Supplementary memorandum by Network Rail
THE FUTURE OF THE RAILWAYS INQUIRY
1. What is Network Rail's latest estimate
of its financial requirements over the next control period?
In December 2003, the Rail Regulator determined
that Network Rail's financial requirement for the five years from
April 2004 is £22.2 billion. We are updating our projections
following the conclusion of the interim review and will publish
our revised forecasts in our new business plan, to be published
in March 2004. This will reflect ongoing further work on the scope
for improved efficiency and assumed savings from improved prioritisation
of work consistent with our regulatory and contractual obligations.
2. The Committee heard evidence earlier in
the inquiry that rail maintenance spending could not be allocated
to specific lengths of track under current arrangements, though
that level of precision had been possible before 1994. Is that
accurate? What are the current arrangements for ensuring that
such resources are spent precisely as planned?
We understand that, up to 1994, it was possible
to allocate costs to individual business route sections (with
each section covering around 40 track miles). This level of precision
was lost following privatisation as a result of the way that the
maintenance contracts were structured, particularly through a
loss of visibility to the infrastructure manager (then Railtrack)
of what work was being carried out by the contractors.
In October 2003, Network Rail announced the
ground-breaking decision to bring all rail maintenance in-house,
one of the most fundamental changes to the structure of the railway
since privatisation. Once this decision is fully implemented,
we will work to address this question and reintroduce accurate
monitoring of the maintenance work being done. For example, we
have already introduced a dedicated work and asset management
system, known as MIMS, across the company as a single tool to
ensure consistent information gathering and reporting. This has
enhanced our ability to monitor the delivery of our maintenance
plans, in terms of both volumes and expenditure.
In addition, we have increased the range of
information about maintenance costs, activities, quality and efficiency
monitored within the company. This includes a specific set of
key and supporting performance indicators to allow us to measure
and monitor performance in delivering the planned maintenance.
These indicators were introduced at the start of the current financial
year (1 April 2003), since when the maintenance areas have been
developing their reporting systems to be able to provide data
on all measures, and we expect to have a full year's data for
all by 31 March 2004.
3. Are you now able to let the Committee
know the amount of compensation Network Rail will pay to the private
sector as a result of the decision to take rail maintenance in
This information is commercially confidential.
4. Exactly how will you ensure that staff
who may have essential skills transfer to Network Rail from the
private sector rail maintenance companies?
This was identified as a specific risk in the
feasibility studies carried out prior to taking the decision to
take maintenance in-house, and a mitigation plan to address it
was developed at an early stage.
Overall risk management is being addressed through
our working very closely with the rail maintenance companies to
ensure a smooth transfer of both responsibilities and staff to
Network Rail. This is being carried out through a dedicated Network
Rail Transition Programme Team, supported by teams responsible
for dealing with the individual IMCs, all of whom are focusing
on all of the key issues relating to the transfer.
Within this, specific actions and initiatives
are being undertaken to ensure that we retain key people. These
a communications strategyEarly
and frequent communication to allay fears and encourage employees
of the IMCs to join Network Rail. This is being approached through
bulletins, local face-to-face meetings, access to local HR Teams
and frequently asked Q&A sheets; and
identification of key employees,
followed by discussions to ensure they understand our wish for
them to see Network Rail as a positive employer with far greater
potential for their future.
Our experience thus far is good. In both the
Reading and Wessex contract areas, which have already transferred
to Network Rail, we were able to transfer in all key employees
required for the successful delivery of rail maintenance in those
areas in the future.
5. How will your estimated annual savings
of £170-250 million from taking maintenance in-house be achieved?
Taking maintenance in-house will provide cost
reducing the overheads associated
with maintenance work, including through removal of the profit
margin which necessarily forms part of commercial maintenance
enhancing our ability to ensure a
"right first time" approach to maintenance, thereby
avoiding costs from unnecessary rework;
improving our ability to make efficient
use of the available resources and therefore increase productivityfor
example, by redeploying maintenance workers where a job is completed
ahead of schedule and by allowing us to further optimise plant
utilisation through national planning;
supporting our initiatives to reduce
the amount of reactive maintenance and to mechanise manual activities;
increasing economies of scale through
direct procurement of maintenance materials.
