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Hendy finds costs for rail CP5 enhancements have increased 21%

Network Rail is to sell £1.8bn of assets and raise a further £700M by borrowing to cover a £2.5bn increase in the price of its enhancement programme for CP5 (2014-19) originally priced at £11.8bn.

The 21% increase was revealed in Network Rail chairman Sir Peter Hendy’s report into the replanning of Network Rail’s investment programme. 

“The remaining projects will be delivered after 2019 so that Network Rail remains within its funding envelope. As a result, the full programme is now expected to be delivered over a more realistic timescale. No infrastructure schemes have been cancelled" - Sir Peter Hendy

Hendy was asked by Secretary of State for Transport Patrick McLoughlin to investigate after the £2bn Transpennine and Midland Main Line electrification schemes were suspended because of increases in budget. They have since been reinstated in the programme but with the bulk of investment pushed back to post 2019.

Former telecoms and financial regulator and chair of the Banking Standards Review Council was also asked to review rail planning; and HS1 chief executive Nicola Shaw to look at Network Rail’s structure and financing. Shaw has published a scoping report hinting at major upheaval while Bowe this week produced a review that slated the sector’s planning and oversight. 

Hendy said the result of his review and the decision to raise money through an asset sale and new borrowing meant “that the vast majority of programmes and projects will go ahead for delivery by 2019.

“The remaining projects will be delivered after 2019 so that Network Rail remains within its funding envelope. As a result, the full programme is now expected to be delivered over a more realistic timescale. No infrastructure schemes have been cancelled," he said.

Hendy said that overoptimism on costs and timescales, inadequate planning processes both within and outside Network Rail and changes in scope during development and delivery were at the root of the problem along with the realization that some large projects should have been managed on a holistic basis rather than piecemeal. Also contributing to the muddle was Network Rail’s return to the Government books and a consequent limit on its borrowing options.

What is being done to resolve the issues?

Network Rail has carried out an extensive review of the cost and deliverability of the enhancement programme.

Cost estimates have been updated for each programme, including contingency for risk and uncertainty that reflects the current state of development. The delivery dates have also been updated to reflect the dates by which Network Rail expects to complete each programme.

Network Rail has applied three levels of assurance in the review of the revised plan.

  • The first level is the relevant Route Managing Director and Infrastructure Projects Delivery Director have appraised and approved each project / programme.
  • The second level is the internal deliverability reviews of the key projects.
  • The third level is independent assurance to Sir Peter Hendy by Nichols, covering both the initial deliverability review and the subsequent finalisation of the plan.

Finally, the overall plan has been subject to review by the Network Rail Executive Committee and the Board.

In reviewing the plan, Network Rail has considered whether some of the enhancements portfolio should be rephased beyond the current control period.

How will the increased costs be funded?

In updating the business plan, Network Rail has sought to balance the level of expenditure required to manage the core business and the extent to which it can deliver the full enhancement programme within the available funding.

It has concluded that the core business can be managed within the borrowing limit that has been set for CP5. The principal change to achieve this will be a reduction in renewals activity, which Network Rail considers can be managed safely and does not create a backlog that cannot be caught up in subsequent control periods.

While this change partially offsets increases in the rest of the core plan, the buffer between the forecast debt requirement and the borrowing limit is now small. Any further cost increases would need to be funded by additional borrowing, further asset sales or further deferral of renewals.

To fund the increased enhancement expenditure, Network Rail will address the funding shortfall by asset divestment totalling around £1.8bn through divestment of non-core assets. This includes considering options for the sale of property assets (including retail units in managed stations and the commercial estate), spare capacity on the telecoms network and non-core rail assets such as depots.

The report said that while Network Rail and DfT consider it is right to sell assets to fund enhancements, there are clearly implications for the future funding of the railway. Less income from property means more will have to come from elsewhere. Given the importance to passengers and the wider economy of the enhancement programme, the overall conclusion is that this plan represents the best balance in delivering value for money.

In addition to the asset sales, DfT has agreed to increase Network Rail’s borrowing limit by £700M to provide further funding for the enhancement programme.

This additional £2.5bn will enable delivery of the vast majority of projects committed to in CP5. However, this is not sufficient to fund all the schemes that Network Rail is capable of delivering in CP5. It has therefore worked with DfT to identify which projects should be completed in Control Period 6 (2019-24) (CP6). This includes projects that are still in the early stages of development (with development continuing but delivery will not be in CP5) and a number of the schemes in ring-fenced funds which will also now be delivered in CP6.