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The Department for Transport (the Department) established Network Rail in March 2002 to bid for Railtrack's network business. Network Rail was the only bidder and acquired the business in October 2002. In January 2004, dissatisfied with rail industry performance, the Department announced a review.
Network Rail's corporate governance and accountability were complex. It was a Company Limited by Guarantee with members from different interest groups instead of shareholders. It was also a regulated monopoly, financed by private sector debt made available in part because of indirect support from the Strategic Rail Authority (SRA).
The SRA's formal powers were not commensurate with its responsibilities. In particular it had no clear rights to set strategy, specify spending priorities or intervene at an early stage if Network Rail's finances veered off course.
Network Rail had made a start in improving the operational performance of the network and cost control, both of which deteriorated following the Hatfield derailment in October 2000. Punctuality had improved but was forecast to remain below October 2000 levels until 2008-09. Spending was expected to stabilise some 30% above pre-Hatfield levels. There were no longer term financial targets against which to measure performance.
Network Rail was being funded through a mix of short and medium term debt from banks and the commercial paper market, costing some £25 million to £30 million more than public sector funding. There were concerns in case this cost was being incurred to keep the debt off the Government's books. Network Rail had plans to raise long term debt secured against future revenues but had not yet met the conditions necessary for raising such debt. The long-term cost could not, therefore, be fixed or compared to Government guaranteed debt.
In July 2004, the Government published a White Paper[1] on the future of the industry, which proposed an expanded role for the Department and Network Rail, and the winding up of the SRA. Network Rail is to be accountable for industry performance under a binding agreement with Government. The agreement would include performance targets proposed by the Department, then negotiated with the relevant parties and monitored by the Office of Rail Regulation (ORR).
The Department plans to decide on total rail spending and priorities through a series of iterative consultations with stakeholders including regional/local interests.
Direct Government support for Network Rail's long term debt programme was announced to reduce borrowing costs, leading to savings that could reach £190 million per year.
It remains to be seen how effectively Network Rail will be able to bear its responsibility for overall industry performance given that the Department determines the shape of the network and sets the terms and conditions of the franchises awarded to train operating companies.
Network Rail can borrow up to £21 billion, now backed directly by the Government, leading to interest cost savings over previous plans. The Department needs to put arrangements in place to manage the risks of such Government support effectively.
On the basis of a Report by the Comptroller and Auditor General,[2] we took evidence from the Department of Transport and the Strategic Rail Authority on the establishment of Network Rail in place of Railtrack and the subsequent review of the Rail industry. In this Report we consider the issues raised by the C&AG's Report and in evidence to this Committee; how far those issues have been met by the subsequent White Paper proposals; and what remains to be done.
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