The Office of Rail and Road (ORR) is well on the way to delivering its 2018 periodic review (PR18). It determines the targets of Network Rail for the five years beginning in 2019 and the funding needed for this control period.
It is critical for Network Rail and through PR18, the ORR can hold Network Rail to account, ensuring targets are being met and users are getting value for money; the regulator can also identify if things are going wrong and seek to rectify any problems.
John Larkinson is the Director of railway markets and economics for the ORR. John sat down with Business Britain for an in-depth discussion about PR18, what it aims to achieve, the challenges ahead, and how lessons learned can shape the future.
This is an extract of the full interview that will feature in our Transport Britain publication.
Could you give us a bit of background on the periodic review and why they were introduced?
This goes back to when British Rail was privatised and a whole new system was implemented for the railway.
Coming out of privatisation, you had a large company that owned all the infrastructure – track, signalling etc – without any competitors. Therefore, the big question at the time was how do you decide how much money a big monopoly needs to run itself and what it has to deliver?
It’s a question people don’t ask of BT for example now, because it has competitors. Network Rail does not, so somebody had to decide all that.
From this, the system of regulation was put in place around the time of privatisation and a specific piece of legislation known as the Railways Act said there will be regular periodic reviews of this company, where the regulator decides what the company has to deliver and the financial support it receives, drawing on inputs from government, the industry and stakeholders.
This is what a periodic review is all about; once the regulatory system was set up, the ORR started doing these reviews. Periodic reviews have changed a bit over the years but their purpose is deciding what Network Rail has to deliver and holding them to account.
What do you feel Network Rail has learned from previous reviews and control periods?
There have been really big changes, but it’s worth remembering the size of Network Rail: it spends £10 billion each year and has more than 35,000 employees.
In terms of changes, firstly was the collapse of Railtrack. Network Rail was set up to replace this, and has now been classified as part of the public sector.
What we’re doing now is regulating a public service company, which is unusual. If you look at the water industry as a comparison, the companies are private; Network Rail is not.
The other massive change is the reorganisation of Network Rail.
In the last few years, Network Rail has devolved power to eight geographical routes that will have their own managing directors, all accountable for their own patch, and the central part of Network Rail will act like a holding company.
The devolution of responsibilities has been the biggest shift in the last few years, from our perspective.
It has made a big difference for the ORR because previously, we had nothing to compare to; again, to use the water industry comparison, you have seven or eight companies and can compare them to see which is doing better than others.
We didn’t have that before, but now Network Rail has devolved its power, we can compare, for example, the north west team with the one in the north east to see which is performing better.
Going back to the periodic review, what type of measures do you look to set out for Network Rail?
Basically, a scorecard will exist between Network Rail and the operators, which will show what they agree on and what should be delivered. For example, this could be the number of trains on time for a particular operating company.
Other measures could include safety, financial performance, as well as asset management measures.
Network Rail will negotiate these agreements that will be part of the scorecards with operators themselves. We only step in if there is a problem.
The next big issue is efficiency. Over the last few years, Network Rail’s efficiency has been poor – they have had targets and failed to meet them. The main problems revolve around the renewing of the network, where Network Rail have had to replace worn-out assets such as signalling and track.
Costs for this have been much higher than expected so we’re working with Network Rail and the supply chain to see how this trend can be reversed and efficiency improved in the forthcoming review, because it is costing a lot of money. It is a really big area of focus for us.
Network Rail’s record on renewing the network in the last few years has been one less of efficiency, and this cannot go on, so we are focused on reversing this and making improvements in the future.