Assessing Capital Maintenance Requirements in Rail

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Assessing Capital Maintenance Requirements in Rail

• Paul McMahon, Deputy Director of Regulatory
  Economics
• Assessing Capital Maintenance Requirements
  Workshop
• Ofwat, Birmingham, 10 May 2006

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Structure of presentation

• Rail industry structure
• Potted history of key relevant developments
• Asset management
• Comparison to water

3
Context industry structure

• Privatised in 1996
• ORR is independent economic and safety regulator
• Broadly conventional incentive based economic
  regulation structure, but key differences to
  water
• Vertical separation of infrastructure and train
  operations
• Franchises (which do not run concurrently with
  control periods)
• Franchisees insulated from changes to charges
  during franchise lifetime and have limited
  commercial flexibility
• Significant amounts of public subsidy
• New process for conducting periodic reviews
• Network Rails structure (CLG, FIM)

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From privatisation to Hatfield

• Railtrack - key issues and concerns
• Lack of asset knowledge
• Antagonistic relationships
• Poor approach to outsourcing
• ORR growing concerns, including incidence of
  broken rails
• 2000 periodic review
• ORR very critical of information available
• Included licence condition 24 (asset register)
• Hatfield accident occurred two days before
  planned publication of PR2000 conclusions in
  October 2000 Potters Bar accident occurred in
  2002

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After Hatfield

• Hatfield exposed inadequacies in asset management
  and led to
• Temporary speed restrictions
• Significant (inefficient) re-railing (overspend
  of gt6bn)
• Railtrack went into administration in October
  2001
• Network Rail took over Railtrack in October 2002
• 2003 access charges review
• Significant increase in funding for asset
  maintenance and renewal
• but significant efficiency challenge
• Bottom-up review of workbanks and review of NR
  models/processes
• Established clear output targets for performance
  and asset condition
• Monitoring framework enhanced
• Network Rail is improving asset knowledge, asset
  condition, operational performance and cost
  control

6
Rail renewal volumes
7
Railtrack/Network Rail opex, maintenance and
renewals expenditure (forecast from 2005/06)
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Network Rails Business Planning Criteria

• Published/developed under licence condition 7 on
  network stewardship
• Set out Network Rails role and processes for
  asset management
• Published on NR website
• Not as sophisticated as CMF
• More work necessary as part of 2008 periodic
  review

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Asset policies

• Central to the Business Planning Criteria
• Set out maintenance/renewals regime for each
  asset type to deliver the outputs
• Network Rail see these as being consistent with
  PAS55
• Include Network Rails risk management framework
• Recognise funding and deliverability constraints
• Draw on modelling tools
• Need to be developed/finalised for PR08

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Rail asset management comparison with PAS55

• Forward looking long term demand forecasting of
  traffic and degradation still difficult to
  predict
• Data supported Asset knowledge still deficient
• Whole life cost / optimisation To an extent
  this takes place but have been funding
  constraints
• Risk based Standards driven to a large extent
• Continued improvement Network Rail Business
  Planning Criteria (and underlying policies,
  models, etc) do reflect this but still a way to
  go
• Pragmatic A dominant feature in rail (funding
  and delivery constraints)

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Network Rail key challenges for developing robust
plans for PR08

• Complete and implement asset management
  planning/business planning criteria
• Improve its understanding of cost causation
• Improve the transparency and robustness of
  expenditure forecasts, relating them to relevant
  measures of activity and output
• Consider explicitly passenger demand forecasts
• Develop companys own view of its efficiency and
  the scope for improvement
• Provide more geographically disaggregated
  activity, output and expenditure forecasts.

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Finally, a brief comparison with water

• Major differences
• Safety critical (knife-edge)
• Very high public profile rail has had a
  difficult 10 years
• Significant deficiencies in asset knowledge
• No (few) comparators
• How have we/industry dealt with this?
• More frequent and intrusive monitoring
• Asset register licence condition
• Hatfield triggered significant research into cost
  causation
• Improving Business Planning Criteria and
  modelling tools
• Reporters currently assessing Network Rails
  asset management tools and processes for PR08,
  includes assessment of key asset life and
  degradation assumptions

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• Thank you. Any questions?
• www.rail-reg.gov.uk