The last funding cycle (Control Period 5, which ran from April 2014-19) brought significant levels of investment into the network as part of the Railway Upgrade Plan to create new capacity. But executing on the investment to deliver projects on time and within budget proved too much of a challenge for Network Rail. Delays and overspend on enhancement programmes (schemes to improve network capacity or capability) such as Crossrail and Thameslink are well-known, but Network Rail’s underperformance was systemic across all main expenditure categories. It overspent against its budget for maintenance and renewals in every year, with a surge of expenditure in the final year in a last-ditch attempt to catch up on slippage of projects earlier in the control period.
The small and medium sized enterprise (SME) supply chain has somewhat benefited from this profligacy. Fairgrove has analysed the accounts of more than 400 direct SME suppliers to Network Rail with turnover data (or where turnover can be reasonably estimated), and our analysis reveals median turnover growth of 4% p.a. between 2014 and 2018 (inflation has averaged 2.4% p.a. during this period). Network Rail also publishes its spend by supplier (since the start of 2017). For the same group of companies, sales direct to Network Rail grew by 10% in 2017-18, and although the full set of data isn’t available (at the time of writing, 2019 figures have only been released to the end of September), it looks likely that 2018-19 will be another year of growth.
The fastest growing SME sectors are IT and On-Track Plant: the aggregate turnover of companies in these sectors grew by 9% p.a. from 2014-18, whilst Network Rail spend on both IT and On-Track Plant jumped by 60% between 2017 and 2018. Electrification suppliers grew turnover by a more modest 3% p.a. over the same period, but enjoyed a 65% rise in Network Rail revenues between 2017 and 2018.
For all of Network Rail’s overspend, the railways have remained under increasing strain. Key performance measures on timeliness and cancellations provide the hard data that substantiates the pain most rail commuters experience on a near-daily basis.
PPM = Public Performance Measure; shows the percentage of trains which arrive at their terminating destination within 5 minutes (for London & South East and regional services) or 10 minutes (for long distance services).
CaSL = Cancellation and Significant Lateness; shows the percentage of trains that are either (a) cancelled at origin, (b) cancelled en route, (c) the originating station is changed, (d) fail to make a scheduled stop at a station, or (e) significantly (>30 minutes) late.
The start of a new funding cycle (Control Period 6) has given Network Rail the opportunity to try something different. It has overhauled its operating model, devolving its operations to 13 route organisations (previously there have only been 8 routes, all led from the centre). It has reoriented itself towards becoming a much more customer-focused organisation, claiming to have a ‘renewed and relentless’ focus on ‘putting passengers first’. To prevent a repeat of overpromising and underdelivering on its mega-projects, enhancements spend has been carved out of the funding cycle, with each project now considered on a case-by-case basis. Work is ongoing to tackle ‘boom and bust’ spending, smoothing out the profile of expenditure across control periods. And a change in budgetary processes means Network Rail cannot overspend to the same degree as in CP5: a maximum of 10% of spend can be rolled-over into later years or accelerated into earlier years.
All in all, Fairgrove calculations show CP6 spend on the physical railway (maintenance, renewal and enhancement expenditure) is budgeted to be c. 5% higher (in real terms) than actual expenditure in CP5, driven by large increases in maintenance and renewals spend. This market growth should deliver an automatic boost to revenues in the supply chain.
Meanwhile, current government policy is for SMEs to benefit from 33% of central government procurement spend, either directly or indirectly via the supply chain, by 2022. Network Rail is ahead of plan, with SMEs already receiving 30% of its total spend in 2018-19, but the push for the extra 1% per year over the next three years should again directly translate into a more buoyant SME marketplace.
The private sector’s involvement in rail has historically been limited to train (rather than track) infrastructure, since the 2001 collapse of Railtrack and the formation of Network Rail. However, there has been an upward trend in investment outside of rolling stock (e.g. in stations, or IT expenditure). Private sector investment is likely to continue its upward trajectory, following the Rail Sector Deal struck between the government and the private sector in late 2018. This is likely to stimulate growth in the digital and data rail SME supply chain, with digital transformation of the railway at the heart of the sector deal.
Overall, Fairgrove is optimistic that the SME rail supply chain will enjoy strong growth (comparative to CP5) over the remainder of CP6. This is despite a relatively slow start: in the first six periods of this year (April to December 2019), renewals volumes were already at 10% behind plan. However, this is not atypical at the start of a new funding cycle, and the new budgetary processes should prevent this from accumulating.
Of course, fortunes will vary across the supply chain. Rail businesses tend to focus on certain asset types (e.g. track vs. signalling vs. electrification vs. earthworks) or project types (i.e. maintenance vs. renewals vs. enhancements), or are local / regional businesses working on specific lines (e.g. Anglia, the North West or Scotland).
Fairgrove supports both investors and SMEs in unpicking the growth opportunity in their particular domain and planning how best to capture it. Please contact Oli Lestner or Patrick Woodrow for further information.
- Annual Efficiency and Finance Assessment of Network Rail, Office of Rail and Road, July 2019
- CP6 Delivery Plan High Level Summary, Network Rail, March 2019
- Investment Report 2020, Rail Delivery Group, November 2019
- Network Rail’s Preparations to Deliver Efficiently in CP6, Office of Rail and Road, December 2019
- PR18 Final Determination Financial Framework, Office of Rail and Road,, September 2018
- Small and Medium Enterprise Action Plan, Department for Transport, June 2018
- Various Articles, Rail Technology Magazine, 2018-19
- Various Statutory Accounts, 2014-19