Select Committee on Transport Tenth Report

3  Network Rail - up to the challenge?

34. Shortly before we began taking oral evidence in January 2008, Network Rail caused very serious disruption and inconvenience to passengers as a result of engineering overruns at Rugby, London Liverpool Street and Glasgow Shields Junction. Thousands of passengers were stranded with very little information about what was happening, and when they could expect rail services to be up and running again. Chaos ensued. We asked Network Rail and Bechtel, the company to whom project management on the West Coast Route Modernisation (WCRM) was contracted out, to appear before us. We questioned the ORR on the New Year overruns when they came before us to talk about the White Paper, and we asked them back a second time, in March, following the publication of their report on the problem. Although the engineering overruns are not directly linked to the White Paper, they cast light on the way in which Network Rail functions, and on crucial relationships within the industry. The events at New Year are a most useful prism through which to examine the ability of Network Rail to fulfil the duties conferred on it, as well as its ability to deliver the objectives set in the White Paper.

The engineering overruns at New Year 2008

35. The ORR's Report on the overruns concluded that Network Rail had been in breach of condition 7 of its network licence—its general duty to maintain, repair and improve the network— and the ORR therefore imposed a fine of £14 million.[68] We will not attempt to go back over the detail of the events, marshalled so succinctly by the ORR, except to provide a summary of the ORR's main conclusions. The ORR concluded that the three major overruns at New Year were caused by somewhat different problems, though many strands were also common to them all, and to certain previous overruns.


36. In the ORR's analysis, the overrun at Rugby was not caused by significant failures of project and risk management before the work started, although the results of the quantitative risk analyses (SQRAs) carried out four and eight weeks beforehand should have led managers to take a less optimistic view of the feasibility of the programme of works.[69] However, both Shields Junction and Liverpool Street were, according to the ORR, characterised by very poor project and risk management, and in the case of Shields Junction, the processes used to manage risk were fundamentally flawed.[70]

37. The ORR concluded that these weaknesses were very similar to those experienced during the Portsmouth re-signalling project in early 2007, and for which Network Rail had had to pay a fine of £2.4 million.[71] At that time, the ORR had virtually predicted the scale of the impact on passengers of events at Liverpool Street and Shields Junction. In its July 2007 press release, announcing the fine for the Portsmouth overrun, the ORR had stated that "similar future breaches elsewhere on the network would have an even greater impact on passengers and train operators."[72] Yet, despite this warning, it would appear that Network Rail had done little to rectify the deficiencies identified by the ORR.

38. The ORR found very significant variations in the nature and quality of the processes used to manage engineering projects as well as assess and manage risks within Network Rail. A process of risk management (SQRA), which had worked well on the West Coast Main Line for several years, was deemed not to be sufficiently robust for the Shields Junction project, and a "fundamentally flawed" process was used instead.[73]


39. The ORR considered that at both Rugby and Liverpool Street, site management by Network Rail staff was characterised by serious deficiencies. In particular, senior management became aware of the true extent of problems and delays only at far too late a stage.[74]

40. The ORR also emphasised that because of the scale and the critical nature of these particular projects, Network Rail should have given maximum priority to ensuring that work was completed successfully and managed the site accordingly.[75] Network Rail's reliance on self-certification by contractors was one of the reasons why senior Network Rail managers only realised the true scale of the delays and overruns so late in the day. The ORR admitted that, "it is quite normal practice to accept self-certification of work completed by contractors," but given the lack of skilled staff and supervisors on site at Rugby, this was no longer an appropriate approach for such a critical project.[76]

41. The management of engineering projects and work sites, together with the associated risks, are core responsibilities of Network Rail. The management of the three engineering projects, which overran at New Year, indicates that there are serious deficiencies in terms of central control and internal oversight mechanisms within Network Rail. It also provides evidence of flawed management of teams and of contractors, including the dubious practice of self-certification.

42. The range of similarities between the Portsmouth overrun in 2007 and the overruns at London Liverpool Street and Glasgow Shields Junction at New Year 2007-08 is significant. The lack of discernible improvement in the intervening twelve months, despite the imposition of a significant fine for the Portsmouth overrun, is a clear indication that either Network Rail's management has failed to act effectively, or that their actions have not filtered down to the operational level.


