GB rail industry financial information 2012-13 April 2014 UNCLASSIFIED 9425892 Contents Executive summary 4 Purpose 4 Summary of our findings 5 Figure 1: Industry income, expenditure and government funding in 2012-13 5 Table 1: Industry income, expenditure and government funding 7 Figure 2: Income and expenditure per passenger kilometre since 2010-11 8 Industry income and government funding 9 Figure 3: Sources of industry income including government funding 9 Figure 4: Sources of government funding 10 Figure 5: The contribution of government funding to total industry income by country 11 Figure 6: The contribution of government funding to total industry income by train operator 12 Figure 7: Contribution of regulated and unregulated fares to passenger income 14 Figure 8: Contribution of regulated and unregulated fares to passenger income by train operator 15 Industry expenditure 16 Figure 9: Breakdown of industry expenditure 16 Figure 10: Comparison of income and expenditure for GB, England, Scotland and Wales 18 Structure of the report 18 1. Introduction 19 Purpose of this report 19 Industry structure and rationale for our analytical approach 20 Figure 1.1 Geographical coverage of Network Rail’s ten regional operating routes 20 Figure 1.2 Alignment and overlap of rail franchise geographies and operating routes 21 Structure of the report 22 Care required in understanding and interpreting our analysis 22 Feedback 23 2. GB rail industry financial information disaggregated by country 24 Table 2.1: Summary of industry income, expenditure and government funding in 2012-13 24 Table 2.2: Industry income in 2012-13 25 Table 2.3: Industry expenditure in 2012-13 25 Table 2.4: Government funding of the rail industry in 2012-13 26 Table 2.5: Industry income, expenditure and government funding in 2012-13 using a cash-based approach for Network Rail’s capital expenditure 27 Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 2 Table 2.6: High level analysis of industry financial information in 2012-13 28 3. GB rail industry financial information disaggregated by regional operating route 29 Table 3.1: Summary of industry income, expenditure and government funding in 2012-13 by regional operating route 30 Table 3.2: Industry income in 2012-13 by regional operating route 31 Table 3.3: Industry expenditure in 2012-13 by regional operating route 32 Table 3.4: Government funding of the rail industry in 2012-13 by regional operating route 33 Table 3.5: Industry income and expenditure in 2012-13 using a cash-based approach for Network Rail’s capital expenditure by regional operating route 34 Table 3.6: High level analysis of industry financial information in 2012-13 35 4. GB rail industry financial information disaggregated by train operator 36 Table 4.1: Summary of industry income, expenditure and government funding in 2012-13 by train operator 37 Table 4.2: Government Premium / Funding in 2012-13 by train operator 38 Table 4.3: High level analysis of industry financial information in 2012-13 by train operator 39 5. Methodology 40 Source data 40 Disaggregation of financial information 41 A cash-based approach for Network Rail’s capital expenditure 45 Adjustments to determine industry income and expenditure 45 Industry surplus / (deficit) 46 Freight and open access operations 46 Table 5.1: Non-franchised train operators’ income and expenditure 46 High Speed 1 47 Table 5.2: Summary of HS1’s income and expenditure for the 12 months ended 31 March 2013 47 Non-financial information 48 Annex A – Geographical overlap of rail franchises and regional operating routes 49 Table A1: Distance travelled by train operators in each regional operating route in 2012-13 Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 3 49 Executive summary Purpose 1. The rail industry receives substantial income from its customers and taxpayers and they have a right to know where their money goes and what it delivers. This third annual publication of GB rail industry financial information helps deepen our understanding of the rail industry’s finances and strengthens accountability. It is one in a series of publications which we produce as part of our transparency programme. 2. We have increased the scope of this year’s analysis and we will seek to continue to work with the industry to develop and refine our analysis over time to inform the debate about the industry’s value for money. The structure and format of this report is largely the same as our 2011-12 publication1. We have expanded our analysis to include a breakdown of fare income to better understand the contribution of regulated and unregulated fares. Our analysis also includes new information about industry costs including the breakdown of fuel costs, corporation tax and dividend payments. 3. The overlapping geographical boundaries of the components of the GB rail industry make analysis of industry financial information at a sub-GB level complex. Whilst we consider that the methods and data sources that we have employed provide as reasonable and accurate analysis as is currently practicable, we recognise that there are multiple approaches to answering this problem and that care is needed in interpreting our analysis. Our analysis uses financial information provided to us by the industry; however, we recognise that there are other sources which may provide different numbers. Where appropriate we seek to show and explain these differences. A detailed explanation of the methodology underpinning our analysis is set out in Chapter 5. 4. Our analysis is primarily focused on Network Rail and franchised passenger operators income and expenditure. However we recognise that whilst in financial terms freight and open access operators are smaller components of the industry than franchised passenger services, they are nonetheless an important component of the rail industry value chain and we provide a high-level analysis of their financial contribution in Chapter 5. Our analysis does not explicitly focus on components of the rail industry which are not directly involved in the provision of rail services, in particular engineering contractors, rolling stock operating companies and other financial institutions. Whilst the supply chain 1 Our previous GB rail industry financial publications are available at http://orr.gov.uk/publications/reports/gb-rail-industryfinancial-information-2011-12. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 4 is important, it is not directly involved in the provision of railway services to customers. Our analysis also excludes the Crossrail construction project which is currently underway but does not yet form part of the operational railway2. 5. This report is the result of a collaborative effort by a number of organisations. We are particularly grateful to Network Rail, franchised train operating companies, the Rail Delivery Group (RDG), the Department for Transport (DfT), Transport Scotland, the Welsh Government, Transport for London and Merseytravel without whose support this work would not have been possible. We welcome feedback on the content of this report and in particular which parts of our analysis readers find most useful. Summary of our findings Overall observations 6. Key financial information and analysis about the Great Britain (GB) franchised rail industry, incorporating the national rail infrastructure manager, Network Rail, and 19 franchised train operating companies for the year 1 April 2012 to 31 March 2013 (2012-13) is summarised in Table 1 and Figures 1 to 10. More detailed analysis is presented in Chapters 2 to 4. Figure 1: Industry income, expenditure and government funding in 2012-13 Government DfT Transport Scotland Welsh Government TfL, PTE and other £2.8bn £0.7bn £0.1bn £0.4bn £4.0bn Franchise payments (£1.9bn) Franchise receipts (£1.9bn) Network grant (£4.0bn) Passenger income (£7.7bn) Other income (£0.7bn) Train operators Access and other charges (£2.0bn) Staff costs: £2.3bn Rolling stock charges: £1.5bn Other costs: £2.5bn £6.3bn Other income (£0.6bn) Network Rail Operating costs: Financing costs: Depreciation: £2.7bn £1.5bn £1.8bn £6.0bn 2 Information about investment in the Crossrail construction project is available at http://www.crossrail.co.uk/aboutus/funding#. