His regulated funding model is broken. It is a given that he is going to get less cash to spend in the next five year cycle, and the woes of electrification continue to cast a long shadow. Yet Network Rail chief executive Mark Carne is remarkably enthused about the future of UK rail, and his operation in particular.
Calculations to determine how much Network Rail should get to spend in Control Period 6 from 2019 to 2024 are now under way within the government and industry. These will be stepped up after transport secretary Chris Grayling publishes the next Statement of Funds Available this autumn.
It will be the first time that the government owned company’s budgets have been decided for a new Control Period since it became a government body in September 2014. One major impact of this change was an end to borrowing on the open financial markets.
This has caused big problems. Before the change, the rail infrastructure owner and operator could borrow money to iron out gaps between when it received government grants and when it was actually ready to spend it. Now it cannot. Now it must spend its cash in the financial years in which it receives it. This has heaped pressure on its spending programme – a programme that was already going to be pressured given its scale. When announced in 2014, it was worth £37.5bn and featured a host of multi-billion pound schemes. Many of these were relatively under-developed and focused heavily on electrification, something Network Rail had not done on a significant scale for a number of years. Carne is clearly annoyed at the situation this has put him in.
“Control Period 5 [2014-2019] has been unbelievably challenging, as we have had to deliver it under a set of financial constraints under which [the system] was not designed,” says Carne. “We couldn’t borrow money so the system doesn’t work.”
Throwing in complex and little understood electrification schemes made it even worse. At the time the programme was fixed, the schemes were far from ready and costs and schedules were little more than guesstimates. Costs soared and schemes have had to be delayed and cancelled as a result.
Control Period 5 has been unbelievably challenging, as we have had to deliver it under a set of financial constraints under which [the system] was not designed
Review after review has followed and it is going to mean the next control period is going to be very different. What is now certain is that the regulated settlement will only cover work affecting the day to day running of the railway – operations, maintenance and renewals (OMR). Enhancement projects, such as electrification or station upgrades, will have to be bid for on a case-by-case basis.
“Going forward it will be much more of a rolling programme of enhancements, with projects confirmed when we have done the [development] work,” says Carne.
“We need to make a very clear distinction between the way we manage enhancements and the way we manage OMR. OMR needs funding certainty from a regulated five year cycle to get efficiencies from the supply chain. That is absolutely key.
“Enhancements are separate, distinct investments that can be, and are, better managed outside of that,” he states.
Big change ahead
This is a huge change that the industry needs to brace itself for.
“There still will be a degree of [workload] certainty through OMR, and we still want to enter into long-term contracts there. But there will be less certainty around infrastructure projects,” he says.
“But there will be a much clearer list of opportunities and I hope the industry will get behind that,” he says.
It is most likely that enhancements will be timed around train operating company (TOC) refranchising schedules, so that franchise bidders know exactly what they are getting into, and can incorporate the expected input of planned enhancements into their bids. “What I want is a shopping list of projects that can be called off as and when franchises come up for renewal,” he says.
“As a system operator we look at how we can improve capacity on the network. We need to make that transparent and so there will be a shopping list where the economic impact of each project is clear to everybody.”
It will be much more of a rolling programme of enhancements, with projects confirmed when we have done the [development] work
With no guarantees for any projects going forward, this shopping list, with its appraisal of each scheme’s economic impact, becomes pretty crucial.
“At the moment everybody has their own favourite projects. What we want is people to get behind, say, the top three projects and focus attention on them,” he says.
Of course, politicians are no strangers to pushing pet projects either and Carne thinks this shopping list will help Network Rail manage these aspirations too.
“There is always going to be a political overlay on it. But it is inherently better for judgements to be seen in the light of clear economic priorities,” he says.
Alongside this change there is another, equally fundamental one. The latest of the post-electrification débâcle reviews was the Hansford review, commissioned by Carne. It set out to find new ways to encourage competition in financing and delivery.
Unfit for purpose
As Carne says, the way Network Rail engaged with third party funders and suppliers “just wasn’t fit for purpose” in many people’s eyes.