43. Mr McCarthy of Bechtel told us that the contracts used at Rugby contained no penalty clauses[77] and Network Rail's Chief Executive, Iain Coucher, said that:

    We use a whole range of mechanisms with our contractors. […] There is a balance of contracting models that we use. [...] You cannot transfer all of that risk onto them without them either declining to do the work in the first instance or being unprepared to contract for that work. [...] Normally they engage because they know failure would mean they would not get any additional work. That is the big risk that they take.[78]

Not surprisingly, the ORR's report on the Network Rail overruns concluded that "Network Rail does not appear to have optimised the balance between risk and reward with its suppliers."[79]

44. We appreciate the need for Network Rail to use a wide range of contracts for suppliers, depending on the individual circumstances of the project and service contracted for. It is also the case that over-zealous penalty clauses could frighten contractors off, or lead them to seek higher rewards in compensation, increasing the cost of the work that is carried out on time and to budget. However, it is surprising that Network Rail does not include penalty clauses in its key contracts as a matter of course. Network Rail needs to re-balance the distribution of risks between itself and its contractors as a matter of urgency.

45. We are not inspired by Mr Coucher's assertion that contractors' principal incentive to carry out projects on time and to budget is the threat of failing to win further contracts. There is little evidence of failing contractors being penalised in this way in other areas of the public sector—including, for example, those responsible for the Metronet fiasco. We remain to be convinced that Network Rail is any more cautious in handing out contracts to companies with a history of failure than other areas of the public sector. We conclude that the threat of future exclusion is an insufficient spur to effective discharge of contracts.

46. For the overhead line engineering (OLE) projects to be undertaken during the Christmas period 2007, the ORR identified more than five separate main contractors.[80] Network Rail's own investigation[81] into the causes of the overruns had already concluded that the supply chain for overhead line engineers needed to be reorganised so as to achieve greater reliability of delivery on future projects. This would be achieved by building up a larger workforce in-house, and being less reliant on agency staff. The goal would be to replicate, for overhead line engineers the model used for signalling staff, where Network Rail effectively controls the national supply of resources in this key skill set.[82] However, the ORR was not confident that the wider problem could be resolved simply by bringing critical staff, such as overhead line engineers in-house. In the ORR's view, the re-balancing of risk between contractors and Network Rail was a vital component to resolve this problem.[83]

47. The time has come for Network Rail to bring all strategic resources, such as overhead line engineering staff, back in-house. Network Rail should also ensure that it has a permanent programme to develop and maintain such strategic skills in order that a stable pool of core skills is maintained within the organisation at any one time. This should enable Network Rail to manage key resources with much reduced risks of crucial staff shortages which might cause overruns and endanger the viability of large scale projects such as the West Coast Route Modernisation.


48. As we heard from Virgin, communication from Network Rail to train operators affected by the overruns lacked both clarity and urgency.[84] In the ORR's evaluation, the failure of Network Rail to inform train operators of emerging problems with the engineering possessions in good time was due in large measure to the fact that senior managers at Network Rail did not themselves know what was happening on the ground. In the ORR's view, this gave rise to two important questions:

i.  is there undue reluctance by some staff to send unwelcome messages clearly and promptly up through the organisation?

ii.  is there too much reluctance by Network Rail to alert operators to emerging risks while they are still striving to contain them (which we acknowledge to be a difficult balance)?[85]

The ORR did not, at this stage, offer answers to these questions.

49. Communication within Network Rail as well as between it and the train operators is seriously deficient. This is, in part, a consequence of the separate ownership of trains and track. The failure of internal communications within Network Rail makes it impossible for senior managers to take appropriate action and resolve problems as quickly as possible. The failure to communicate adequately with train operators is likely to be, at least in part, a consequence of poor internal communication. Both failures have serious consequences for passengers.


