Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence

Memorandum by Railtrack (RI 20)


  The history of the railway before privatisation was one of low investment, low subsidy by international standards and long term decline. Investment in the UK railway has historically been less than half the levels of other major European countries.

  This lack of investment has been reflected in the differences between the relative market shares of the road and rail network in our major European competitors and those in this country. In 1997, rail passenger traffic took an average of seven per cent of the transport market in Europe compared with only 4.9 per cent in the UK; for freight traffic the relative levels were 14.7 per cent in Europe and ten per cent in the UK. The lack of investment between 1970 and 1995 caused our passenger railway to decline in contrast to the growth of three per cent pa seen in other European countries.

  The railway in this country, over a long period, has struggled with limited resources with little opportunity or aspiration to expand and develop. As John Welsby, a former Chief Executive of British Rail has observed, the "railway problem" had historically reflected a tension "between a political imperative to maintain as wide a rail network as possible and the financial imperative of containing public expenditure." The structures created by privatisation were based on the assumption of no growth, the objective to maximise proceeds to the Treasury and minimise future subsidy requirements. There was no vision of the size and type of railway the country needed.

  In the last four years we have seen a complete turnaround. Investment in the railway has more than doubled, and we have seen a 28 per cent increase in passenger train miles and a 38 per cent increase in freight tonne miles.

  For this growth and investment to continue, the Government's 10 year transport plan, the SRA's plan and the Regulatory Review of access charges, are critical. They have to provide the industry with the finances and framework to continue to invest and provide the country with a railway to rival our European competitors, fit for purpose for the twenty-first century.


  The privatised railway needs to improve the quality of its services to customers further, but that should not obscure the considerable progress that has been made in recent years. As the Parliamentary Under-Secretary, Keith Hill MP, has said "it [the railway] has been successful in many respects under privatisation." (Hansard, 10th May 2000, col 921). Investment is over twice that of British Rail; delays have been reduced providing a better service to passengers; more passengers are travelling by train, which brings significant economic and environmental benefits. Passenger levels are now higher than at any time since 1946. These are real achievements on which to build.


  Railtrack will spend £2.5 billion on the network this financial year, including investment in CTRL phase 1, more than twice the level invested by British Rail. This year's plans build on the £2 billion we invested last year of which £1.7 billion was renewal and enhancement on the core network.

  This significant increase in spending has been funded by an increase in debt. Interest payments on the debt have increased, reducing the company's interest cover (the ratio of profit to interest). Further increases in debt, without an increase in profit will reduce the company's interest cover further, to levels where the company's agreements with the banks could be breached.

  This increase in Railtrack investment, funded by debt has occurred during a period of declining subsidy.

  At the time of the prospectus Railtrack acknowledged, on the basis of detailed engineering studies undertaken, that it would need to spend around one billion pounds more than allowed for by the Regulator in 1995. Since then our assessment of the required level of renewals has increased by a further one billion pounds as a result of improved asset knowledge, traffic growth and the need to deliver improved outputs. As a result, Railtrack has spent around two billion pounds more than allowed for by the Regulator in setting access charges in 1995 and one billion pounds more than projected at privatisation. For these reasons the claim that Railtrack has underinvested in the network has no foundation.

Train Delays

  As the Deputy Prime Minister acknowledged at the rail summit on 25th May, punctuality on the network has improved despite the problems caused by congestion as traffic grows. Since privatisation delays to passenger trains due to infrastructure related causes have reduced by 44 per cent, including a ten per cent reduction last year and reflecting the efforts made throughout Railtrack to target the key causes of delay.

Asset Stewardship

  Railtrack's record as steward of the network has been subject to considerable scrutiny. We accept that, despite increased investment and improvement in many areas, the condition of all our assets is still not where we would like it to be. The impact, particularly on track and related assets, of running unprecedented numbers of passenger and freight trains has been significant. This means that our assets degrade more quickly and require earlier renewal and cost us more to accommodate the extra traffic than we and the Regulator predicted.

  The sharp increase in broken rails in 1998-99 prompted a £100 million recovery programme. We have halted that upward trend and the number of broken rails decreased by 4 per cent last year, and in the first two months of this year the number of broken rails were 20 per cent lower than the same period last year.

  Track quality, which affects the smoothness of the ride experienced by passengers, declined sharply between 1994 and 1996 when Railtrack was in the public sector and subject to Treasury spending limits. Since then it has improved steadily and we have put a major programme in place to return quality to 1994 levels by 2001. We are now within 1.2 two per cent of our target for 2001. Furthermore, as shown below, we have made substantial improvements in the quality of that track deemed to be in the worst condition ("super-reds").


  Whilst safety is not specifically mentioned in the Committee's remit for this inquiry we set out below some of the key steps we have taken to make rail travel safer both through our working practices and through investment.