Hansford’s reforms – which are being fully endorsed by Carne – address this by creating three types of rail project.
The first is government-funded projects. Network Rail’s Infrastructure Projects team will have to compete with external providers for the right to deliver these. This will create competition and, Carne hopes, encourage innovation and boost productivity. Carne also likes this, he says, because it will provide the opportunity to benchmark his team against these newcomers. He says he hopes this will “allow us to demonstrate where we’re doing really well”.
The second will contain third party funded projects where there is no expectation of a return from Network Rail. Typically these would be projects funded by housing developers seeking to get transport links into their developments and where the return on investment is in the form of increases in the value of the houses.
Third party funding
There are, says Carne, “lots of opportunities here”, with the East-West rail scheme between Oxford and Cambridge a “great example”, he says.
Others include the redevelopment of Coventry and Warrington West stations, new branch lines in Brentford; a line to the proposed Moorside power station; and a multi-storey car park in Northampton.
The third type of project is the one that is getting most attention. This involves third parties putting up the finance for a Network Rail project in exchange for a return on their investment.
One of the first of these looks set to be the Heathrow Southern Rail link, which is being taken on by consultant Aecom as its first stab at privately financing a project in the UK. “It is a new project, a greenfield project and so an attractive proposition,” says Carne.
He also sees plenty of opportunities in digital railways, and he cites the deal recently done with signalling and train control technology firm Resonate to install its traffic management system on the Great Western route. There, Resonate is installing its system for free in exchange for a share in reduced compensation payments to TOCs resulting from reduced delays.
Borders railway landscape crop
Others already on the table include a £1.2bn to £1.5bn upgrade to the Brighton Main Line, albeit a “more complex” project.
There, Network Rail believes that unblocking bottlenecks around Croydon in south London could boost capacity from 36 trains per hour to 44.
A full project pipeline will be published in December.
There is more change too. Another of Hansford’s actions was to drive productivity into the rail industry by allowing suppliers to challenge standards.
We don’t want to lead people up the garden path, but we do need to find a way to encourage design companies that can genuinely help us
The idea is that if a designer or a contractor can show there is a more efficient, yet still safe, way to design or deliver a piece of railway then the standard can be changed and the supplier and Network Rail will share in the saving.
“We’re saying all our solutions are open for scrutiny and if anyone has a better way of doing it then there is a reward for finding it,” he says.
“We don’t want to lead people up the garden path, but we do need to find a way to encourage design companies that can genuinely help us,” he says.
Encouraging non-compliant bids
He also wants to encourage more non-compliant bids for projects through a move towards more outcome-based bidding processes. That, he says, was the essence of the Resonate deal, which, he says, stands as a great example of focusing on outcomes not outputs. The troubled electrification programme is an example of doing it the other way round.
“It really is a good example of this,” says Carne. “I say to the Department for Transport: ‘don’t tell me you want electrification; tell me how many more trains you want, and how much faster you want them to go, and then we’ll come up with a solution that might be electrification – or it might not’.”
“Spend twice as long upfront on the outcomes and you’ll deliver a better project,” he adds. “Great Western is a great example of that.”
Lots going on then, and Carne is pretty positive about his organisation’s performance.
22% of UK infrastructure spend
“People don’t really recognise the scale of what we do,” he says, reckoning that Network Rail is responsible for 22% of all infrastructure spend in the UK. “By far we are Britain’s biggest builder.”
And performance of his Infrastructure Projects team is now, he says, “pretty extraordinary”.
“Our hand-back record is very impressive at almost 99%, and projects that are well defined and scoped are delivered to within 2.7% of their agreed budget,” he says.
He cites the recent summer Bank Holiday programme in which just one project out of 3,000 worksites was handed back late.
That project was at Waterloo station, but even there Carne is not despondent.
“On a portfolio of the scale we have, where we are delivering £130M of projects a week, things are going to go wrong. But the measure of a team is not never getting things wrong, but in the way it fixes it,” he says. “It’s about how you learn the lessons.”