three per cent
pa seen in other European countries.
The railway in this country, over a long period,
has struggled with limited resources with little opportunity or
aspiration to expand and develop. As John Welsby, a former Chief
Executive of British Rail has observed, the "railway problem"
had historically reflected a tension "between a political
imperative to maintain as wide a rail network as possible and
the financial imperative of containing public expenditure."
The structures created by privatisation were based on the assumption
of no growth, the objective to maximise proceeds to the Treasury
and minimise future subsidy requirements. There was no vision
of the size and type of railway the country needed.
In the last four years we have seen a complete
turnaround. Investment in the railway has more than doubled, and
we have seen a 28 per cent increase in passenger train miles and
a 38 per cent increase in freight tonne miles.
For this growth and investment to continue,
the Government's 10 year transport plan, the SRA's plan and the
Regulatory Review of access charges, are critical. They have to
provide the industry with the finances and framework to continue
to invest and provide the country with a railway to rival our
European competitors, fit for purpose for the twenty-first century.
The privatised railway needs to improve the
quality of its services to customers further, but that should
not obscure the considerable progress that has been made in recent
years. As the Parliamentary Under-Secretary, Keith Hill MP, has
said "it [the railway] has been successful in many respects
under privatisation." (Hansard, 10th May 2000, col 921).
Investment is over twice that of British Rail; delays have been
reduced providing a better service to passengers; more passengers
are travelling by train, which brings significant economic and
environmental benefits. Passenger levels are now higher than at
any time since 1946. These are real achievements on which to build.
Railtrack will spend £2.5 billion on the
network this financial year, including investment in CTRL phase
1, more than twice the level invested by British Rail. This year's
plans build on the £2 billion we invested last year of which
£1.7 billion was renewal and enhancement on the core network.
This significant increase in spending has been
funded by an increase in debt. Interest payments on the debt have
increased, reducing the company's interest cover (the ratio of
profit to interest). Further increases in debt, without an increase
in profit will reduce the company's interest cover further, to
levels where the company's agreements with the banks could be
This increase in Railtrack investment, funded
by debt has occurred during a period of declining subsidy.
At the time of the prospectus Railtrack acknowledged,
on the basis of detailed engineering studies undertaken, that
it would need to spend around one billion pounds more than allowed
for by the Regulator in 1995. Since then our assessment of the
required level of renewals has increased by a further one billion
pounds as a result of improved asset knowledge, traffic growth
and the need to deliver improved outputs. As a result, Railtrack
has spent around two billion pounds more than allowed for by the
Regulator in setting access charges in 1995 and one billion pounds
more than projected at privatisation. For these reasons the claim
that Railtrack has underinvested in the network has no foundation.
As the Deputy Prime Minister acknowledged at
the rail summit on 25th May, punctuality on the network has improved
despite the problems caused by congestion as traffic grows. Since
privatisation delays to passenger trains due to infrastructure
related causes have reduced by 44 per cent, including a ten per
cent reduction last year and reflecting the efforts made throughout
Railtrack to target the key causes of delay.
Railtrack's record as steward of the network
has been subject to considerable scrutiny. We accept that, despite
increased investment and improvement in many areas, the condition
of all our assets is still not where we would like it to be. The
impact, particularly on track and related assets, of running unprecedented
numbers of passenger and freight trains has been significant.
This means that our assets degrade more quickly and require earlier
renewal and cost us more to accommodate the extra traffic than
we and the Regulator predicted.
The sharp increase in broken rails in 1998-99
prompted a £100 million recovery programme. We have halted
that upward trend and the number of broken rails decreased by
4 per cent last year, and in the first two months of this year
the number of broken rails were 20 per cent lower than the same
period last year.
Track quality, which affects the smoothness
of the ride experienced by passengers, declined sharply between
1994 and 1996 when Railtrack was in the public sector and subject
to Treasury spending limits. Since then it has improved steadily
and we have put a major programme in place to return quality to
1994 levels by 2001. We are now within 1.2 two per cent of our
target for 2001. Furthermore, as shown below, we have made substantial
improvements in the quality of that track deemed to be in the
worst condition ("super-reds").
Whilst safety is not specifically mentioned
in the Committee's remit for this inquiry we set out below some
of the key steps we have taken to make rail travel safer both
through our working practices and through investment.
The number of signals passed at danger fell
by 11 per cent last year to the lowest number ever. However, the
tragedy at Ladbroke Grove highlighted the absolute requirements
for the industry to deliver a step change in safety improvements.