  The number of signals passed at danger fell by 11 per cent last year to the lowest number ever. However, the tragedy at Ladbroke Grove highlighted the absolute requirements for the industry to deliver a step change in safety improvements.

  Action already taken includes carrying out risk assessments of the 224 signals passed at danger more than twice in the last five years and implementing all the recommended steps to reduce risk. A similar exercise has been carried out at all complex layouts. We have also accelerated the introduction of the train protection warning system (TPWS). This project, costing £330m, will now be completed by December 2002, a year earlier than originally planned. This should reduce the risk of SPADs by over 70 per cent. We are rolling out the confidential reporting system and it should be in place across the whole country by the autumn. Over 80 per cent of investment has a safety benefit so the increase in investment will play its part in improving safety.

  Work has also begun on the creation of a new group subsidiary, Railway Safety, covering the responsibilities of the Safety and Standards Directorate and Sir David Davies has been appointed its chairman. We anticipate that Railway Safety will be established formally in the autumn. It will then take over in full when necessary modifications to Railtrack's Network Licence have been made by the Rail Regulator and new Railway (Safety Case) Regulations are in place.

  Seven inquiries are proceeding or have taken place into the Ladbroke Grove accident. We are already implementing the recommendations of those that have reported and await the outcome of the public inquiry currently underway. We are committed to learning the lessons of the accident and translating them into action and have appointed a main board director of line safety to implement the recommendations.


Current Network Enhancement

  Over the past year we have completed a wide range of enhancements to the network which are set out on a route by route basis in Railtrack's 2000 Network Management Statement.

  Work has also continued on major projects such as the upgrading of the West Coast Main Line where the first phase is underway with £1.2 billion of contracts now let. On the East Coast Main line, phase one of improvements to the station and layout at Leeds is 39 per cent complete and work has begun on the Sunderland Metro extension. We have also been working on the planning issues related to the Thameslink project for which the public inquiry starts shortly. On the Channel Tunnel Rail Link, work is now 30 per cent complete on phase one and we are undertaking due diligence work on phase two.

Future Investment Plans

  Railtrack also set out plans in the NMS to build on the growth we have seen in the last four years and accommodate future demand. Our new passenger demand forecasting capability, which we have developed in partnership with ATOC, suggests that growth in passenger traffic could range from 23 per cent to 64 per cent over the next 10 years and our central forecast, on which our investment plans are based is 47 per cent over the next 10 years. We have also set out a range of scenarios for freight and plans to accommodate increases in traffic in that sector.

  In the NMS we set out a range of options for developing the railway which, added together, could cost up to £52 billion over the next 12 years. It will be for Government, the SRA, train operators and Railtrack to determine which of these options they wish to take forward and the priorities for the future development of the railway.

  Our recommendation is for an £8 billion enhancement programme over the next five years which will deliver 25 per cent growth in the first five years of the 47 per cent forecast. This programme has been built up on a route by route basis and includes the upgrades to the East Coast Main Line and Great Western Main Line; improvements to the London to Stansted route; the North Trans-Pennine Upgrade; and capacity improvements around Manchester, Coventry and Birmingham. The total committed investment is £3 billion and we are discussing the funding of the remaining £5 billion with the sSRA and the Regulator.

Improving Delivery

  Delivering a £2.5 billion spending programme on a busy integrated railway presents a particularly demanding challenge. We have overhauled our approach to major projects and strengthened our supply chain and logistics to ensure that our plans are delivered effectively and efficiently on the operational railway.

  The West Coast Main Line project, conceived prior to privatisation, has had to be reconfigured under new management and the moving block signalling strategy (which had to be abandoned on the Jubilee line) has been abandoned in favour of a lower risk but more expensive approach. The lessons learned from this project have been reflected in our revised approach to managing enhancement projects from initial evaluation to delivery. International project management companies (currently Bechtel, Fluor Daniel and Parsons Brinkerhoff) now work in integrated teams with our own railway experts. We split all major projects in phases to reduce risk and are only using proven technologies. We now have a system which uses five levels of cost estimation, representing progressive degrees of knowledge about the feasibility of a project, and will only offer fixed price commitments once we have reached level five. This way all those involved can be confident that the costs and timescales of delivering projects are well understood and properly provided for.

  We have also taken steps to improve management of our supply chain and the associated logistics.


  We are at a critical point in the development of the railway. Our regulators, customers, and Government all have to clarify the kind of railway they want and the enhancements they are willing to pay for.

  The major issue to be resolved is the future funding of the railway and the level of access charges in the next control period. The massive development of the network we outlined in our NMS cannot be funded on the basis of the Regulator's preliminary determination published in December 1999. Delivering investment on this scale, whilst maintaining our investment grade credit rating, will require access charges to rise significantly. Whilst some of this can be funded from extra revenue from fares it is inevitable that public subsidy will have to rise because large enhancement projects cannot be justified commercially. Without a significant increase in access charges the current investment programme would become unfinanceable and would have to be cut back.

