Bowe Review slates rail industry planning and oversight

DfT, ORR and Network Rail all at fault for mismanagement of CP5 enhancements. Transport Secretary accepts all recommendations.

Jackie Whitelaw
26 November 2015

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It’s fair to say that Dame Colette Bowe and her team on the Bowe Review into the planning of Network Rail’s enhancements programme 2014-2016 have gone through the rail industry like a dose of salts. No one escapes attention, everyone is culpable, a lot needs to be done.

Bowe, who was a former telecoms and financial services regulator, published her report at the same time as that of Network Rail chairman Sir Peter Hendy’s review into the re-planning of the investment programme this week. HS1 chief executive Nicola Shaw put out the scoping documnnt for  the Shaw report into Network Rail’s structure and financing earlier this month. Their work was all commissioned by Transport Secretary Patrick McLoughlin  following cost escalation and a temporary halt on some electrification schemes which have since been restarted but rescheduled.

McLoughlin has accepted every one of the Bowe recommendations including a fundamental review of the roles and responsiblites of ORR so it looks at not only value for money for each five year settlement but also deliverability  and a” resetting” by Department for Transport and Network Rail of rail enhancement planning and oversight.

“My Department is working with Network Rail to strengthen the governance and day-to-day management of the process for planning and overseeing rail enhancements, providing clearer accountability for associated costs and project management,” he said.

“All projects will be subject to a clear change control process. These new arrangements will be underpinned by improved governance arrangements between the Department and Network Rail, underpinned by a new Memorandum of Understanding which I will publish next March.”

McLoughlin also announced that the planning and delivery of enhancements will be brought together under a single Director of Network Services, who will be responsible for approving the scope of all current and future enhancements and be the single point through which any change of scope is authorised.

“This will mirror similar arrangements being introduced in Network Rail,” he said.

Dame Colette Bowe said in her review that “there is no one overarching cause which explains the cost escalation and delays to projects and programmes in the current control period, which if corrected would prevent it from recurring.

“Instead, a number of issues have combined to require this programme to be reviewed and elements to be replanned.”

These include:

• planning processes, which had been thought to have worked successfully at the previous control period, have been shown to be inadequate in the face of the scale and complexity of the CP5 programme – including, very importantly, proposed electrification works on a scale not attempted before in the UK;
• the definition of organisational responsibilities between the Department, Network Rail and the ORR. These were unclear, lacking the relentless focus and clarity required for the design and execution of a major infrastructure programme;
• the fact that the overall plans encompassed a complex portfolio of schemes, subject to poor scope definition from the outset and ongoing ‘scope creep’ which led to cost increases;
• issues of effective internal programme and portfolio management, notably at Network Rail, where a combination of changing internal structures and responsibilities obscured lines of accountability for efficiency and delivery; and
• when it came to delivery, early costing errors, unanticipated interdependencies, lower than expected productivity and the failure to ensure agreed front end scope definition have also contributed.

“Compounding these issues,” she says “was the change in accounting classification status of Network Rail which took effect in 2014. This has led to Network Rail’s debt being on the Government’s balance sheet (with all the obvious consequences for control).

“Whilst not a cause of cost escalation, reclassification exposed a previous reliance by all parties on access to financing that was off government balance sheet as a means of managing financial overruns.

“The establishment by the Department and HM Treasury of a fixed debt limit, compared to a previous ratio driven debt limit, has imported a new financial discipline on Network Rail."

She recommends:

The role and responsibilities of the ORR in respect of enhancements planning should be reviewed. This should include, but not be confined to, its role in providing assurance in respect of affordability and deliverability.

In light of reclassification, the Department and Network Rail should reset the formal framework of rail enhancements planning, implementation and oversight. This should include:

i.  a clear and transparent governance process;

ii. the Department being significantly more active in prioritising strategic objectives supporting the allocation of funding for schemes in the early stages of development;

iii. transparent and mutually understood criteria (including required outcomes) against which schemes can be prioritised and developed;

iv. formal development decision gateways and later investment decision gateways (once scope and costs are clearly established), which reflect the fact that projects in the development stage are generally highly immature; and

v. re-establishing the flexibility to adjust the programme in response to emerging pressures with both increments and decrements on projects, such as a formal variation process (as seen in the programme during CP4).

