67.As described in chapter 1, the problems experienced in CP5 triggered reviews of the planning (Bowe)81 and delivery (Hendy)82 of enhancements. These reviews have brought about a change of approach for CP6 (2019–24). Simultaneously, a process of reform within Network Rail, in particular route devolution and opening up the railways to third-party investment, has been accelerated following the Shaw83 and Hansford84 reviews respectively.
68.The broad picture is therefore one of substantial change in the funding, governance and delivery of rail infrastructure investment. Below we pick out the key changes, and assess their likely effects.
Figure 3: Network Rail’s route businesses
Source: Network Rail
69.The process of devolution of power from the centre of Network Rail to its route businesses (illustrated in figure 3 above) began in 2014. Network Rail described the rationale as follows:
At the heart of devolution is the principle that empowered leaders can better understand the specific needs of their customers and local communities, take decisions faster and innovate more effectively.85
70.Each route is led by a Route Managing Director (RMD), who has the authority to make decisions about how works are delivered within their area. Network Rail reported that RMDs “can now authorise 99% of all maintenance and renewals work undertaken on their routes, allowing them to directly respond to need without further approvals”. Network Rail’s central functions, including corporate offices, such as finance, legal and human resources, and whole-network strategy and capacity planning (known as the “System Operator”), now “support the route businesses”. Network Rail told us that “by CP6, 95% of our staff will either work in a route or provide a cost-competitive service to the routes.” In CP6 each of the devolved routes will have their own targets and regulatory settlement.86
71.The approach has the strong support of the DfT and the regulator, the ORR.87 The ASLEF union and others were concerned about the effects of route-based regulation, but Professor Andrew Smith of the Leeds University Institute for Transport Studies was confident the ORR could “rise to the challenge”.88
72.Nigel Harris, Managing Editor of RAIL magazine, was particularly enthusiastic about the practical effects on the ground. He gave a specific example of a RMD overturning a centrally-made decision on the basis of local knowledge. He emphasised that this single, route-based decision had the potential to save £150 million. His broader view was:
[…] the current system puts a lot of decision-making into the hands of well-meaning and probably skilled people, but they are completely separated from the business of running the finished railways. […] When you get transport and engineering decisions made closer to the coalface, generally speaking the evidence is that you get more efficiency, better projects and better railways.89
73.Mr Harris’s enthusiasm, however, was met with scepticism by the RMT union. Mick Lynch, the RMT Assistant General Secretary, feared that route devolution would produce fragmentation and ultimately lead to the sale of route businesses to the private sector:
Somebody will say, “This business has been innovative on this route. We are going to privatise it, either with a TOC or a third-party investment.” We are in the halfway house to privatising those devolved businesses.90
The Minster emphatically rejected this suggestion. He was very clear that privatisation was “not one of the objectives” of route devolution.91
74.We support devolution of decision-making from the centre of Network Rail to its route businesses, in conjunction with an enhanced, central, whole-network System Operator function. There are positive signs that it is having beneficial effects. We welcome the Minister’s clear statement that route devolution is not intended to lead to privatisation of route businesses. We are aware of recent plans to more closely integrate Network Rail route businesses with train operating companies, including in proposed public/private partnerships. We are scrutinising this approach as part of our inquiry into the Department’s long-term plan for the current Intercity East Coast franchise.
75.The Secretary of State’s HLOS for CP6 was published in July 2017, with the SoFA following in October 2017, because the Government wanted more time to assure itself that volumes and costs of work were reasonable and affordable. The major change is that the focus in CP6 will be on operations, maintenance and renewals, the volume of which will increase substantially.
76.Subject to the outcome of the ORR’s PR and final determination, £47.9 billion will be available in 2019–24, £34.7 billion of which will be from government grant (the remainder coming from passenger and freight operators’ fees and charges and Network Rail’s commercial property). The figure encompassed around £10 billion for enhancements originally planned for CP5, including delayed electrification projects.