6. What is Network Rail's current credit
Network Rail and its group companies do not
yet have credit ratings. However, Network Rail's Commercial Paper
programme has the highest possible short-term ratings from the
three ratings agencies (FI+/Al+/PI). The commercial paper programme
has SRA credit support.
7a. What is the amount of Network Rail's
Net Debt for the Network Rail Group for the
financial year ending 31 March 2004 is forecast to be between
£13 billion and £13.5 billion.
7b. What projections are there for additional
borrowing over the next 12-24 months?
Based on the final conclusions of the interim
review, we expect to borrow a further c £4.4 billion over
the next 24 months. We are currently discussing with the SRA and
ORR whether there is scope to reprofile an element of our revenues.
This could increase borrowing by up to £2.8 billion over
the same period.
7c. What Network Rail borrowing appears on
the accounts of the government or the SRA, if any?
We understand that the SRA treats Network Rail
as a quasi-subsidiary for accounting purposes and that the SRA's
accounts reflect this position.
7d. What would the additional charges be
on £8 billion of borrowing?
This would be dependent on the phasing of any
borrowing and the company's cost of debt at the relevant time.
At current one month LIBOR, the cost of borrowing £1 billion
would be around £39.5 million per year.
7e. What is your estimate of the potential
savings to Network Rail in interest charges were the company to
have access to Government borrowing?
Network Rail is a private sector company without
access to Government borrowing. Accordingly, we are not in a position
to make calculations of this nature.
8. What is the company's policy on benchmarking?
Apart from the Regulator's interim review exercise, what examples
of Network Rail benchmarking can be offered and with what result
for value for money?
We believe that benchmarkingboth within
the company and with external comparatorshas an essential
part to play in identifying and supporting opportunities for efficiency
and process improvements.
To that end, Network Rail has already made substantial
progress in improving the consistency of definitions and reducing
the number of different ways of doing things across the business,
so that meaningful unit cost comparisons and benchmarking can
be carried out over time and between regions. We have also sought
to improve the quality of data and a further step change will
be achieved by bringing maintenance in-house. The work done by
the independent consultants as part of the interim review took
this further forward and we will continue to develop this over
the next few years. We have also sought to learn from best practice
in other countries or other industries and are working with other
railways to share experiences.
9. What is the total number of contractors
employed by Network Rail over all of its activities? Could you
confirm that many, if not all, contractors sub-contract aspects
of such work? Does Network Rail keep a record centrally of such
Network Rail has just over 10,000 suppliers
of goods and services with the top 200 accounting for 90% of total
expenditure in the 2003 calendar year.
Network Rail contracts with about 200 suppliers
of physical works on the controlled infrastructure and there is
a high level of subcontracting. Contractors are controlled through
a supplier accreditation framework that assesses and verifies
capabilities and competencies to work on the controlled infrastructure.
Network Rail's direct contractors are required
to submit a contractor assurance case and demonstrate how they
will manage the health, safety, environmental and quality issues
associated with the scope of any work that they might be awarded.
Contractor assurance cases are reviewed annually after the initial
approval and subject to complete re-assessment every three years.
A feature of the contractor assurance case is the requirement
to detail the process for management of sub-contractors. Contractor
assurance case holders are required to use sub-contractors that
are qualified through "Link-up", the rail industry supplier
certification system, which therefore provides a full list of
all permitted sub-contractors.
Link-up is the database of certified suppliers
of specific services and activities. To be included in the database,
suppliers, are subjected to a verification process that is matched
to the level of risk associated with their service specialism.
For suppliers of services with no impact on safe operation, the
verification is straightforward and low cost. For services that
do impact on safety there is a detailed qualification process
supported by a formal, comprehensive audit of the supplier's management
system, to confirm competence and capability. It is only on successful
completion of this process that the supplier becomes qualified
and available for work and this certification is repeated annually.
Link-up is subscribed to by 80 organisations,
including all the principal contractors in the industry. The database
contains 3,500 certified suppliers and is available on-line to
the subscribing organisations. The system is used by about 4,000
individual procurement users to identify certified suppliers.
