By Phil Marsh

Public Accounts Committee grills Network Rail, the Department for Transport and Office of Rail and Road on electrification delays and cost over-runs

Published: 24th November 2015

But was it all just electioneering by the Government a year ago?

The Public Accounts Committee (PAC) has investigated the performance of the Department for Transport (DfT), Network Rail (NR) and the Office of Rail and Road (ORR) so far as signing off the five year investment plan known as Control Period 5 (CP5) in October 2013. The PAC quizzed NR Chief Executive Mark Carne, ORR Chief Executive Richard Price and DfT Permanent Secretary Philip Rutnam.

This commenced in April 2014 and was much lauded by the Government as part of their Long Term Plan with the sum of £38billion repeated over and over again as being invested into the UK’s rail network, the biggest investment for 100 years or more.

This was obviously great news for the rail industry and the ever growing millions of passengers as lines and stations were scheduled to be re-opened around the General Election time of May 2015. And this is the conspiracy theory as Transport Secretary Patrick McLoughlin was instructed by The Treasury to ‘pause’ many projects immediately after the election.

The PAC says that the three organisations agreed an unrealistic programme of rail investments for CP5 and that the programme contained too much uncertainty around the costs when the funding arrangements were signed.

How does it work?

The Government sets out an HLOS, (High Level Output Statement) which depends on a SOFA (Statement of Funds Available). In essence, The Government decide which projects they wish to fund, NR puts a cost and delivery timescales to these projects and the ORR signs off the expected outputs which include delivery timescales and budgets.

It is common knowledge that NR has not matched its signed off expectations in terms of budget or timescales and given that it is a Government Department has caused some friction. In fact most of NR’s executive directors have left and its Chairman replaced as a result.

PR spin?

Some were somewhat taken aback when Paul Plummer left the NR Board to head up the Rail Delivery Group and said: “It has been a huge privilege to have been able to play a part in the development of Network Rail for 13 years but the opportunity to represent the whole industry at the RDG and was too good to miss.”

Electrification woes

The PAC says that NR’s work has cost more and taken longer than expected and that they are concerned that the ORR lacks the capability to robustly scrutinise NR’s plans and cost estimates. They single out the Great Western main line electrification saying that the severity of the planning and budgeting failures is especially clear in that project’s cost which has escalated from £1.6 billion to £2.8billion at 2013 prices in one year. The PAC described this increase as staggering and unacceptable and asks if this is due to NR inefficiency, ORR lacking a full understanding of the work needed, or a combination of both.

The DfT were unable to advise the PAC when the GW electrification programme will be completed but confirmed that delays to the previously announced schedule were highly likely. The DfT procured the new trains for the GW route due to be delivered from February 2018 and they will have to pay for them irrespective if the infrastructure is ready or not. Roger Ford from Modern Railways magazine suggests that each five coach train could cost the DfT over £300,000 a month to stay idle.

The PAC has suggested that the DfT and NR should publish an updated schedule and cost forecast for this project and a full account of what has caused the cost increases and proposals for controlling future costs, including the liabilities associated with the new electric trains.

What are the stated aims of The DfT?

• ensure effective governance and properly manage risks

• shape and direct a shared agenda for the department as a whole, both to deliver ministers’ priorities and to build capability

• monitor performance and risk, making choices (or recommendations to ministers) on priorities/risk appetite

New Chairman reviewing things

The new NR chairman, Sir Peter Hendy is undertaking a detailed review into how the investment programme can be delivered on a sustainable footing and is due to report before Christmas.

Since when did operational expenditure count as investment?

One thing that the PAC has highlighted, and known within the rail industry is that the politicians claim that £38billion was being invested into the railways was stretching a point! This amount includes routine maintenance, renewals and operational costs such as staff and offices with £12.8 billion for enhancements, still a huge sum to be welcomed. But the costs and funding packages were signed off when 52% of the projects were at an early stage of development with the associated highly uncertain costs.

When NR was reclassified in September 2014 as a public sector body, in essence it lost its credit facility. The company could, and did borrow against the ORR’s valuation of the assets, known as the regulated Asset Base (RAB).

When upgrades were completed, ORR allowed NR to charge more access charges to service the debt but it was always going to be impossible to pay off the debt. The credit line was capped by the Government from Sept 2014 at £30.3 billion for CP5 as the funding rules changed. This existed from NR selling long-term Bonds on international financial markets, 100% supported by government guarantee and as a separate company did not have a fixed credit limit.