77.The HLOS was clear that the Secretary of State did not commit to any further enhancements, which would be subject to a new, separate process (see Rail Network Enhancements Pipeline, below).92
78.There was some concern that the postponement of renewals in CP5 was likely to have, or may already have had, a detrimental effect on network resilience and costs.93 Some witnesses were concerned the increased funding available in CP6 would be insufficient.94 The key concern from the supply chain was the effect on confidence to invest in its workforce, skills and innovation. RIA told us the postponement of renewals in CP5 had already resulted in “redundancies, short-time working, and reduced—or in some cases frozen—graduate and apprenticeship recruitment”.95
79.There were mixed views about the renewed focus on maintenance and renewals in CP6. Some witnesses worried that Network Rail and its suppliers might struggle to cope with a sudden upsurge in renewals activity.96 Others welcomed the approach, and saw it as overdue. The Association for Consultancy and Engineering (ACE), for example, believed the predominant focus on a highly ambitious enhancements programme in CP5 had been a “significant distraction”, and that “any effort to better manage the balance between renewals and enhancements, if successful, will be positive.”97
80.The major theme of evidence from supply chain companies was the historic “lumpy, “stop/go” or “boom and bust” profile of renewals spending, as illustrated in figure 4 below. RIA believed the current model of sharply defined five-year control periods contributed to these “significant peaks and troughs”.98
Figure 4: Control period funding 2000–2024: Network Rail Renewals Expenditure
Source: RIA
81.RIA reported that the lumpy profile of renewals spending had inhibited suppliers’ confidence to invest. It pointed to recent survey evidence suggesting that “the average forward confidence of a rail supplier was between 11 and 24 months”, while “return on investment spending on skills and kit” was “around three years plus.”99
82.RIA was clear from the outset that that it did not necessarily advocate radical change to the control period process. It, and other witnesses, emphasised that fixed, five-year control periods were much preferable to the system of annual British Rail budgets, which had been in place prior to 1996.100 While several alternative control period models were suggested, there was no consensus about the optimal solution.101 In its initial written submission RIA noted three potential options:
Figure 5: Options for change to the control period process
Source: RIA
83.In a follow up submission, RIA came out more firmly in favour of the “baseline” of funding and work option. It argued that, given the SoFA had been published six months later than usual and had been subject to greater scrutiny, there ought to be sufficient certainty and confidence in the CP6 funding settlement to guarantee a minimum level of work and funding throughout. It called for the industry, the DfT, Network Rail and the ORR to come together to work out and implement a solution that could smooth out the renewals spending profile in CP6 and beyond.103
84.The stop/go nature of renewals activity was clearly an issue of which the whole sector, including Network Rail and the ORR, was aware. The ORR’s view was there was “no reason” why renewals workbanks could not be more effectively smoothed out within the current system.104 While emphasising that the current rail control period system offered a level of investment certainty of which many other sectors would be envious, Mark Carne, Network Rail’s Chief Executive, confirmed he was:
[…] very sympathetic to the need to have as smooth a supply chain as possible, because that is a key driver of efficiency. If people understand what the workload is going to be in the longer term, they will recruit more confidently and they will invest more confidently in the technology and skills we need to deliver the work.105
85.A greater focus on maintenance and renewals in control period 6 is necessary and welcome, following the postponement of works during the current control period. It is vital that the increased volume of renewals is managed effectively from the outset, throughout the period and beyond. The historic stop/go nature of the renewals spending profile is widely acknowledged to be highly problematic for the supply chain, inhibiting confidence to invest in its workforce, skills and innovation. This issue is also critically important in driving increased efficiency in the railway industry, and addressing it should be a key objective of the Government and the regulator. We support the Railway Industry Association’s call for the Department for Transport to bring together all the key stakeholders, including suppliers, Network Rail and the Office of Rail and Road, to evaluate the effects of the current system on the renewals spending profile. This process should identify and implement a mechanism by which investment can be smoothed out from the start of control period 6 in April 2019, throughout the period and beyond.