Network Rail is heavily involved in the continuing
development of effective supplier certification and is working
closely with the Health and Safety Executive and the Railway Safety
and Standards Board to enhance the existing process.
10. The Committee was told that in October
2000 delays attributable to infrastructure amounted to 7.7 million
minutes; that this delay was 14.7 million minutes last year; and
consequently that infrastructure performance is 92% worse now,
down from 70% in the summer of 2003. Does Network Rail accept
The figures quoted for total delays attributable
to the infrastructure for 1999-2000 (7.7 million minutes) and
2002-03 (14.7 million) are correct.
However, due to the increased congestion on
the rail network, the figures are not directly comparable. The
key measure for passengers is train punctuality which stood at
88% for 1999-2000, fell to 63% in the immediate aftermath of the
Hatfield accident and presently stands at 81.2%.
Whilst we accept that a great deal of improvement
is still required, it must be recognised that the higher levels
of performance prior to the Hatfield accident were achieved in
the context of much lower volumes of work on the rail network,
leading to the deterioration in asset condition which Network
Rail inherited. We are presently renewing four times as much track
as was done under Railtrack and are committed to reaching 90%
punctuality in 2008-09.
It is important to understand that the number
of points and signalling failures has remained relatively static
in recent years and it is the increase in the average minutes
delay per incident which lies behind much of the deterioration
in performance. The increase in delay per incident is due to a
number of factors, including changes in driving styles, safety
standards, and contractor times to respond to and fix faults.
These changes have been compounded by timetables which in some
cases are not achievable in practice and by weaknesses in the
cross-industry capability to efficiently restore service following
disruptive incidents. As is discussed in response to question
12 below, we are working to address these issues. Recently there
have been signs that delay per incident is improving.
11. What is Network Rail's delay minutes
target for 2003-04?; what is your present assessment that it will
be met; and what currently are the in-year achieved figures against
your in-year milestone targets?
Our delay minutes target for 2003-04, as published
in our business plan, is 13.25 million minutes.
As is discussed in our interim review submissions
to the ORR, a range of factorsnot least the impact of the
unprecedentedly high summer temperatureshave led to performance
improving less quickly than we had planned. Our latest forecasts
point to an outcome of around 13.8 million minutes. While this
would not achieve our target, it would still represent an improvement
of 1 million minutes compared to 2002-03.
For the nine 4-week periods up to 6 December,
Network Rail delays are running 6.6% worse than internal targets.
However, during the main eight week autumn period, performance
was 2% better than the internal target, a 27% improvement on the
performance during the previous autumn.
12. Is the company confident of being able
to meet all the delay/minutes targets set in paragraph 9.3 of
the Regulator's draft final interim review document?
As set out in our response to that document,
we believe that the performance targets proposed by the Regulator
in his draft conclusionsand subsequently confirmed in the
final conclusionsare extremely challenging. While we remain
committed to delivering substantial improvements in performance,
it will be a very stretching task to do so in line with the Regulator's
The key to delivering significant performance
improvements, lies in tackling the increase in delay per incident
(DPI). As illustrated by the response to question 16 below, we
have already begun to see some improvements as a result of the
targeted approach being taken to identifying and addressing the
root causes of increases in DPI. At the same time, there remains
substantial scope for further reductions.
It is important to note that, as acknowledged
by the Regulator, delivering performance improvements does not
lie fully within the gift of Network Rail. Some aspects of DPI,
such as incident response times, can and are being addressed directly
by us, and further improvements will be achieved through bringing
response teams under our direct control as maintenance is brought
in-house. But some contributory factors, such as train driving
styles, will require improvements by train operators, and others,
such as recovering the service after an incident, will require
improved co-operation across the industry. We recognise that there
is an important role for Network Rail in leading the delivery
of these wider improvements, and we are actively fulfilling that
role. However, we will ultimately carry some risk that our industry
partners will not be able to achieve the profile of improvements
which would enable us to meet the Regulator's targets.
13. Please explain how Network Rail encourages
and uses research into the railway. What is the scope of such
research in the UK? Approximately how much is being spent on the
research? In Network Rail's view, is sufficient research nation-wide
being undertaken to ensure that the UK rail industry is benefitting
from the best of world research in this field?
