Financing regime for Network Rail implemented by Rail Regulator

10 March 2004
ORR/06/04

The Rail Regulator, Tom Winsor, today served notice that he has decided to implement his conclusions for the five-year financial framework for Network Rail - allowing expenditure of £22.2 billion for the operation, maintenance and renewal of the core national network, an increase of approximately £7 billion over his October 2000 settlement for Railtrack - and to accept Network Rail's proposal (supported by the Government and the Strategic Rail Authority) that:

  • access charges payable by train operators to Network Rail should not rise for the first two years of the five-year control period, as Network Rail will borrow the necessary amount (£3.14 billion)
  • a higher proportion of direct grants from the SRA to Network Rail will be allowed, so as to enable government to classify the expenditure as capital and so not violate the golden rule on borrowing for expenditure outside the economic cycle
  • a suite of controls which the SRA had established over Network Rail, at the time of Network Rail's acquisition of Railtrack, will be released, so streamlining and simplifying the company's accountability to its customers and its regulator.

These proposals do not change the Regulator's December 2003 determination that Network Rail's net revenue requirement between 2004 and 2009 is £21.45 billion, and that its income should be set accordingly. The company will receive this money by way of grants direct from the SRA (£9.35 billion), access charges from train operators (£8.96 billion) and the remainder from additional borrowing in the next two years (£3.14 billion). The additional borrowing will be paid back partly in the last three years of the five-year control period (approximately £1 billion which includes financing costs) and partly in future control periods.

The proposed year-by-year split of the net revenue requirement established by the Regulator's December 2003 final conclusions as between access charges and grants (excluding additional grant payable in respect of part reprofiling within the control period) is shown in Table 1.

Table 1: Composition of net revenue requirement under Network Rail's proposal

£ million (2002/03 prices)

2004/05

2005/06

2006/07

2007/08

2008/09

Total

Net revenue requirement
4,444
4,413
4,245
4,203
4,142
21,448
Fixed and variable charges
1,203
1,219
2,132
2,121
2,284
8,959
Grants
1,710
1,585
2,113
2,082
1,858
9,348
Shortfall made up by:Additional borrowing
1,532
1,609
0
0
0
3,141
 
All figures are in 2002/03 prices

The request for a higher proportion of income to be received in the form of government grants stems from a joint submission made to the Regulator by the SRA and the Department for Transport in December 2003. In it, they explained that for government accounting reasons it would be desirable for the SRA in future to increase the amount of money that it pays in grant to Network Rail, allowing access charges to be set at a lower level. The request for income to be reprofiled has been made to smooth the introduction of higher charges and/or grants in order to assist the SRA as it adjusts its budget to accommodate the new level of access charges/grants.

There was no time for the government proposal to be worked up in sufficient detail for the Regulator to make a decision on it before publication of his access charges review final conclusions in December 2003. He therefore allowed the proposal to be made to him by 29 February 2004, and for a decision to be made by 10 March 2004. He said he would consider the proposal against a number of published tests - set out in his December 2003 document. The Regulator received the proposal from Network Rail on 27 February 2004. It has been agreed with the SRA.

Mr Winsor said: "After much consideration and judged against the criteria I laid down in my December 2003 document, I have accepted Network Rail's proposal since it satisfies all the tests that I set out. I have therefore today issued a formal notice to train operators and Network Rail which has the effect of reducing the amounts which would have been payable by train operators from 1 April 2004 to offset the proposed increased grant payments and reprofiled income.

"In accordance with my statutory duties, I am satisfied that the proposal will not make it unduly difficult for the company to finance its relevant activities. Nor will it threaten the long-term sustainability of the railway or prejudice the interests of the users of railway services. I am also satisfied that an increase in the amount of Network Rail's revenue paid directly by the SRA does not diminish the company's principal accountabilities to its train operator customers and its regulator. The SRA, through a revised deed of grant, has an unconditional obligation to pay specified amounts of grant on specified dates. If the SRA defaults on its obligation or attaches conditions to payments in the future, I have included a mechanism in track access agreements which will cause track access charges to rise automatically.

