Network Rail and ORR in the firing line as Public Accounts Committee says electrification cost increases “staggering and unacceptable”.

The Public Accounts Committee has lambasted severe planning and budgeting failures in Network Rail’s current five-year investment programme.

In particular it points to "staggering and unacceptable" cost increases in the project to electrify the Great Western Main Line from London to Cardiff, which is now expected to cost up to £1.2 billion more than the £1.6 billion estimated a year ago.

The Committee said there is still "far too much uncertainty" on costs and eventual delivery dates for the electrification of both the TransPennine route and the Midland Main Line – and warns more projects could be delayed in order to balance Network Rail’s budget.

As a result, the Committee is calling for a fundamental review of the regulator’s role and effectiveness in planning rail infrastructure.

The PAC report follows the publication of the scoping report by HS1 CEO Nicola Shaw into her study on future financing options for Network Rail which also implies a major shake up is needed at the rail operator.

It also urged the government to publish a revised and re-costed programme of electrification improvements, including the rationale for prioritising different schemes, following a review by Network Rail chairman Sir Peter Hendy.

“Our inquiry has found that the agreed work could never have been delivered within the agreed budget and timeframe. Yet Network Rail, the Department for Transport and the regulator – the Office of Rail and Road – signed up to the plans anyway."

"Network Rail has lost its grip on managing large infrastructure projects. The result is a twofold blow to taxpayers: delays in the delivery of promised improvements, and a vastly bigger bill for delivering them,” said chair of the PAC Meg Hillier.

“The potential near-doubling in cost of the electrification of the Great Western Line is a symptom of seriously flawed control and planning. Another is the continuing uncertainty over electrification of both the TransPennine route and the Midland Main Line.”

Both projects were paused by the government earlier this year but are now back on the books though delayed.

“The government has identified rail infrastructure as a vital part of its economic plans, for example in establishing what it describes as a ‘Northern Powerhouse’. It is alarming that, in planning work intended to support these plans, its judgement should be so flawed,” Hillier said.

“Our inquiry has found that the agreed work could never have been delivered within the agreed budget and timeframe. Yet Network Rail, the Department for Transport and the regulator – the Office of Rail and Road – signed up to the plans anyway.

Passengers and the public are paying a heavy price and we must question whether the ORR is fit for purpose."

The PAC said that the Department for Transport (the Department), Network Rail and the Office of Rail and Road (ORR) agreed an unrealistic programme of rail investments for 2014-2019.

“The programme contained too much uncertainty around the costs of many large projects when it was signed off. Since then Network Rail’s work has cost more and taken longer than expected. We are concerned that the ORR, Network Rail’s regulator, lacks the capability to robustly scrutinise Network Rail’s plans and cost estimates.

“The severity of the planning and budgeting failures is especially clear in the programme to electrify the Great Western Main Line from London to Cardiff, which is now expected to cost up to £1.2 billion more than the £1.6 billion estimated only a year ago.”

Independent passenger watchdog Transport Focus said passengers needed a clear plan of action on future development of the railways. 

"Passengers will be disappointed to learn of potential delays to much-welcomed and long-promised improvements. These follow years of increasingly crowded carriages, disruptive engineering works and above-inflation fare increases," said chief executive Anthony Smith. 

“There has already been lots of investment - what we want to see now is a clear plan of action, setting out exactly when this will deliver the promised improvements and, in the meantime, how important issues such as overcrowding and worn out rolling stock will be tackled. Knowing when performance will improve is crucial to maintaining trust."

PAC conclusions and recommendations

1.The 2014–2019 rail investment programme could not have been delivered within the budget which the Department, Network Rail and the Office of Rail and Road agreed.

 Shortly before signing up to the programme, the then chief executive of Network Rail described it as “unbalanced and unrealistic”. The scope and costs of projects making up 52% of enhancement costs (spending on improving the network), including the large electrification projects, were highly uncertain at the start of the period. The scope of electrification work on the Great Western Main Line was agreed in September 2014, at which time it was expected to cost £1.6 billion, but Network Rail now expects this programme to cost between £2.5 billion and £2.8 billion. Network Rail also committed to deliver £600 million of efficiency savings (meaning a 20% reduction in costs) in renewals work to replace worn out parts of the network such as signalling, even though it did not know how it could achieve that level of savings. To date, Network Rail has failed to deliver the target savings on renewals work. Network Rail still does not know how much more the total programme will cost.

Recommendation: For the next planning round for rail investment, and in all future investment planning, the Government must assure itself that its plans can be delivered. For all rail spending decisions the Department, Network Rail and the Office of Rail and Road must assess and explain how uncertainty in key projects could affect the plan’s overall costs and schedule.