PAC Conclusions and recommendations

The PAC has concluded that the CP5 investment plans could not have been delivered within the budget which the DfT. NR and ORR signed up to. Just prior to signing, the then Chief Executive of Network Rail described it as “unbalanced and unrealistic”.

For example, the scope of the GWML electrification was only finally agreed in September 2014, nearly a year after the CP5 agreement had been signed so there was absolutely no way the project cost could have been estimated at that time.

Amazingly, NR also committed to deliver a 20% cost reduction or £600 million of efficiency savings in renewals work even though it did not know how it could be done. So far, NR has not delivered the target savings.

The PAC suggests that for CP6 which starts in April 2019, all parties should assess and explain how uncertainty in key projects could affect the plan’s overall costs and schedule. It also says that ORR’s approach to reviewing the efficiency of NR’s costs is unconvincing and it was not robust enough in scrutinising their plans.

The DfT should carry out a fundamental review of rail infrastructure planning.

The PAC says that the rail five year investment planning and funding model is not adequate for major enhancement work such as the current electrification schemes. Five-year planning blocks are suitable for OM&R (operations, maintenance and renewals) as these can be reliably forecast but not for major investment schemes which can span several Parliaments and funding cycles. This because as with the GW electrification scheme, the costs have to be signed off maybe five years before delivery when the scope has not been agreed.

Long-term projects such as Thameslink and Crossrail are being delivered by Network Rail and the DfT as they have been outside the five year Control Periods. The news that a National Infrastructure Task Force has been formed with Lord Adonis heading it up, suggests that is likely these major projects will be managed by this new organisation rather than remaining inside the HLOS and SOFA processes.

The PAC alludes to this when it recommends that the DfT, NR and ORR should put in place sharper accountability arrangements for major enhancement projects and agree principles on when it is appropriate to fund and manage these projects outside the five year rail funding cycle

The ORR said:

A spokesperson for the Office of Rail and Road (ORR) said:

"The Office of Rail and Road welcomes the Public Accounts Committee’s scrutiny of Network Rail's vitally important rail investment programme for 2014-2019. The escalating costs and late delivery of key rail projects are unacceptable.

"The report recognises that problems have arisen which need addressing for rail users and taxpayers and makes a series of recommendations which affect a number of parties. We need to learn the lessons, and agree with PAC’s recommendations that uncertainties in key projects need to be addressed differently; clear accountability arrangements need to be in place for major projects; Network Rail needs to embed tighter project planning, cost control, and deliverability; and a sector-wide skills strategy for the rail industry is needed.

"With the changes to Network Rail’s ownership and finances since it became a public sector company, ORR agrees that a review of its own role in major projects is appropriate. That review will need to cover the specification, planning and costing of major projects, their delivery and monitoring. It is important that this review covers governance arrangements across all parties.

"ORR looks forward to participating in this work to ensure that Network Rail’s extensive rail investment programme is delivered on behalf of taxpayers and users of the network."

Network Rail & The Government

Because NR’s reclassification as a public body introduced reduced its borrowing facility, the ability to cover project cost increases was lost. The PAC says that NR must embed much tighter project planning, costing and cost control throughout the organisation and be clearer with the DfT about what can and cannot be afforded along with clearer accountability for project costs and management.

Despite the high profile National Electrification signing on March 7 last year, it seems that NR has not really engaged with the supply chain which has a severe skills shortage in key areas. The volume of work planned for CP5 demanded a strong supply chain and in particular, electrification skills which are no longer around. The PAC says that the DfT and NR should publish a rail skills strategy for the industry with milestones for delivery.

And further north….

The PAC also looked at the electrification of the TransPennine and the Midland Main Line routes and observed that there is still far too much uncertainty on costs and eventual delivery dates for these which will be delayed into CP6 for delivery by 2024. Tellingly, NR is now entering a two-year planning phase for the TransPennine electrification after it had been announced by the Government before the election it was being carried out.

The PAC expects Sir Peter Hendy’s review of all projects to reveal more bad news on costs and timescales. Once this review is published, The PAC says that the DfT and NR should publish a revised programme of rail electrification improvements, including the rationale for prioritisation between projects, with updated cost and delivery forecasts.

It is highly likely that other projects will be delayed to keep the NR budget intact and the PAC identifies that over promising what can be delivered leads to inevitable delays and cost overruns and simply delaying projects further as a budget management mechanism is not good financial planning. But was NR acting on instructions from George Osbourne and Patrick McLoughlin?

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