Network Rail faces £6bn cut in funding

Funding for Network Rail, the state-backed organisation that runs Britain's railways, may need to be cut by almost £6bn in future years, the industry's regulator said yesterday.

The Office of Rail Regulation published an initial assessment of the company's revenue requirement suggesting that it could fall from £22.7bn in the current five-year period from 2004 to 2009, to as little as £17bn in the following five-year period up to 2014. The assessment reflects the scope for further efficiency gains, a reduction in the amount needing to be spent on renewal work and the fact that Network Rail is underspending on its current budget anyway.

Government support for the rail industry is running at around £4bn a year - of which nearly half is accounted for by grants to Network Rail. But the Department for Transport has indicated that support could fall to about £3bn a year in future years.

Chris Bolt, the chairman of the ORR, said Network Rail's funding requirement in the 2009-14 period could be between £17bn and £20bn. That would average between £3.4bn and £4bn a year compared with the £4.55bn a year it is currently receiving in access charges. These are paid either directly by the Government in the form of grants or via the train operating companies using government subsidies and fare income.

Mr Bolt conceded that there was a fair degree of uncertainty about how much Network Rail would need and where it would come from, not least because the train operators are now being required to pay huge sums to the Treasury for the right to operate franchises. This week, FirstGroup agreed to hand over almost £2bn in premium payments in return for running the Greater Western and Thameslink/Great Northern franchises. Earlier this year, GNER paid £1.3bn to retain the East Coast Mainline.

The ORR said Network Rail could raise its efficiency by 10 to 34 per cent over the 2009-14 period on top of the 31 per cent improvement it has to achieve between 2004 and 2009. It also calculated that spending on renewals, which account for about half Network Rail's budget, could fall by between 6 and 24 per cent before any efficiency gains were taken into account.

Mr Bolt would not be drawn on whether the efficiency targets would result in job losses, pointing out that the ORR had also built into its assumptions 2 per cent annual passenger growth over the period, which could require Network Rail to maintain staffing levels.