4.120 Maintenance expenditure covers the work required to maintain assets efficiently and sustainably. Maintenance work may be either planned (for example, routine or visual inspections) or reactive (for example, responding to asset failures). Maintenance expenditure is forecast and assessed for each of the following main asset categories: track, civil structures and earthworks, signalling, electrification, telecommunications, and plant and machinery.
4.121 Renewals expenditure covers work to replace assets which have reached, or are nearing, the end of their useful lives with the modern equivalent asset. Renewals expenditure is forecast and assessed for the same asset types as maintenance (track, civil structures and earthworks, signalling, electrification, telecommunications, plant and machinery) as well as buildings, and other renewals.
4.122 In Network Rail‟s SBP, its maintenance plans for CP5 assumed efficiencies of 13.8% by the final year of the control period and total maintenance expenditure in CP5 of £5,282m. We have restated these figures in this chapter so that they are more comparable with our determination, to take account of accounting changes between CP4 and CP5, and the effects of traffic and network growth.
4.123 Network Rail‟s renewals plans for CP5 assumed an increase in expenditure compared to CP4 driven by a programme of rationalisation and centralisation of signalling and electrical control, a large increase in expenditure on civil structures and earthworks, accelerated renewals (due to enhancements), a programme to improve asset information and additional investment schemes. It planned efficiency savings of 15.8% by the final year of the control period and total renewal expenditure in CP5 of £13,559m. These figures have also been restated as described above.
4.124 The efficiencies include those embedded in Network Rail‟s proposed CP5 asset policies and consider efficiency across all costs classified as renewals, whereas Network Rail‟s efficiency assumption in its SBP was based on a subset of renewals asset types (i.e. the main asset categories such as track). Based on our review and the evidence, we have included efficiency savings in other categories of renewals expenditure, where Network Rail assumed no efficiencies, e.g. information
management.
4.125 Our approach to the assessment of maintenance and renewal efficiencies is set out in detail in the asset management: maintenance and renewals chapter (chapter 8). In summary, we have carried out both a bottom-up and top-down assessment of efficiency, including:
(a) a detailed review of Network Rail‟s plans, including an audit of its benchmarking work and SBP efficiencies;
(b) our bottom-up benchmarking and efficiency studies conducted for PR13; (c) our review of previous studies (for example those carried out for PR08 and for
the RVfM study) and cataloguing of remaining efficiency opportunities; and
(d) our top-down statistical (econometric) analysis of the efficiency gap to the frontier rail infrastructure manager.
4.126 The efficiency assumptions for maintenance and renewal draws mainly, on (a) to (c) with (d) used as a sense check.
Responses to our draft determination
4.127 Network Rail noted that the maintenance and renewals efficiency profiles in its SBP and in our draft determination are all based on comprehensive bottom-up
assessments of how much Network Rail can change its ways of working in CP5. They already account for emerging developments in technology and incorporate significant elements of stretch (notably in signalling and maintenance).
4.128 Network Rail stated that it is not methodologically consistent to include top-down efficiency overlays in addition to a thorough bottom-up assessment by either Network Rail or by us. Additionally, Network Rail stated that in the case of renewals
expenditure, it thinks that some issues related to the top-down efficiency overlays sit largely outside its control, as they are more of an issue for the contracting base that Network Rail relies upon to carry out the works. Network Rail also noted that any advances in these areas are already accounted for in the efficiency assumptions for CP5 that it included in its SBP.
4.129 RMT mentioned the concern previously raised by Network Rail about our top-down benchmarking of maintenance and renewals.
Our comments on the response to our draft determination
4.130 Our draft determination applied efficiency overlays to our bottom-up efficiency
assessment for the management of occupational health and inflation. We continue to consider that these adjustments are appropriate as the bottom-up assessment did not address these potential areas of efficiency. The overlays have been applied at a level, which is considered appropriate in the round and after also taking account of Network Rail‟s ability to influence its costs.
4.131 As we note above, our maintenance and renewals efficiency assumptions draw mainly on other analysis, e.g. bottom-up analysis, rather than our top-down analysis.
Our determination
4.132 We assume that Network Rail can achieve maintenance efficiencies of 16.4% by the final year of the control period and we assume that it spends £5,166m on
maintenance during CP5. This is £116m less than proposed in the SBP. This is largely due to adjustments to pre-efficient reactive maintenance as described in the asset management: maintenance and renewals chapter (chapter 8).