  If we are to fund the development of the future railway the Regulator's final determination will need to adopt realistic assumptions on the scope for efficiencies; fully reflect the impact of traffic growth and service improvement in his conclusions on renewal volumes; and take a balanced view on the costs of the West Coast route modernisation project.

  Other uncertainties arise from the franchise replacement process that is still at a very early stage and raises many questions about the train services which train operating companies will wish to offer and the changes to the railway infrastructure these will require. Equally, clarity on the future funding of the railway will only come from the Government's ten year plan which we hope and expect will provide additional resources for the railway, recognising the environmental and social benefits that increased rail usage brings.

Regulatory Review

  The periodic review, which sets our access charges for the five years from 2001 to 2006, provides an opportunity to correct the flaws in the existing regulatory regime which were highlighted in the NAO report. This regime, drafted before privatisation, now needs revision so that it meets the needs of an expanding railway.

  Current levels of access charges fail to reflect the level of investment necessary to maintain and renew the network in 'steady state'; nor do they allow for the effects of growth. They were set on the basis of inadequate information with ill-defined concepts such as modern equivalent asset values and static traffic forecast assumptions. As a consequence, Railtrack expects to have spent nearly £2 billion more in renewing the network than had been anticipated when the current track access charges were set in 1995. In reviewing the future levels of track access charges it is important that the Regulator avoids repeating the mistakes of the past when insufficient allowance was made for the maintenance and renewal costs of sustaining the network. This is particularly important given the improved outputs now expected from the network. This means that access charges will need to rise substantially in the next control period simply to maintain the current network.

  Problems have also arisen because regulatory expectations were poorly specified in 1995. The access charges were based on the concept of renewal in "modern equivalent form" which as the NAO report has pointed out "has been difficult to apply in practice" (NAO Report, Ensuring that Railtrack maintain and renew the network, paragraph 3.27). The report also says that it "should have been a priority for the ORR to devise, in conjunction with Railtrack a consistent set of performance indicators for maintenance and renewal activity with unambiguous definitions". (ibid 3.26). The failure to establish these clear definitions has caused problems for both Railtrack and ORR.

  This reinforces the need to clarify the outputs specified in the next control period and to establish, in advance, the nature of the associated monitoring and incentive regimes. We have therefore been working closely with the Regulator to set up a new set of baseline outputs to ensure a clear framework is in place from April 2001.

  Providing for the future railway will require additional funding and a clear structure for remunerating enhancement expenditure. The lack of such a framework in the current control period has been a significant impediment to network development. We were disappointed with the Regulator's proposals in his Provisional Conclusions on the Incentive Framework in this area. We feel these do not recognise the risks involved in developing large scale investment projects and do not provide an adequate framework for Railtrack to earn a return on capital investment projects.

  Railtrack supports the Regulator's view that "incentive regulation is and always has been preferable to enforcement action" (ORR Provisional Conclusions on the Incentive Framework. April 2000). We hope that the current review of access charges will reinforce that principle. However, we are concerned that his latest thinking, set out in his provisional conclusions, does not go far enough towards establishing a proper incentive framework which allows Railtrack to share in the benefits of growth. The Regulator appears to be placing a disproportionate emphasis on enforcement action. In other regulatory regimes, enforcement action is extremely rare and should be unnecessary in a properly constructed incentive framework.

  The current regime of 90 per cent fixed access charges means that Railtrack's incentives are misaligned with those of the TOCs. The recent growth in traffic brings insufficient financial compensation to Railtrack for the additional costs of these extra trains. In effect the extra trains are not covering their marginal costs. The periodic review, together with the process of franchise replacement, provides an opportunity to create a framework for industry growth which aligns incentives.

Government's Ten Year Plan

  The future funding of the railway is the critical question, which will need to be addressed in the Government's ten year plan. The restructuring of the railway at the time of privatisation assumed declining subsidy. However, it is now clear that if Government wishes to see the railway continue to grow and to achieve a greater shift of traffic from road to rail then further Government support will be required.

  There are many railway projects which do not have a clear commercial case but which would bring considerable social and environmental benefits. We have shared with Government the work we have done on this area to help prioritise schemes.

  Therefore, we believe that the Government's ten year plan should provide a firm financial commitment to the development of the railway and clarity as to how that funding should be provided and the kind of projects which will be supported.

The Role of the SRA

  As the Minister has said during the passage of the Transport Bill which will establish the SRA "we need to create a proper and flexible framework that will allow for an expanding railway." (Keith Hill, Hansard, 10 May 2000, Col 921). It is therefore important that the SRA has a clear definition of its role and responsibilities.

