What lies ahead for road and rail funding?
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As infrastructure is elevated at a political level, there is a step change in funding for two of civil engineering’s biggest sectors, roads and rail, as the focus shifts and lessons are learnt.
We are in the middle of the two major five year funding cycles for infrastructure in the UK, control period 5 (CP5) for rail and Roads Period 1.
But already both cycles, particularly rail, have been dogged by delays and increasing costs. So as the government moves to elevate infrastructure, how will the spending plans for these sectors change?
Devolution of the rail sector is likely to result in significant changes in the way the sector is funded and regulated for the next funding cycle, control period 6 (CP6).
Periodic Review 18 (PR18) – which debates the spending plans for CP6 – is already debating route level regulation, which will tie in with moves Network Rail is already making to work at a more devolved level. It could see future funding determined by route.
As planning for CP6 gets underway, it is important to take stock of rail funding. CP5 has been problematic, with infrastructure renewal work costing more than expected and leaving a £3.5bn backlog of work. This has proved a financial drain on Network Rail, which now has its borrowing capped by government. Alongside that, there have been substantial and well-documented increases in the costs of big projects – the electrification of the Great Western line being one – and the performance of passenger trains has not been as good as expected. It is not all bad, however. Network Rail’s asset performance is improving. But the overall picture puts pressure on the government, regulator the Office for Rail & Road (ORR), and Network Rail to ensure that CP6 goes more smoothly. So how can funding and targets for rail be better managed?
Taking a different track
The first half of 2017 is a key time as the government sets out its high level output specifications (HLOSs) – what it wants from the railways – and statements of funds available (SOFAs). This work, due before the end June, will start to drive decisions about what will get funded in CP6.
“Last time round both governments went into a lot of detail about what they wanted to buy, lots of specific projects, and very of specific requirements on performance. What they have to decide this time is whether what they want to do is the same,” says ORR director of railway markets John Larkinson.
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The problem with so many projects proposed for CP5 was that projects were included that were insufficiently developed, leaving a lack of foresight in terms of cost or timescales.
This time around, there is expected to be a narrower focus on projects the Department for Transport (DfT) wants to do. Projects that once might have previously made it into CP5, might now not make the cut in CP6. Instead, they are expected to be put together in a pipeline of broad intent where decisions can be made over a longer timeframe.
The other major change the sector is likely to see is structural change in terms of devolution by route.
The industry is already starting to move towards this, for example with transport secretary Chris Grayling’s announcement of East West Rail as a standalone piece of infrastructure with track and trains operated by the same organisation. This idea has been already developed elsewhere, for example in Scotland. This sits alongside another drive by Network Rail to make it easier for third parties with innovative ideas to come into the rail industry. Former ICE President Sir Peter Hansford is currently undertaking a review of barriers to new entrants and innovation in the rail sector.
These two drivers marry up to push the overall intention that Network Rail gets closer to train operating companies (TOCs) and becomes more customer focused. A key way of doing this is believed to be through devolution, where track and trains are operated by the same body
Routes to success
The ORR could support this devolution and drive to become more customer focused by treating Network Rail by route, rather than one entity. This idea is up for consultation as part of PR18.
“This time we’re going to say: ’here’s what the geographical routes need to deliver, here’s what the system operators need to deliver’ and will then split out the statement of what needs to be delivered individually for the routes. We’ll say: ’here’s the amount of money we think the route needs and the system operator needs. We’ll fit our approach in terms of what’s required of people and how much money they get and the incentives are put upon them and we’ll do that at a much more disaggregated level,’” says Larkinson.
This will be followed through by monitoring of Network Rail by route, rather than as one big company. Data will be published comparing route and other areas of business, such as asset and structural monitoring.
Another new direction
While the rail strategy is clearly taking a new direction, the second Road Investment Strategy (RIS2) which organises funding for the strategic road network, is a little sketchier on detail. Starting in 2020, early on in the process of putting together RIS2, there are certainly echoes of what is happening with PR18 in rail.
Highways England is currently conducting an extensive information gathering and analysis exercise, including strategic studies and route studies. Funding will not be nailed down for another couple of years.
But the ORR has set out its intended approach for the RIS2. Overall, the drive is towards a more robust evidence base and delivery capability for projects – this means stronger stakeholder input in development, user research and investment forecasting. In short, the scope and specifics of any project will have to be nailed down earlier so that there are fewer delivery or cost overruns down the line.
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Of critical importance will be a study the ORR and Highways England are jointly undertaking to look at “efficiency improvements” it could realistically make through the way it procures and manages costs. Around 85% of what Highways England spends goes through its supply chain, and the ORR sees the streamlining as ‘key to unlocking future cost savings’.
Highways England says it is taking a more strategic approach, looking at routes as a whole, not just certain areas. It determines what it thinks are investment priorities, although government decisions on certain routes or projects will be taken at a later date.
Alongside the RIS2 developments, there is the ongoing issue of the Collaborative Delivery Framework (CDF), expected to reach its £5bn upper limit around the final quarter of the 2018/19 financial year – depending on what packages of work are awarded before then.
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Highways England says it is having an ongoing conversation on how procurement for this moves forward. This means that after this CDF finishes, it is not certain what it will be replaced by. A Highways England spokesman said it is in conversations with suppliers.
“We have a good track record for delivering and are confident in our ability meet the challenge that the £15bn Roads Investment Strategy presents,” says the spokesman.
“The Collaborative Delivery Framework is a key part of how we deliver this significant step up in roads investment and provides a streamlined route for procuring capital works.
“We are assessing how we will procure the remaining projects in our delivery programme once the CDF reaches its threshold and is gathering the views of our stakeholders, supply chain and partners to help inform what future models could look like.”
Despite government announcements of billions of pounds for new infrastructure, for roads and rail at least, the reality of delivery is not going to be a heady spending bonanza. It looks like there will be narrower focus on achievable, industry-backed projects and a stronger emphasis on delivering value and customer satisfaction.