2 Operating performance and cost control
8. Immediate challenges for Network Rail had been
to improve performance and cost control. Punctuality is usually
taken as the main measure of performance (Figure 2). Network
Rail's punctuality performance is measured by the number of delay
minutes incurred, peaking at 14.7 million minutes of delays in
2002-03. Annual infrastructure costs had risen steeply and were
expected to peak in 2003-04 at £6 billion. At £4 billion
in 2008-09, the end of the current regulatory settlement, they
were projected to remain 30% higher than before the Hatfield derailment
of October 2000.[9]
9. Network Rail succeeded in improving punctuality
but projected that it would remain below the levels that preceded
the Hatfield accident until 2008-09. Delay minutes attributable
to Network Rail were planned to fall by 43% to 8.4 million by
2012-13, helping the industry towards a punctuality target of
91.4%.[10] Network Rail
considered this long term target to be meaningful despite annual
revisions to targets.[11]
Figure 2:
Percentage of trains arriving on time
Source: C&AG's Report, Network Rail-Making
a Fresh Start (HC 532, Session 2003-04) updated from National
Rail Trends, published by the Strategic Rail Authority
10. Other performance improvements, such as faster
services and better stations, also needed to be a Network Rail
priority. Demand for rail services was increasing but unevenly.
Certain parts of the network, such as Thameslink Services, had
experienced demand growth of up to 70%, whereas rural areas had
experienced much less growth.[12]
11. As Network Rail's knowledge of the condition
of railway assets improved, it found more assets coming to the
end of their useful life or needing attention for safety reasons.
Network Rail's resulting infrastructure spending projections exceeded
pre-Hatfield levels, despite measures to control costs.[13]
The level of spending which an efficient Network Rail would
be allowed to operate, maintain and renew the rail infrastructure
is determined by the regulatory regime. A regulatory review completed
in December 2003 had concluded that spending of £22.2 billion over
the five years to 31 March 2009 would be needed. An additional
£2.4 billion for enhancements had also been allowed.[14]
12. In practice Network Rail has some freedom to
spend more or less than the regulatory settlement provides, depending
on its commercial judgement and its ability to borrow. Figure
3 shows that Network Rail plans to increase total expenditure
on the operation, maintenance and renewal of the network to £23.3
billion over the five years, mainly due to additional planned
spending on signalling renewals. Completion of work on the West
Coast Main Line accounts for most of the projected decline.
Figure 3: Trends
in planned Network Rail spending
Source: Network Rail Business Plan 2004
13. The need for increased spending compared to pre-Hatfield
levels is attributed, in part, to underinvestment in the earlier
period. Railtrack had seen itself as the owner of assets which
others maintained, so that decisions on the amount and timing
of maintenance work were made by maintenance contractors. Railtrack
paid for contractors' assessment of the work required. Network
Rail decided what maintenance should be done and when and had
secured both cost savings and improvements in performance.[15]
14. Network Rail's cost control measures included:
- bringing maintenance inhouse
to control quality and costs, with initial savings of £70
million per year;
- putting in place a series of renewals contracts
at a lower unit cost than in the past, with targets to reduce
the renewals cost further;
- reducing management numbers by a target of 2000
over two years, including 600 middle managers in 2003-04; and
- offering apprenticeships for new railway workers,
increasing graduate intake, and taking engineers from other disciplines
on to conversion courses for track or signalling.[16]
15. Under a Management Incentive Plan, top management
can receive bonuses of up to 60% of salary. The principles behind
the plan had been agreed by the SRA but were now mainly the responsibility
of Network Rail's Remuneration Committee, composed of non-executive
Directors. The Remuneration Committee takes independent advice
as to the terms needed to attract the right level of skills and
expertise.[17] One-third
of the bonus payable under the Management Incentive Plan is set
by reference to a financial efficiency index, which compares spending
to budget but without taking unit costs into account. Network
Rail has agreed with ORR that it will be examining the appropriateness
of this measure for the 2005-06 Management Incentive Plan and
the two bodies are working towards developing a more robust measure.[18]
16. For the future, the Department plans to decide
on total rail spending and priorities through a series of iterative
consultations with stakeholders, including regional/local interests.
The aim is to introduce greater dialogue over route priorities
both at the strategic and the local level. The Department intends
to involve the devolved regions and passenger train executives
in decisions on the best use of subsidy, comparing different modes
of transport.[19]
17. The Department and Network Rail saw possible
benefits in developing a longer term financial target for Network
Rail. This would measure the cost of track maintenance and renewal
over time, adjusting for the number of passenger miles undertaken.
Such measures are used in many other industries and rail businesses
overseas. Targets would be regularly reviewed and could be benchmarked
against what others had achieved, adjusting for differences such
as the age of the network.[20]
9 C&AG's Report, paras 2.3, 2.5 Back
10
Qq 69-73 Back
11
Qq 73-78 Back
12
Qq 87, 90, 105 Back
13
C&AG's Report, para 2.1; Qq 6, 98 Back
14
Qq 5, 79 Back
15
Qq 10, 12, 98, 142 Back
16
Qq 6, 10-14 Back
17
Qq 3, 33-36 Back
18
ORR Consultation for a balanced scorecard for Network Rail,
November 2004 Back
19
White Paper, The Future of Rail (Cm 6233, July 2004), paras
2.5.16, 4.3.6 and Chapter 5 Back
20
Qq 4, 150-151 Back
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