Nicola Shaw's final report into the future shape and financing of Network Rail was published on 16 March 2016. For the most part, her recommendations build on existing changes that were already in motion and support the conclusions of other recent reviews, amounting to evolution rather than revolution for the future of Network Rail.
The report recommends further devolution from the centre of Network Rail to the route level, including the creation of a new route for the North and a 'virtual' freight route, but stops short of recommending the creation of regional companies. Instead, it recommends that options to introduce private capital are explored in the form of route-based concessions and investment in specific infrastructure projects.
The reports recommendations are grouped into key themes of customers, devolution and growth and are, in summary:
- Place the needs of passengers and freight shippers at the heart of rail infrastructure management.
- Deeper route devolution, supported by independent ORR regulation.
- Create a new route for the North.
- Clarify the role of Government in relation to Network Rail.
- Plan the railway based on customer, passenger and freight needs, led at route level.
- Explore new ways of paying for growth
- Develop industry wide plans to develop skills and improve diversity.
Background to the report
The commissioning of this report was announced in the 2015 Summer Budget, following the reclassification of Network Rail to the public sector in 2014.
The reclassification of Network Rail (which was previously a private sector company) to being an arm's length government body resulted in several important changes to Network Rail and its relationship with Government. The company is now under much more public scrutiny and control, it is unable to borrow from the market and its borrowing and debt now add to overall public sector borrowing and debt. In June 2015, it was reported that Network Rail was behind on its enhancements programme and had overspent on its budget, causing Transport Secretary Patrick McLoughlin to 'pause' certain major electrification programmes.
Against this backdrop, the Government commissioned three reports dealing respectively with past, present and future issues:
- The Bowe report – focussing on the enhancements planning process;
- The Hendy Report – focussing on delivery of the current investment programme in CP5; and
- The Shaw Report – focussing on the future structure and financing of Network Rail.
Following publication of the Bowe and Hendy Reports in November 2015, a scoping document was published for the Shaw Report. The scoping report indicated that the full spectrum of options was to be considered – from full privatisation to full nationalisation and a wide range of alternatives in-between. The report team was clear that it would not make recommendations solely with the aim of removing Network Rail's debt from the government's balance sheet.
The Shaw Report recommendations in more detail
The report makes seven recommendations:
1. Place the needs of passengers and freight shippers at the heart of rail infrastructure management
In Shaw's view passengers and freight shippers are currently "disempowered to effect change on the railway". The report calls for more to be done to ensure that the needs of these groups are met, with the onus placed on passenger and freight train operators (TOCs and FOCs) to help make this happen.
Route-based scorecards should be developed to report on performance against certain deliverables reflecting the issues that matter to passengers and freight shippers. TOCs and FOCs, as Network Rail's direct customers, should ensure the issues affecting their own customers are taken into account in developing these scorecards.
The report recommends that a route-level profit and loss account is included in the scorecards, reflective of industry-wide performance on the particular route. To avoid issues of commercial confidentiality, Shaw recommends these accounts are prepared using synthesised data from ORR reports.
2. Deeper route devolution supported by independent ORR regulation
A central feature of the report is the recommendation of greater devolution away from the centre of Network Rail to the route level, with the objective of enabling Network Rail to better respond to the needs of its customers. Recognising that freight customers operate across the whole network, there should also be a "virtual" freight route.
Network Rail has already begun this process, but Shaw recommends a "step change" of deeper and faster devolution. Separation of Network Rail into separate route-based companies is rejected, however, in favour of giving further autonomy to each route, which will operate as independent business units of Network Rail. This structure will allow for the performance of each route to be benchmarked against standard regulatory metrics, providing transparency on performance at a route level.
The report also considers the role of the regulator, ORR, concluding that whilst economic regulation in the public sector is unusual, it should be retained in order to short term interests are balanced against longer term requirements. The report recommends a move to route level regulation, which will require changes to the regulatory and licence changes in order to take effect.
Shaw recognises that not all functions are suitable for devolution to route level. To enable the railway to operate as a single system, certain functions should be retained at the centre including health and safety, setting of standards, issuing guidelines on cross-network issues, sale of access rights and timetabling (described as System Operator and Technical Authority functions). Shaw also supports the creation of a central Route Services Directorate, to allow the advantages of bulk purchasing power to be retained.