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 5 7. The cost of running Britain’s railways was £12.3bn in 2012-13, a real terms3 increase of 2.1% compared to 2011-12 and a real terms increase of 0.1% compared to 2010-11. Half of these costs were incurred in train operations and half were incurred in managing the rail infrastructure. Our analysis suggests that the increase is mostly due to the industry’s response to increased passenger numbers over this period. After adjusting for growth in passenger numbers, industry expenditure increased by 0.2% from 2011-12 and decreased by 6.2% from 2010-11. 8. Government funding was £4.0bn in 2012-13, a real terms decrease of 4.2% compared to 2011-12 and 9.1% from 2010-11. There are significant variations in the level of government funding between England, Scotland and Wales. For example, our analysis shows that total funding varied from £2.19 per passenger journey in England to £7.60 per journey in Scotland and £9.33 per journey in Wales. 9. Whilst the industry continues to receive substantial government support, our analysis shows that passengers have covered an increasing proportion of the rail industry’s costs relative to taxpayers over the past three years; 62.6% of industry costs in 2012-13, compared to 61.7% in 2011-12 and 58.5% in 2010-11. 10. Total passenger income was £7.7bn in 2012-13. As shown in Figure 3, around two-thirds of this income was from unregulated fares and one-third from regulated fares4. We don’t think it is well understood that a significant proportion of industry funding comes from unregulated fares. 11. Passenger income increased in real terms by 3.6% compared to 2011-12 and by 7.1% compared to 2010-11. The majority of this increase is likely to be due to increased passenger numbers with the number of journeys increasing by 2.9% from 2011-12 and 10.4% from 2010-11. Our analysis shows that in real terms, average income per passenger journey increased by 0.7% from 2011-12 and decreased by 3.0% from 2010-11. 3 Consistent with our determination the November RPI uplift is used throughout our analysis to adjust for the effect of inflation. The retail price index (RPI) increased by 3.0% from November 2011 to November 2012. 4 As explained in Chapter 5 (Methodology), there are limitations to our analysis due to the restricted number of ticket types that are captured in the industry’s LENNON passenger income database. However, we consider that our analysis is likely to provide a reasonable attribution of income to the ticket types presented here. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 6 Table 1: Industry income, expenditure and government funding 2012-13 2011-12 a variance Passenger income 7,683 3.6% 7.1% Other income (incl. intra-industry) 3,280 5.8% 3.4% -2,002 12.2% 7.8% 8,960 2.7% 5.6% Train operating costs (incl. intra-industry) 8,288 4.2% 5.6% Infrastructure costs 5,984 2.3% -4.5% -2,002 12.2% 7.8% 12,269 2.1% 0.1% 4,016 -4.2% -9.1% 707 -21.5% 8.7% Passenger income per journey £5.12 0.7% -3.0% Passenger income per pass. km travelled £0.13 1.7% 0.3% Train operating costs per pass. km travelled £0.11 0.0% -1.7% Infrastructure costs per track km £0.19m 2.3% -4.4% Infrastructure costs per train km £11.79 2.0% -9.7% (£m except where stated) 2010-11 a variance Industry income Less intra-industry income Industry expenditure Less intra-industry expenditure Government funding Surplus / (deficit) b a Adjusted for RPI inflation. 2011-12 and 2010-11 financial information has also been restated from information published in previous versions of this publication as we now have better information. b As explained in Chapter 5 (Methodology) this is not an accounting profit in a statutory reporting sense. 12. Figure 2 shows an analysis of the annual change in real terms income and expenditure on a passenger kilometre basis, since the first year of our publication in 2010-11. Table 1 indicates that the cost of the industry is broadly unchanged from 2010-11 in real terms. Figure 2 shows that after taking in to account increasing use of the network, the industry cost for each kilometre travelled has reduced, particularly within Network Rail. Our analysis shows that taxpayers, rather than passengers, have benefited the most from a reduction in their contributions to the industry. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 7 Figure 2: Income and expenditure per passenger kilometre since 2010-11 £ per pass.km 0.25 -4.5% £0.13 -1.4% -6.4% £0.13 £0.13 0.2% £0.11 £0.11 0.20 -1.4% -1.7% 1.7% £0.11 0.0% 0.15 0.10 £0.12 £0.08 £0.07 -9.4% -6.0% -10.9% 0.4% 0.05 £0.02 -4.6% £0.02 -4.5% £0.02 0.00 2010-11 Passenger income a 2011-12 Income Government funding £0.10 £0.10 £0.07 2012-13 Other income 2010-11 2011-12 Expenditure Train operator expenditure 2012-13 Network rail expenditure Excluding intra-industry income and expenditure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 8 Industry income and government funding 13. The rail industry received total income of £12.9bn in 2012-13 of which 31% was provided by government, 59% by passengers and 10% from other income including car parking and property rentals. Figure 3: Sources of industry income including government funding Passenger income regulated, £2.6bn Net government funding , £4.0bn Passenger income unregulated, £5.0bn Other Network Rail income a, £0.6bn Other train operators income b, £0.7bn a Income from station retail outlets, property sales, freight and open access operators etc. b Income from car parking etc. Government funding 14. Our analysis shows that total government funding was £4.0bn in 2012-13, representing 30.9% of the industry’s total income5. Government contributed £4.0bn to Network Rail and in aggregate made a net contribution of £0.04bn to train operators, although there were significant regional variations. In 5 Our analysis uses financial information provided by Network Rail and train operators. There are differences between the amount of franchise receipts and payments reported by train operators and the amounts reported by government. These differences are shown in Table 4.2 and are primarily due to differences in the timing of recognition of grant income (as required by accounting standards) and how Passenger Transport Executive’s funding has been reported. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 9 real terms, total government funding has reduced by 4.2% compared to 2011-12 and by 9.1% compared to 2010-11. 15. In real terms, government funding of Network Rail decreased by 2.5% from 2011-12 and by 0.2% from 2010-11. This funding was set out in ORR’s 2008 Periodic Review of Network Rail’s revenue requirement for the funding period 2009-2014 (PR08)6 and it has declined largely as a result of the efficiency savings that Network Rail have made over this period. 16. Government’s net £0.04bn contribution to train operators included £1.98bn of payments to some train operators, which were nearly offset by £1.94bn of receipts from other train operators. Our analysis shows that this net funding of train operators reduced by £0.1bn from 2011-12 and by £0.4bn from 2010-11. 17. The sources of government funding of the rail industry are shown in Figure 4. Figure 4: Sources of government funding Transport for London, £0.1bn Passenger Transport Executives and other, £0.2bn Welsh Government, £0.1bn Transport Scotland, £0.7bn Department for Transport, £2.8bn 6 http://orr.gov.uk/what-and-how-we-regulate/regulation-of-network-rail/how-we-regulate-network-rail/previous-controlperiod/periodic-review-2008. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 10 18. As shown in Figure 5, there are significant variations in the level of government funding between England, Scotland and Wales. As a proportion of total income, England had the lowest level of government funding; 27% of total England industry income, compared to 56% for Wales and 61% for Scotland. Government funding varied from £2.19 per passenger journey in England to £7.60 per passenger journey in Scotland and £9.33 per passenger journey in Wales. Figure 5: The contribution of government funding to total industry income by country GB total England 0% -4% Scotland 31% 31% 27% 37% Wales -10% 31% 17% 0% 10% 56% 39% 20% 61% 24% 30% 40% 50% 60% Government funding as a percentage of total income Funding of train operations Funding of infrastructure 19. Figure 6 shows our analysis of total government funding (including the allocation of funding to Network Rail) as a percentage of total industry income across rail franchises. As shown in Figure 6, passengers on rural franchises were the greatest beneficiaries of government funding with passengers on intensively used London commuter and intercity franchises receiving substantially less support. Indeed our analysis suggests that passengers on two franchise operators (South West Trains and East Coast) did not receive any financial support from government7. 