Action already taken includes carrying out risk
assessments of the 224 signals passed at danger more than twice
in the last five years and implementing all the recommended steps
to reduce risk. A similar exercise has been carried out at all
complex layouts. We have also accelerated the introduction of
the train protection warning system (TPWS). This project, costing
£330m, will now be completed by December 2002, a year earlier
than originally planned. This should reduce the risk of SPADs
by over 70 per cent. We are rolling out the confidential reporting
system and it should be in place across the whole country by the
autumn. Over 80 per cent of investment has a safety benefit so
the increase in investment will play its part in improving safety.
Work has also begun on the creation of a new
group subsidiary, Railway Safety, covering the responsibilities
of the Safety and Standards Directorate and Sir David Davies has
been appointed its chairman. We anticipate that Railway Safety
will be established formally in the autumn. It will then take
over in full when necessary modifications to Railtrack's Network
Licence have been made by the Rail Regulator and new Railway (Safety
Case) Regulations are in place.
Seven inquiries are proceeding or have taken
place into the Ladbroke Grove accident. We are already implementing
the recommendations of those that have reported and await the
outcome of the public inquiry currently underway. We are committed
to learning the lessons of the accident and translating them into
action and have appointed a main board director of line safety
to implement the recommendations.
3. PLANS FOR
Current Network Enhancement
Over the past year we have completed a wide
range of enhancements to the network which are set out on a route
by route basis in Railtrack's 2000 Network Management Statement.
Work has also continued on major projects such
as the upgrading of the West Coast Main Line where the first phase
is underway with £1.2 billion of contracts now let. On the
East Coast Main line, phase one of improvements to the station
and layout at Leeds is 39 per cent complete and work has begun
on the Sunderland Metro extension. We have also been working on
the planning issues related to the Thameslink project for which
the public inquiry starts shortly. On the Channel Tunnel Rail
Link, work is now 30 per cent complete on phase one and we are
undertaking due diligence work on phase two.
Future Investment Plans
Railtrack also set out plans in the NMS to build
on the growth we have seen in the last four years and accommodate
future demand. Our new passenger demand forecasting capability,
which we have developed in partnership with ATOC, suggests that
growth in passenger traffic could range from 23 per cent to 64
per cent over the next 10 years and our central forecast, on which
our investment plans are based is 47 per cent over the next 10
years. We have also set out a range of scenarios for freight and
plans to accommodate increases in traffic in that sector.
In the NMS we set out a range of options for
developing the railway which, added together, could cost up to
£52 billion over the next 12 years. It will be for Government,
the SRA, train operators and Railtrack to determine which of these
options they wish to take forward and the priorities for the future
development of the railway.
Our recommendation is for an £8 billion
enhancement programme over the next five years which will deliver
25 per cent growth in the first five years of the 47 per cent
forecast. This programme has been built up on a route by route
basis and includes the upgrades to the East Coast Main Line and
Great Western Main Line; improvements to the London to Stansted
route; the North Trans-Pennine Upgrade; and capacity improvements
around Manchester, Coventry and Birmingham. The total committed
investment is £3 billion and we are discussing the funding
of the remaining £5 billion with the sSRA and the Regulator.
Delivering a £2.5 billion spending programme
on a busy integrated railway presents a particularly demanding
challenge. We have overhauled our approach to major projects and
strengthened our supply chain and logistics to ensure that our
plans are delivered effectively and efficiently on the operational
The West Coast Main Line project, conceived
prior to privatisation, has had to be reconfigured under new management
and the moving block signalling strategy (which had to be abandoned
on the Jubilee line) has been abandoned in favour of a lower risk
but more expensive approach. The lessons learned from this project
have been reflected in our revised approach to managing enhancement
projects from initial evaluation to delivery. International project
management companies (currently Bechtel, Fluor Daniel and Parsons
Brinkerhoff) now work in integrated teams with our own railway
experts. We split all major projects in phases to reduce risk
and are only using proven technologies. We now have a system which
uses five levels of cost estimation, representing progressive
degrees of knowledge about the feasibility of a project, and will
only offer fixed price commitments once we have reached level
five. This way all those involved can be confident that the costs
and timescales of delivering projects are well understood and
properly provided for.
We have also taken steps to improve management
of our supply chain and the associated logistics.
We are at a critical point in the development
of the railway. Our regulators, customers, and Government all
have to clarify the kind of railway they want and the enhancements
they are willing to pay for.
The major issue to be resolved is the future
funding of the railway and the level of access charges in the
next control period. The massive development of the network we
outlined in our NMS cannot be funded on the basis of the Regulator's
preliminary determination published in December 1999. Delivering
investment on this scale, whilst maintaining our investment grade
credit rating, will require access charges to rise significantly.
Whilst some of this can be funded from extra revenue from fares
it is inevitable that public subsidy will have to rise because
large enhancement projects cannot be justified commercially. Without
a significant increase in access charges the current investment
programme would become unfinanceable and would have to be cut
If we are to fund the development of the future
railway the Regulator's final determination will need to adopt
realistic assumptions on the scope for efficiencies; fully reflect
the impact of traffic growth and service improvement in his conclusions
on renewal volumes; and take a balanced view on the costs of the
West Coast route modernisation project.