2.The Office of Rail and Road’s approach to reviewing the efficiency of Network Rail’s costs is unconvincing and it was not robust enough in scrutinising Network Rail’s plans.

 In September 2014 the ORR decided that the ‘efficient cost’ for the Great Western electrification programme, should be £1.6 billion. Since then the expected costs have increased by up to £1.2 billion. It is not clear whether this is due to Network Rail inefficiency, ORR lacking a full understanding of the work needed, or a combination of both. The ORR identified risks in Network Rail’s plans at the start of the 2014–2019 programme, but it failed to act aggressively enough to ensure that Network Rail addressed those risks.

Recommendation: The Department should carry out a fundamental review of the regulator’s role and effectiveness in rail infrastructure planning.

3.The rail investment planning and funding model is not adequate for major enhancement work such as the current electrification schemes. 

Five-year funding cycles are appropriate for ongoing operations, maintenance and renewals. But they are not suitable for major investment projects, the scope and costs of which may be highly uncertain when funding is set. Network Rail and the Department have been more successful in delivering big infrastructure projects, such as Thameslink and Crossrail, when they have handled them separately from the rolling programme of five-year funding cycles. The Department told us that the current reviews of rail planning and funding were looking at this.

Recommendation: The Department, Network Rail and the Office of Rail and Road should put in place sharper accountability arrangements for major enhancement projects, such as the Great Western Main Line electrification. They should also agree principles on when it is appropriate to fund and manage these projects outside the five year rail funding cycle, and build in strong accountability mechanisms to avoid costly overruns.

4.Network Rail’s reclassification as a public body has brought reduced flexibility to borrow to cover cost increases. Before reclassification in 2014, Network Rail covered cost increases through borrowing from the financial markets, but now it can only borrow from government, with a loan cap of £30.3 billion. Network Rail therefore needs a much stronger focus on accurate project costing at the planning stage, and on controlling the costs of the work as it is done. Network Rail welcomed the new ‘capital discipline’ that should come with tighter restrictions on its ability to borrow.

Recommendation: Network Rail must embed much tighter project planning, costing and cost control throughout the organisation and be clearer with the Department about what can and cannot be afforded. We want to see clearer accountability for project costs and project management.

5.Cost increases on the Great Western Main Line electrification programme are staggering and unacceptable. 

Network Rail estimates that the Great Western Main Line electrification programme will cost between £2.5 and £2.8 billion, £1.2 billion more than the £1.6 billion which the Office of Rail and Road said it should cost, a year ago. The Department could not tell us when the programme will be completed, but said that delays to the previously announced schedule, which would have seen sections completed between 2016 and 2018, were highly likely. New electric trains for the Great Western Main Line are due to be delivered from February 2018 and the Department is liable to pay for these trains whether electrification is complete or not.

Recommendation: The Department and Network Rail should publish an updated schedule and cost forecast for the Great Western Main Line electrification programme, a full account of what has caused the cost increases to date and proposals for controlling future costs, including the liabilities associated with the new electric trains.

6.Without active engagement and management of the supply chain, skills shortages in key areas pose serious risks to Network Rail delivering its plans. 

The scale and volume of work planned requires a strong supply chain with enough capacity and skills, particularly in electrification where there is a shortage of skilled workers. Network Rail told us it is engaging with its supply chain to provide clarity on its work programme so that industry can invest to provide the skills needed. Network Rail told us it is also encouraging industry to take on apprentices and has a large apprentice scheme of its own. There is a real opportunity to create skilled British jobs in this sector as well as ensure delivery of important and long awaited projects. With proper planning, a skills shortage should be no excuse for delivery failure or delay.

Recommendation: The Department and Network Rail should publish a rail skills strategy for the industry with milestones for delivery.

7.There is still far too much uncertainty on costs and eventual delivery dates for the other two major rail electrification programmes in the 2014-2019 programme. 

Electrification of both the TransPennine route and the Midland Main Line will now be delayed into the next five year planning period (2019–2024). TransPennine electrification could be completed by 2022, though this depends on the results of a two-year detailed design phase, and Midland Main Line is expected to be completed in 2023. Sir Peter Hendy’s review of these and the other rail enhancement planned for 2014-2019, which is to be published towards the end of this year, will bring more bad news on costs.

Recommendation: The Department and Network Rail, drawing on the Hendy review, should publish a revised programme of rail electrification improvements, including the rationale for prioritisation between projects, with updated cost and delivery forecasts.

8.There is a risk that more projects will be delayed in order to balance Network Rail’s budget. 

Over promising what can be delivered leads to inevitable delays and cost overruns; and simply delaying projects further as a budget management mechanism is not good financial planning.

Recommendation: The Department and Network Rail need to have a clear and agreed public strategy about which rail projects are deliverable. Deadlines for key milestones must be clear, realistic, and transparent to passengers and the public.