It is our view that railway research has been
neglected in the UK over the past decade and, although there are
still pockets of excellence, the UK has lost its former pre-eminent
position. This was recognised by the report of the DTLR's Rail
Research Strategy Project published in 2001.
During the course of 2003, Network Rail set
up a Technology Research Group to encourage research into railway
infrastructure issues and to translate it into developments that
meet its business needs. In order to encourage research, this
group has published a Research Needs Statement in the form of
an accessible brochure identifying the priority areas for research.
The brochure will have a wide circulation amongst researchers,
potential research collaborators and those with solutions transferable
from other industries.
Network Rail actively participates in the following
AGRRI (Advisory Group for Railway
Research and Innovation)The cross-industry group promoting
co-operation in UK Railway Research.
ERRAC (European Railway Research
Advisory Committee)A group setting the agenda for collaborative
EU railway research.
UIC (International Union of Railways)Network
Rail contributes to its infrastructure related research programmes.
RRUK (Rail Research UK)The
UK universities "centre of excellence" sponsored by
Engineering and Physical Sciences Research Council. Network Rail
provides expert advice, facilities and funding on a project-specific
Network Rail spent approximately £8 million
on research and development in 2002-03, and we expect that a similar
amount will be spent in this and subsequent years. The volume
of university research into railway topics is lower than would
be expected from the size of the industry sector.
Network Rail's priority is for knowledge and
solutions that contribute directly to the better management of
the UK rail infrastructure and it is anxious to build on research
from anywhere in the world. Key parts of its strategy for technology
Supporting RRUK and funding applied
research with clear potential benefit for Network Rail's business.
Building alliances with UK commercial
research companies with a particular focus in identifying transferable
technologies from other industries.
Maintaining awareness of the state
of worldwide research in priority areas. The Network of Excellence
for Railway Research being set up with EU 6th Framework funding
is a promising development in this field.
14. Mr Coucher was to come back to the Committee
with figures for duplicated laid track. Are these available now?
Approximately 17.6 miles of track which was
renewed following Hatfield to address rolling contact fatigue
and gauge corner cracking has subsequently been replaced again
as part of an integrated renewal, with sleepers and ballast. As
was explained to the Committee, this small amount of track relaying
reflects the fact the post-Hatfield work, through being essential
to maintain the safe operation of the railway, was carried out
quickly and in a manner which did not allow for an integrated
renewal of rail, sleeper and ballast in cases where that would
normally have been the most economic and efficient approach.
15. Could the changes in the company's operational
structure country-wide please be detailed. Did the company issue
a press release about this change specifically?
The full details of the new structure are currently
being finalised, in discussion with our customers and other key
stakeholders. However, the principal change will be from a regional
to a functional structure. This reflects the fact that our three
principal areas of activityoperations, maintenance and
renewalseach face different relationship and delivery issues,
and that it is not therefore optimal for the company to adopt
a single structure for all three.
We therefore intend to adopt a more bespoke
structure which delivers the right focus on each activity area,
Operations. Our principal need here
is to be able to interact effectively with the train operators
in our day-to-day management of how the trains run across our
network. We therefore intend to base operations around a number
(putatively 8) of operational routes, which will map as closely
as possible onto passenger franchises in order to provide our
customers with clearer lines of accountability based as much as
possible upon single points of contact. The routes will be built
upon the existing 18 Network Rail areas, with each General Manager
retaining responsibility for delivering operations. The General
Managers will report to the relevant Route Manager, who will in
turn report to a national Director of Operations and Customer
Service responsible for ensuring national consistency;
Maintenance. With the taking of maintenance
back in-house, our structure needs to provide for both delivery
at the local level and consistency at the national level. The
principal unit will be the existing 18 areas, with General Managers
again retaining responsibility for delivery in their area. The
areas will be grouped into a number (putatively 5) of asset management
territories, with a Territory Maintenance Manager ensuring consistency
across each. The Territory Maintenance Managers will in turn report
to a national Director of Maintenance, who will be responsible
for ensuring a single standardised company process; and
Renewals. We will continue to deliver
renewals, and also enhancements, through our contractors. We therefore
need to be structured in a way which ensures that consistent policies
and processes are being followed nationally. The principal units
for this will be the asset management territories, although relevant
staff will work closely with (and generally be based in) the areas.
