ORR comments on Network Rail’s performance

The key conclusions are:

• There has been good progress by Network Rail in the last year, with reductions in delays and improvement in measures of asset stewardship, exceeding regulatory targets;
• Network Rail has made an encouraging start to its broader role following the Rail Review, for example in developing joint plans with individual train operators to improve performance further;
• But there is a need to ensure that Network Rail is on track to deliver outputs and efficiency targets in the current control period (to March 2009), which requires better analysis by Network Rail of the underspending against regulatory assumptions; and
• There are also concerns that Network Rail’s longer term plans are not yet sufficiently detailed or well-based to underpin the next Periodic Review.

“Reduced delays are good news for passengers, and there are encouraging signs that Network Rail and train operators are set to make further improvements this year. But there is a longer term challenge to improve asset serviceability, train performance and efficiency, and Network Rail needs to demonstrate more clearly that its plans will deliver all the performance and capacity improvements for which it is funded. Only then can we be confident that any underspending represents real efficiency improvement.

“Network Rail also recognises the need to develop more robust plans for the medium term, so that appropriate decisions can be taken on future outputs and funding.

“As the independent body charged with the regulation of Network Rail, the Office of Rail Regulation will continue to monitor Network Rail’s performance and planning and to seek improvements where that is needed.”

Chris Bolt will be presenting ORR’s assessment of Network Rail’s performance to Network Rail members on 13 June to provide information for them ahead of the Network Rail AGM.

