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Insight | How tight cash buffer could affect Network Rail renewals

rail work

Network Rail’s pot is running dry. In fact it has just £100M to account for any “surprise costs” between now and April 2019. 

On Tuesday, the Office for Rail and Road (ORR) expressed concern about Network Rail’s finances when it published its annual report on the rail body’s performance.

The transport watchdog found that while the number of infrastructure-related failures had fallen by 1.7% in the last year, Network Rail’s cash position had not enjoyed such great success.

It revealed that Network Rail’s emergency budget “remains tight” with only £100M of headroom for any unexpected costs in the last year of Control Period 5 (CP5). This could lead the rail body to defer more renewals work to its CP6 investment programme which runs from 2019 until 2024.

Last year Network Rail had £300M of financial headroom, but the ORR still forecast that £3.9bn of renewals work would be pushed back into CP6, putting the sustainability of the rail network at risk, and raising costs.

Network Rail itself admitted its headroom was tight, with a spokesperson saying: “Network Rail has the funds it needs to complete its plans for 2018/2019. Our contingency for unforeseen events is tight, but is being closely monitored by ourselves and the ORR.”

On the £100M financial buffer, one ORR source said: “We think it’s tight. They have in the last couple of years, if you look through the previous few reports, needed to defer renewals in order to stay within their spending limit. It’s difficult to speculate but previous history says that it’s a tight amount of headroom.”

But the ORR was keen to make clear it was not certain that more renewals work would be deferred into CP6.

“It’s completely too early to say even if they will; it’s our projection that if anything does crop up this year, that’s following the pattern from what we’ve seen and that’s what they might do,” the source said.

So how likely is it that more renewals work will be pushed back into the next control period? Rail Industry Association (RIA) senior policy manager Damien Testa believes having more cash in Network Rail’s buffer pot would not have made a difference.

“I think that [pushing over renewals work] was going to happen anyway,” he said. “The concern for the supply chain is actually when that work comes to market.”

Testa explained how renewals work goes through a pattern of “boom and bust” during Network Rail’s five year funding periods, making it harder for the supply chain to plan.

“There’s not much work at the beginning, and then the supply chain has to ramp up its activity to deliver that programme, and then as you go through the control period it tails off again. So you’ve got this peak and trough going across all the control periods”.

Together with Network Rail and other industry bodies, the RIA has been campaigning for a smoother renewals spending profile.

Its efforts were rewarded last week when the Commons transport committee published its report into, among other things, funding plans for CP6.

The Commons transport select committee recommended the Department for Transport should bring together Network Rail, the ORR and supply chain stakeholders to work out a mechanism to achieve steadier funding for renewals work.

Committee chair Lillian Greenwood said: “It is vital that the increased volume of renewals is managed effectively from the outset, throughout the period and beyond.

“The historic stop/go nature of the renewals spending profile is widely acknowledged to be highly problematic for the supply chain, inhibiting confidence to invest in its workforce, skills and innovation.

“This issue is also critically important in driving increased efficiency in the railway industry, and addressing it should be a key objective of the Government and the regulator.”

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