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Efficiency benchmarking of Network Rail

The assessment of the scope for Network Rail to improve on its cost efficiency is central to our work, since it enables us to establish efficient levels of track access charges when we periodically review Network Rail’s outputs as part of a balanced package.

The use of international benchmarking is necessary as Network Rail is a national network monopoly, and hence there are no straightforward direct domestic comparators we can compare it to. The international group of railway infrastructure managers we use in our efficiency analysis is made up of European mainline rail infrastructure managers.

Our comparative international cost efficiency analysis of Network Rail builds on our work from the 2008 periodic review (PR08), setting Network Rail’s outputs and funding levels for control period 4 (CP4). The benchmarking model currently covers maintenance and renewal costs only, and excludes operating and network enhancement costs.

We have undertaken two complementary types of efficiency analysis: “top-down” econometric analysis and “bottom-up” engineering analysis to validate and better understand the cost efficiency "gap” exposed for Network Rail by the econometric work. We intend to involve Network Rail in further "gap" analysis during the forthcoming periodic review (PR13).

We intend to carry out an update of our econometric benchmarking work every year, because regular updates provide important cost efficiency information to us, Network Rail, and interested stakeholders.

Comparing Network Rail’s maintenance and renewal cost efficiency directly with that of other rail infrastructure managers shows, at least partially, how the company is progressing on its cost efficiency glide path over time against the base assumption we made in PR08 that the company should be able to improve on the efficiency of its controllable operating, maintenance, and renewal costs by at least 21% over the five years covered by CP4. 

Econometric analysis

Our econometric analysis uses a subset of the “Lasting Infrastructure Cost Benchmarking” (LICB) dataset developed and maintained by the International Union of Railways (UIC) for 14 European rail infrastructure managers, including Network Rail, covering the period 1996 to 2008. We are very grateful to the UIC, its members, and Network Rail for making the dataset available and for the discussions and presentations we had with NR and the UIC.

We have undertaken extensive econometric model development and sensitivity testing. Our results show that, in 2008, Network Rail was between 34 to 40% less cost-efficient than the top European infrastructure managers in the peer group. This result broadly confirms the econometric analysis we undertook in PR08 which showed that, compared to the top European infrastructure managers, Network Rail was around 40% less cost-efficient.

By comparison with the best 25% of international companies, the cost efficiency difference for Network Rail is 29 to 37%, considering the full sample of international comparators over thirteen years from 1996 to 2008 inclusive. This represents an improvement against our PR08 econometric modelling results, where we estimated that there was a difference of 37% measured from the overall frontier made up of the best 25% of international comparators.  

Gap analysis

We have conducted further work to understand the drivers of the difference in maintenance and renewal cost efficiency between Network Rail and its international comparators.

Two studies undertaken by Balfour Beatty Rail for the Railway Markets and Economics and Railway Planning and Performance Directorates, show that the cost efficiency difference between Network Rail and four international comparators is driven by a number of activities, including procurement strategy, possessions strategy, and approaches to asset management. We will continue to develop this work with Network Rail in PR13. 

Ongoing efficiency analysis

In PR13, we will continue to develop our existing benchmarking work and expand on its scope to investigate structural factors, cost controllability, and operating and enhancement costs.

We understand that Network Rail is currently undertaking detailed internal work in a number of benchmarking-related areas, and welcome discussions at an early stage to develop a better understanding of the cost data as well as the nature of the comparisons with other railways. We will also investigate the possibility of extending our analysis to non-European countries.

Top-down, and specifically econometric, cost benchmarking of regulated network activities is routinely carried out by other regulators in Europe and beyond. Together with the Centre on Regulation in Europe (CERRE), we have summarised the main techniques used in regulatory benchmarking worldwide (econometrics, linear programming) and prepared a survey of international benchmarking practices in other network industries, with a number of case studies (Australia, New Zealand, Austria, Germany, the Netherlands, and Norway). For each country, we considered the object of benchmarking (operating expenditure, capital expenditure, total expenditure), the techniques adopted, model specification (inputs, outputs, and context variables), whether different approaches are employed and cross-checked in practice, and how benchmarking results are incorporated into the regulatory framework. In particular, the report considers how and whether efficiency estimates feed through the price/revenue allowance process.

In our Determination of Network Rail’s outputs and funding for 2009-14, we explained that our efficiency assessment for Network Rail covered three elements: “catch-up efficiency”, “frontier-shift efficiency”, and input price inflation.

The catch-up element related to the expectation that Network Rail could achieve cost savings by catching up to the levels of performance of more cost-efficient companies. The frontier-shift element related to the expectation that, in addition to any catch-up, Network Rail should be able to improve on its cost efficiency over time. Our decisions on frontier-shift and catch-up elements were made in light of consultancy reports which provided analysis of historical changes in measures of unit costs and productivity for other UK companies and sectors.

We commissioned Reckon LLP in 2011 to carry out an update of that analysis. Their report does the following:

  1. They provide estimates of historical changes in measures of unit operating expenditure for some regulated network industries in the UK. They use recent data to update an analysis of unit operating expenditure that was carried out for us at the last periodic review. They also provide some further analysis using alternative data sources and output measures.
  2. They provide estimates of historical changes in measures of productivity growth, based on data for sectors of the UK economy. They use recent data to update an analysis of “TFP composite benchmarks” for Network Rail which was carried out by our consultants at the last periodic review. They also provide estimates for some alternative measures of productivity growth for sectors of the UK economy.
  3. They review the way in which we used this type of information at the last periodic review, drawing on the approaches used by other GB regulators. They suggested potential improvements to us and, in light of their suggestions, they carried out some further quantitative analysis.

For further information or to discuss any specific aspect of the analysis described on this page, please contact:

Robert Mills
Senior Economist
Tel. +44 (0) 20 7282 3744
Fax +44 (0) 20 7282 2043
Email: robert.mills@orr.gsi.gov.uk

Last updated: 2 November 2011