86.As previously discussed, the Bowe review considered the major failures of planning in the enhancements portfolio for CP5. It recommended that the role and responsibilities of the ORR in respect of enhancements planning, including its oversight of affordability and deliverability, be reviewed. The framework for enhancements planning, implementation and oversight should be “reset” by the DfT and Network Rail, and include:
87.The basis for a new framework for enhancements was set out in a Memorandum of Understanding (MoU) between the DfT and Network Rail, signed in March 2016. The MoU laid the foundations for “a shared lifecycle for enhancements covering development, design and delivery”, which “supports a continuous planning approach and moves away from an overly rigid 5-year cycle for enhancement planning linked to Railway Control Periods.”107 A Letter from the ORR to the DfT in December 2016 confirmed that, for the remainder of CP5, “efficiency and affordability” of enhancements would be “determined by DfT”. The ORR’s role would be to monitor delivery.108
88.There was significant support for dealing with enhancements outside of the control period process. Alan Price of the ACE, noted that “lots of people have suggested that it is time to take enhancements out of the periodic review”, and was clear that:
You need a pipeline. […] The approach should be to work up what you are trying to solve and release projects at the point when the Treasury has the money, not trying to rush them all out of the door. We all know what was rushed out of the door at the start of CP5.109
89.Mark Bullock of Balfour Beatty had a slightly more nuanced view. He agreed it made sense, looking at the “big picture”, to remove long-running enhancement projects from the five-year control period process, but had some practical concerns about the short-term implications. He felt that, until details about the new process had been decided and bedded down, the industry was effectively “in the dark”.110 The priority for the wider supply chain was clear “visibility” of upcoming projects. Darren Caplan of RIA said, “We need to see what is coming up over the next five to 10 years, or beyond.”111
90.The DfT published further details about its new approach, the Rail Network Enhancements Pipeline, on 20 March, after we had heard oral evidence from industry witnesses. It describes a five-step process, with three “decision gateways” (determine; develop; design) prior to the commencement of stages four and five (delivery and deployment):
Figure 6: Five stages of the Rail Network Enhancements Pipeline
Source: DfT
91.The document sets out the Government’s broad priorities for new enhancement projects, which must show they can deliver: the benefits of already committed schemes; performance and reliability benefits; added capacity or connectivity; and/or technological or innovative change. The decision-making principles for investment are similarly broad. For example, projects will need to demonstrate a robust business case, based on government appraisal guidance; a focus on outcomes, both for railway users and the taxpayer; a positive and balanced effect on railway demand; an appropriate effect on the “balance of the portfolio”, including regional balance; and opportunities for third-party investment.112
92.We were concerned that this broad outline would be insufficient to provide the reassurance industry stakeholders were looking for. We were keen to understand the steps the Department had taken to ensure it had the requisite skills to drive and manage the new process, and turn around proposals for enhancements in a reasonably timely manner. The Minister’s answers suggested the Department was focused on becoming an effective gatekeeper, rather than driving projects through the process. He said the skills officials needed were “about getting a much tighter grip on business cases before commitments to public funding are given.” Brian Etheridge said the Department could “call on additional expertise if we need to.” He also emphasised the collaborative nature of the process, with the DfT working closely with Network Rail and the supply chain, but Mr Johnson confirmed that “ultimately, significant enhancement projects would come to Government Ministers for sign-off”.113
93.Despite the Bowe review’s call for transparency, the Minister could not give a commitment to provide full “visibility” to the industry by publishing details of proposals in the pipeline. He said it was “something we are giving some thought to”. Mr Etheridge implied that full transparency was unnecessary, asserting that “key contractors” were likely to “have visibility of what was coming forward in the pipeline”, through their continual discussions with the Department and Network Rail. He was also clear that “Ministers have yet to make a decision about exactly what is in CP6”, and, after the problems of CP5, the Department wanted to avoid raising unrealistic expectations. He said, while there were “lots of schemes out there […] only a small number will survive to absolute delivery.”114
94.We had concerns about a potential deficiency of independent oversight, given what appeared to be a weakened role for the ORR in the enhancements process. The Department, Network Rail and the ORR, however, appeared comfortable with this. Brian Etheridge believed the new process, which was “not just about developing schemes for the future but monitoring them as they progress”, would entail “much more effective oversight”.115 Joanna Whittington, Chief Executive of the ORR, accepted the situation had changed. She confirmed the DfT, as the predominant rail infrastructure client, was “very confident” it could work with Network Rail to establish the efficient costs of enhancement projects:
[…] following the Bowe review, we agreed a slightly different approach with the Department, whereby they took over responsibility for determining the efficient costs of enhancements […] but we continued to have the monitoring role […] of whether they had met the milestones. The process is that, in effect, they act as the client and agree with Network Rail what they are going to buy. That creates a set of milestones. We change-control those milestones into Network Rail’s delivery plan. We then monitor Network Rail’s delivery of those milestones and publicly report on them on a six-monthly basis.116
95.The underlying tenet of Professor Peter Hansford’s review of the UK rail market was that:
[…] a more contestable market for rail projects would create pressure on Network Rail and its suppliers to be more innovative, to improve cost performance, deliver projects more competitively and predictably and therefore offer better value for money.