4.133 Our assessment of efficient renewals expenditure for CP5 assumes lower levels of pre-efficient expenditure, where its plans were not sufficiently justified. For example, we have assumed lower levels of expenditure on buildings, information management and R&D, and made adjustments where we have identified issues with its unit costs. 4.134 We assess that Network Rail can achieve renewals efficiencies of 20.0% by the final
year of the control period and we assume that Network Rail spends £12,107m on renewals during CP5. This is £1,452m less than it proposed in its SBP.
Enhancements
4.135 As explained above, our assessment of the efficient level of expenditure for
enhancements is different from the approach taken for other costs. Firstly, we looked at whether the proposed projects were required to meet the HLOSs. We then
scrutinised individual project costs and portfolio efficiency overlays.
Responses to our draft determination
4.136 Other than the comments Network Rail has made above about the application of frontier shift, we have included all other responses, e.g. the responses in relation to the Northern Hub and Uckfield train lengthening projects, in the enhancements chapter (chapter 9).
Our determination
4.137 Of the £12.4bn enhancement expenditure in Network Rail‟s SBP, there were about £3.3bn of costs for projects that are determined outside of our review by the
governments (Thameslink, Crossrail, Borders and an element of EGIP135) and £1.3bn
of ring-fenced funds. We scrutinised the remaining £7.8bn of expenditure and we think that these projects can be delivered for £7.0bn, largely as a result of applying Network Rail‟s own efficiency overlay to more projects, where we thought the efficient level of expenditure should be lower. We also reduced the allowances for risk that Network Rail had included in its SBP on some of its projects, where we concluded they were too high.
4.138 Finally, we have included about £1.3bn in our determination for136:
(a) an assumption for non-government investment framework schemes (consistent with our assessment of other single till income) (£416m);
(b) additional Schedule 4 costs as a result of the recalibration of Schedule 8 (£172m);
(c) funding for R&D (£50m);
(d) additional funding for level crossings (£32m); (e) CP4 rollovers (£246m);
(f) funding for ETCS cab fitment (£194m); and (g) funding for depots and stabling (£312m).
135 The Edinburgh to Glasgow Improvement Programme.
Package
Background and our draft determination
4.139 In our draft determination we identified why we thought our package was challenging but achievable.
Responses to our draft determination
4.140 Network Rail thought that our overall draft determination package unrealistically requires it to go beyond its SBP ambitions and deliver even higher levels of performance and cost savings with less investment, and less money to operate, manage and enhance the railway.
4.141 Some other respondents said that our draft determination was achievable and some thought that there might be deliverability issues with the package.
Our assessment
4.142 In PR13, we have set Network Rail‟s revenue requirement for Great Britain on the assumption that it will achieve 19% efficiencies on its support, operations,
maintenance and renewals by the end of CP5. We have decided that it is reasonable to assume that Network Rail will achieve this level of savings in CP5 and it builds on the efficiencies of 40% in total that Network Rail has already achieved in CP3 and CP4.
4.143 All our decisions on the overall PR13 settlement are made as part of a „balanced package‟ for CP5. By balanced package we mean one which considers the outputs to be delivered, the costs, the incentives, the risks, Network Rail‟s capability to safely and sustainably deliver the efficiency savings and the safety requirements.
4.144 The package should be considered and judged as a whole. Our considered view after fully considering the responses to our draft determination and our statutory duties, is that this determination is challenging but achievable for Network Rail in terms of efficiency, value for money and deliverability, and indeed could potentially be
exceeded without compromising the delivery of outputs (including health and safety). It will improve safety and it takes account of long-term needs as well as the short-term – i.e. it is sustainable.
4.145 Furthermore, it incentivises Network Rail to efficiently manage the costs it can control and provides strong incentives in CP5 for Network Rail to strive for continuous and sustained improvements in efficiency, building on the improvements in efficiency that Network Rail has achieved in CP3 and CP4.
4.146 It also provides appropriate protections against risk. We have made specific provisions to provide protections against certain risks, for example the new civils adjustment mechanism. We have also made some specific changes to our draft determination to take account of the evidence from consultation responses and ensure an appropriate balance, for example we have increased our expenditure
4.147 For the above reasons we do not agree with Network Rail‟s response.