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ORR: Defining an 'efficient' railway

Ahead of CP6, Howard Taylor, cost manager of railway planning and performance at the ORR, dives deep into the regulator’s assessment of what an ‘efficient’ Network Rail means in practice.

For most of 2018, a great many people at the ORR were involved with our Periodic Review of Network Rail’s plans for the next five-year control period, CP6. A major part of this review was determining whether the costs in Network Rail’s plans were “efficient.” “Efficient” is in inverted commas because – in this context at least – its meaning is ambiguous and subjective.

Trying to understand the many ways of interpreting (and misinterpreting) efficiency was at the heart of our review and will underpin our monitoring of Network Rail in CP6. Here, we will look at five questions around the definition of efficiency.

Expectation

As a regulator, we do not expect Network Rail to be perfect. For any piece of work, there is probably someone who could deliver a station canopy or a cubic metre of ballast cheaper than Network Rail. We are OK with this. But we do expect Network Rail to have processes which challenge costs in every aspect of its business, from purchasing rail steel in bulk, to relocating signallers to Route Operating Centres, and deciding how often the board of directors needs to meet. As a minimum, we expect that Network Rail’s plans should not contain any ‘fat.’ But beyond this, we expect it to demonstrate it has taken all reasonably practicable steps to make the organisation leaner.

Scope efficiency

This is determining the minimum volume of work required to achieve objectives. Objectives must be carefully defined, and for Network Rail this typically means only comparing options which achieve (or improve) current levels of safety, sustainability, and service-affecting failures. A compromise must also be achieved between efficient construction and disruption to rail users. Nowadays, technology is the key driver for scope efficiency, either through decision support tools – for example, to define which of its 30,000 bridges need to be renewed next year – or through new equipment, to reduce the number of hours a line needs to close for one job.

Cost efficiency

Once the scope of works is defined, each item can be priced. This starts with determining base rates; for example, how much did it cost to replace one kilometre of ballast in CP5? If current rates are unusual – maybe because ‘the Beast from the East’ meant simple track repairs took twice as long – this needs to be factored out of base rates. Then, the whole organisation looks for ways to improve upon base costs in the future.

Cost efficiencies are the easiest to quantify, so they attract the most scrutiny. For example, we are often asked about benchmarking Network Rail’s costs. Benchmarking for specific materials and work items is essential to understand competitiveness across the supply chain, but the desire to benchmark aggregated units (such as unit cost per kilometre for new overhead line electrification) can easily lead to misunderstandings. Managers of more expensive projects always protest that they were victims of physical and political factors outside their control, and anyone trying to use the benchmark must try to quantify if this was true.

But the biggest risk in cost efficiency is a drive to report lower ‘costs per unit’ in financial reports. If volumes are not clearly defined, teams may feel incentivised to use the cheapest materials and techniques to achieve a lower cost per kilometre at the expense of system functionality or longevity. Another example is late-running projects, which may report lower-than-planned expenditure this year, appearing on financial reports (if not checked) as an efficiency. Transparency of reporting is the key, so that for each cost line it should be clear exactly what the client is getting for this money.

External factors

Changes in the economy, new standards, or even the environment, could make it more (or less) expensive to deliver the same work next year. If these changes are certain, they should be factored into base plans. If they are highly unlikely, or difficult to quantify, then we should check there is provision for them within risk funding. This leaves a grey area of changes which are quite likely and can be roughly quantified. Network Rail refers to these as ‘headwinds’ (negative) and ‘tailwinds’ (positive) and deals with them as part of efficiency calculations, mainly because this is the most transparent way to capture them. Summing the base cost, any efficiencies, plus any headwinds or tailwinds gives a ‘post-efficient’ cost, which represents the cost that we actually expect to incur.    

Sustainability

Ideally, scope and cost efficiencies should look at whole-life costs, considering not just the cost to install a new asset but also the long-term costs to operate, maintain, and decommission the asset in the future. This sounds obvious but can often be overlooked, especially when the pressure of trying to keep the network running, with little or no ‘spare cash,’ makes it challenging for asset managers to select more expensive, more complicated solutions over quicker, cheaper options. But part of the issue also lies with government funders and the regulator, who must do everything possible to incentivise more sustainable options – and we certainly must not punish asset managers for choosing a sustainable option just because it leads to higher ‘costs per unit’ in this year’s financial reports. Again, transparent reporting (and intelligent review of these reports) is crucial to ensure we recognise sustainable plans as being efficient.     

In October, we published our final determination confirming the base costs and planned efficiencies for CP6 – but this is just the beginning. In the run-up to the start of CP6, we are finalising the details of exactly what information Network Rail will report to the ORR so we can fulfil our duty to monitor delivery of the plans. We will rely on this information to quantify the efficiency that Network Rail achieves, but also to understand how well Network Rail’s day-to-day decision-making is addressing the issues of scope efficiency, cost efficiency, external factors, and long-term sustainability.

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