Assessing the efficient cost of sustaining Britain’s rail network: perspectives based on Zonal comparisons. First Conference on Railroad Industry Structure,

Assessing the efficient cost of sustaining Britain’s rail network: perspectives based on

Zonal comparisons.

First Conference on Railroad Industry Structure, Competition and Investment

Toulouse, 7 Nov 2003

Andrew Smith*(email: [email protected])

* Co-author: John Kennedy. Full paper forthcoming in Journal of Transport Economics and Policy. Working paper version can be found at http://www.econ.cam.ac.uk/dae/research/regulate/rail-regulation.htm. This presentation should not be quoted without permission.

Acknowledgements

• Co-author: John Kennedy (Network Rail).

• Supervision:

– Cambridge: Dr Michael Pollitt and Professor David Newbery

– Network Rail: Stephen Gibson; John Smith; Paul Plummer; Duncan Hannan; and Ian Marlee.

Introduction

• Between 1994 and 1997 British Rail restructured and sold.

• Infrastructure (Railtrack) separated from train operation.

• Office of Rail Regulator (ORR) set up to regulate Railtrack.

• What level of “efficient costs” required to sustain network?

• Propose internal (Zonal) benchmarking to inform debate.

Background

• First major review of costs in 2000 Periodic Review.• External benchmarking approaches proved inconclusive.

Background

Study Type Target

Booz-Allen “Bottom-up” 18%.


Background

Study Type Target


NERA International 14-18%.


Background

Study Type Target



Europe Economics Privatised industries 14-23%.


Background

Study Type Target




OXERA 9%.Nature of work


Background

Study Type Target




ORR conclusions 17%.

OXERA 9%.Nature of work


Recent developments

• October 2000 Hatfield derailment (defective track).

• Heightened concerns over state of infrastructure.

• Precipitated major financial crisis at Railtrack.

• In October 2001 Railtrack went into administration.

• A year later assets taken over by Network Rail - CLG.

• Immediately ORR announced interim review of new company’s finances.

Progress of escalating costs

First five years: £14 bn £10.40 per train mile


First five years: £14 bn

Next five years:

£16.7 bn 2000 PR “settlement”

£10.40 per train mile




Next five years:




£21.8 bn Railtrack summer 2001 £14.67 per train mile



Next five years:




£21.8 bn Railtrack summer 2001 £14.67 per train mile

£27.1 bn Network Rail summer 2003 £18.24 per train mile

Internal benchmarking - a Zonal approach

• Railtrack divided into seven geographical Zones.

• Potential for savings from implementing own best practice consistently.

• Data consistent across zones; smaller differences in scale, technology etc.

• Precedents: OFWAT; OFGEM.

Efficiency measurement techniques

• Efficiency of M&R activity across network (by Zone).

• Input distance function estimation (COLS and SFA); analysis.




niDyxxTLx IiiKiiKi ,....2,1),ln(),,,,/()ln(




• Zones assumed to minimise inputs (costs; quality) for exogenously-given output (track miles; traffic volumes).





• Zones assumed to minimise inputs (costs; quality) for exogenously-given output (track miles; traffic volumes).

• Trade-off between cost and quality explicitly recognised in DF.


Data

List of variables Coverage• Maintenance costs

• Track renewal costs

• RT-caused delays

• Broken rails

• Passenger train miles

• Freight tonne miles

• Track miles

• 7 Zones: 1995/96 to 2001/02

• 7 Zones 1995/96 to 2001/02

• Track quality; TSRs; track age; track category

• 7 Zones, 2001/02 only.

Inputs

Outputs

Otherfactors

Input trends: maintenance and renewal costs

Figure 2Inputs: Maintenance and Track Renewal Costs

0.0

200.0

400.0

600.0

800.0

1000.0

95/96 96/97 97/98 98/99 99/00 00/01 01/02

00

/01

£m

Maintenance

Track renewal

Hatfield accident(Oct 2000)

Input trends: quality measures

Figure 4Quality (inputs): Delays and Broken Rails per train mile

0

20

40

60

80

100

120

95/96 96/97 97/98 98/99 99/00 00/01 01/02

Ind

icie

s (

19

95

/96

= 1

00

)

Delays per train mile

Broken rails per train mileHatfield accident(Oct 2000)

Output trends

Figure 3Outputs: Passenger train miles and

Freight tonne miles

0.00

50.00

100.00

150.00

200.00

250.00

300.00

95/96 96/97 97/98 98/99 99/00 00/01 01/02

Mil

lio

n t

rain

mil

es

0

10

20

30

40

50

60

70

Bil

lio

n t

on

ne

mil

es

Passenger train miles

Freight tonne miles

Hatfield accident(Oct 2000)

Potential for savings

Maintenance costs Total Costs

East Anglia 19% 18%Great Western 21% 9%London North Eastern 3% 9%Midlands - 18%North West 17% 24%Scotland 1% -Southern 20% 9%

Company weighted average 13% 13%

Indicative potential cost reduction and/or quality improvement

Table 10

• Suggests savings of 13% if apply (own) best practice.

• Recent report prepared by ORR: 11-24% for maintenance.

Change post-Hatfield?

1999/00 Rankings*

LNE [1]

Scotland [2]

East Anglia [3]

Southern [4]

Great Western [5]

North West [6]

Midlands [7]

LNE [4]

Scotland [1]

East Anglia [6]

Southern [3]

Great Western [2]

North West [7]

Midlands [5]

• Differing responses to Hatfield by Zone.• LNE deteriorates.

2001/02 Rankings*

* Total cost rankings

Robustness of scores• Do the most efficient Zones fall down on other measures?

Robustness of scores

Variable

L2 Exceedences

• Do the most efficient Zones fall down on other measures.

Correlation based on 1 year

Efficient zones have low L2 exceedences*

* Significant at 5% level.


Variable

L2 Exceedences

Speed restrictions




Efficient zones have fewer speed restrictions**

* Significant at 5% level. ** Not significant at 5% level.


Variable

L2 Exceedences

Speed restrictions

Track category (linespeed andtonnage)





Efficient zones associated with higher track category**



Variable

L2 Exceedences

Speed restrictions

Track category (linespeed andtonnage)

Age of track





Efficient zones associated with higher track category**

Efficient zones have older assets**


Efficiency and contractors

Maintenance cost efficiency rankings versus maintenance contractor*

Zone Maintenance contractors

Midlands SERCO; AMEY; Carillion.Scotland First Engineering.London North Eastern Jarvis.North West First Engineering; Jarvis; Carillion.East Anglia Balfour Beatty; AMEC.Southern Balfour Beatty; AMECGreat Western AMEY; Carillion.* Most efficient Zone (in 2001/02) listed first.

• No clear relationship between efficiency and contractor.

• Note Great Western - now in-house - bottom of rankings.

Some conclusions

• At company level, sharp unit cost reductions after privatisation largely wiped out by Hatfield.

• Relative performance: – Differing responses by zones to Hatfield– Scope for average savings of 13% if replicate best practice

• Results robust to variety of other possible cost drivers. And in line with more recent ORR zonal benchmarking.

• Suggests that internal benchmarking a useful additional tool for ORR; especially given lack of external benchmarking options.

Documents

Assessing the efficient cost of sustaining Britain’s rail network: perspectives based on Zonal comparisons. First Conference on Railroad Industry Structure,