Other uncertainties arise from the franchise
replacement process that is still at a very early stage and raises
many questions about the train services which train operating
companies will wish to offer and the changes to the railway infrastructure
these will require. Equally, clarity on the future funding of
the railway will only come from the Government's ten year plan
which we hope and expect will provide additional resources for
the railway, recognising the environmental and social benefits
that increased rail usage brings.
The periodic review, which sets our access charges
for the five years from 2001 to 2006, provides an opportunity
to correct the flaws in the existing regulatory regime which were
highlighted in the NAO report. This regime, drafted before privatisation,
now needs revision so that it meets the needs of an expanding
Current levels of access charges fail to reflect
the level of investment necessary to maintain and renew the network
in 'steady state'; nor do they allow for the effects of growth.
They were set on the basis of inadequate information with ill-defined
concepts such as modern equivalent asset values and static traffic
forecast assumptions. As a consequence, Railtrack expects to have
spent nearly £2 billion more in renewing the network than
had been anticipated when the current track access charges were
set in 1995. In reviewing the future levels of track access charges
it is important that the Regulator avoids repeating the mistakes
of the past when insufficient allowance was made for the maintenance
and renewal costs of sustaining the network. This is particularly
important given the improved outputs now expected from the network.
This means that access charges will need to rise substantially
in the next control period simply to maintain the current network.
Problems have also arisen because regulatory
expectations were poorly specified in 1995. The access charges
were based on the concept of renewal in "modern equivalent
form" which as the NAO report has pointed out "has been
difficult to apply in practice" (NAO Report, Ensuring that
Railtrack maintain and renew the network, paragraph 3.27). The
report also says that it "should have been a priority for
the ORR to devise, in conjunction with Railtrack a consistent
set of performance indicators for maintenance and renewal activity
with unambiguous definitions". (ibid 3.26). The failure to
establish these clear definitions has caused problems for both
Railtrack and ORR.
This reinforces the need to clarify the outputs
specified in the next control period and to establish, in advance,
the nature of the associated monitoring and incentive regimes.
We have therefore been working closely with the Regulator to set
up a new set of baseline outputs to ensure a clear framework is
in place from April 2001.
Providing for the future railway will require
additional funding and a clear structure for remunerating enhancement
expenditure. The lack of such a framework in the current control
period has been a significant impediment to network development.
We were disappointed with the Regulator's proposals in his Provisional
Conclusions on the Incentive Framework in this area. We feel these
do not recognise the risks involved in developing large scale
investment projects and do not provide an adequate framework for
Railtrack to earn a return on capital investment projects.
Railtrack supports the Regulator's view that
"incentive regulation is and always has been preferable to
enforcement action" (ORR Provisional Conclusions on the Incentive
Framework. April 2000). We hope that the current review of access
charges will reinforce that principle. However, we are concerned
that his latest thinking, set out in his provisional conclusions,
does not go far enough towards establishing a proper incentive
framework which allows Railtrack to share in the benefits of growth.
The Regulator appears to be placing a disproportionate emphasis
on enforcement action. In other regulatory regimes, enforcement
action is extremely rare and should be unnecessary in a properly
constructed incentive framework.
The current regime of 90 per cent fixed access
charges means that Railtrack's incentives are misaligned with
those of the TOCs. The recent growth in traffic brings insufficient
financial compensation to Railtrack for the additional costs of
these extra trains. In effect the extra trains are not covering
their marginal costs. The periodic review, together with the process
of franchise replacement, provides an opportunity to create a
framework for industry growth which aligns incentives.
Government's Ten Year Plan
The future funding of the railway is the critical
question, which will need to be addressed in the Government's
ten year plan. The restructuring of the railway at the time of
privatisation assumed declining subsidy. However, it is now clear
that if Government wishes to see the railway continue to grow
and to achieve a greater shift of traffic from road to rail then
further Government support will be required.
There are many railway projects which do not
have a clear commercial case but which would bring considerable
social and environmental benefits. We have shared with Government
the work we have done on this area to help prioritise schemes.
Therefore, we believe that the Government's
ten year plan should provide a firm financial commitment to the
development of the railway and clarity as to how that funding
should be provided and the kind of projects which will be supported.
The Role of the SRA
As the Minister has said during the passage
of the Transport Bill which will establish the SRA "we need
to create a proper and flexible framework that will allow for
an expanding railway." (Keith Hill, Hansard, 10 May
2000, Col 921). It is therefore important that the SRA has a clear
definition of its role and responsibilities.