20. The regional differences in government funding largely reflect the fact that the rail network has a high fixed cost base, differences in passenger markets (e.g. competition from other modes of transport, lower and more dispersed demand on rural franchises) and government willingness to maintain services through financial support in areas where passenger and other industry generated income alone is insufficient to meet costs. The reasons for cost differences between train operators 7 We consider that our approach to allocate government funding of infrastructure costs to franchise areas is as reasonable and accurate an analysis as is currently practicable. However we recognise that there are multiple approaches to this and that care is needed in interpreting our analysis. The methodology underpinning our analysis is explained in Chapter 5. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 11 and the level of control train operators have over particular cost categories are explored further in paragraph 31. For these reasons the level of government funding received cannot be used as an indicator of the financial effectiveness of any individual train operator. Figure 6: The contribution of government funding to total industry income by train operator Net government funding 0% GB total -11% c2c Rail Chiltern -2% New Cross Country 3% East Coast -29% Greater Anglia Abellio First Great Western 33% 35% 40% 37% -2% 27% 36% 35% -19% 10% 29% -15% 20% 34% 29% LOROL 28% 30% Northern Rail 49% 19% 38% Merseyrail 39% 42% First ScotRail 8% Southeastern Southern 14% 25% 2% East Midlands Trains 31% 31% -17% South West Trains -30% First Capital Connect -30% First Transpenine Express London Midland -40% -20% 69% 64% 33% 25% 28% 11% 29% -1% 13% 0% 65% 40% 17% 26% 10% Funding of infrastructure 49% 36% 25% -9% Funding of train operators: Payments to operators (+ve)/Receipts from operators (-ve) 5% 35% Arriva Trains Wales Virgin Trains 22% 66% 45% 35% 20% 40% 60% 80% Government funding as a percentage of total income Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 12 Passenger income 21. Passenger income represents ticket income from passenger journeys as opposed to non-ticket industry income such as car parking and retail income at stations8. Passenger income was £7.7bn in 2012-13 which was £0.5bn (6.7%) higher than in 2011-12. Adjusted for inflation, passenger income was £0.3bn (3.6%) higher than in 2011-12. 22. As summarised in Table 1, the increase in passenger income compared to 2011-12 needs to be considered in the light of the passenger growth in 2012-13 with the number of passenger journeys increasing by 2.9% and total distance travelled by passengers increasing by 1.9%. The average passenger fare in 2012-13 was £5.129, an increase of 3.7%10 compared to 2011-12 and the average fare per passenger kilometre travelled was £0.13, an increase of 4.8% compared to 2011-12. Adjusted for inflation, the average passenger fare in 2012-13 increased by 0.7% and the average fare per passenger kilometre travelled increased by 1.7%. 23. The regional variations in passenger income in 2012-13 are significantly lower than the regional variations in the level of government funding discussed above. Per passenger journey, passenger income was highest in Wales (£5.85) followed by England (£5.16) and Scotland (£4.17). Per passenger kilometre travelled, passenger income was highest in England (£0.14) followed by Wales (£0.12) and Scotland (£0.09). 24. On a passenger km basis, there was a low variability of passenger income between train operators, which is perhaps surprising considering the different nature of the 19 franchises, covering both longer distance intercity operators, short distance commuter and rural operators11. London Overground received the highest passenger income per passenger kilometre travelled (£0.16 per passenger kilometre) and Merseyrail the lowest (£0.07 per passenger kilometre travelled). These differences will largely reflect the different services provided to passengers and government’s willingness to maintain services through subsidy in areas where passenger and other income alone is insufficient to meet industry costs. 25. Our analysis of the contribution of regulated and unregulated fares to passenger income is shown in Figures 7 and 8. Our analysis suggests that the majority (two-thirds) of passenger income was 8 Within the industry, passenger income is commonly known as farebox income. 9 Calculated by dividing total passenger income by the total number of passenger journeys. 10 11 Regulated fares increased by 5.9% in January 2012 and 4.2% in January 2013. Further details are available on ATOC’s website www.atoc.org. ORR publishes an index of the average price of rail fares. The index increased by 4.3% from January 2012 to January 2013 which is higher than suggested by our analysis. The variation may be due to the way the index is calculated as it does not easily capture changes in types of tickets available, e.g. one-off rates. A review of the methodology underpinning the rail fares index is currently underway. The coefficient of variation of passenger income per passenger kilometre travelled was 15.8% across train operators. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 13 generated from unregulated fares12. There are significant variances between the contributions from different ticket types to train operators’ revenues, which reflect the different markets in which they operate. For example, regulated standard season tickets typically contribute around 30% of the revenues of London and South East operators, whereas for long distance operators they account for less than 10% of revenues. Likewise, unregulated discounted tickets make a much greater contribution to long distance operators’ income than regulated fares compared to London and South East operators. Figure 7: Contribution of regulated and unregulated fares to passenger income13 Unregulated: First, 8.5%, £0.7bn Unregulated: Other, 0.4%, £0.03bn Regulated: Season, 19.5%, £1.5bn Regulated: Standard, 7.4%, £0.6bn Unregulated: Discount, 32.7%, £2.5bn Regulated: Discount, 7.6%, £0.6bn Unregulated: Season, 2.9%, £0.2bn Unregulated: Standard, 21.0%, £1.6bn 12 Our analysis also showed that 49% of all journeys were covered by unregulated fares. In practice the price of some unregulated fares are effectively capped by the price of regulated fares. The greater contribution of unregulated fares to total passenger income is mostly due to the greater use of unregulated fares on (more expensive) long-distance journeys. 13 We used the LENNON passenger income database to calculate the relative contribution of different fare types and applied this to train operators’ 2012-13 total passenger income to produce this analysis. As explained in Chapter 5 (Methodology), this data was for the calendar year 2012 and excludes some fare-types. However we consider that our approach provides a reasonable estimate of the contribution of different fare types to overall passenger income. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 14 Figure 8: Contribution of regulated and unregulated fares to passenger income by train operator GB c2c Chiltern New CrossCountry East Coast East Midlands Trains Abellio Greater Anglia First Great Western LOROL Merseyrail Northern Rail First ScotRail Southeastern South West Trains Southern First Capital Connect First Transpennine Express Arriva Trains Wales Virgin Trains London Midland 0% 10% 20% Regulated: Season Regulated: Discounted (Advance, Off-peak, Super off-peak) Unregulated: Standard - Anytime Unregulated: First (Season, Standard & Discounted) 30% 40% 50% 60% 70% 80% 90% 100% Regulated: Standard - Anytime Unregulated: Season Unregulated: Discounted (Advance, Off-peak, Super off-peak) Unregulated: Other Other income 26. The rail industry received £1.3bn of income in 2012-13 from sources other than passenger income, a decrease of 2.7% in real terms. Train operators received £0.7bn from car parking, property rental, catering and other sales. Network Rail received £0.6bn from its stations and property portfolio, and charges to freight and open access train operators. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 15 Industry expenditure 27. Total industry expenditure in 2012-13 was £12.3bn of which £6.3bn (51%) was incurred in train operations and £6.0bn (49%) was incurred in operating the rail infrastructure. Figure 9: Breakdown of industry expenditure Infrastructure financing costs, £1.5bn Depreciation (amortisation) of infrastructure capital expenditure, £1.8bn Infrastructure operating, maintenance and other costs, £2.7bn a Train operators' staff costs, £2.3bn Rolling stock charges, £1.5bn Train operators' other costs a, £2.5bn Fuel, train maintenance costs etc. Train operators’ expenditure 28. As shown in Table 1 and Figure 9, train operators’ expenditure excluding Network Rail charges was £6.3bn in 2012-13, a real terms increase of 1.9% compared to 2011-12. Taking account of inflation and passenger growth (i.e. the total distance travelled by passengers), train operators’ costs were unchanged compared to 2011-12. 29. Average train operator expenditure was £0.11 per passenger kilometre travelled. Using this measure, train operators’ expenditure was highest in Wales (£0.15 per passenger kilometre), followed by Scotland (£0.14 per passenger kilometre) and England (£0.11 per passenger kilometre). These variances are likely to reflect different levels of passenger usage (i.e. the average number of passengers on a train). Average train densities were 121 passengers per train in England, compared to 75 in Scotland and 67 in Wales. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 16 30. Average train operator expenditure was £12.38 per train kilometre travelled. Using this measure England had the highest average train operator costs (£12.77 per train kilometre), followed by Scotland (£10.44 per train kilometre) and Wales (£9.74 per train kilometre). These variances will likely reflect the different lengths of trains (trains in England have, on average, more vehicles per train), and also the type of trains that are in use (England has a higher proportion of higher cost rolling stock, for example, Pendolino trains). 31. There are significant variances in train operating costs between franchises. There will be many reasons for these variances including the nature of the franchise specifications, such as local geography and demographics, as well as other drivers of costs which are more controllable by train operators such as staff salaries. There are also other costs which are only partially controllable by train operators, for example, rolling stock leasing costs where train operators have only limited choice about what trains they can operate14. This report does not seek to investigate or explain the reasons for the differences in train operating costs across franchises. For the reasons stated above care is required in interpreting our analysis in this area and the information provided cannot be used to draw conclusions about financial performance of individual operators. However, this is clearly an important subject and by providing more transparent information about train operators’ costs we hope to inform the public debate about the value for money of the rail industry as a whole. 32. Train operators paid £2.0bn in track access and other charges to Network Rail, an increase of 12.2% compared to 2011-12. This increase is mostly due to increased fixed track access charges as set out in PR08. Infrastructure expenditure (Network Rail) 33. As shown in Table 1, Network Rail’s expenditure15 was £6.0bn in 2012-13, a real terms increase of 2.3% compared to 2011-12 and decrease of 4.5% compared to 2010-11. The increase from 201112 is largely due to increased traction electricity costs and increased compensation payments to train operators for unplanned engineering work. The decrease compared to 2010-11 is mostly due to lower maintenance and financing costs. 34. Average Network Rail expenditure was £0.19m per track kilometre. Using this measure, Network Rail’s expenditure was highest in England (£0.21m per track kilometre) followed by Scotland (£0.14m per track kilometre) and Wales (£0.11m per track kilometre). 14 For example, rolling stock charges paid by Virgin Trains were £302m and those paid by East Coast were £53m. A key driver for this variance is likely to be the age and type of rolling stock used by these operators. The average age of Virgin rolling stock is 9 years and this fleet mostly comprises Class 390 Pendolinos. The average age of East Coast’s fleet is 27 years and this fleet mostly comprises InterCity 225s (source: ORR Data Portal). 15 Our analysis also includes £14m of infrastructure expenditure by TfL on the core East London Line. For convenience, we generally only refer to Network Rail in this analysis. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 17 35. Network Rail spent £4.8bn on capital projects (renewals and enhancements to the network) in 2012-13. This expenditure was £3.0bn greater than the £1.8bn of amortisation of capital expenditure that ORR included in its PR08 determination and has been included as capex amortisation / depreciation in our industry costs analysis16. This difference represents additional investment and was funded by Network Rail borrowing. England GB total Figure 10: Comparison of income and expenditure for GB, England, Scotland and Wales Income Expenditure Income Passenger income Expenditure Scotland Net government funding Other income Income Train operations costs Infrastucture costs Expenditure Wales Income Expenditure 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 £ millions Structure of the report 36. Our objectives for this work are explained in Chapter 1. Financial information and analysis for the GB rail industry as a whole, and separately for England, Scotland and Wales is presented in Chapter 2. This information is then presented for each of Network Rail’s ten regional operating routes in Chapter 3 and for each of the 19 franchised train operators in Chapter 4. The methodology underpinning our analysis is explained in Chapter 5. Supporting information is included as an annex to the report. Our analysis is also available in Excel format at http://orr.gov.uk/__data/assets/excel_doc/0003/5673/industry-financials-2012-13.xls. 16 See Chapter 5 (Methodology) for an explanation of these differences. This variance is partly due to Network Rail rephasing a significant amount of renewals and enhancements work from earlier to later years in CP4. Further information is available in our annual efficiency and finance assessment of Network Rail 2012-13: http://orr.gov.uk/publications/reports/efficiency-and-finance-assessment. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 18 1. Introduction Purpose of this report 1.1 We consider that there is a need for greater transparency about the rail industry’s finances to strengthen accountability and to improve informed debate about the value for money of the industry for its funders, both passengers and governments. In its Rail 202017 report, the Transport Select Committee fully endorsed this need for more transparency about the rail industry’s finances. The UK Government is also seeking greater transparency in public services more generally and the Scottish Government is of the view that providing better information on public services will help to increase the usefulness of those services. 1.2 The complex structure of the British rail industry makes it difficult for stakeholders to understand the income, expenditure and government funding of the industry as a whole and we consider that transparency has a vital role to play in driving the behavioural changes necessary for rail industry reform. This third annual publication of Great Britain (GB) rail industry financial information18 aims to help address this need and to inform the debate about the industry’s value for money for its funders, i.e. passengers and taxpayers. 1.3 The information presented within this report will help: (a) passengers to understand what they are paying for; (b) allow a clearer picture of where governments are providing support; (c) interested parties to gain a better understanding of industry financial performance; (d) inform decisions on the future structure of the rail industry; (e) improve industry planning; (f) improve partnerships and co-operation within the industry; (g) enable more efficient regulation and incentives for the rail industry, e.g. to support efficiency and revenue sharing mechanisms; (h) support increased route level accountability and decision making; and (i) provide better benchmarking data of costs and efficiencies. 