Dame Colette Bowe and Sir Peter Hendy publish their reports on Network Rail, and Nicola Shaw sets out the scope of hers.

Introduction

Back in the Summer, Network Rail seemed to be in trouble.  The Great Western electrification programme was going over budget and Patrick McLoughlin, Transport Secretary, paused the Midland Main Line and Transpennine Express electrification programmes and appointed Dame Colette Bowe to examine how Network Rail's five-year enhancement programme had been planned and Sir Peter Hendy to look at re-planning it to stick within the agreed £38 billion budget.  Shortly afterwards, the government asked Nicola Shaw to advise on how it should approach the longer term future shape and financing of Network Rail.

The Bowe and Hendy reports were published on the same day as the Chancellor's Spending Review and Autumn Statement and the scope of the Shaw report came out two weeks earlier.

The Bowe report into enhancements planning

Bowe was appointed to examine the lessons to be learned from the planning process and to recommend practical steps to ensure more effective planning and delivery of enhancement (i.e. infrastructure upgrade) projects in the future. 

The Bowe report found that there was no one overarching cause that explains the cost overruns and delays to projects and programmes in the current control period (the five year investment period running from 2014-2019 known as Control Period 5 or CP5).  They were caused by a combination of factors, not least an unclear distinction of responsibilities between the Department for Transport (DfT), Network Rail and the Office for Rail and Road (ORR), and the reclassification of Network Rail as a public body, which curtailed the amount of funds that Network Rail could call upon to deal with cost overruns.  Network Rail were also in a way the victim of their own success, as the CP4 enhancements had been largely delivered on time and to budget.  The CP5 schemes were, however, unusually complex and at a much earlier stage of costing, meaning that it was harder to set a budget for them at the outset of CP5.

The clear message coming out of the Bowe report is that the roles and responsibilities of the DfT, ORR and Network Rail need to be much more clearly defined, both within each organisation and between them.  In particular, there seems to have been a misunderstanding about the role of the ORR in the process and Patrick McLoughlin in his response to the Bowe report confirms that "the role and responsibilities of ORR will be fundamentally reviewed". There will also be improved governance arrangements between the DfT and Network Rail, underpinned by a new Memorandum of Understanding which the DfT will publish next March. Within the DfT, the planning and delivery of enhancements will be brought together under a single Director of Network Services, mirroring similar arrangements being introduced in Network Rail.

In future, as recommended in the Bowe report, passengers and operators will play a much greater role in developing priorities for future investments, which should be more closely aligned to the franchising programme, moving the industry from being 'producer led' to 'passenger led'.

The Hendy report 'replanning' the current investment programme

"We could have scaled back our ambition on transport.  We could have stopped building the infrastructure our country needs.  Instead, the government is investing in our future.  Our railways will not become a brake on growth and opportunity."  Stirring words, from Patrick McLoughlin's response to the Hendy report, which sum up how important the Government sees the railway network, and why it was so keen to keep Network Rail's enhancements programme on track as far as possible. 

Hendy looked at every element of the enhancement programme and reviewed its costs and timescales.  He found that around 80% of the cost increase related to five programmes: electrification schemes that were still in development when the ORR set the budget for CP5. However, many things were going well and Network Rail in the first year of CP5 delivered over £5 billion of infrastructure improvements.

The original budget for the enhancements was £11.8 billion but after reviewing the cost of each element, Hendy found it was going to cost an extra £2.5 billion to complete, and take longer. Network Rail will raise most of the extra funding (£1.8 billion) itself by selling off some "non-core and lower value assets" including property assets such as retail units in managed stations and the commercial estate, and some depots.  This will mean a reduced income stream over the longer term that Network Rail will need to factor in, although property income over the last three financial years only averaged around 4% of Network Rail's total revenues.

The balance of the extra money will come from an increase of £700 million in Network Rail's borrowing limit, but this still does not fund all the schemes that were scheduled to complete in CP5 and so some have been extended into CP6 including the Midland Main Line and Transpennine Express electrification projects that were 'paused' back in June and will now take an extra four years to complete.

Next steps

Network Rail will publish an updated draft Enhancement Delivery Plan for each project in early December and an updated overall Delivery Plan will be published in March 2016.  In the meantime, the DfT will consult on the Hendy review's findings.

Scope of the Shaw Report

On 12 November 2015 Nicola Shaw published her scoping report containing discussion questions for everyone involved in the railway industry, including operators, suppliers, employees and passengers.  Her final report is due to be provided to the Transport Secretary and Chancellor in early 2016 and the consultation on the questions she poses closes on 24 December 2015.

The Shaw report fits in with the Bowe report looking at the past (the enhancements planning process) and the Hendy report looking at the present ('replanning' the enhancements programme), by looking to the future.  It focuses on the time period from 2019-29.  This is after the end of CP5, giving time to get recommendations in place, then allowing a period of ten years to see if those recommendations work, assuming HS2 opens in 2026 as planned.

It looks at the structure of Network Rail through three 'lenses': customer (in this case TOCs, FOCs the DfT rather than passengers), devolution and growth, and asks whether that structure works from each of these three perspectives.  Key questions include whether to change the route structure and whether Network Rail's internal restructure to focus around routes is working or needs further support.

It also looks at the financing and funding of Network Rail, distinguishing between funding (money which is not repaid) and financing (money which is repaid).  The key message is that finance should follow structure.  Shaw sets out some initial thoughts on potential financing and funding options, ranging from full nationalisation to full privatisation and every permutation in between, including combinations such as letting out specific routes as concessions.  Shaw asks in particular what factors would be required for private sector capital introduction; and what types of investors may be interested in investing in Network Rail, any of its functions or in select parts of it, and what would be the key attractions, risk appetite and enabling factors required.

Back on track

With these three reports into Network Rail, and indeed looking at the rail industry as a whole, we hope that all parties can take on board the Bowe report's findings on the enhancements planning in CP5, see the Hendy restructure as an opportunity to safeguard the current programme of investment (albeit it might take a bit longer and cost a bit more) and look to the future in terms of structuring and funding Network Rail in a way that means it can contribute even more to the UK economy and infrastructure.