50. The three serious overruns at New Year 2008 affected thousands of passengers, and cost millions of pounds in lost revenue and fines. The Chief Executive of Network Rail, Mr Coucher acknowledged the seriousness of the damage done: "It was unacceptable […] We know that these incidents reflect badly, not just on Network Rail but indeed the whole rail industry." He sought to place the overruns in context, explaining that these three instances where things had gone wrong represented a fraction of a huge programme of 5,000 engineering projects costing some £4 billion per annum.[86]

51. The range and seriousness of management failures as well as the inadequacy of internal processes and structures demonstrated above can leave no-one in doubt about the need for significant improvements in the way Network Rail is managed, and the way it manages its projects. The fact that the ORR has issued a Final Order to Network Rail to secure Network Rail's compliance with condition 7 of its licence is indicative of the seriousness of the breaches identified. In its letter to Network Rail, announcing the £14 million fine, the ORR required Network Rail to submit, by 31 May, a plan setting out how it intends to remedy the weaknesses identified by ORR,[87] but Network Rail subsequently requested an extension to 30 June, a request agreed to by the ORR. The date whereby all remedial action has to be in place remains 31 December 2008.[88]

52. The engineering overruns over New Year were quite simply unacceptable. Much excellent work is done by a large workforce of good and dedicated staff at Network Rail, but the lack of clear procedures, consistency, communication and management controls combine to undermine all these undoubted achievements. The ORR's careful analysis of events exposes serious management failures.

53. We fear that the lack of a sense of urgency manifested by Network Rail's Chairman over the New Year period, as well as when he appeared before us, is symptomatic of widespread complacency within Network Rail.

54. The Government along with the ORR must ensure that the risk of this kind of overrun occurring again—ever—is minimised. The Government, along with the ORR, must monitor closely the progress made by Network Rail over the next year, and examine what structural changes might be required to ensure that Network Rail is capable of managing its projects effectively and consistently.

The White Paper challenge for Network Rail

55. The White Paper requires Network Rail to continue to deliver infrastructure developments and improvements on a large scale, as well as to take a leading position in coordination and planning for the industry as a whole. The company will have to keep up the pace of infrastructure development, improve reliability, punctuality and safety across the network, reduce costs, and take a clearer lead in the industry. According to the White Paper, lengthy possessions over weekends and Bank Holidays will not be appropriate in future, and this will present a challenge to Network Rail. As we noted in our recent report on Freight Transport, Network Rail also needs to make significant and urgent improvements in the service it offers to freight customers, reducing costs and improving quality of service. In particular, we concluded that there was an urgent need for Network Rail to get a better grip on its costs, and to reduce track access charges, already among the highest in Europe, and set to rise still further.[89]

56. Before it can even begin to tackle the challenges posed by the White Paper, Network Rail needs to deal with the urgent matter of improving the way it manages projects, risks, suppliers and communications.[90] Essential reforms of Network Rail's systems and processes of management will almost certainly require significant reforms in its governance.

57. The challenge to Network Rail is compounded by the fact that Network Rail's efficiency levels for both maintenance and renewal operations are poor. Recent studies have found that, in comparison to the railways in other countries in Europe and North America, renewals and maintenance are more costly, less efficient, and cause significantly more "train-delaying infrastructure incidents" in the UK than elsewhere.[91]


58. Network Rail is a company limited by guarantee. Its Board consists of three executive and seven non-executive directors as well as the Chairman, Sir Ian McAllister. Much of Network Rail's decision-making is delegated to committees, including an Executive Committee. Operations are organised into eight different "routes" which broadly mirror the major franchise areas. The Board is accountable to Network Rail's 'Members'.[92]

59. Members fulfil most of the oversight functions ordinarily carried out by shareholders in a limited company. Their tasks include holding the Board to account for the way in which the business is managed, and for monitoring the standards of corporate governance. They have no financial stake in Network Rail and receive no dividends or payments, other than travelling expenses. Members can be either "Industry Members", representing passenger rail operators, freight operators or infrastructure manufacturers, or they can be "Public Members", representing passenger groups, industry interest groups or individuals. The Department for Transport is also a member. The number of members is unspecified, so it can vary,[93] but there are currently about 100.[94]

60. Members are appointed by an independent Membership Selection Panel, but the Panel, which may have up to five members, is in turn appointed by the Board of Network Rail, and a non-executive director from Network Rail sits on the Panel.[95] This creates a circular inter-dependence between Network Rail's Board and the Membership Selection Panel, which makes the appointment of critical members who are likely seriously to challenge the management of Network Rail less likely.