17 This is available at http://www.parliament.uk/business/committees/committees-a-z/commons-select/transportcommittee/inquiries/parliament-2010/rail-2020/. 18 Our 2011-12 publication is available at http://orr.gov.uk/publications/reports/gb-rail-industry-financial-information-2011-12. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 19 1.4 Our work provides a more comprehensive understanding of industry income and expenditure than has recently been available. It is the result of a collaborative effort by a number of organisations. We are particularly grateful to Network Rail, franchised train operating companies, the Rail Delivery Group (RDG), the Department for Transport (DfT), Transport Scotland, the Welsh Government, Transport for London (TfL) and Merseytravel19, without whose support this work would not have been possible. Industry structure and rationale for our analytical approach 1.5 The GB rail industry comprises the national rail infrastructure provider, Network Rail, franchised train operators which provide passenger services on the rail infrastructure, other freight and open access operators and the supply chain (rolling stock operating companies, engineering companies and other suppliers). The primary focus of our analysis is Network Rail and franchise train operators. 1.6 Network Rail manages the rail infrastructure through regional operating routes whose geographies are shown in Figure 1.1. The operating routes are Anglia, East Midland, Kent, London North East (LNE), London North West (LNW), Scotland, Sussex, Wessex, Western and Wales. Network Rail is a not-fordividend company which uses its profits to reinvest in the industry or pay down debt. Figure 1.1 Geographical coverage of Network Rail’s ten regional operating routes Source: Network Rail. 19 Merseytravel is the Merseyside passenger transport executive. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 20 1.7 There are currently 19 train operators, which operate passenger services under franchise from the governments. DfT is the franchising authority for the majority of England & Wales franchises (16). Transport Scotland, TfL and Merseytravel have franchising authority for the ScotRail, London Overground and Merseyrail franchises respectively. 1.8 As shown in Figure 1.2, there are significant overlaps between the geographies of rail franchises, and between the geographies of rail franchises and regional operating routes. For example, five franchises make use of the central spine of the west coast mainline (West Coast, West Midlands, London Overground, ScotRail and Southern)20. Taken together with the different sources of government funding, this structure significantly complicates understanding of the rail industry’s financial performance at a subGB level. Further details are available in Annex A. Concentration of train movements on an operator's primariy operating route (% of a train operator's distance travelled on its primary operating route) Figure 1.2 Alignment and overlap of rail franchise geographies and operating routes 100% 80% Localised operations 60% 40% Dispersed operations 20% Majority operator Minority operator 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Individual train operator's share of total usage on its primary route (% of the combined distance travelled (by all operators) on the primary operating route by one train operator Source: ORR analysis. 1.9 For these reasons there is not one best way to present rail industry financial information at a sub-GB level. For example, geographical disaggregation by operating route is arguably more useful for understanding regional variances in infrastructure costs, whereas disaggregation by train operators is 20 As another example, of the five train operators which travelled in excess of 2.5 million train kilometres on the London North East operating route (New Cross Country, East Coast Mainline, Northern Rail and First Capital Connect) only one (East Coast Mainline) did not travel at least this distance on at least one other operating route. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 21 arguably more useful for understanding variances in industry income. Using a mixture of both is perhaps most useful for understanding some items such as government funding. 1.10 In order to best achieve our objectives for this work we consider that it is most informative to present financial information separately at a national, regional and train operator (passenger service) level within this report. 1.11 Our analysis is primarily focused on Network Rail and franchised passenger operators income and expenditure. However we recognise that whilst in financial terms freight and open access operators are smaller components of the industry than franchised passenger services, they are nonetheless an important component of the rail industry value chain and we provide a high-level analysis of their financial contribution in Chapter 5. Our analysis does not explicitly focus on components of the rail industry which are not directly involved in the provision of rail services, in particular engineering contractors, rolling stock operating companies and other financial institutions. Whilst the supply chain is important it is not directly involved in the provision of railway services to customers. Our analysis also excludes the Crossrail construction project which is currently underway but does not yet form part of the operational railway21. 1.12 We have not attempted to analyse industry income and expenditure at a greater level of granularity, for example for individual train journeys. This would require a significant increase in the amount of data and analysis required, and its value would be questionable as many items of income and expenditure cannot accurately be attributed beneath the level at which costs are actually managed. Structure of the report 1.13 Chapter 2 summarises rail industry financial information for Great Britain as a whole, and separately for England, Scotland and Wales. Chapter 3 summarises this information for each of the ten regional operating routes and Chapter 4 summarises this information for each of the 19 train operators. 1.14 The methodology underpinning our analysis is explained in Chapter 5 (Methodology). Our analysis is also available in Excel format at http://www.orr.gov.uk/__data/assets/excel_doc/0003/11946/gb-railindustry-financials-2012-13.xls. 1.15 Annex A summarises the regional operations of franchised train operators. Care required in understanding and interpreting our analysis 1.16 For the reasons explained above, a significant challenge in developing our analysis was how to allocate financial information to the overlapping and misaligned geographies of franchises and operating routes. Whilst we consider that the methods and data sources that we have employed provide as reasonable and accurate an analysis as is currently practicable, we recognise that there is no one right 21 Information about investment in the Crossrail construction project is available at http://www.crossrail.co.uk/about-us/funding#. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 22 answer to this problem. The methods and data sources underpinning our analysis are explained in Chapter 5 (Methodology). 1.17 There might be some differences in numbers in the tables in this report due to rounding. Feedback 1.18 We welcome comments on the content of this document. These should be sent to: Customer correspondence team Office of Rail Regulation One Kemble Street London WC2B 4AN Email: contact.cct@orr.gsi.gov.uk Tel: 020 7282 2018 Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 23 2. GB rail industry financial information disaggregated by country 2.1 GB rail industry financial information for 2012-13 is presented in this chapter, together with analysis for England, Scotland and Wales. 