Office of Rail Regulation asks how long governments will sustain rail infrastructure subsidies and calls for exploration of commercial approach

The funding and structure of the UK railway is inherently inefficient and will need to be revised to ensure the investments required to meet future demand for rail travel are affordable, the Office of Rail Regulation has warned.

In a discussion paper calling for a debate on how to ensure railway finances are sustainable in the long term, the ORR questions whether future governments will be prepared to subsidise the infrastructure required to meet the DfT’s aspiration for rail journeys to double over the next 20 years.

Its projections show that if Network Rail continues to invest the current average of £2.5bn a year on infrastructure enhancements (not including Crossrail and HS2), its debt will have risen from £30bn at present to £62bn in 2034 (at current prices). Interest payments last year were £1.4bn accounting for 23.3% of Network Rail’s revenue requirement. By 2034, ORR forecasts interest payments will rise to £2.3bn or 35.5% of revenue requirement.

Although ORR has ruled that Network Rail can reduce the day-to-day cost of running the railway by 20% over the next five years on top of 40% achieved in the past decade, it said that driving efficiencies through regulation will be reaching the boundaries of what can be achieved by 2019. The limited scope to achieve further efficiencies under the current industry structure combined with increased Network Rail interest payments will place pressure on government ambitions to further reduce subsidy while meeting demand for rail travel. In real terms, the UK railway will still receive £3.9bn of UK and Scottish government funding in 2018-19 compared to £4.1bn in 2014-2015.

“This approach to funding the railway is sustainable for so long as governments decide that it is affordable and choose to provide support to Network Rail in this way,” ORR said. “In order to maximise the options available to future governments, one of the most significant long-term challenges facing the industry is how to deliver the enhancement and modernisation of the railway in the most efficient and sustainable way, so as to minimise the accrual of ongoing cost and risk to taxpayers.”

The key issues identified by the ORR for the railway to address relate to the absence of a normal commercial relationship between Network Rail and train operators and lack of clarity on what government subsidy pays for. ORR said these issues mean inefficiency is built into the industry structure. “The next substantial advances in the quality and efficiency of the industry will be very hard to achieve without a more commercial, customer-focused approach,” the regulator concluded.


Related reports can be found inside the latest issue of Passenger Transport:


‘Rail must realise its commercial potential’
ORR says new charging structure and less Department for Transport involvement are required if the railway’s future is to be financially viable

Reforms could hasten moves to concessions
Could new model attract private sector investment?