October 3, 2017
The collapse of Railtrack plc in 2001 as a result of the deterioration of the national network revealed by the Hatfield crash in October 2000 resulted in the creation of Network Rail which acquired the assets of Railtrack for a sum of £500million in October 2002.
Network Rail was not a conventional company being a not for profit organisation without shareholders. Corporate governance was provided by 100 members who in reality had little say in the running of the business.
It was recognised that much greater sums of money were required to make good maintenance arrears and provide enhanced capacity to meet growth in passenger numbers and freight haulage. The Government provided an initial £21 billion of Network Rail funding that included funds to repay £6.6 billion owed by Railtrack and a structure that allowed future finance to be raised from the market.
In December 2013, the Office for National Statistics announced that Network Rail would be reclassified as a Central Government Body from 1 September 2014. This was a statistical change driven by new guidance in the European System of National Accounts 2010 (ESA10).
As a result, in July 2014 the UK Department for Transport and Network Rail signed a £30.3bn loan facility to cover Network Rail funding for the current control period running from 1 April 2014 to 31 March 2019. The bonds issued to the private sector worth £40 billion remained in place and retained their Government guarantee but on maturity will be refinanced from the loan facility.
Another adverse financial factor was the Network Rail funding settlement agreed by the then Office of Rail Regulation which determined that a £38 billion budget for the 5-year control period from 2014 to 2019, of which £12 billion was set aside for capacity enhancement.
This was £2 billion below the amount NR believed was necessary as an imposed productivity target of 20% in the Operations Maintenance and Renewals budget was not thought deliverable. This has proved to be the case with the Government having to provide additional money for the digital railway programme and maintenance of key operational assets.
It was recognised quite quickly after the debt re-classification that as Network Rail funding would in future come from the Treasury there would be less enhancement funds unless a mechanism could be found to involve the private sector in a way that did not result in additional public debt.
As a result, it appointed Professor Hansford to assess what NR needed to do to attract more private investment in the railway. FCP undertook a parallel study covering the scope for rail contractors to provide enhancement funding.
As a starting point it was identified that NR needed to publish its intention to undertake projects and provide Route Directors with expertise within their organisations to look at alternative design and delivery models.
The review identified that new service level agreements will be needed to establish terms of business to protect funders from the threat of higher costs due to specification changes and an appeals process if there are disputes about engineering standards.
NR is implementing the findings but acknowledges that as a publicly owned body there are challenges but Chief Executive Mark Carne has summarised that if private finance can be unlocked railway improvements can be developed that would otherwise not be possible.