He found, however, that Network Rail did not have the structures or culture in place to support third parties to engage and participate in the planning, delivering, funding or financing of the railway. His recommendations were intended to break down the barriers to more third-party involvement.117
96.In response, Network Rail has embarked on a range of reforms as part of its ongoing Transformation Plan. For instance, it has established “third-party project champions” within the organisation, across the country within each of its route businesses. It has also taken steps to enable its operational standards to be challenged (stringent and sometimes “over-interpreted” Network Rail standards have long been perceived as a deterrent to third-party investment).118
97.Industry witnesses were confident of a healthy appetite for third-party investment in railway enhancement schemes. In addition to the third-party electrification scheme discussed in chapter 2, there was evidence of interest in investing in station and car park redevelopment, including retail and housing development, new stretches of line, for instance a proposed second London to Brighton line, and digital signalling, producing a potential return on investment through increased capacity and reliability.119 Tammy Samuel, rail partner in law firm Stephenson Harwood, was perhaps the most confident that third-party investment across a wider range of railway assets was a viable proposition.120
98.However, witnesses also identified several remaining difficulties. Not least was the problem of allocating risk and reward in an effective and cost-efficient way. Malcolm Brown of Angel Trains believed there was more work to do to establish the condition of existing railway infrastructure assets before third-parties would have the confidence to invest more widely. Angel Trains recommended Network Rail undertake a “forensic audit” of a range of classes of railway assets in which third-party investment was being sought.121 Mark Bullock of Balfour Beatty noted that risk allocation would always be difficult on a complex network like the railway, where failures in one place inevitably have knock-on effects elsewhere.122
99.The Department published guidance for market-led proposals (MLP) and a call for ideas on 20 March, alongside its document on the Rail Network Enhancements Pipeline and a Written Statement to the House.123 It should be noted that none of our industry witnesses had sight of these documents before giving oral evidence. The Written Statement stated that:
By encouraging innovative ideas and new investment on our railways, we can relieve the burden on taxpayers and fare payers with schemes that match our transport needs, support our economic and housing aspirations and ensure everyone benefits from an enhanced rail network.124
100.The broader call for ideas document set out three illustrative examples of projects that might form a “new tier of investment from the private sector”:
i)A “commercial new route”, in which a design and build contractor works with an investor to propose a new route through a housing development, in which the investor could have an equity interest. Construction costs could be part-met through revenue from fares. Proposals of this kind would be subject to ORR consent and open tender;
ii)A “Traffic Management System”, similar to the digital signalling idea mentioned above, which would “speed up recovery times following a disruptive incident” resulting in reduced compensatory costs to the train operator. The promoter of the MLP would come to a commercial agreement with the train operator, “based on the savings and benefits” provided by the new system; and
iii)A “Local Branch Line”, in which “a consortium of promoters, designers and contractors propose a scheme to reinstall a closed branch line and reinstate a terminus station and connection to the existing mainline.” A scheme of this kind would bring significant regional benefits. The consortium would be expected to fund the total capital costs, which could include Local Enterprise Partnership and local authority funding. Design and build contracts would be subject to open competition. After construction, “the branch line could be accepted into the Network Rail Route asset base. Government may consider accepting demand risk if this achieves value for money (e.g. increased regional economic and social benefits).”125
101.Our concern was that the illustrative examples were limited to new or reopened routes and new traffic management systems; there were no examples of potentially credible proposals for other enhancements, such as changes to track layouts and other reconfigurations, or reconstruction of bridges or platforms. We wanted to know whether a broader range of enhancements could be taken forward within the MLP process and, if so, what the strategic priorities were.
