Annual efficiency and finance assessment of Network Rail

23 July 2018

This document provides our efficiency and finance assessment of Network Rail for 2017-18, the fourth year of control period 5 (CP5), which runs from 1 April 2014 to 31 March 2019.

Our annual assessments are intended to help customers, funders and other interested parties gain a better understanding of Network Rail's financial performance compared with the CP5 financial assumptions that we set out in our 2013 periodic review (‘PR13’) determination. Our assessments provide a yearly snapshot based on the best available information. It presents financial information on Great Britain, Scotland, and Wales, as well as Network Rail’s routes. It contains information and commentary on Network Rail's expenditure and its efficiency compared to our PR13 determination, its income, borrowing, debt and regulatory asset base (RAB).

The report highlights:

  1. The efficiency of Network Rail’s operations, support, maintenance and renewals activities declined by £4m (0.4%) in 2017-18, compounding the £218m (4.4%) decline across the first three years of CP5. Network Rail’s declining efficiency across the first four years of CP5 has been largely due to a £322m decline in renewals efficiency. Network Rail did not undertake £441m of renewals work planned in its budget for 2017-18 and has built up a substantial backlog of work across CP5 that will now need to be caught up in CP6 and beyond. We report on the problems with renewals delivery and efficiency in CP5.
  2. Network Rail underperformed against its internal budget by £0.1bn in 2017-18 largely because of higher than budgeted Schedule 8 payments for poor train performance and rates for renewals. The level of underperformance has improved compared to the first three years of CP5 (average £0.6bn annual underperformance against budget).
  3. Significant enhancements have been delivered on budget. Network Rail spent £4.1bn on enhancements in 2017-18, the largest annual investment in rail infrastructure in recent years. This work was delivered for slightly lower (£4m) than budget. Network Rail’s difficulties with its enhancements programme earlier in CP5 resulted in increased budgets and deferred milestones for delivery of schemes. Problems with delivering these enhancements have contributed to problems with delivering planned renewals in CP5.
  4. Network Rail’s debt increased by £5.5bn to £50.3bn in 2017-18. It has fixed borrowing facilities with the Department for Transport (DfT) for CP5 for its activities in England and Wales, and in Scotland. For England and Wales, Network Rail expects to use all its remaining available borrowing for its planned activities in 2018- 19. The lack of headroom means that the company will have no contingency in the event that income or expenditure outturn worse than planned. In view of Network Rail’s underperformance against its own budget in each year of CP5 to date, we consider that this lack of contingency is risky. In practice, we expect that the company would need either to request additional funds from DfT, or defer further renewals work into CP6, which would exacerbate the declining efficiency of its renewals activities.
  5. Preparing for control period 6: Because poor planning for CP5 caused a number of the problems with Network Rail’s renewals delivery and efficiency, we challenged the company to demonstrate that it is better prepared to deliver efficiently from the start of CP6. Network Rail has undertaken an analysis of some of the key leading indicators of efficient delivery for each of its routes for 2019-20, the first year of CP6. Given that it is around nine months before the start of CP6, we would not expect routes to have fully developed workbanks, contractual arrangements and resources. However, Network Rail’s analysis shows that most routes still have a substantial amount of work to do to get ready for the start of CP6. Network Rail needs to be clearer about its targets, and to improve its comparative analysis of the regional variations across its leading indicators. We will hold Network Rail to account through our regular director-level meetings with individual routes and report on progress in our next Monitor publication.

Previous assessments

Underspend and efficiency

It is important for the viability and development of the railway that Network Rail delivers its outputs at the least possible cost in order to minimise the financial burden on both its customers and funders.

In order to facilitate this, in 2006 we published our policy on monitoring underspend and efficiency.

Further information