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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%.
• First major review of costs in 2000 Periodic Review.• External benchmarking approaches proved inconclusive.
Background
Study Type Target
Booz-Allen “Bottom-up” 18%.
NERA International 14-18%.
• First major review of costs in 2000 Periodic Review.• External benchmarking approaches proved inconclusive.
Background
Study Type Target
Booz-Allen “Bottom-up” 18%.
NERA International 14-18%.
Europe Economics Privatised industries 14-23%.
• First major review of costs in 2000 Periodic Review.• External benchmarking approaches proved inconclusive.
Background
Study Type Target
Booz-Allen “Bottom-up” 18%.
NERA International 14-18%.
Europe Economics Privatised industries 14-23%.
OXERA 9%.Nature of work
• First major review of costs in 2000 Periodic Review.• External benchmarking approaches proved inconclusive.
Background
Study Type Target
Booz-Allen “Bottom-up” 18%.
NERA International 14-18%.
Europe Economics Privatised industries 14-23%.
ORR conclusions 17%.
OXERA 9%.Nature of work
• First major review of costs in 2000 Periodic Review.• External benchmarking approaches proved inconclusive.
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
Progress of escalating costs
First five years: £14 bn
Next five years:
£16.7 bn 2000 PR “settlement”
£10.40 per train mile
£11.24 per train mile
Progress of escalating costs
First five years: £14 bn
Next five years:
£16.7 bn 2000 PR “settlement”
£10.40 per train mile
£11.24 per train mile
£21.8 bn Railtrack summer 2001 £14.67 per train mile
Progress of escalating costs
First five years: £14 bn
Next five years:
£16.7 bn 2000 PR “settlement”
£10.40 per train mile
£11.24 per train mile
£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.
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(
Efficiency measurement techniques
• Efficiency of M&R activity across network (by Zone).
• Input distance function estimation (COLS and SFA); analysis.
• Zones assumed to minimise inputs (costs; quality) for exogenously-given output (track miles; traffic volumes).
niDyxxTLx IiiKiiKi ,....2,1),ln(),,,,/()ln(
Efficiency measurement techniques
• Efficiency of M&R activity across network (by Zone).
• Input distance function estimation (COLS and SFA); analysis.
• 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.
niDyxxTLx IiiKiiKi ,....2,1),ln(),,,,/()ln(
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.
Robustness of scores
Variable
L2 Exceedences
Speed restrictions
• Do the most efficient Zones fall down on other measures.
Correlation based on 1 year
Efficient zones have low L2 exceedences*
Efficient zones have fewer speed restrictions**
* Significant at 5% level. ** Not significant at 5% level.
Robustness of scores
Variable
L2 Exceedences
Speed restrictions
Track category (linespeed andtonnage)
• Do the most efficient Zones fall down on other measures.
Correlation based on 1 year
Efficient zones have low L2 exceedences*
Efficient zones have fewer speed restrictions**
Efficient zones associated with higher track category**
* Significant at 5% level. ** Not significant at 5% level.
Robustness of scores
Variable
L2 Exceedences
Speed restrictions
Track category (linespeed andtonnage)
Age of track
• Do the most efficient Zones fall down on other measures.
Correlation based on 1 year
Efficient zones have low L2 exceedences*
Efficient zones have fewer speed restrictions**
Efficient zones associated with higher track category**
Efficient zones have older assets**
* Significant at 5% level. ** Not significant at 5% level.
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.