Railtrack believes that the SRA needs to take
a truly strategic approach and we see its role as:
the promotion of railways for the
funding socially necessary schemes;
securing necessary funding from the
influencing strategic development.
We do not believe that it would serve the interests
of passengers if the SRA became involved in operational issues.
The planning of network capabilities and meeting the needs of
railway users is best done by Railtrack and the TOCs who are closest
to their customers. Duplication of that activity or second-guessing
by the SRA would clearly be against the interests of passengers.
Direction of investment on the basis of strong central planning
is likely to lead to bad decisions unrelated to passenger needs.
We are concerned that both the SRA and the Office
of the Rail Regulator are planning considerable increases in staffing
and resources. These increases come at a time when the Regulator
is proposing 3 to 5 per cent efficiency reduction for Railtrack.
We believe that these increases need proper scrutiny to ensure
that costs of regulation do not divert resources away from the
|Budget (running costs)||
||£8 million||£13 million
|Budget (running costs)||
||£8 million||£13 million
|Budget (running costs)||
||£10 million||£12 million
Source: DETR annual report
(1) The Regulator has proposed an increase in licence fees of
40 to 50 per cent in this financial year to cover significant
increase in running costs (Letter, 7/2/00).
Sources of Funding
Railtrack has been exploring the alternative ways in which
the extra investment (£8 billion over the next control period)
needed in the railway could be provided. The most efficient way
in which this could be achieved is through adequate access charges,
and we look to the Regulator to do this in the final Regulatory
settlement this July. If we have the assurance of sufficient income
through access charges this would provide flexibility to raise
additional equity from shareholders through a rights issue.
Alternatively public finance could be provided through grant
funding from the SRA although we continue to believe that direct
funding is not in the interests of passengers as it undermines
our commercial relationship with TOCs and is an inefficient way
of bringing finance into the industry.
A third option is to use third party funding known as Special
Purpose Vehicles (SPVs) which would pose considerable practical
problems and would be the most expensive form of finance. We cannot
see how these would work in practice on an integrated network
and believe that, other than for stations and new railways on
green field sites, they will be more costly and very complicated.
This is consistent with the situation with other network utilities,
where in gas and electricity competition has been introduced in
the provision of local connections but the core network is provided
by a single (regulated) operator.
It is important to stress that further fragmentation of the
industry must not compromise the safety and integrity of the network.
The SRA has expressed concern that Railtrack has insufficient
resources to manage the investment programme. We believe that
concern is unfounded. We have employed international project management
companies to work with us and provide additional resources when
Going forward we believe a partnership between Railtrack
and the SRA is fundamental to the delivery of a bigger, better
railway. Public subsidy must rise if the Government's growth aspirations
for rail are to be met. A true public/private partnership between
Railtrack as the owner and operator, and the SRA as the major
funder is, we believe, the right institutional architecture for
the future of a growing railway. We have proposed that the SRA
invest in preference shares in Railtrack as being the most efficient
way to lever public money into the railway. We have made good
progress in developing proposals for project development boards
for major schemes with the SRA. Reaching agreement on the detail
of the SRA/Railtrack partnership will be a key priority for the
Historically the UK has under invested in its railways which
means that, compared with our EU competitors, rail has a smaller
share of the passenger and freight markets.
Restructuring of the industry was predicated on stable traffic
volumes and cost reduction. The regulatory framework, fixed in
1995, failed to reflect the extent of backlog investment required
in the network or provide adequate incentives for growth and development.
These issues are now being addressed through the Regulator's Periodic
Review of track access charges.
With privatisation of the industry, the historic cycle of
low investment and decline has now been broken. Passenger numbers
have risen to a level higher than at any time since 1946 and freight
volumes have also grown by 38 per cent. Railtrack has doubled
investment which is now running at £2.5 billion pa.
Contrary to claims that Railtrack has failed to invest sufficiently,
by 2001, we shall have spent around £2 billion more than
allowed for in the current track access charges.
Consequently, to maintain the serviceability of the existing
network with higher expected traffic volumes and delivering improved
outputs (in terms of performance and track quality) will require
a substantial increase in track access charges.
Payment through access charges is, we believe, the most effective
way to finance development of the network to provide the capacity
for an estimated 50 per cent growth over the next 10 years. Railtrack
is committed to working in partnership with the sSRA in a strategy
for network enhancement.
Development and delivery of large construction projects in
a complex operating environment carries greater risks than routine
maintenance and renewal of the network. In developing a framework
for enhancement, it is important that the Regulator makes adequate
allowance for these risks.
Over the coming months, a co-ordinated approach is needed
between the Government's 10 year plan for transport, the Regulatory
Review and refranchising, to provide clarity on investment priorities
and ensure the financeability of proposals for network development.