"The Government has made clear public statements about the about the accountability of Network Rail in general and the role of grants in particular. On 15 December 2003, the Secretary of State for Transport made a statement to Parliament which said that the SRA would not acquire any control or influence over Network Rail if a higher proportion of its income requirement were to be paid in the form of grants, and that Network Rail must continue to operate at arm's length from the SRA. He said that Network Rail "... must focus on meeting the needs of its real customers - the freight and passenger operators".

"To ensure that the accountability of Network Rail to its customers and its regulator is strengthened further, I have supported a proposal by Network Rail that a number of changes to the contracts which it made with the SRA before the acquisition of Railtrack are now required so as to remove unnecessary duplication of the regulatory regime in a number of material respects. Many of the SRA controls introduced at that time are redundant and serve only to double up on controls and protections within the existing regulatory regime. They constituted inappropriate double jeopardy for the company and distortions in the dynamics of accountability, and so could have adversely affected the proper functioning of the regulatory process. The SRA has now agreed with Network Rail to remove many of the controls in the existing agreements in order to remove such duplication. I welcome that constructive step by Network Rail and the SRA."

Network Rail's request to reprofile income in the first two years and borrow the shortfall is conditional on the first issuance under the company's securitisation programme having occurred on or before 31 December 2004. If first issuance has not occurred by this date, there will be no reprofiling of 2005/06 income and the reprofiled income in 2004/05 will be paid back (including interest) in the form of increased grants during the remainder of the control period.

Notes for editors

  1. The Rail Regulator's 2003 access charges review:
    • established the total income - from access charges, grants and other sources (such as freight traffic and property) - which Network Rail needs for the next five years, beginning on 1 April 2004 - £24.9 billion
    • set the access charges which the company is allowed to charge franchised passenger train operators for use of the network - £18.9 billion.
    • set the outputs which the company is required to deliver in return for its regulated income - in terms of its performance obligations and the appropriate targets for the capacity, condition and capability of the network, including on the West Coast route modernisation
    • stated when the required outputs have to be delivered.
  2. The only element of this that changes as a result of Network Rail's financing proposal is the amount to be recovered through access charges - £8.96 billion - offset by an increase in direct grants payable by the SRA and additional short-term borrowing.
  3. The Regulator's jurisdiction to carry out an access charges review comes from the terms of the contracts between Network Rail and its franchised passenger train operator customers. The procedure for the implementation of the review comes from Schedule 4A to the Railways Act 1993.
  4. In arriving at his decision in an access charges review, the Regulator is required to discharge the statutory public interest duties laid down in the Railways Act 1993.
  5. The Regulator's decision in an access charges review determines the size, quality and efficient cost of the national rail network. The implications of the decision are likely to last for a considerable number of years.
  6. If access charges are increased in an access charges review, franchised passenger train operators have to pay higher amounts to Network Rail for the use of the network. Under their franchise contracts with the Strategic Rail Authority, the SRA indemnifies the train operators against the increase in charges. Those indemnities are not limited in amount. They last for the life of the contract. Their effect is that the Government bears the entire cost of the increase.
  7. The indemnities in the franchise contracts are not required in railway legislation. They are voluntary acts by a sovereign government, through its agent the SRA. The Regulator does not establish the indemnities, nor does he approve them. They are private law obligations freely entered into by the SRA as part of its franchising programme. The SRA is able to stop signing new indemnities whenever it chooses. All existing and new franchise contracts contain these indemnities.
  8. The Regulator's jurisdiction protects the network operator - and, through Network Rail, all companies and others who use or depend on the railway - against short-term political interference in the economics of the railway industry. Independent economic regulation is acknowledged by the Government as an essential continuing requirement for the railway.
  9. The Regulator has today served on Network Rail and the franchised passenger train operators a review implementation notice under Schedule 4A of the Railways Act 1993. The review implementation notice directs those companies to amend their track access contracts so as to include provisions which give effect to the Regulator's decision. The companies are under statutory duties (under section 144 of the Railways Act 1993) to comply with the Regulator's directions.

Press enquiries

ORR Press Office - 020 7282 2002/2007
Out of hours - pager 07659 127303