Predictions for the Shaw Review on the Future Structure and Financing of Network Rail

Published on 2nd Feb 2016


In July 2015 the government asked the chief executive of High Speed 1, Nicola Shaw, to advise it on the long term future shape and structure of Network Rail.  As an initial response, the Shaw Review published a ‘scoping document’ in November 2015 which introduced the key challenges and summarised some of the complexity to be addressed in a reshaping of Network Rail.

The scoping document explains the perspectives from which reshaping options will be assessed, namely:

  • customer;
  • devolution; and
  • growth.

It also considers the various financing options available for a restructured Network Rail. At present, the Shaw Review team is consulting on these matters across the industry. The detailed report, in which its final recommendations on structure and financing will be made, is expected around the time of this year’s Budget (due on 16 March 2016).

In this paper, we:

  • make some observations on the ‘scoping document’;
  • offer predictions based on what is feasible and what we are hearing across the industry; and
  • look at the advantages and disadvantages of some of the options under consideration.

The quest for consensus

The current approach of the Shaw Review team is to seek consensus for change across the industry.

This is laudable insofar as the final recommendations will hopefully receive broad acceptance. However, it increases the likelihood that any changes to the structure or financing of Network Rail will be small-scale and incremental. Of course, Network Rail itself may be unlikely to agree wholeheartedly to changes which would see it broken up into separate Route level companies, even if doing so would arguably bring various benefits, such as providing ready comparators for cost and efficiency bench-marking, easier management of smaller entities, and more effective alliancing (whether formal or informal with TOCs operating on a particular route or in a region).

“System operation”: how Network Rail might be reshaped

One area to watch is the Office of Rail and Road’s current work on ‘system operation’, also under consideration by the Shaw Review team. System operation comprises the functions essential for efficient delivery of the whole rail network, maximising the benefits of its use.

This role can be split into short, medium and long term elements. Short term includes, for example, signalling and day-to-day management of disruption. Medium term might include timetabling and track access. Long term functions centre on the strategic decisions about the system as a whole, such as planning of enhancements.

A reshaped Network Rail might appropriately be streamlined towards the short and medium term functions, with government (as funder) expanding its strategic and planning role in enhancements.

Which comes first, the structure or the financing?

The Shaw Review team has been clear that it is not going to recommend any particular structure simply because that would remove Network
Rail’s debt from the government balance sheet. Presumably to underline that basic tenet of its review, it has approached the review by looking first at the possible structures that could be adopted, and only then will it move on to consider the financing options.  At some stage there will surely need to be a more iterative process than that, to ensure that the recommended structure is indeed one for which private sector financing will be available in the market.

From the information available to date, it does not appear that much time has been spent consulting with infrastructure funds or other
sources of private sector financing. Financiers will have their own requirements as to the structure and these will need to be factored in to the
recommendations.  How would they wish to see Network Rail (or parts of it) packaged for sale?  How will long-term return on investment be

Equally, from a political perspective, how can existing debt be moved off balance sheet in a way that secures good value for the tax-payer? And in a way which conforms with EU accounting rules as to what can truly be treated as sitting off the government’s books?

In terms of attracting this investment, the successful sale of the High Speed 1 concession gives a flavour of what might work in a Network Rail context, albeit that there is no one-size-fits-all solution. Attractive attributes include:

  • stable returns and long-standing patronage levels on the High Speed 1 route;
  • domestic passenger revenue being backed by a government guarantee; and
  • considerable opportunities to generate income from non-core assets on the route such as station retail space, car parks and depots.

Alongside this, a stable regulatory and political climate remains the critical backdrop to attracting investment in any infrastructure sector. This only serves to emphasise the importance of completing the current review phase for the rail industry and settling on a new structure promptly.


So, what will the Shaw Review recommend?  Here are our predictions:

  • No full-scale privatisation.
  • Greater devolution to route level, leading to the establishment of separate Network Rail subsidiaries at a future date, which could be privatised in the future.
  • A Network Rail parent company to retain a system operator role, which will be defined as covering medium term functions such as signalling, timetabling and track access  – but not planning of enhancements and other longer term strategic decisions.
  • DfT to take control of the enhancements programme; each Network Rail subsidiary to take charge of its own OMR (Operation, Maintenance and Renewals) expenditure.
  • ORR to monitor OMR on a comparative basis across the various Network Rail subsidiaries.
  • Management and culture: higher salaries to attract talent; a recommendation to engage with the diversity agenda to help address the skills shortage.
  • Wales: an infrastructure concession let initially for a 10 year period, with options for WAG to extend it if successful.

Structure and Funding Options: Advantages and Disadvantages

Here are our thoughts on the pros and cons of various financing and structural options:

Structure Funding Pros Cons
Full scale privatisation IPO of the parent company; or share sale to equity investor / consortium Enables private sector investment and removes £38bn debt from government balance sheet Politically unappealing as would be viewed as a “return to Railtrack”

Network Rail (and its debt) simply to big to privatise in one go in this way, particularly through sale of equity to one investor / consortium

Phased privatisation Series of IPOs / sales of Network Rail route-level subsidiaries, similar to the privatisations seen in the utilities sector Enables private sector investment and a phased reduction of the £38bn debt from government balance sheet

Enables comparative benchmarking of efficiencies by rail regulator

Political sensitivities about “return to Railtrack”

Fragmentation could lead to duplication of costs and inefficiencies.

A central system operator would still be required for some functions

Infrastructure concessions Premium payment for 30 – 50 year infrastructure concession (either build and operate, or operation of existing infrastructure), with ROI through track access charges and non-core assets e.g. property and depots Secures private sector investment in infrastructure

Enables comparative benchmarking

Unlikely to be viable for unprofitable parts of the network without significant subsidy

Fragmentation runs counter to the McNulty recommendations to reduce the number of interfaces across the industry and improve efficiencies

Private sector investment needs to be mandated to avoid Railtrack-style underspend on OMR

Vertically integrated concession ROI through farebox and track access charges Secures private sector investment in infrastructure More suited to parts of
the network where currently only one principal train operator

Potential regulatory limitations given EU rail
packages’ emphasis on separation of ‘train and track’

Project-specific PPP for enhancements ROI through track access charges payable to private sector funder Secures private sector investment in infrastructure Risk that track access charges on the enhanced  route will not cover the investment costs. Government support likely
Sales of non-core assets Network Rail already planning to sell £1.8bn of non-core assets Raises finances needed to fund cost-overruns on enhancement projects Loss of assets (e.g. stations and depots) will reduce future Network Rail income, creating a further funding gap.
Full nationalisation Network Rail currently a central government body following the ONS reclassification in 2014 Allows direct management by DfT of NR spending. Removes need for periodic reviews Means full impact of Network Rail debt sits on government balance sheet. Does not align with current government’s agenda.
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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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