Notes for editors

1. The documents published today are:
• the second edition of the quarterly Network Rail Monitor. This covers ORR’s assessment of Network Rail’s performance against targets across a wide variety of measures for the last quarter of 2004-05, available at http://www.rail-reg.gov.uk/upload/pdf/nr_monitorq4_0405.pdf;
• a statement on Network Rail’s 2005 business plan. This assesses whether the plan meets the needs of the business, and the company’s stakeholders and forms an adequate basis to assess future expenditure needs, available at http://www.rail-reg.gov.uk/upload/pdf/nrbp_stat.pdf;
• a consultation on how ORR proposes to monitor and account for Network Rail’s underspending, if any, against regulatory assumptions in a way that ensures delivery of Network Rail’s obligations while providing effective incentives to achieve greater efficiency, available at http://www.rail-reg.gov.uk/upload/pdf/237.pdf; and
• a letter to Network Rail containing ORR’s assessment of its 1 April 2005 asset information plans, available at http://www.rail-reg.gov.uk/upload/pdf/aip_let05.pdf.
2. Specific issues highlighted in the documents include:
• 2004-05 delivery
• train performance is well ahead of target - delay minutes 7% better than 2003-04 at 11.4 million minutes, Public Performance Measure (PPM) 2.4% better;
• asset condition as measured by the composite asset stewardship index (ASI) is 15% better than target, representing improvements in the condition of track, signalling, structures and power supply assets;
• asset failures show a 10% reduction on 2003-04. There was however a shortfall of approximately 6% in planned delivery of track renewal volumes;
• timetabling – Network Rail is making significant progress in restoring delivery of the Informed Traveller requirement and is complying with its obligations under its recovery plan.  A full statement on this matter will be made by ORR shortly;
• cost control – expenditure on operations, maintenance and renewals some £0.8 billion less than 2003-04 and net payments under incentive regimes for better performance (Schedule 8) and planning of possessions (Schedule 4) were substantially (approximately £0.4 billion) lower;
• expenditure overall was approximately £1 billion (15%) less than budget and £0.9 billion (14%) less than that assumed in the 2003 access charges review (ACR 2003);
• of this approximately £90 million represented reduction in payments under Schedule 4 and 8 due to better performance and possession planning.  Enhancement spend was 35% (nearly £0.4 billion) below budget, due in part to lower expenditure on the Southern Power upgrade (for which allowance was made in ACR 2003) on the basis of actual expenditure incurred and renewals 15% below budget;
• there is a need to understand how much of this is due to deferral of work, with possible implications for sustainability of the network, or improved efficiency and/or reduction in the scope of the work necessary.  ORR will be examining this further with independent regulatory reporters and is addressing the incentivisation of outperformance (ie. where underspending does not result in any reduction in outputs in the short or long term) in its proposed policy statement today (see below);
• although increasing, net debt is lower than expected, due to lower expenditure and debt/RAB ratio stood at 77% at the year end; and
• there is a need to get better measurement of network availability to ensure cost savings are not being achieved at the expense of unnecessary/inefficient possessions.
• Business Planning and Asset Information Strategy, the 2008 Periodic Review
• Network Rail is consulting on its business planning criteria.  These are an improvement on the original criteria set out in 2003 but still do not set out in a sufficiently transparent way how the company makes decisions about what to spend where and the economic criteria underpinning these decisions;
• ORR welcomes targets to meet or beat regulatory targets but there is insufficient linking of expenditure with detailed plans and outputs;
• in respect of the West Coast, Network Rail has not made the progress it had hoped in achieving efficiencies and there is a need to finalise the specification of the work which will be carried out in this control period;
• the route plans are an improvement on those in 2004 but much needs to be done to improve the quality and usefulness of plans and to ensure that they reflect and complement the new Route Utilisation Strategies;
• there will be a need in future plans to provide separate figures for outputs and costs in Scotland;
• the development of a robust basis for longer term plans by Network Rail is essential to the success of the 2008 Periodic Review;
• this requires better asset management strategies, information and decision support tools;
• during the last year, Network Rail has implemented major changes to the way in which it manages its business, including taking direct control of its rail infrastructure activities, and it has therefore reviewed its business information requirements;
• Network Rail continues to progress this analysis, and ORR’s emphasis in monitoring progress on ‘the asset register’ is therefore to ensure that Network Rail;
• Network Rail is consulting on its business planning criteria.  These are an improvement on the original criteria set out in 2003 but still do not set out in a sufficiently transparent way how the company makes decisions about what to spend where and the economic criteria underpinning these decisions;
• ORR welcomes targets to meet or beat regulatory targets but there is insufficient linking of expenditure with detailed plans and outputs;
• in respect of the West Coast, Network Rail has not made the progress it had hoped in achieving efficiencies and there is a need to finalise the specification of the work which will be carried out in this control period;
• the route plans are an improvement on those in 2004 but much needs to be done to improve the quality and usefulness of plans and to ensure that they reflect and complement the new Route Utilisation Strategies;
• there will be a need in future plans to provide separate figures for outputs and costs in Scotland;
• the development of a robust basis for longer term plans by Network Rail is essential to the success of the 2008 Periodic Review;
• this requires better asset management strategies, information and decision support tools;
• during the last year, Network Rail has implemented major changes to the way in which it manages its business, including taking direct control of its rail infrastructure activities, and it has therefore reviewed its business information requirements;
• Network Rail continues to progress this analysis, and ORR’s emphasis in monitoring progress on ‘the asset register’ is therefore to ensure that Network Rail;
• finalises the definition of its business information requirements;
• establishes what gaps and shortfalls in this information remain to be filled;
• completes a prioritised programme that fills those gaps and improves data quality where necessary; and
• ensures that full access is provided to this asset information for use in the business.
• these are the key steps that are critical to Network Rail’s successful delivery of its asset information strategy. Network Rail’s own framework for complying with Condition 24 of its licence sets out the planned delivery dates for these key steps, and ORR is actively and closely monitoring progress against Network Rail’s plans to ensure that the company remains focused on the key tasks and delivers to its own timetable;
• Network Rail also requires identification of strategic issues and options and criteria and models for assessing them, so that ORR can provide advice to funders and, if necessary determine the best package of outputs for available funding at the end of the process.
• Monitoring and Treatment of Underspend and efficiency
• clearly ORR wants to ensure that Network Rail is incentivised to outperform the ACR 2003 targets and achieve further efficiencies without compromising the delivery of outputs in the short or long term;
• ORR has therefore developed a framework for the monitoring and treatment the achievement of efficiency during CP3 which addresses the issue of Network Rail’s underspending compared with assumptions in ACR 2003;
• ORR proposed that Network Rail will be allowed to retain any outperformance (ie. where there is underspend which does not affect outputs) for the duration of CP3.    The effect on outputs will be verified by the independent regulatory reporters.  It will not be allowed to benefit from underspend due to underperformance. ORR may adjust Network Rail’s revenue at the next access charges review to reflect any de-scoping or deferral associated with underperformance; and
• as there are no shareholders all of the outperformance will be available for use in Network Rail.  ORR has asked Network Rail to develop criteria for the use of any outperformance in conjunction with ORR, the Department for Transport and the Scottish Executive. Uses of outperformance may include the reduction of net debt, efficient investment in the network, and rebates to customers and funders.
3. ORR will be setting out the overall framework for the 2008 periodic review in its consultation document planned for July – in the meantime it will be discussing with Network Rail what it needs to play its role and resource itself properly for the review.