Further memorandum by Railtrack (RI 20B)
1. INTRODUCTION
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.
2. UPDATE ON
INVESTMENT THIS
YEAR
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.
3. IMPACT OF
TEN-YEAR
PLAN
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.
4. IMPACT OF
THE PERIODIC
REVIEW CONCLUSIONS
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.
Enhancement
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.
5. ACCIDENT AT
HATFIELD
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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