61. Christian Wolmar, claimed that "members" do little more than listen to the senior management explaining how well they are doing.[96] Many of our witnesses agreed, with the Transport Salaried Staffs' Association (TSSA) arguing that the entire structure needed to be changed so as to strengthen oversight of the performance of the Board,[97] and Passenger Focus saying that if the structure remained unchanged, non-executive directors needed to take on a much more proactive and critical oversight function within the organisation.[98] London TravelWatch argued that passengers needed to be better represented.[99]

62. An example where serious scrutiny from members might be expected is that of executive bonuses. On 6 June 2008, the company announced that, in respect of the financial year to April 2008, its staff would receive bonuses totalling £55 million.[100] Whilst this sum gets distributed widely, the Chief Executive alone stands to receive more than £305,000. Although Network Rail emphasised that it has outperformed expectations during 2007-08, with punctuality now better than ever before and an after-tax profit of £1.2bn,[101] 2007-08 was also the year in which Network Rail was awarded the biggest fine ever awarded for licence breach as a consequence of the New Year overruns.[102] The ORR expected the licence breach to be reflected in the award of bonuses but noted that, because Network Rail had outperformed its targets in terms of, for example, punctuality, a certain level of bonuses was still expected.[103] In a June 2008 consultation document, the ORR has proposed that the incentives structure for Network Rail senior managers be made more transparent, that the criteria be widened to include, for example, compliance with all aspects of the Network Licence and that Network Rail be required to explain how different factors have been balanced in determining the level of bonuses.[104]

63. It is quite extraordinary for Network Rail to reward its senior managers with huge financial bonuses in a year where passengers have been humiliated and inconvenienced by three separate major engineering fiascos, where an entire catalogue of management failings has been laid bare for all to see, and where a record fine has been imposed for breach of the Network Licence. It is a gesture which adds insult to injury for the long-suffering passengers who have had to struggle with the consequences of the company's failings. If Network Rail's members cannot, or will not challenge and block such a move, they are not a body worth having.

64. We support the ORR's proposals to alter Network Rail's licence so as to change the incentives policy. Greater transparency about financial incentives, paid for by tax payers and passengers, is welcome. So is the proposal that incentives should take account of all aspects of Network Rail's performance against its licence. This should prevent generous bonuses being handed out for good performance in some areas against a background of catastrophic failure in others. Such changes to the framework would not, however, be a substitute for scrutiny and tough questions by Network Rail members.

65. Although they acknowledged that the governance mechanisms at Network Rail were unusual,[105] both the Minister and the ORR argued that the current governance structure was adequate for the company to rectify its problems and the Minister emphasised that, on the whole, Network Rail had performed well, in some respects outperforming the targets set for it.[106]

66. We do not agree with the Minister and the ORR that the governance structure of Network Rail is adequate. The range and seriousness of management failings identified above will only be rectified through very strong leadership from the Board combined with robust oversight and challenge by members. This would require a structure that brought accountability for passengers and the public and created a smaller, independent group to whom the Board was answerable for operational matters. Passengers, Government and train operators all have a significant stake in the success of network Rail. The current system where members are effectively approved by Network Rail's Board, albeit indirectly, is inadequate. We recommend that the Government consider alternative options for a more effective governance and scrutiny of Network Rail.


67. Both the completion of the route modernisation of the West Coast Main Line and the requirement that development and maintenance of infrastructure be undertaken with much fewer and shorter engineering "possessions" in future pose tough challenges for Network Rail. It is a regulatory commitment that Network Rail has to complete the current phase of the route modernisation on the West Coast Main Line by December 2008, enabling the new timetable to come into effect.[107] The new timetable could not be introduced without the current phase of the works being completed because it will include significant journey time reductions as well as an increase in the number of services, neither of which would be possible without the completion of the works.