Major and especially complex route enhancement schemes should be subject to integrated governance frameworks, such as those already used on Crossrail and Thameslink, which are contractual and reflect the whole-system requirements of such upgrades (including greater involvement of operators).

Leading project, programme and portfolio management practices should be introduced throughout the process; noting in particular the key issues of assurance, integration, and risk management.

A more strategic, long term approach to managing the availability of the right people both within the three organisations and throughout the supply chain is required. This should include in particular identifying long term demands across the entire industry and emphasising opportunities for improved skills development in these areas.

In planning how schemes are delivered and in focusing future investment there should be more consideration of passenger and operator priorities, with regard to both passenger and freight needs. Network Rail should be challenged to prioritise consistently users’ needs when delivering enhancement works.

Bowe is particularly interesting on the accounting reclassification of Network Rail as a public sector body.

"Under the system in place before reclassification, when the ORR assessed affordability at CP5, they were not, by their definition, considering whether the programme could be delivered within a set capital figure, but rather considering whether Network Rail could borrow sufficient funds and whether this borrowing cost could be serviced within the financial settlement for the period, she said.

"Since reclassification, Network Rail, and by extension the Government, is no longer insulated from the immediate impact of increased capital expenditure. The Department now needs to make scope choices or provide additional funds from its budgets or from HM Treasury if Network Rail’s debt ceiling is forecast to be exceeded.

“It is clear that there was substantial cost immaturity and lack of definition of many of the enhancement projects at the start of CP5. If a rigid debt ceiling were to be effective, therefore, the costs and scope of the projects that the funding was expected to cover needed to be much better defined.

"The previous method of assessing efficient cost and sanctioning sufficient borrowing as projects matured was no longer tenable. The imposition of a debt limit, in particular, should act as an effective incentive in future planning to prioritise issues of affordability and hence improve the planning process.”

She continues: “In terms of the effects of this change on the escalation of costs in CP5, I do not consider reclassification on its own to be a causal factor in explaining why the costs of CP5 have escalated so quickly, or why there have been delays in the execution of the programme. However, it seems clear that the sudden, and to many participants unexpected, imposition of a hard debt ceiling very quickly exposed the highly uncertain nature of many of the cost estimates that were contained in CP5.

“In my view the full impact of reclassification was not initially appreciated, though contributors to this Review at the Department, ORR and Network Rail now attribute fundamental importance to the role of reclassification and the associated loan agreement.”

She is critical of current rail enhancement planning.

“In the planning of CP5 enhancements, I have found that there was a lack of clarity among and within the Department, Network Rail and the ORR about their respective responsibilities, despite these roles nominally being set out in legislation. This was exacerbated by inconsistent communication between the organisations, allowing misunderstandings to persist.”

ORR is also a focus of criticism.

“With respect to the ORR, it has become apparent to me in this Review that parties to the planning process ascribed to the ORR functions it was not undertaking. The clearest example of this is the ORR’s role in assuring affordability. The Secretary of State’s Guidance to the ORR, published at the same time as the HLOS in July 2012, asks the ORR to note that, “the statement of funds available [to secure the HLOS] represents the maximum level of funding the Government is able to commit”. Views provided to the Review also indicate that within the Department, it was expected that ORR was assuring that the portfolio of schemes developed could be delivered within the funding envelope.

“Yet in the Final Determination, ORR states that it is assuring the affordability of the financing of the enhancement portfolio. This difference between financing cost (i.e. debt servicing) and scheme costs became more critical following reclassification, where Network Rail became subject to more rigorous capital controls, and the role of assurance of affordability materially more significant.

“I conclude that the reclassification of Network Rail fundamentally increases the oversight required in assuring the affordability of rail infrastructure investment. At CP5 the ORR’s role, in hindsight, was unclear; and, given reclassification, I conclude that the role of the regulator for future rail enhancement planning needs to be rethought.”

Bowe also slated the project, programme and portfolio management practices at Network Rail, including unclear scope definition, inconsistent change management, poor cost estimating and scope creep.