Select Committee on Transport Written Evidence

Supplementary memorandum by Network Rail (FOR 57B)


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 house?

  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 include:

    —  a communications strategy—Early 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 savings through:

    —  reducing the overheads associated with maintenance work, including through removal of the profit margin which necessarily forms part of commercial maintenance contracts;

    —  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 productivity—for 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; and

    —  increasing economies of scale through direct procurement of maintenance materials.

6.   What is Network Rail's current credit rating?

  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 current borrowing?

  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 benchmarking—both within the company and with external comparators—has 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 sub-contractors?

  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 these figures?

  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 factors—not least the impact of the unprecedentedly high summer temperatures—have 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 conclusions—and subsequently confirmed in the final conclusions—are 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 targets.

  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 bodies:

    —  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 basis.

  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 research are:

    —  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 activity—operations, maintenance and renewals—each 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, as follows:

    —  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 day—for 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 network.

  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 NowFuture in SRA Strategy
Fast Lines26 3145
Slow Lines10 3548

  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 to above.

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 finally complete?

  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 figure refer?

  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 to 2006-07.

  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 renewed—and, where we are the station operator, managed—to 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 scheme.

  Within this framework, we also seek to optimise the revenues achieved from our station assets—particularly through retail at the 17 managed stations—without 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 access charges.

  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

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