Caught between the need for essential enhancement work and a tighter government leash, Network Rail may need to rethink its route to reform

Richard Threlfall

I am on the 8.15 from Leeds to King’s Cross, a journey I make on a regular basis. I am pretty sure it will arrive on time at 10.30. It is fast, it is comfortable and it is reliable, and, until the advent of the driverless car, it will remain much more productive than joining the traffic on the M1.

Unfortunately these characteristics are not true across the entire rail network. Commuter lines into London are jammed solid, and not just in the morning peak. Cross-country lines, for example between Leeds and Birmingham and the TransPennine route between Leeds and Liverpool, are hideously slow and unreliable. It may not be politically comfortable, but this is a consequence not of a poorly run railway, but a legacy of underinvestment which we have only recently started to address.

On 25 June the wheels finally fell off as the government admitted Network Rail couldn’t deliver its agreed outputs for the budget. The government announced the suspension of two major electrification programmes and a review by Dame Colette Bowe to drive better investment planning. On 7 July the government went further, adjusting the subsidy model to drive more funding through train operating companies, and announcing that Nicola Shaw of HS1 and newly-appointed Network Rail Chair Peter Hendy would review the future shape and financing of Network Rail. All entirely justifiable, but in the short term it will just bring more delay to the investment we so desperately need.

I would contend that the UK rail network is generally well run. According to the independent watchdog Transport Focus, 88% of long-distance and 85% of regional passengers are satisfied with their journeys. It is the creaking London and South East network which drags the average down, with only 78% satisfied.

But the railways are struggling from the sheer increase in volume they are trying to deal with. During the 60 years up to 2011/12, annual passenger journey growth was 0.58%. Since privatisation, the growth rate has leapt to nearly 4% a year. That growth has seen the distance travelled by rail passengers in Britain increase by 50%, and the railway’s market share compared with other modes of transport rise from 6% of all journeys in the UK to 9%.

Now Network Rail was facing a regulatory settlement and a Treasury paymaster who had taken away the key to the piggy bank

For insiders the crisis which has just engulfed Network Rail was no surprise. The only uncertainty was when the storm would break. It was clear as soon as the ink was dry on the last regulatory settlement in 2014 that the business was in trouble. A much larger proportion of its spend than previously was dedicated to a number of major enhancement projects, and many of those were at relatively early stages of definition, making accurate estimation of cost quite difficult.

At the same time the government, by bringing Network Rail back onto its books, had cut up its corporate credit card, so cost overruns could no longer be financed on a buy now, pay later (who knows when) basis. Now Network Rail was facing a regulatory settlement which demanded £1.75bn in efficiencies and a Treasury paymaster who had taken away the key to the piggy bank.

Arguably if Network Rail was better run it wouldn’t need an overdraft facility. Mark Carne and a cadre of reformers within Network Rail know they have to do better, in particular in the estimation of major project costs, and the management of those projects to cost and time.

Equally it needs to be recognised that the upgrading of existing operational railway lines is monumentally harder than building a new railway such as HS2, though HS2 obviously has particular challenges where it interfaces with the existing railway, in particular at Euston.

The number one priority on the operational railway is safety, so in practice it is impossible to do any significant upgrade work except by shutting lines for weeks at a time, which is generally regarded as unacceptable, or trying to do the work in two or three-hour periods in the middle of the night. It is not surprising that it is extremely expensive to undertake
major projects under such conditions, and difficult to estimate the costs in advance.

The fundamental problem is there is no effective benchmark to drive better performance. Each of the UK’s water companies is essentially a regional monopoly, but the regulator can compare their performance. I am not advocating the break up of Network Rail, but I am saying we need further devolution to the regional routes, to create separately and transparently accounted operating units, and more effective sharing of best practice.

But reform presents significant risks, of moving the focus of management time away from the business today to its future, and of political rather than real solutions. In the meantime dedicated engineers work tirelessly to keep an overcrowded system running safely. That is the story which really deserves the headlines.

Richard Threlfall is head of infrastructure, building and construction at KPMG