'THE GOVERNMENT'S ABSOLUTELY AWARE ... - Rail Professional

LEGAL OPINION
ON YOUR MARKS…
Matthew Hansard-Ward explains the
process that the period review of
Network Rail’s funding will take
After nearly 18 months of warming up,
the Periodic Review of Network Rail's
funding has finally got underway. On
28 February, the Office of Rail Regulation (ORR)
published its advice to ministers and took the
first formal step on what will undoubtedly prove
to be a long and winding road. The review is the
first to be undertaken under the new process
established in the Railways Act 2005 and will
shape the future of the industry until 2014. It will
be a test for all concerned.
Network Rail receives the lion's share of its
funding through charges paid by passenger and
freight operators for access to its network.
These charges are regulated and periodically
reviewed, usually every five years. The current
review will determine Network Rail's regulated
output, its revenue requirement and ultimately
the access charges it will be paid for the period
2009 to 2014.
Since 2005, ORR and Network Rail have
been building up to February's publication. In
particular, Network Rail has had a first stab at
assessing what it thinks it needs and in July
2006 published its initial strategic business plan
(ISBP). This explains the company's ‘strategies’
for proposed activity, expenditure and revenue
requirements.
The ‘base line’ strategy is intended to deliver
a non-degrading network providing for minimal
growth – in other words, looking after what's
already there. The second is more ambitious,
and is designed to deliver significant
enhancements to address anticipated
passenger and freight demand growth –
arguably the biggest challenge now facing the
industry. ORR has assessed the ISBP and
February's publication offers the first real sense
of ORR's view: good, but could do better.
ORR considers that Network Rail can make
efficiency savings without compromising safety
or performance, and thinks the company
doesn't need as much money as it says it does.
For example, Network Rail thinks it needs
£19.92bn for the base line strategy in England
and Wales, whereas ORR thinks it needs
between £16.47bn and £19.20bn.
Unlike previous periodic reviews, this one
will follow a brand new process established
under the Railways Act 2005. Under this new
process, the ORR fires the starting gun by
issuing a formal statutory notice explaining that
it will undertake a review.
This is what February's publication
comprised. In response, the DfT and the
Scottish ministers must provide the ORR with
information about what they want to be
achieved by railway activities during the next
control period and the public financial
resources that are, or are likely to be, available
for the achievement of those activities.
They have already indicated that they will
express their requirements through high level
output specifications (HLOSs) which will cover
three main areas: safety, performance and
capacity. It is also thought that DfT will publish
a longer term rail strategy to accompany the
HLOS to put things in a wider, longer term
context. The amount of public money that is
available to deliver these outputs will be
expressed in ‘statements on the public financial
resources available’ (or SoFAs). ORR has asked
for the HLOSs and accompanying SoFAs to be
provided by the end of July 2007.
In the meantime, it has asked Network Rail
to work with the industry to develop a fullblown
strategic business plan by October,
which will set out its detailed costed plan for
how it proposes to deliver its contribution to
the whole industry outputs required by the
HLOSs.
The ORR will then assess whether the
HLOSs can be delivered within the constraints
of the SoFAs. If there is a mismatch, the ORR
must conduct an iterative process which may
culminate in the DfT and Scottish ministers
being asked to submit a more modest HLOS
or ultimately the ORR deciding to scale back
what can be delivered for the money. Clearly,
this may lead to some difficult, politically
sensitive decisions having to be taken. ORR
expects to offer its initial assessment of whether
there is any mismatch by the end of this year,
with a view to reaching final decisions next
summer.
There are some early clues as to what the
review might bring. For some time now, the
ORR has been concerned that the incentive
framework isn't properly aligned. It thinks there
is a lack of correspondence between whole
industry costs and whole industry revenues,
resulting from misalignments in incentives
between industry players and the public
interest.
To address these perceived shortcomings,
the ORR has been considering a number of
potentially controversial measures, including
volume incentives on Network Rail, benefit
sharing mechanisms and new ways to facilitate
operator innovation.
This year looks set to be an interesting one,
the race is on.
Matthew Hanslip Ward is part of the rail team at
Denton Wilde Sapte.
44 RAIL PROFESSIONAL : APRIL 2007