2.2 Our analysis shows that that the cost of running the railway in 2012-13 was £12.3bn of which the majority (£10.6bn) was incurred in England, followed by £1.1bn in Scotland and £0.5bn in Wales. Government provided £4.0bn of funding. Passenger income was £7.7bn and other income (car parking, stations and property income etc.) was £1.3bn. Table 2.1 Summary of industry income, expenditure and government funding in 2012-13 Table 2.2 Industry income in 2012-13 Table 2.3 Industry expenditure in 2012-13 Table 2.4 Government funding of the rail industry in 2012-13 Table 2.4a Sources of government funding Table 2.5 Industry income, expenditure and government funding in 2012-13 using a cash-based approach for Network Rail’s capital expenditure22 Table 2.6 High level analysis of industry financial information in 2012-13 Table 2.1: Summary of industry income, expenditure and government funding in 2012-13 £m GB total England Scotland Wales 7,683 3,280 -2,002 8,960 7,108 2,733 -1,570 8,271 376 415 -355 436 199 132 -78 253 8,288 5,984 -2,002 12,269 7,061 5,126 -1,570 10,617 909 578 -355 1,133 317 280 -78 519 -3,309 -2,346 -696 -266 4,016 3,014 685 317 707 668 -12 50 a Industry income Passenger income Other income Less intra-industry income a Industry expenditure Franchised train operators expenditure Rail infrastructure expenditure Less intra-industry expenditure Income less expenditure Government funding Surplus / (deficit) a b b a Tables 2.2, 2.3, 2.4 and 2.4a provide more detailed information about income, expenditure and government funding. As explained in Chapter 5 (Methodology) this is not an accounting profit in a statutory reporting sense. 22 The approach adopted in Table 2.5 shows the amount of money that Network Rail spent on renewals and enhancements projects during the year rather than the depreciated expense (accruals based) approach shown in Table 2.1. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 24 Table 2.2: Industry income in 2012-13 £m GB total England Scotland Wales 7,683 739 8,422 7,108 654 7,762 376 40 416 199 45 243 1,109 583 849 2,541 -2,002 784 534 761 2,079 -1,570 273 38 64 375 -355 52 11 24 87 -78 8,960 8,271 436 253 GB total England Scotland Wales 2,302 387 233 1,460 1,769 2,063 17 57 8,288 1,988 322 215 1,264 1,355 1,854 17 46 7,061 213 39 17 147 337 148 1 6 909 101 25 1 49 77 60 0 4 317 939 497 1,013 1,781 1,496 0 258 5,984 804 438 872 1,483 1,282 0 247 5,126 84 47 89 213 140 0 5 578 51 12 52 85 74 0 6 280 Less: Network Rail income from franchised train operators (per NR) -2,002 -1,570 -355 -78 Total industry expenditure 12,269 10,617 1,133 519 Franchised train operators Passenger income Other Network Rail income Fixed charges Variable charges Other Less income from train operators Total industry income Table 2.3: Industry expenditure in 2012-13 £m Franchised train operators Staff costs Fuel costs – diesel Fuel costs – traction electricity (paid to NR) Rolling stock charges Network Rail charges Other operating expenditure Interest & exceptional expenditure/income Corporation tax Infrastructure Controllable opex Non-controllable opex a Maintenance Amortisation of capital expenditure Financing costs Corporation tax Other a This includes £14m that TfL spent on maintaining the East London Line (ELL). Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 25 Table 2.4: Government funding of the rail industry in 2012-13 £m GB total England Scotland Wales -1,939 1,231 746 38 -1,840 655 714 -471 -37 443 7 414 -62 133 24 96 -1,330 920 -410 -1,287 512 -775 -29 290 261 -15 118 103 3,999 -35 14 3,978 3,475 -3 14 3,486 303 -32 0 271 221 0 0 221 Net government funding (source: train a operators + Network Rail accounts) 4,016 3,014 685 317 Net government funding (source: a government + Network Rail accounts) 3,567 2,711 532 324 Total Train operators Network Rail 2,834 718 131 97 235 4,016 -859 447 131 83 235 38 3,693 271 0 14 0 3,978 Franchised train operators (source: a train operators) Franchise payments to government Franchise receipts from government Profit sharing/other revenue support Franchised train operators (source: a government) Franchise payments to government Franchise receipts from government Infrastructure (Network Rail) Government grants Rebates to government TfL (East London Line) Table 2.4a: Sources of government funding Sources of government funding £m Department for Transport Transport Scotland Welsh Government Transport for London b PTEs and other b a There are differences in the amount of Government funding recognised in train operators’ and government financial statements. We understand that this is largely due to the income recognition criteria set out in accounting standards which require train operators to match receipts from government in the period in which the relevant expenditure occurs in their income statements. Therefore, the timing of the recognition of this income in train operators’ financial statements will not necessarily match the expenditure shown in government’s financial statements. b This comprises Passenger Transport Executive (PTE) funding of Merseyrail (£75m) and Northern (£160m) which we are showing for the first time to increase transparency. Note that in previous publications we included PTE funding of Northern within the DfT line of this table. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 26 Table 2.5: Industry income, expenditure and government funding in 2012-13 using a cash-based approach for Network Rail’s capital expenditure23 £m Industry income Passenger income Other income Less intra-industry income Industry expenditure Train operators Network Rail non-capex expenditure Network Rail capex - renewals Network Rail capex – enhancements Less intra-industry expenditure Income less expenditure (cash basis) Government funding Income less expenditure including net government funding (cash basis) GB total England Scotland Wales 7,683 3,280 -2,002 8,960 7,108 2,733 -1,570 8,271 376 415 -355 436 199 132 -78 253 8,288 4,203 2,760 2,046 -2,002 15,294 7,061 3,643 2,283 1,931 -1,570 13,348 909 365 295 105 -355 1,320 317 195 182 10 -78 626 -6,334 -5,077 -883 -373 4,016 3,014 685 317 -2,318 -2,063 -199 -57 23 This approach shows the actual amount of money that Network Rail spent during the year. Table 2.1 presents the information consistent with the accruals-based accounting approach recognising the cost of an asset over its useful life. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 27 Table 2.6: High level analysis of industry financial information in 2012-13 GB total England Scotland Wales n/a 75.1% 17.0% 7.9% 30.9% 26.7% 61.1% 55.6% Government funding per passenger journey (£) 2.67 2.19 7.60 9.33 Government funding per passenger km travelled (£) 0.07 0.06 0.17 0.19 59.2% 63.0% 33.5% 34.9% Passenger income per passenger journey (£) 5.12 5.16 4.17 5.85 Passenger income per passenger km travelled (£) 0.13 0.14 0.09 0.12 24.17 24.70 21.32 21.11 Industry expenditure per passenger km travelled (£) 0.21 0.20 0.28 0.32 Train operator expenditure per passenger km travelled (£) 0.11 0.11 0.14 0.15 11.79 11.92 10.88 11.38 0.10 0.10 0.14 0.17 51.2% 51.7% 49.0% 46.1% 62.6% 67.0% 33.2% 38.2% Income (excl. gov funding) less expenditure per passenger journey (£) -2.20 -1.70 -7.73 -7.85 Income (excl. gov funding) less expenditure per passenger km (£) -0.06 -0.04 -0.17 -0.16 Government funding Share of government funding (%) Government funding / total income (%) Passenger income Passenger income / total income (%) Industry expenditure Industry expenditure per train km travelled (£) Network Rail expenditure per train km travelled (£) Network Rail expenditure per passenger km travelled (£) Train operator share of total costs (%) Income / expenditure Passenger income / industry expenditure (%) Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 28 3. GB rail industry financial information disaggregated by regional operating route 3.1 Our analysis of rail industry financial information for 2012-13 is presented separately for each of Network Rail’s ten regional operating routes in this chapter. 3.2 Our analysis shows that there are significant variations in industry income, expenditure and government funding across the ten regional operating routes. These variations are summarised in the Executive Summary. Table 3.1 Summary of industry income, expenditure and government funding in 2012-13 by regional operating route Table 3.2 Industry income in 2012-13 by regional operating route Table 3.3 Industry expenditure in 2012-13 by regional operating route Table 3.4 Government funding of the rail industry in 2012-13 by regional operating route Table 3.5 Industry income, expenditure and government funding in 2012-13 using a cash-based approach for Network Rail’s capital expenditure by regional operating route24 Table 3.6 High level analysis of industry financial information in 2012-13 24 This approach shows the actual amount of money that Network Rail spent during the year. Table 3.1 presents the information consistent with the accruals-based accounting approach recognising the cost of an asset over its useful life. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 29 Table 3.1: Summary of industry income, expenditure and government funding in 2012-13 by regional operating route Operating route £m Anglia Kent c London North East London North West East Midland Sussex Wessex Western Wales Scotland Total a Industry income Passenger income Other income Less intra-industry income a Industry expenditure Train operators Infrastructure Less intra-industry expenditure Income less expenditure Government funding Surplus a b c b a 919 296 -152 1,063 712 266 -169 809 1,085 467 -262 1,290 1,618 702 -431 1,889 466 174 -99 542 649 238 -126 761 917 285 -179 1,023 743 304 -152 894 199 132 -78 253 376 415 -355 436 7,683 3,280 -2,002 8,960 768 601 -152 1,216 816 438 -169 1,085 1,151 911 -262 1,801 1,909 1,417 -431 2,895 404 303 -99 608 582 414 -126 871 715 536 -179 1,072 717 505 -152 1,069 317 280 -78 519 909 578 -355 1,133 8,288 5,984 -2,002 12,269 -154 -277 -511 -1,007 -65 -109 -49 -175 -266 -696 -3,309 190 360 598 1,246 211 98 24 287 317 685 4,016 37 84 87 239 146 -11 -25 112 50 -12 707 Tables 3.2, 3.3 and 3.4 provide more detailed information about income, expenditure and government funding. As explained in Chapter 5 (Methodology) this is not an accounting profit in a statutory reporting sense. Care is required in comparing Kent to other operating routes due to some of Southeastern’s services in Kent use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 30 Table 3.2: Industry income in 2012-13 by regional operating route Operating route £m Anglia Franchised train operators Passenger income Other Infrastructure (Network Rail) Fixed charges Variable charges Other Less income from train operators Total industry income a Kent a London North East London North West East Midland Sussex Wessex Western Wales Scotland Total 919 56 975 712 59 771 1,085 126 1,210 1,618 159 1,777 466 50 517 649 67 716 917 69 986 743 67 810 199 45 243 376 40 416 7,683 739 8,422 69 64 107 240 65 53 89 207 147 77 117 341 233 144 166 543 57 41 26 124 48 52 71 171 72 55 89 216 93 48 96 237 52 11 24 87 273 38 64 375 1,109 583 849 2,541 -152 -169 -262 -431 -99 -126 -179 -152 -78 -355 -2,002 1,063 809 1,290 1,889 542 761 1,023 894 253 436 8,960 Care is required in comparing Kent to other operating routes due to some of Southeastern’s services in Kent use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 31 Table 3.3: Industry expenditure in 2012-13 by regional operating route Operating route £m Anglia Franchised train operators Staff costs Fuel costs – diesel Fuel costs – traction electricity (paid to NR) Rolling stock charges Network Rail charges Other operating expenditure Interest and exceptional expenditure / (income) Corporation tax Infrastructure (Network Rail) Controllable opex Non controllable opex b Maintenance Amortisation of capital expenditure Financing costs Corporation tax Other Less: Network Rail income from franchised train operators (per NR) Total industry expenditure a b Kent a London North East London North West East Midland Sussex Wessex Western Wales Scotland Total 211 47 36 190 0 32 334 71 31 512 87 53 104 32 7 187 1 28 228 16 28 222 68 1 101 25 1 213 39 17 2,302 387 233 178 116 177 0 111 137 339 4 165 231 304 2 450 378 416 -2 55 91 107 4 82 98 181 0 126 151 159 0 96 151 171 10 49 77 60 0 147 337 148 1 1,460 1,769 2,063 17 3 768 3 816 13 1,151 16 1,909 3 404 5 582 6 715 -2 717 4 317 6 909 57 8,288 93 64 116 167 144 0 17 601 68 50 74 123 106 0 17 438 158 69 153 254 220 0 57 911 228 113 262 403 349 0 62 1,417 45 20 52 94 81 0 10 303 66 44 51 123 106 0 24 414 73 57 77 162 140 0 27 536 73 21 87 156 135 0 33 505 51 12 52 85 74 0 6 280 84 47 89 213 140 0 5 578 939 497 1,013 1,781 1,496 0 258 5,984 -152 -169 -262 -431 -99 -126 -179 -152 -78 -355 -2,002 1,216 1,085 1,801 2,895 608 871 1,072 1,069 519 1,133 12,269 Care is required in comparing Kent to other operating routes due to some of Southeastern’s services in Kent use of the High Speed 1 rail infrastructure. This includes £14m that TfL spent on maintaining the East London Line (ELL). Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 32 Table 3.4: Government funding of the rail industry in 2012-13 by regional operating route Operating route £m Franchised train operators a (source: train operators) Franchise payments to government Franchise receipts from government Profit sharing / other revenue support Anglia Kent b London North East London North West East Midland Sussex Wessex Western Wales Scotland Total -200 44 -20 24 -318 199 -157 360 -151 3 -159 20 -452 0 -383 4 -62 133 -37 443 -1,939 1,231 31 64 52 47 109 12 152 247 24 7 746 -125 69 -67 250 -40 -127 -300 -133 96 414 38 -170 -24 -252 -92 -54 -210 -339 -145 -15 -29 -1,330 28 83 104 269 6 13 1 8 118 290 920 -143 59 -148 177 -49 -197 -337 137 103 261 -410 302 0 291 0 665 0 996 -1 251 0 225 0 325 0 420 0 221 0 303 -32 3,999 -35 14 0 0 0 0 0 0 0 0 0 14 315 291 665 995 251 225 325 420 221 271 3,978 Net government funding (source: a train operators + NR accounts) 190 360 598 1,246 211 98 24 287 317 685 4,016 Net government funding (source: a government + NR accounts) 173 350 516 1,172 202 28 -13 283 324 532 3,567 Franchised train operators a (source: government) Franchise payments to government Franchise receipts from government Network Rail Government grant to NR Less Network Rail rebates to Government TfL East London Line a There are differences in the amount of Government funding recognised in train operators’ and government financial statements. We understand that this is largely due to the income recognition criteria set out in accounting standards which require train operators to match receipts from government in the period in which the relevant expenditure occurs in their income statements. Therefore, the timing of the recognition of this income in train operators’ financial statements will not necessarily match the expenditure shown in government’s financial statements. b Care is required in comparing Kent to other operating routes due to some of Southeastern’s services in Kent use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 33 Table 3.5: Industry income and expenditure in 2012-13 using a cash-based approach for Network Rail’s capital expenditure by regional operating route Operating route £m Anglia Industry income Passenger income Other income Less intra-industry income Kent a London North East London North West East Midland Sussex Wessex Western Wales Scotland Total 919 296 -152 1,063 712 266 -169 809 1,085 467 -262 1,290 1,618 702 -431 1,889 466 174 -99 542 649 238 -126 761 917 285 -179 1,023 743 304 -152 894 199 132 -78 253 376 415 -355 436 7,683 3,280 -2,002 8,960 768 434 816 315 1,151 657 1,909 1,014 404 208 582 291 715 374 717 349 317 195 909 365 8,288 4,203 218 51 160 419 445 291 603 343 216 121 156 106 198 112 287 488 182 10 295 105 2,760 2,046 -152 1,318 -169 1,541 -262 2,282 -431 3,438 -99 851 -126 1,010 -179 1,220 -152 1,688 -78 626 -355 1,320 -2,002 15,294 -256 -733 -992 -1,549 -308 -248 -197 -794 -373 -883 -6,334 Government funding 190 360 598 1,246 211 98 24 287 317 685 4,016 Surplus / (deficit) (cash basis) -65 -373 -394 -304 -97 -150 -172 -507 -57 -199 -2,318 Industry expenditure Train operators expenditure Network Rail non-capex expenditure Network Rail capex - renewals Network Rail capex enhancements Less intra-industry expenditure Income less expenditure (cash basis) a Care is required in comparing Kent to other operating routes due to some of Southeastern’s services in Kent use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 34 Table 3.6: High level analysis of industry financial information in 2012-13 Operating route East Midland Sussex a London North East London North West 4.7% 9.0% 14.9% 31.0% 5.3% Anglia Kent Wessex Western Wales Scotland Total 2.4% 0.6% 7.1% 7.9% 17.0% 100.0% Government funding Share of government funding (%) Gov. funding / total income (%) 15.2% 30.8% 31.7% 39.7% 28.0% 11.4% 2.3% 24.3% 55.6% 61.1% 30.9% Gov. funding per pass. journey (£) 0.79 1.91 4.46 5.08 4.04 0.51 0.11 3.01 9.33 7.60 2.67 Gov. funding per pass. km (£) 0.03 0.08 0.07 0.10 0.07 0.02 0.00 0.05 0.19 0.17 0.07 Pass. income per pass. journey (£) 3.83 3.78 8.08 6.60 8.92 3.37 3.99 7.79 5.85 4.17 5.12 Pass. income per passenger km (£) 0.15 0.15 0.12 0.13 0.15 0.14 