In addition, we will need to make a number of
changes to our HQ organisation to better align with and support
the new functional structure.
While company structure is, in the first instance,
an internal matter, we recognise that it has important implications
for our customers and, indeed, that their support will be essential
for the new structure to work effectively. This has been reflected
in the discussions with customers and other key stakeholders referred
to above, which has been a more effective and appropriate form
of communication than would be a press notice.
16. Is Network Rail able to provide the Committee
with a run of figures showing the comparisons of delay per incident
since October 2000 to date?
We enclose two graphs showing delay per incident
from 1998-99 to date for points and signalling and for non-track
asset failure categories. These graphs demonstrate that following
a substantial increase in delays per incident in recent years,
Network Rail is beginning to deliver some improvement, with significant
falls in recent months.
17. The Committee requested a detailed explanation
of the higher costs of signalling and track renewal on the WCML
project as compared with other parts of the network.
There are a number of factors with together
contribute to higher costs occurring on the WCML project than
are incurred on other parts of the network.
Network access. Unlike most routes,
the WCML is intensively used for 24 hours a dayfor example,
to the north of Crewe the line is most intensively used at night
with a very high volume of freight traffic. As a result, the cost
of procuring access from train operators, which contributes strongly
to the cost of renewals, is higher than on other parts of the
The following figures illustrate just how different
the West Coast Main Line traffic is from other "busy"
railways on the UK network.
|Axle Traffic in Equivalent Million Gross Tonnes per Annum |
|East Coast Main Line
||West Coast Main Line ||
||Now||Future in SRA Strategy
This difference has an impact both on the cost of possessions
and indeed the frequency of renewal interventions:
Physical route constraints. The route was
built and upgraded under Victorian private companies at minimal
cost so that embankment widths were the minimum necessary, bringing
all four tracks very close together. Under our present rule book,
when we need to work on either of the two inner tracks, then we
need to close both adjoining tracks, ie three lines out of the
four. This places an enormous constraint on the remaining capacity
of the route, which both adds to compensation costs and constrains
the times when we can work compared with the rest of the network.
Absence of suitable electrified diversionary
routes. This has precluded us from being able to take lengthy
possessions because it has meant that any blockages necessitate
lengthy and inconvenient diversions with complex busing operations.
One of the great benefits of the SRA's Strategy for the West Coast
is that it creates competent electrified diversionary routes for
all of the main destinations south of Manchester and Crewe. The
SRA strategy will enable us to procure access much more cheaply
in the future, as well as enhancing the value of the route for
leisure travel at weekends.
The constraints referred to above feed directly into the
unit rates of work. Most renewals on the rest of the network are
performed in 54-hour weekend possessions. On WCML, because of
the schedule pressure and the constraints of access, much work
is having to be done in eight hour possessions on midweek nights.
Typically, four hours are consumed by the set up and handback
procedures, leaving around four hours for productive work. Accordingly,
the unit rates per yard of track are very much higher than those
for a yard of track done over a 54-hour weekend as the overhead
is spread over many fewer productive hours.
A further issue on West Coast, which is also being addressed,
is contractual. Historically, the contracts which Railtrack entered
into for renewing the railway were not appropriate for the situation
in which it was operating. Contractors were invited to price for
sharing risks which in practice could only be managed by Railtrack
(eg access to the network and train performance risks). It is
well known that attempting to pass a risk to a party who does
not have the power to manage that risk is an expensive procedure.
Furthermore, the work was inadequately defined without method
specifications or quality assurance procedures so that. the cost
of rework for poor quality and proper finishing of incomplete
work was added to the contract sum. The basic cause of this was
that Railtrack was not adequately experienced or resourced as
a purchaser of railway work on the scale of West Coast. All of
these features inflated unit rates.
Network Rail has taken greater control of its contractors,
establishing method specifications and quality assurance such
as would be found in any, modern company, including our contractors.
