Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence

Further memorandum by Railtrack (RI 20B)


  This evidence, in line with the Sub-committee's request, is a supplement to the material provided by Railtrack in June 2000. It looks at the impact of the Government's 10 year plan and the Periodic Review as well as updating the Committee on activity arising from the accident at Hatfield.

  As Railtrack outlined in its earlier evidence, we are making significant investment in improving and developing the railway. However, our future priorities and ability to provide this funding are dependent on the 10 year transport plan, the Regulator's periodic review and the Strategic Rail Authority's (SRA) strategic plan. The outcome of the first two are now known although we are still assessing the detailed implications of the Periodic Review. We are still awaiting the SRA's plan, now expected early next year. Only when that is published and all the Periodic Review issues finalised will we have a comprehensive picture of the priorities for the future development of the network.


  Despite the regulatory uncertainty prevailing this year, Railtrack is providing record levels of investment to develop and improve the railway. The first half of this financial year saw the level of investment increase by 36 per cent to £1.2 billion. This is more than Railtrack invested in the whole of 1996-7. Work on major projects like the £125 million upgrade of Euston and the £36 million improvements to Proof House junction were completed as part of the West Coast Main Line route modernisation. Railtrack is well on course to meet the £2.5 billion investment target for the whole year, which is twice the level of four years ago.

Asset Stewardship

  We also have continued to focus much of our attention on renewing and maintaining our key assets, in particular track. In the light of the rise in the number of broken rails last year we have focused attention on tackling the issue. This work has reduced numbers of broken rails significantly and in the first six months of the year, the number declined by 32 per cent from 256 to 174. However, in the light of the accident at Hatfield we are reviewing our activity on tackling broken rails and rail renewal.


  We welcome the Government's ten-year plan and the extra investment in the railway which it will provide and its acknowledgement that "the Government will need to provide substantial financial support, reflecting the social, environmental and economic benefits that cannot be paid for through fares and charges". (Ten-year plan, para 6.13)

  The targets in the plan for a 50 per cent increase in passenger kilometres and an 80 per cent increase in freight tonne km are challenging and ambitious. In order to achieve these targets, action will be required by the rail industry supported by Government policy to ensure the right funding framework, sufficient regulatory certainty and appropriate taxation of road traffic.

  The plan places considerable reliance on public and private partnership with an expectation that £34bn will be provided by the private sector and £25bn from Government. In order to achieve this, and to level in private capital, Railtrack will need a regulatory and funding framework which allows it to maximise access to the markets.

  The 10 year plan says that the SRA strategic plan "will set out the principles of investment support and describe the forms of funding that will be available". We hope that this document will provide clarity, particularly about the procedure for SRA funding of enhancement projects. At present it is not clear the extent to which investment will be funded through re-franchising with funding passing through TOCs, or more directly through capital grants paid directly to Railtrack. We also need to see more transparent and explicit guidance on prioritisation to enable efficient planning. The plan will also provide the context for next year's Network Management Statement in which we will set out our plans for the next 10 years.

Rail Modernisation Fund

  The 10 year plan sets out proposals for a £7 billion Rail Modernisation Fund. We welcome the creation of this fund although we are concerned about the precise accounting treatment and timing of the payment of these grants. The Government has made it clear that it sees the grants in the Rail Modernisation Fund as being able to "lever in a much greater amount of private capital." In order for Railtrack to achieve this aim then it is vital that the costs of raising debt against the grants are lower than raising it against Railtrack's balance sheet and the SRA will need to recognise the detailed requirements of our funding providers in the market in the way it administers grants.


  The Regulator's final conclusions were published on 23 October. The document is complex and detailed and the company is still assessing the full implications for our future activity and investment. However, we welcome the fact that the Regulator has responded to our representations on the cost of capital; the size of the Regulatory Asset Base and the framework for enhancement projects.

  Overall the Regulator has acknowledged the need to increase our revenue in some significant areas with 34 per cent of our income now coming through Government grants and the remainder through access charges. We welcome the recognition that our income needs to rise substantially. It is clear that access charges in the current control period have proved to be inadequate and that significant investment is needed in the next control period to provide the high quality network we need to accommodate forecast increases in traffic. However, we are concerned that whilst the Regulator has increased our allowed income by £700 million since his draft conclusions only £200 million of that will be paid in the forthcoming control period. This deferral of income could cause financing problems.

Renewal and Maintenance

  The Regulator has allowed Railtrack almost £11 billion (after allowing for efficiency savings) for renewal and maintenance over the next five years. In addition £4.2 billion has been allocated for operating expenditure.

  The renewal and maintenance spending is divided amongst the various asset categories as set out in the following chart showing that the key areas of expenditure will be on track and train control systems (signalling).

Initial Assessment

  Whilst we are still assessing the detailed financial implications of the conclusions we have concerns about a number of the Regulator's proposals. In particular, we believe that the efficiency target is extremely challenging. It requires Railtrack to take out some 17 per cent of the total cost base over the five-year control period at the same time as dealing with growth and the demand for improved outputs. Equally, the basis for setting future benchmarks for train delay is also an area which we believe needs further review to ensure that it provides an appropriate balance of incentives and priorities rather than a punitive regime.


  The Regulator has said that he expects Railtrack to be able to fund £8 billion of investment in the next control period. We are currently committed to an enhancement programme of £3.4 billion over the next five years which will include projects such as Thameslink 2000. We are still assessing the impact of his proposals on our funding capacity but it is unclear whether the Regulator's conclusions will provide us with the funding capacity to finance a larger scale enhancement programme.

Areas of Uncertainty

  There are a number of areas where the level of activity and spending the industry will need to undertake is unclear. These include the work that will be required in the light of the Hatfield accident to establish clarity on the long-term implications. Equally, the Cullen Inquiry recommendations will need to be accommodated by the Regulator. Whilst the Regulator has allowed funding for the instalment of the train protection warning system (TPWS) there will undoubtedly be other recommendations which will bring additional costs. Furthermore, we understand that the Cullen Inquiry is looking as aspects of the Periodic Review settlement. All this means that the Regulator will need to ensure that framework for the next control period provides sufficient flexibility to accommodate these new spending requirements as they emerge.


  In the light of the accident at Hatfield the whole industry has embarked on a re-assessment of its priorities to ensure that all the safety issues are addressed promptly and effectively.

  Railtrack is working with the industry to develop mechanisms which can reconcile the sometimes conflicting pressures for network safety, performance and growth. Passenger traffic grew by 33 per cent in the five years to March 2000, and freight by 40 per cent. This level of growth inevitably puts pressure on the operation of the network. A series of joint industry working groups have been set up to examine areas where perverse or conflicting incentives or interests deter integrated operation of Britain's railway system. These will report in a few weeks to an industry steering group chaired by Sir Alastair Morton.

  We will be able to provide an up-to-date briefing to the sub-committee, at the oral evidence session later this month, on this activity and on the recovery programme we are putting in place to renew and repair the track.

November 2000

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