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Network Rail CP5 costs soar with poor renewals performance

Higher renewals costs and enhancements underperformance have been key factors to Network Rail’s work costing £1.7bn more than expected so far in CP5, according to the ORR, and will leave the company in a worse financial position at the start of the next control period.

The regulator’s ‘Annual Efficiency and Finance Assessment of network Rail 2015-16’ report revealed that the infrastructure owner’s renewals expenditure was £680m (12.6%) higher than the ORR’s PR13 determination for the control period to date, and £97m higher than in 2014-15 (3.3%). The total overspend in 2015-16, adjusting for the volumes of work not delivered, is shown in the table below.

The ORR noted that Network Rail work to the value of just over £1bn will be delivered at a later date, including £703m on renewals, £293m on enhancements and £39m on associated schedule 4 & 8 compensation payments for track possessions and delays.

For the work delivered, the ORR said Network Rail underperformed against its own budget by £394m on renewals (adjusted to £99m in line with the 25% sharing mechanism) and £115m on enhancements (adjusted to £37m in line with the 25% sharing mechanism).

Overspend breakdown

In 2015-16, Network Rail spent £353m (13%) more on renewing the network compared to the ORR’s determination, but lower volumes have been delivered than expected (this work has been valued at £579m) and will be delivered at a later date. Therefore, the cost of the work that Network Rail has delivered was “£932m higher than we assumed in our PR13 determination”.

The ORR noted that the infrastructure owner had a track overspend of £274m. It said there was an increase in plain line unit costs at the end of CP4, which meant that the starting unit rates in CP5 were around 25% above the rates assumed in its PR13 determination. This was one of the main reasons that the gross underperformance was £316m. There were also deferrals of £42m, largely because fewer volumes of switches and crossings were delivered than planned.

Due to the deferral of several key projects to later periods, there was a signalling underspend of £145m but this was offset by higher expenditure on the volumes delivered in 2015-16, which was due mainly to cost overruns on large signalling projects such as Swindon and East Kent, and cost increases from the need to restage work. There was also additional expenditure as a result of contractor delays. On a gross basis £280m has been recognised as underperformance.

In civils, there was an overspend of £146m due to several severe weather incidents that led to landslips and other damages across the network.

“Additionally the efficiencies expected in our determination have not materialised leading to a total gross underperformance of £216m,” said the ORR. There was also £70m of deferrals due to the diversion of resources in dealing with the severe weather incidents.

Enhancements and Hendy

Network Rail spent £2.9bn on enhancements to the network in 2015-16, which was £161m less than assumed in the ORR’s PR13 determination. The underspend is, however,  due to the £340m of deferrals (this represents work delayed less work brought forward) and the adjustments for the Hendy review offset by £179m of gross financial underperformance.

“This means that although Network Rail has spent less than the adjusted determination, it has also delivered less than expected,” said the ORR.

Compared to its forecast at the start of CP5, Network Rail has spent more on the renewals and enhancements work it delivered in 2014-15 and 2015-16 than it originally expected. It is also planning to spend more than it originally expected in the remainder of CP5. This means there is pressure on its borrowing facility with DfT.

Between September and December 2016, the Network Rail Board and DfT will be considering whether or not to move into the next phase of work in terms of progressing any potential disposals of non-core assets, including stations, to raise £1.8bn to plug the company’s debt. However, in 2015-16, debt (net of cash balances) increased by £3.67bn from £36.5bn to £40.1bn (nominal prices).

By the end of CP5, the total amount of renewals work deferred to a later date is currently forecast by Network Rail to be £3.1bn.

For the control period to date, Network Rail reported a decline in efficiency on its core business – excluding enhancements – of -8%, compared to the ORR’s PR13 determination assumption of a 10.1% efficiency improvement.

The regulator said: “Network Rail will be in a worse position financially at the start of the next control period than we expected, increasing the financial pressure on CP6.”

A Network Rail spokesperson said: “The funding settlement for Control Period 5 was extremely challenging from the outset, requiring Network Rail to deliver more for less on an increasingly congested network.

“A corporate transformation plan is in place which will enable us to make improvements across our business. But the backdrop is that demand for services on the network are growing significantly and the result has been an ever greater squeeze on the amount of time we have available to carry out scheduled maintenance, renewals and enhancements. This means we have not met our efficiency targets, but it has enabled us to cater for a record 1.7 billion passenger journeys over the course of the year.

“We continually strive to maximise our efficiency and deliver genuine value to taxpayers as we upgrade the rail network. At the same time, we recognise that we need to improve further in managing the cost of our major schemes and drive further efficiency in our work to maintain and renew the network.” 

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