By Nathan Coyne
Network Rail's debt stands at £30,242 million. At the end of the next funding period it will have hit £40,818 million. It will spend £1,200 million per year just servicing this debt. But Richard Price, chief executive of the Office of Rail Regulation (ORR), seems very relaxed. Speaking to Politics.co.uk in the wake of his review of Network Rail's finances, Price insists the levels of debt are roughly comparable to any private sector utility company.
The ORR determined that Network Rail should receive £2 billion less than it asked for to run the network over the next five years. Price said the infrastructure company had done well to respond to the efficiency challenges it had been set and the reduction in funding was simply a case of the regulator completing the efficiency process.
However, beyond 2019 there is concern that requirements for continued investment could push Network Rail debt ratios up to unsustainable levels and the ORR will be publishing in July details of the "choices" that need to be made on future funding.
On the additional charges for bulk freight transportation announced in the review, he said the regulator had looked very closely at the impact and any loss of traffic as a result of the increase would be "very marginal".
Should we be worried about the extent of Network Rail's debt at a time when the wider narrative is on deficit reduction? Not according to Price. "The debt rises because there is more investment going on," he said. "But at the same time as the debt rising, the value of the asset is rising so by 2019 the ratio of debt to asset value is 68% and the limit that we set for Network Rail - and that we monitor very closely - is 75%. So there is still a margin that we don’t think Network Rail will come close to reaching."
The level of Network Rail's debt attracts attention because the company receives government funding and is firmly in the public eye. But as Price points out: "That is the kind of number that you would expect for a company like Network Rail. Other network utilities - water companies, electricity distribution - the debt-to-asset ratios are all in that sort of region."
However, there are longer term concerns, beyond the end of the current control period if the level of investment is to be sustained.
"For the longer term we think there are real choices that need to be made around the way Network Rail and the broader railway are funded," he said.
"If we can choose the sustained growth in passengers and freight there is the need to continue to invest in extra capacity. You then start, over the period beyond the five years, to think 'well if you need to sustain that kind of level of investment in the longer term what is the effect of that on financial sustainability?' You start to edge closer on some scenarios closer to that 75% limit."
To help provide solutions in this area, he said the ORR would be publishing a document at the beginning of July that "puts some options to government and other funders in terms of how future growth, future investment can be financed."
Despite deciding to cut Network Rail 's budget for the next five years by nearly ten per cent to £21.5 billion, Price said the company has "responded quite well" to the demand for greater efficiency as called for in the McNulty review. Sir Roy McNulty's May 2011 review found that the UK's railways were 20% more expensive than their counterparts in Europe.
"What we are looking at is savings over and above [those in Network Rail's strategic business plan]. So Network Rail had come up with efficiency proposals that were some way towards the 20% already. We have taken them the rest of the way towards 20%."
Explaining in more detail the work that has been done by the ORR since Network Rail published their strategic business plan in January, he said they went "through in great detail, activity by activity, everything Network Rail does and what it costs and we benchmark it all".
"There is a mix of things in the £2 billion. Some of it is additional efficiency. Some of it is changes to the volumes of work that we think they need to do in some areas, so it’s a mix of those two things," he said.
The £4.0 billion annual expenditure sanctioned by the ORR, while lower than the £4.4 billion requested by Network Rail, is higher than that suggested by McNulty but Price maintains that efficiency has been fully addressed, and that the additional requirements are the result of work that has come to light since that report.
"For the whole of the post-war period there’s been underinvestment in the railway’s embankments and bridges and tunnels; and the quality of asset knowledge hasn’t been enough really to put it right. We are therefore adding half a billion over the period in additional work on civil renewals across the railway as Network Rail improves its asset knowledge," he said.
Efficiency improvements need to go beyond just Network Rail, including working with train operators to reduce costs. This being tested in an alliance between the infrastructure company and South West Trains, and although it's "early days" as far as the level of efficiency savings, they are identifying what they "can do differently to address the fragilities in punctuality, to address the key bits of the infrastructure that need to be sorted out to improve resilience of the passenger services".
"It is too early to say what sort of gains they are delivering or they will deliver. But we are watching that very closely because we want other train companies and other Network Rail groups to learn from the experience."
The ORR would like to see a greater movement toward use of asset charges, whereby costs reflect the use of rail assets by train companies.
He said: "We think that is the right thing to do to get the commercial relationship between the train companies and Network Rail right; to make sure that a larger proportion of cost of providing capacity to the train companies is reflected in what they are paying. So over time we would like to see the balance moving in that direction but we haven’t reached a decision, nor have the Department for Transport, for the next period."
Prior to the publication of the review freight companies were concerned that access charges would be increased to levels that would result in freight being pushed off the railway. There were conflicting pressures brought about by the need to increase charges to reflect the costs that heavy freight trains were inflicting upon the network while ensuring that they were not priced off the railways.
It transpired that the ORR will apply a new freight-specific-charge for the carriage of bulk goods including power station coal, nuclear fuel and iron ore because they could bear the increased charges. Intermodal traffic – containers - on the other hand will not be subject to this charge because it would have been more sensitive to a price rise, and biomass, while it was considered, is also exempt.
"We looked at this very carefully," said Price. "The analysts working and our board spent a lot of time going over this in some detail because the last thing we want to do is price freight off the network and onto road. And indeed what we want to see is more traffic coming off the road and onto rail. There’s quite a bit of investment in this plan to enhance the freight network to allow that to happen.
"We looked carefully at a number of studies that we commissioned for this review at the likelihood of two things: that traffic would switch, and for those bulk categories we explicitly took that into account; and we looked at the affordability of what we were proposing for both the freight operators and their customers and we took that into account too.
"And that led us to the conclusion that we should raise freight charges on average by no more than 21% by the end of the period. It is a bit more for those bulk categories but that is on the basis of looking very carefully at the potential likelihood of switching.
He conceded there may be some loss of bulk traffic but "it will be really marginal".
On biomass he said it was something they looked "long and hard" at, but erred because "it is not yet a mature market".
"We came to the conclusion that we should not introduce the freight specific charge now for biomass and we should not do it until the development of the market is on a surer footing and is much clearer," he said.
"So the option remains open for the next control period but we won’t do anything for the next five years."
After the work that has gone into producing the 851-page draft periodic review 2013, Price couldn't be blamed for applying this assertion to more than just biomass.