102.The Chief Executive of Network Rail, Mark Carne’s, view was that, while he was “not saying it is too difficult” to secure third-party investment in a broader range of enhancement projects, such schemes would continue to require central government funding. Asked what value of investment he expected in enhancements during CP6 over and above the £10 billion for projects carried over from CP5, he said he “hoped” it would be “a great deal more”.
103.Mr Carne emphasised that, “We are all learning about this slightly new way of working”. He described the Hansford review and the Department’s new guidance and call for MLPs as “stepping stones in this way of thinking”, in which:
The market itself will have to evolve and develop, and politicians will have to evolve and develop their thinking on what schemes should be developed and who should pay for them.126
104.The Minister could not put a figure on how much investment in railway enhancements the Government expected the MLP process to secure. Mr Johnson said:
Let’s wait and see how the process develops. It is barely in its infancy. We have not even opened the window yet, so let’s not consign it to failure at this point. We are optimistic; there is a lot of interest in it.127
105.Brian Etheridge said the Department anticipated some government funding would be put aside for enhancements in CP6, in addition to the £10 billion to complete pending CP5 projects, but Ministers had not yet decided the level of that funding.128 Pushed on whether there was a “plan B” should substantial third-party investment not materialise as hoped, however, the Minister seemed to confirm there was not:
Plan B is that we carry on with the £48 billion that we have set out, which in itself represents record investment in our railways over the next control period. […]
There is a shift in the mix [from enhancements to renewals] for good reason. The railway has benefited from significant enhancements and major big infrastructure projects—HS2, Crossrail and so on. It is time now to make sure that we are maximising performance and making the railway as highly performing as we can, and as reliable and punctual as we can, so that people feel they are getting value for money from that investment.129
106.Having had time to read and digest the various new documents published since she gave oral evidence, Tammy Samuel, rail partner at Stephenson Harwood LLP, updated us on her views, and those of her clients and industry contacts, about the proposed pipeline and MLP processes. On the whole, she reported the reception had been “tentatively positive”, but a number of issues had provoked a level of “disappointment and scepticism”.130
107.She emphasised the lack of published details about specific projects available for investment. There was also uncertainty about the role of Network Rail in “signing off” projects that made it through the MLP process and into the pipeline. Her view was that entirely self-funding MLPs were likely to be “few and far between”, and she reported several concerns about the competitive tendering processes for MLPs requiring some public funding. For example, there was a lack of clarity about “ownership of proposals” shared with the DfT and Network Rail at an early stage, and concern that multiple-stage tendering processes could also deter proposals. She reported a sceptical view in the sector that the lack of clarity was “intentional”, and could indicate an expectation that “proposals are not going to produce any discernible benefit and therefore prove the point that it is all too difficult.”131
108.She was, however, hopeful that some of the issues could be addressed in rail investment opportunity open days, which the Department planned to hold in May and June 2018. She concluded that:
[…] although there is a lot of money and interest in developing and investing in railway infrastructure, there are many calls on private sector resources and financing. Other non-rail infrastructure (that has perhaps more well-developed structures and risk allocation) is perhaps easier for that money to be invested in, for example motorways, water, bridges and tunnels. […] The current policy shows that the DfT and Network Rail are very much taking a step in the right direction. However, more thought as to the detail is required and a more granular policy should be determined by the relevant authorities to ensure that good ideas are turned into good projects.132
109.The case for dealing with enhancements outside of the five-yearly control period and periodic review processes is strong. Many enhancements will span several control periods. The 2015 Bowe review and the 2016 Memorandum of Understanding between the Department for Transport and Network Rail provide a solid foundation for a continuous planning approach with “determine, develop and design” decision gateways before projects move to the delivery and deployment stages. We support the intention behind the Rail Network Enhancements Pipeline, which should ensure the well-documented scoping and planning mistakes made early in the control period 5 enhancements programme are not repeated. It has the potential to repair the Department’s and Network Rail’s damaged reputations across the industry, providing greater certainty about the schemes that will ultimately be delivered. We believe, however, that more transparency about the enhancements pipeline and decision-making processes within the Department is needed, particularly if the potential for a substantial increase in third-party investment is to be realised.
