Network Rail on target for efficiency savings, rail regulator reports

8 November 2012

Network Rail has achieved efficiencies of £775m over the past three years and is currently on target to deliver required savings by 2014, says a report published by the Office of Rail Regulation (ORR) today.

ORR's annual assessment of Network Rail's efficiency and financial performance examines the amount of money that Network Rail has spent and what it has delivered in return for the money it has received from train operators and the governments in London and Edinburgh. In particular, the report assesses Network Rail's progress in meeting the regulator's stretching efficiency target for its current five year funding period (2009-2014) of cutting £1bn annually from the cost of operating, maintaining and improving Britain's rail infrastructure. It also reports on the Efficiency Benefit Sharing Mechanism (EBSM), established to incentivise Network Rail and train operators to work together to achieve savings.

Network Rail has implemented a number of initiatives to reduce its costs to this point in its funding period. These include rationalising signalling and control centres and reorganising its rail maintenance function, resulting in reduced staff costs and reduced use of sub-contractors.

However, the rail regulator's assessment of financial performance is £172m less than that reported by Network Rail taking account of the company's failure to deliver required levels of train punctuality and reliability. The regulator also has concerns about the sustainability of Network Rail's management of parts of the railway infrastructure, such as bridges, tunnels and major structures, and the company itself has not reported efficiencies in this area.

ORR's Chief Executive, Richard Price, said:

It is essential that the rail industry delivers significant improvements in value for money. Reducing the costs of Britain's railways is vital to help ease the pressure on tax and fare payers and freight customers.
We welcome the progress that Network Rail is making in improving its efficiency and that the company is currently on track to meet the stretching target we set for reducing its costs. However, we remain concerned about the company's performance in line with regulatory targets, with serious problems still affecting punctuality on key services. Our assessment has been adjusted to reflect these shortfalls. We expect Network Rail to deliver improved performance and meet its targets by 2014, and will keep up the pressure on the company to do so.
ORR wants to see Network Rail working closely with the rest of the rail industry in building on these efficiencies to deliver in full its share of improved value for money for the railways and to demonstrate that it is doing so on a sustainable long-term basis. The drive for efficiencies needs to be skilfully planned and delivered by the company so that its stewardship of the infrastructure and the performance of the network do not suffer.

Key to driving further efficiency will be closer working and collaboration between Network Rail, passenger and freight operators. To incentivise Network Rail and train operators to work together to produce efficiency savings, ORR established the EBSM at the beginning of the current funding period in 2009.  Based on the rail regulator's assessment of Network Rail's efficiency savings over the past three years, together with evidence from train operators demonstrating how they have contributed to these efficiencies by helping to reduce station operating costs and supporting activity to achieve lower energy costs, ORR has concluded that payments under the EBSM should be made.

Notes to editors

  1. The Office of Rail Regulation is the independent safety and economic regulator for Great Britain's railways.
  2. Read ORR's Annual Efficiency and Finance Assessment of Network Rail 2011-12 pdf icon PDF, 775 Kb
  3. The report is ORR's assessment of Network Rail's efficiency and financial performance for the year ending 31 March 2012 – the third year of control period 4 (CP4) which runs from 1 April 2009 to 31 March 2014.
  4. ORR's latest performance assessment shows that Network Rail is failing to deliver its plans to improve punctuality on long distance rail services. The Network Rail Monitor, which also highlights ORR's assessment of punctuality on London and South East sectors, and the regulator's overview of Network Rail's stewardship of the railway infrastructure.
  5. It is important that ORR provides strong incentives for train and freight operating companies to work with Network Rail to improve its efficiency given that Network Rail has weak corporate financial incentives - for example, it does not have equity shareholders. The regulator therefore established the EBSM at the beginning of the current funding period in 2009 to incentivise train and freight operating companies to support Network Rail's efforts to improve its efficiency. Under the mechanism operators receive a share of cumulative outperformance against efficiency targets, with each operator receiving payments in proportion to their variable track access charges.
  6. ORR's assessment of Network Rail's cumulative outperformance on the relevant elements of expenditure and income for the first three years of CP4 shows that EBSM payments to train and freight operators should be £2.7m in England and Wales and £13.2m in Scotland. Under provisions in some franchise agreements, the Department for Transport and Transport Scotland may seek to recover some EBSM payments to franchised train operators.