68. The ORR report on the engineering overruns expressed significant concerns about the likelihood of the West Coast Route Modernisation Programme being sufficiently advanced by December 2008 for the implementation of the new timetable.[108]

69. The ORR therefore required Network Rail to review urgently the feasibility of its schedule for the West Coast Route Modernisation in order to determine whether the current phase of the project could be completed on time. Network Rail submitted its review to the ORR on 31 March, and the ORR responded on 12 May 2008, concluding that Network Rail's strategy for the completion of the current phase by December 2008 was sufficiently robust, though it remained a challenging programme.[109] The delivery of the plan will involve a number of disruptive possessions on the West Coast Main Line before December 2008, but following consultation with passenger representatives as well as operators, the ORR concluded that on balance, this option was preferable to delaying the new timetable in order to avoid the high level of disruption.[110]

70. The completion of the current phase of the route modernisation on the West Coast Main Line in time for the introduction of the new timetable in December 2008 will provide a final test of the ability of Network Rail to plan and manage major infrastructure projects, as well as of the ability of the Office of Rail Regulation to regulate Network Rail adequately. If this project fails, we would expect the Government to intervene and take responsibility for the integrity of services as well as the introduction of the new timetable on the West Coast Main Line.


71. In its report on the New Year overruns, the ORR acknowledged that the current rate of investment in rail infrastructure is unprecedented. It is a challenge to combine the successful delivery of such large volumes of engineering and maintenance work whilst retaining continuity of service for rail users.[111] However, the Rail White Paper raises expectations still further by arguing that it is likely to be necessary for Network Rail to find ways to manage upgrades and maintenance projects in such a way that lines are less likely to be closed. If lines do have to be closed, it will need to be for shorter periods than at present. Network Rail should "increase the availability of the network to allow a near-seven-day railway to operate to satisfy the demand of passengers and freight operators."[112]

72. Commentators such as the Institution of Mechanical Engineers and the County Surveyors Society agreed with this approach, arguing that "it is just not acceptable for regular passengers when routes become a "48 week per year" railway."[113] The Institution of Mechanical Engineers suggested that good railway maintenance and development was achieved in other countries without having to shut down lines to anything like the extent that it happens in the UK, and that we could learn from them.[114] However, Ian Harrison of the CSS indicated that doing the maintenance and renewal the way it is done elsewhere would not necessarily be straightforward because of a lack of flexibility in the infrastructure in the UK. Many lines that could have served as alternative routes when maintenance or upgrade work was taking place had been closed down, reducing the flexibility of the system.[115]

73. We asked Network Rail to provide us with a list of all the delays caused by them on just one line, the West Coast Main Line, between the beginning of January and the end of May 2008. We are of course very conscious that this is a line which is undergoing a major upgrade, and that this project is particularly pressurised in 2008 because of the rush to meet the December deadline for the new timetable to come into force. Also, many delays are caused by circumstances beyond the control of Network Rail. Although we did expect there to be significant delays, the sheer number of delays, and in particular the number of very long delays of several hours, was a surprise. More than 40 incidents on the West Coast Main Line caused delays of more than 24 hours to parts of the line during the five months January to May 2008—and this includes only delays attributed to Network Rail. 171 incidents caused delays of more than 500 minutes.[116] This puts into context the announcement by Network Rail that it will be moving towards the 'seven-day-a-week, 365 days a year railway'. Mr Coucher told The Times that:

    the company would find new ways of working to carry out all engineering works at night, and keep to deadlines. Bridges and points will be preassembled in a factory rather than on site and will be lifted into place from rail wagons. Schemes that take a whole weekend currently and require tracks to be closed will be completed in eight hours overnight, allowing services to continue until 10pm and resume at 6am.[117]

74. We welcome the commitment of both Network Rail and the Government to the seven-day per week railway, where engineering works are done overnight, avoiding major engineering possessions at weekends and Bank Holidays. Network Rail will need to implement many changes to the network, such as rerouting and double tracking before the seven day per week railway can become anything more than a distant dream. It will also be crucial for Network Rail to make very significant improvements in the efficiency of its renewal and maintenance operations.

75. No other organisation is more important than Network Rail to the achievement of the targets and objectives contained in the Rail White Paper and the High Level Output Statement. If Network Rail fails, the industry as a whole will fail. The Government and the ORR, in collaboration with Network Rail itself, must take action to ensure that it is equipped to meet the challenges ahead.