110.The Department will need to take steps to ensure it has the capacity and capability to assume its strengthened role in the new process, which includes determining cost efficiency and value for money. The Minister’s answers did not reassure us that the Department had yet taken these steps. Given the Office of Rail and Road’s broader responsibilities as economic regulator of the railway, we were surprised at how comfortable it appeared about stepping away from this role and the Department’s preparedness to take it on. We recommend the Office of Rail and Road set out in response to this Report the steps it has taken to assure itself that the Department has the capability and capacity to fulfil its responsibilities in relation to determining the cost efficiency and value for money of enhancements. We expect to return to look in more detail at the role of the Office of Rail and Road as the independent rail regulator, in the light of recent changes, later in this Parliament.
111.The Department’s recently published guidance on, and call for, market-led proposals (MLPs) does not specify a list of projects available for third-party investment, or give a sufficiently clear picture of strategic priorities for investment in each region. We are concerned that this lack of specificity, combined with concerns in the sector about the process itself, appears likely to dissuade third-parties from submitting proposals. The Department is relying heavily on market-led proposals to deliver further enhancements of the railway. It does not appear to have a “plan B” should MLPs not materialise as hoped. Our judgement is that there is a substantial risk that the rush to deliver poorly planned and scoped schemes in the current period will be replaced by a different problem—a slowdown or interregnum in new enhancement projects. This would be particularly disadvantageous to regions that have experienced under-investment in recent periods, and work against the Government’s intention to use investment in rail infrastructure to help rebalance the economy. It would also risk further damaging confidence in the supply chain to invest in its workforce, skills and innovation.
112.We recommend the Department for Transport commit to the following actions to mitigate the risk of a severe slowdown in strategically necessary rail enhancements. It should:
113.We welcome the Department’s engagement with third-parties in recent “Rail Investment Opportunity Days”. We hope these were used as an opportunity to address potential investors’ concerns about the MLP guidance and processes, including the approach to “ownership of proposals” and proposed tendering processes. In its response to this Report, the Department should update us on the outcome of these discussions and the steps it intends to take to reassure potential investors, including through changes to its recently published guidance.
81 DfT, Report of the Bowe Review into the planning of Network Rail’s Enhancements Programme 2014–2019, November 2015
82 Network Rail, Report from Sir Peter Hendy to the Secretary of State for Transport on the replanning of Network Rail’s Investment Programme, November 2015
83 Nicola Shaw, The future shape and financing of Network Rail, March 2016
84 Professor Peter Hansford, Unlocking rail investment – building confidence, reducing costs, June 2017
92 DfT, Railways Act 2005 Statement: High Level Output Specification, July 2017; DfT, Railways Act 2005 Statement: Statement of Funds Available, October 2017; see also, “CP6: Planned from the bottom up”, Rail Engineer, 12 March 2018
101 See for example, Lord Tony Berkley and Michael Byng (INV0053); Institution of Railway Signal Engineers (INV0011); The Chartered Institute of Logistics and Transport (INV0029); Siemens Mobility UK (INV0035); Brian Welch FCILT (INV0019); Transport for Greater Manchester (INV0042)
103 RIA (INV0068)
106 DfT, Report of the Bowe Review into the planning of Network Rail’s Enhancements Programme 2014–2019, November 2015
107 DfT/Network Rail, Memorandum of Understanding between Department for Transport and Network Rail on rail enhancements, March 2016
108 Letter from Joanna Whittington, Chief Executive, ORR to Bernadette Kelly, Director General (Rail), DfT, 12 December 2016
117 Professor Peter Hansford, Unlocking rail investment—building confidence, reducing costs, June 2017
118 Network Rail (INV0057); see also Q13 [Darren Caplan]; Q14 [Mark Bullock]; Q15 [Peter Roberts; Pino de Rosa; Darren Caplan]; Q151 [Rob Morris; Alan Price]; Q192–6 [Rob Morris]; Q198 [Malcolm Brown; Alan Price]
119 See, for example, Q146 [Jonathan Willcock]; Q148 [Alan Price]; Q272 [Tammy Samuel]; Q376 [Mark Carne]
123 DfT, Rail market-led proposals: Guidance, March 2018
125 DfT, Rail market-led proposals: Call for ideas, March 2018
Published: 28 June 2018