We are acting to reduce the overhead going forward and to migrate
the high volume renewals activities on the West Coast into the
company's new renewal construction contracts over the next two
years. This will cause the costs to move much closer to those
on the rest of the network, although there will remain some difference
due to the intensity of use and the track spacing issues referred
18. Is it Network Rail's view that the current structure
of the railway industry is now appropriate to facilitate growth
and significant improvement in railway services in future?
Growth and service improvements can be achieved provided
that the industry continues to engage and to work together to
address issues across structural boundaries. A key example is
performance where, as discussed in our evidence to the committee,
we are working closely with the train operators to jointly find
and deliver solutions which will improve the day-today operation
of the railways. Some small structural changes, such as our own
internal reorganisation and the move to single operators at major
London termini, will help to support this co-operation, but are
not a prerequisite for it to happen.
19. When will the company's asset register be fully and
Network Rail's Asset Register is a collection of projects
and process improvements designed to improve, update and, where
none exist presently, develop databases to hold suitable data
and information about the relevant assets at an appropriate level
of data quality, including knowledge of their condition, capability
and capacity, so as to enable best achievement of the maintenance;
renewal and replacement; improvement, enhancement and development;
and operation of the railway network.
One very significant part of the asset register is MIMS,
which is being implemented throughout our business. We are on
programme to have this system reliant across the network by the
end of the financial year 2003-04, and following this plan to
make a series of improvements to make increased use of the functionality
in the software, as business need dictates.
Our work in relation to the asset register is subject to
a condition of our operating licence, number 24, which requires
us to establish and maintain a register of relevant assets. We
have prepared guidelines specifying the detail and form of the
asset register, information contained in it, and the methods used
in it. These are subject to regular updates, and have been agreed
with the Regulator.
Alongside this, we have developed a programme to achieve
our obligation in respect of the asset register at the earliest
practicable date, and have agreed this with the ORR. We would
expect this to deliver a baseline asset register, providing an.
inventory of the assets and their key attributes, by mid-2005,
although work will necessarily continue beyond then to further
improve both our asset knowledge and our processes and tools for
making use of that information.
20. The Committee heard that the cost of maintaining rail
freight only lines was £132 million. Is this figure accurate?
If not, what is the correct figure; and to what lines does the
Although it is not a total that we have explicitly published,
we believe that the figure of £132 million is derived from
the forecasts of annual maintenance and renewals expenditure for
freight-only routes contained within our June 2003 Business Plan
Update. (For these purposes, freight-only routes are those shown
in section 3 of our 2003 Route Plans published in March 2003.)
Using those figures, £132 million would represent the average
forecast annual expenditure on those routes in the years 2004-05
However, the figure quoted in the question overstates the
actual cost. While the renewals forecasts are derived from planned
workbanks, the maintenance projections were derived by manually
reallocating planned national maintenance expenditure to the routes.
This was done on the basis of mileage, rather than usage, and
therefore incorrectly assumes that proportionately the same level
of maintenance as is required on freight-only routes as on more
heavily used routes. In addition, the further development of our
efficiency programme and prioritisation rules is likely to affect
the level and cost of activities carried out on all types of route.
21. Finally, it would be helpful to have a summary of
Network Rail's current policy with regard to railway stations;
if there is any intention to review, revise or change current
policy; and, if so, what any such a change will be?
Our overall policy is to ensure that stations are maintained
and renewedand, where we are the station operator, managedto
meet the needs of train operators and passengers. This includes
achieving our regulatory station condition targets. Our precise
role in doing so will differ for the franchised stations (where
maintenance and renewal responsibilities are split between ourselves
and the relevant TOC) and for the 17 Network Rail managed stations.
In general, station enhancements and the creation of new stations
will depend upon funding from the SRA or another promoter of a
Within this framework, we also seek to optimise the revenues
achieved from our station assetsparticularly through retail
at the 17 managed stationswithout compromising the safe
and efficient operation of the railway. As was recognised within
the interim review, optimisation of this form of revenue is an
essential part of minimising the revenue required through track
Going forward, we expect to work with ORR and SRA to consider
possible changes to the allocation of responsibilities between
ourselves and the TOCs at franchised stations, in order to determine
whether current or revised arrangements would be most appropriate
and cost effective.
8 January 2004