68   Letter from Bill Emery, CEO, ORR to Iain Coucher, CEO, Network Rail, 28 February 2008. This fine was confirmed on 9 May 2008 see ORR Press Notice 13/08: ORR confirms £14m penalty for Network Rail, when parties affected by the overruns had had the opportunity to submit representations to the ORR. Back

69   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, paras 2.19-2.20 and 5.8 Back

70   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, paras 5.9-5.11 Back

71   ORR Press Notice: Network Rail faces penalty for poor planning, 30 July 2007 Back

72   ORR Press Notice: Network Rail faces penalty for poor planning, 30 July 2007 Back

73   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 5.10 Back

74   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, paras 5.8-5.15 Back

75   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, paras 5.13-5.14 Back

76   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 2.44 Back

77   Q 98  Back

78   Qq 99-101  Back

79   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 5.19 Back

80   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 3.3 ff. Back

81   Network Rail press notice, "West Coast route to reopen", 3 January 2008 Back

82   Ev 327  Back

83   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 5.19 Back

84   Qq 143-146  Back

85   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 5.22 Back

86   Q 2 (Ev 312 ff.)  Back

87   Letter from Bill Emery, CEO, ORR to Iain Coucher, CEO, Network Rail, 28 February 2008, para 8 Back

88   Letter from Bill Emery, CEO, ORR to Iain Coucher, CEO, Network Rail, 22 April 2008, para 4 Back

89   Transport Committee: Eighth Report of Session 2007-08: Freight Transport, HC 249, July 2008, paras 66-67 Back

90   Q 287  Back

91   See for example: Andrew Smith and Phill Wheat (Institute for Transport Studies) Hannah Nixon (ORR) (on behalf of the ORR): International benchmarking of Network Rail's maintenance and renewals costs, June 2008; BSL Management Consultants GmBH (on behalf of Network Rail): Network Rail: Rail infrastructure Cost Benchmarking: Brief LICB-gap analysis and cost driver assessment, April 2008, Error! Bookmark not defined.; Office of Rail Regulation: ORR Best Practice Study: A report on the programme of international visits carried out by ORR between July - October 2007: Summary Report, version 3, March 2008 Back

92   Network Rail website: Error! Bookmark not defined. Back

93   Network Rail: Policy and Procedure for the Selection and Appointment of the Members of Network Rail: Error! Bookmark not defined.  Back

94   Network Rail: Error! Bookmark not defined.  Back

95   Network Rail: Policy and Procedure for the Selection and Appointment of the Members of Network Rail:, paras 28-29 Error! Bookmark not defined. Back

96   Christian Wolmar, Transport Times, January 2008, p 15 Back

97   Q 409; see also Q 609; Q 619 Back

98   Q 609  Back

99   Q 619  Back

100   "Bonuses of £55m at Network Rail", BBC News web-site, 6 June 2008 Back

101   Network Rail Press Release: Train punctuality reaches all time high in a year of improvement on Britain's railways, 6 June 2008 Back

102   Ev 350  Back

103   Q 541  Back

104   Office of Rail Regulation: Review of Network Rail licence: consultation, June 2008, paras 3.46-3.47 Back

105   Q 501; Q 775  Back

106   Qq 515-16; Q 778  Back

107   Ev 327  Back

108   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 4.10 Back

109   See Letter from Bill Emery, Chief Executive of the ORR, to Iain Coucher, Chief Executive of Network Rail, dated 12 May 2008, particularly para 9: Error! Bookmark not defined.  Back

110   Letter from Bill Emery, Chief Executive of the ORR, to Iain Coucher, Chief Executive of Network Rail, dated 12 May 2008, para 12: Error! Bookmark not defined. Back

111   ORR: Report of ORR's investigation into Engineering Overruns, February 2008, para 5.2 Back

112   Department for Transport: Delivering a Sustainable Railway, CM 7176, July 2007, para 6.18 p 63 Back

113   Ev 134; See also Q 94  Back

114   Q 99  Back

115   Q 100  Back

116   Ev 333  Back

117   "Railways will run every day of year", The Times, 19 January 2008 Back

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