3. Creation of a new route for the North
The report recommends that the current route structure is altered to create a new North route. This would better align with the current political and economic geography and the creation of Transport for the North, which is aiming to become the first statutory sub-national transport body in 2017.
4. Clarification of the role of Government
Greater clarity in relation to the role of Government is recommended. Specific recommendations include:
- formulation of a long-term vision for the railway by the DfT, setting out clear, deliverable priorities for the rail industry over the next 30 years; and
- clarifying and updating the Government's role with respect to Network Rail, to reflect its different roles as owner, client, and funder.
5. Plan the railway based on customer, passenger and freight needs, led at route level
The report's recommendations in respect of enhancement planning build on those made in the Bowe Report, which have already been accepted by Government. Bowe's recommendations included: reviewing the role of ORR in enhancement planning, implementing integrated governance structures for major and complex enhancements, introducing leading project management practices, adopting long term approach to managing human resource availability and implementing a focus on end users' needs.
The key recommendation from the Shaw report team is that enhancements planning should be led locally, rather than centrally, to allow customers and end users to be far more involved in planning and delivering enhancements. This is consistent with the theme of greater devolution to route level. The report recommends that the function of providing network-wide co-ordination and prioritisation of enhancement projects should no longer be undertaken by Network Rail. It implies that a new body should be created to undertake this role, as there is not currently any existing organisation which is suitable to do so.
6. Explore new ways of paying for growth
The scoping report highlighted the key challenge of how to secure future investment in the railway at a time of constrained public sector spending. The report team considered a variety of funding and financing solutions, concluding that private sector investment is required, but that this should be focussed on certain parts of the infrastructure and specific projects. The press have been keen to pick up on the point that wholesale privatisation has been dismissed, although in reality this was unlikely to have been a realistic option due to the size of Network Rail's debt and issues of political and public acceptability.
The report recommends that route-based concessions over sections of the network offer the best scope for the introduction of private capital into parts of Network Rail. This does not come as a great surprise and was widely predicted to be one of Shaw's key recommendations. Under this model, long-term ownership remains in the public sector but the risk of operating the infrastructure is transferred to the private sector for a specified period. Shaw advocates a 'hybrid' model, featuring characteristics of both regulated asset ownership and a conventional concession:
- the award of exclusive rights to operate, maintain, renew and potentially also invest in enhancements of the assets for 20 – 30 years;
- payment of an upfront sum by the concessionaire;
- regulation, with price control periods and a regulatory asset base (RAB); and
- clear risk transfer to the concessionaire to allow off-balance sheet treatment.
In addition to the upfront financial input to the public purse, Shaw cites the benefits of a concession as including: autonomy; a different approach to the management of assets; the ability to benchmark alternative approaches; innovation; and a greater efficiency and a focus on cost management. The Wessex and Anglia routes are highlighted as having the strongest potential for a concession due to low levels of public subsidy and little forecast enhancement activity.
The report stops short of recommending the immediate implementation of concessions, recognising that these are complex arrangements and that a 'public interest test' needs to be carried out before going ahead.
Investments in specific projects
The report recommends greater third party and private funding and financing for specific infrastructure projects, and recognises that Network Rail is already developing plans to achieve this. Examples given by Shaw include:
- support from local developers who will benefit from the enhanced transport capacity;
- design-build-finance-transfer models;
- new procurement models representing an evolution of Network Rail's alliancing procurement process; and
- combinations of the above (potentially also coupled with additional public sector funding from sources such as local authorities and devolved bodies).
7. Develop industry wide plans to develop and improve diversity
The report's final recommendation addresses the issue of workforce skills and diversity and applies to the whole industry, not just Network Rail. Recognising that people are a significant asset within the rail industry, Shaw recommends that there should be a holistic and industry-wide approach to skills planning and diversity issues. Clear targets and independent reporting are recommended in order to achieve these goals.
The Government will publish its response to the Report later this year. If (as seems likely) the report's recommendations are accepted, then the changes will need to be adopted quickly in order to be completed in time for the start of the next Control Period in April 2019.