  Railtrack believes that the SRA needs to take a truly strategic approach and we see its role as:

    —  the promotion of railways for the public good;

    —  funding socially necessary schemes;

    —  securing necessary funding from the Treasury; and

    —  influencing strategic development.

  We do not believe that it would serve the interests of passengers if the SRA became involved in operational issues. The planning of network capabilities and meeting the needs of railway users is best done by Railtrack and the TOCs who are closest to their customers. Duplication of that activity or second-guessing by the SRA would clearly be against the interests of passengers. Direction of investment on the basis of strong central planning is likely to lead to bad decisions unrelated to passenger needs.

  We are concerned that both the SRA and the Office of the Rail Regulator are planning considerable increases in staffing and resources. These increases come at a time when the Regulator is proposing 3 to 5 per cent efficiency reduction for Railtrack. We believe that these increases need proper scrutiny to ensure that costs of regulation do not divert resources away from the railway.
Office 1998-991999-2000 2000-01
OPRAF/SRAStaff126 160237
Budget (running costs) £8 million£13 million £15 million
ORRStaff130 147180(1)
Budget (running costs) £8 million£13 million £14 million
OfwatStaff191 210198
Budget (running costs) £10 million£12 million £12 million

Source: DETR annual report

(1) The Regulator has proposed an increase in licence fees of 40 to 50 per cent in this financial year to cover significant increase in running costs (Letter, 7/2/00).

Sources of Funding

  Railtrack has been exploring the alternative ways in which the extra investment (£8 billion over the next control period) needed in the railway could be provided. The most efficient way in which this could be achieved is through adequate access charges, and we look to the Regulator to do this in the final Regulatory settlement this July. If we have the assurance of sufficient income through access charges this would provide flexibility to raise additional equity from shareholders through a rights issue.

  Alternatively public finance could be provided through grant funding from the SRA although we continue to believe that direct funding is not in the interests of passengers as it undermines our commercial relationship with TOCs and is an inefficient way of bringing finance into the industry.

  A third option is to use third party funding known as Special Purpose Vehicles (SPVs) which would pose considerable practical problems and would be the most expensive form of finance. We cannot see how these would work in practice on an integrated network and believe that, other than for stations and new railways on green field sites, they will be more costly and very complicated. This is consistent with the situation with other network utilities, where in gas and electricity competition has been introduced in the provision of local connections but the core network is provided by a single (regulated) operator.

  It is important to stress that further fragmentation of the industry must not compromise the safety and integrity of the network.

  The SRA has expressed concern that Railtrack has insufficient resources to manage the investment programme. We believe that concern is unfounded. We have employed international project management companies to work with us and provide additional resources when required.

  Going forward we believe a partnership between Railtrack and the SRA is fundamental to the delivery of a bigger, better railway. Public subsidy must rise if the Government's growth aspirations for rail are to be met. A true public/private partnership between Railtrack as the owner and operator, and the SRA as the major funder is, we believe, the right institutional architecture for the future of a growing railway. We have proposed that the SRA invest in preference shares in Railtrack as being the most efficient way to lever public money into the railway. We have made good progress in developing proposals for project development boards for major schemes with the SRA. Reaching agreement on the detail of the SRA/Railtrack partnership will be a key priority for the coming months.


  Historically the UK has under invested in its railways which means that, compared with our EU competitors, rail has a smaller share of the passenger and freight markets.

  Restructuring of the industry was predicated on stable traffic volumes and cost reduction. The regulatory framework, fixed in 1995, failed to reflect the extent of backlog investment required in the network or provide adequate incentives for growth and development. These issues are now being addressed through the Regulator's Periodic Review of track access charges.

  With privatisation of the industry, the historic cycle of low investment and decline has now been broken. Passenger numbers have risen to a level higher than at any time since 1946 and freight volumes have also grown by 38 per cent. Railtrack has doubled investment which is now running at £2.5 billion pa.

  Contrary to claims that Railtrack has failed to invest sufficiently, by 2001, we shall have spent around £2 billion more than allowed for in the current track access charges.

  Consequently, to maintain the serviceability of the existing network with higher expected traffic volumes and delivering improved outputs (in terms of performance and track quality) will require a substantial increase in track access charges.

  Payment through access charges is, we believe, the most effective way to finance development of the network to provide the capacity for an estimated 50 per cent growth over the next 10 years. Railtrack is committed to working in partnership with the sSRA in a strategy for network enhancement.

  Development and delivery of large construction projects in a complex operating environment carries greater risks than routine maintenance and renewal of the network. In developing a framework for enhancement, it is important that the Regulator makes adequate allowance for these risks.

  Over the coming months, a co-ordinated approach is needed between the Government's 10 year plan for transport, the Regulatory Review and refranchising, to provide clarity on investment priorities and ensure the financeability of proposals for network development.

June 2000

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