Regulating Network Rail’s Efficiency

Audited Entities

• Office of Rail Regulation

Audit Objective(s)

• The report is focused on the Office of Rail Regulation 's effectiveness against two key requirements: 1) there must be strong incentives on the regulated company to achieve efficient and sustainable levels of cost; and 2) there must be robust information for the Regulator to judge what level of cost is efficient and sustainable, and how the regulated company's performance compares with that efficient cost.

Audit Scope

• The report reviews: Network Rail’s efficiency outcomes as reported by the Office of Rail Regulation; the use of regulatory tools. Including incentives to promote efficiency; and information collected and used by the Office of Rail Regulation to measure and promote efficiency.

Audit Criteria

• Not available.

Main Audit Findings

• The Regulator has contributed to improving Network Rail’s efficiency, but reports that a substantial efficiency gap remains.
• Incentives for Network Rail to find efficiency savings are weaker than those facing other regulated companies.
• The Regulator has performed innovative benchmarking analysis but there are gaps in its information on Network Rail’s own unit costs.
• The Regulator has identified an efficiency gap but this is not yet fully explained.

Audit Recommendations

• The Regulator should:
  • require Network Rail to improve the quality, coverage and geographic breakdown of its unit cost and work volume information to the point where it can be a more valuable component of both Network Rail’s own plans and internal benchmarking, and the Regulator’s efficiency judgments in the next Periodic Review;
  • work with Network Rail to improve its confidence in the breakdown of reported cost reductions between unit cost efficiencies, scope efficiencies and deferrals, and satisfy itself that the latter do not compromise short- or long-term delivery of required outputs; and
  • adjust for levels of input price inflation different to those assumed in settlements, when reporting efficiency savings made by Network Rail.
• The Regulator should work with Network Rail to understand better the reasons for the evident efficiency gap relative to the most efficient European operators, and the opportunities to bridge it. It should also work with other regulators and Infrastructure UK to understand the reasons for the generally high level of UK infrastructure costs, and to address any aspects of regulatory frameworks that may contribute to it.
• The Regulator should amend Network Rail’s licence conditions to require it to have regard to the Regulator’s assessment of performance when setting management bonuses, as well as (as currently) stating how it has reflected that assessment in its decisions. The Regulator should also ensure that measures of efficiency used within the management incentive plan align well with its own measures of progress towards improved efficiency.
• Whatever new structures or realignment of incentives emerge from the Rail Value For Money Study, the Regulator should ensure that progress made in improving understanding of Network Rail’s costs and reporting efficiency gains is protected and built upon within the regulatory regime.
• If direct agreements between Network Rail and funders for infrastructure provision are necessary, the Regulator should nevertheless have the opportunity to engage with their development, to satisfy itself that they represent efficient cost and do not expose tax- and fare payers to excessive risk.

• PreviousThe BBC’s Efficiency Programme
• NextThe Efficiency of National Insurance Administration