0.14 0.13 0.12 0.09 0.13 Industry exp. per train km (£) 24.46 30.58 24.51 24.84 22.35 24.51 22.89 23.71 21.11 21.32 24.17 Industry exp. per pass. km (£) 0.20 0.23 0.20 0.23 0.20 0.19 0.16 0.18 0.32 0.28 0.21 Train operator exp. per pass. km (£) 0.10 0.14 0.10 0.12 0.10 0.10 0.08 0.10 0.15 0.14 0.11 Network Rail exp. per train km (£) 12.08 12.35 12.40 12.16 11.13 11.67 11.45 11.20 11.38 10.88 11.79 Network Rail exp. per pass. km (£) 0.10 0.09 0.10 0.11 0.10 0.09 0.08 0.09 0.17 0.14 0.10 50.6% 59.6% 49.4% 51.0% 50.2% 52.4% 50.0% 52.8% 46.1% 49.0% 51.2% 75.6% 65.6% 60.2% 55.9% 76.7% 74.6% 85.5% 69.4% 38.2% 33.2% 62.6% -0.64 -1.47 -3.81 -4.11 -1.25 -0.57 -0.21 -1.83 -7.85 -7.73 -2.20 -0.03 -0.06 -0.06 -0.08 -0.02 -0.02 -0.01 -0.03 -0.16 -0.17 -0.06 Passenger income Industry expenditure Train operator share of total costs (%) Income / expenditure Pass. income / industry exp. (%) Income (excl. gov funding) less expenditure per pass. journey (£) Income (excl. gov funding) less expenditure per pass. km (£) a Care is required in comparing Kent to other operating routes due to some of Southeastern’s services in Kent use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 35 4. GB rail industry financial information disaggregated by train operator 4.1 Our analysis of rail industry financial information for 2012-13 is presented separately for each of the 19 train operators in this chapter. 4.2 Our analysis shows that there are significant variations in industry income, expenditure and government funding across the 19 train operators. These variances are summarised in the Executive Summary. 4.3 There will be many reasons for these variances including the nature of the franchise specifications such as local geography and demographics, as well as other drivers of costs which are more controllable by train operators such as staff salaries. There are also other costs which are only partially controllable by train operators, for example, rolling stock leasing costs where train operators have only limited choice about what trains they can operate25. This report does not seek to investigate or explain the reasons for the differences in train operating costs across franchises. For the reasons stated above care is required in interpreting our analysis in this area and the information provided cannot be used to draw conclusions about financial performance of individual operators. However, this is clearly an important subject and by providing more transparent information about train operators’ costs we hope to inform the public debate about the value for money of the rail industry as a whole. Table 4.1 Industry income, expenditure and government funding Table 4.2 High level analysis of industry financial information in 2012-13 Table 4.3 High level analysis of industry financial information in 2012-13 by train operator 25 For example rolling stock charges paid by Virgin Trains were £302m and those paid by East Coast were £53m. A key driver for this variance is likely to be the age and type of rolling stock used by these operators. The average age of Virgin rolling stock is 9 years and this fleet mostly comprises Class 390 Pendolinos. The average age of East Coast’s fleet is 27 years and this fleet mostly comprises InterCity 225s (source: ORR Data Portal). Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 36 Table 4.1: Summary of industry income, expenditure and government funding in 2012-13 by train operator Train operator Merseyrail 584 782 219 635 633 843 513 178 116 851 252 125 46 297 7,683 11 0 0 312 86 0 0 0 52 131 0 59 83 75 447 1,279 4 15 7 75 42 33 78 54 50 67 64 46 13 46 45 38 13 16 34 739 138 159 443 687 358 617 860 586 771 700 906 558 243 293 896 348 221 136 779 9,701 30 44 84 129 84 131 232 208 172 178 196 119 52 92 150 109 63 50 181 2,302 7 12 35 30 40 36 71 36 0 0 9 0 20 22 26 10 1 0 31 387 6 0 0 20 0 27 0 4 29 28 26 25 0 0 37 13 3 4 12 233 24 20 147 53 28 134 68 55 104 81 109 55 62 40 302 43 17 12 105 1,460 19 6 0 203 0 138 165 0 0 141 283 182 0 0 104 0 0 0 0 1,241 2 0 0 7 4 0 -3 6 2 5 6 2 4 5 6 0 2 4 5 57 44 82 164 247 193 153 335 242 456 255 261 167 91 120 251 174 130 54 430 3,849 131 163 429 689 348 618 869 552 764 687 890 550 229 279 877 349 216 124 764 9,529 7 -3 14 -2 10 -1 -9 34 7 13 16 8 14 14 19 -1 5 12 15 172 19 34 95 96 70 100 125 104 110 98 109 73 36 60 165 66 9 13 297 1,679 42 89 278 187 201 213 385 401 262 231 278 213 145 208 298 202 55 56 234 3,978 13 75 16 138 38 411 37 319 40 311 41 354 66 576 70 576 82 454 65 394 90 477 46 333 24 205 36 304 54 517 48 317 11 74 10 78 76 607 862 6,519 82 -7 126 12 381 30 265 54 258 52 414 -60 478 98 559 17 395 58 411 -18 457 20 301 32 206 -2 269 35 434 83 286 31 87 -13 79 -1 495 112 5,984 535 213 297 854 1,006 669 971 1,437 1,162 1,225 1,094 1,383 891 447 598 1,413 665 295 215 1,386 16,219 213 0 289 9 810 44 954 52 606 63 1,031 -61 1,347 89 1,111 51 1,159 66 1,099 -5 1,347 36 852 40 435 12 548 49 1,311 102 635 30 303 -8 203 11 1,259 127 15,513 707 -24 -83 -300 16 -212 -75 -219 -713 -348 -90 5 -31 -197 -340 -194 -262 -138 -131 -682 -4,016 -24 -74 -255 68 -150 -136 -130 -663 -282 -95 41 9 -185 -290 -92 -232 -145 -119 -555 -3,309 8 0 0 0 0 0 0 36 9 12 18 10 21 16 40 0 9 15 12 204 LOROL First Scotrail Arriva Trains Wales 305 0 London Midland Trans Pennine Express 612 21 Virgin Trains First Capital Connect 415 0 Abellio Greater Anglia South West Trains Southern South eastern a Northern Rail First Great Western East Midlands East Coast New Cross Country 145 0 Chiltern 134 c2c Rail Source £m Total Franchised Train operators Passenger income 1 Franchise receipts from government 1 Other b 1 Franchised train operator income 3 Staff costs 1 Fuel costs (diesel) b 1 Fuel costs (traction electricity paid to NR) 2 Rolling stock charges 1 Franchise payments to government 1 Corporation tax 1 Other (including Network Rail charges) 1 3 Franchised train operator expenditure Franchised train operator inc less exp Network Rail c 3 Franchised train operator access charges Net government grant 2 Other Network Rail income 3 3 3 Network Rail expenditure Network Rail income less expenditure c 3 3 Total industry income d Total industry expenditure 3 d 3 Industry income less expenditure c 3 Less net government funding e Industry income less expenditure excl. government funding c Dividends paid by train operator 3 3 3 Source: (1) train operators’ mgt accounts; (2) Network Rail’s regulatory financial statements; and (3) ORR analysis. As explained in para 4.3 there are many reasons for variances between costs/income and care is needed in interpreting our analysis. a Care is required in comparing Southeastern’s income and expenditure to other franchised train operators due to some of Southeastern’s services use of the High Speed 1 rail infrastructure. b Some train operators have indicated that the fuel costs (diesel) and Other (income) may in some cases include the additional cost/revenue from fuel sold to other operators. c As explained in Chapter 5 (Methodology) this is not an accounting profit in a statutory reporting sense. d Including government funding and intra-industry income and expenditure. e Calculated as the sum of the government funding of rail infrastructure and the franchise receipts and payments lines within this table. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 37 Table 4.2: Government Premium / Funding in 2012-13 by train operator Train operator Merseyrail -435 0 0 -141 -412 -228 0 -28 -131 0 0 0 0 -1,939 0 0 0 0 0 0 0 329 22 0 0 0 57 159 0 59 83 74 447 1,231 First Scotrail -156 LOROL -114 London Midland -203 Virgin Trains Arriva Trains Wales -66 Abellio Greater Anglia Trans Pennine Express First Capital Connect South West Trains Southern South – eastern b Northern Rail First Great Western East Midlands East Coast Total government funding (source: train operators + NR a accounts) Total government funding (source: government + NR a accounts) New Cross Country Rail infrastructure Government grant to Network Rail Less Network Rail rebates to government TfL East London Line -6 Chiltern Franchised train operators a (source: government) Franchise payments to government Franchise receipts from government -19 c2c Rail £m Franchised train operators a (source: train operators) Franchise payments to government Franchise receipts from government Franchise profit sharing and other revenue support Total 0 0 87 0 125 18 270 -17 64 0 129 46 -5 0 28 0 0 1 0 746 -19 -6 21 -203 11 -138 -165 312 86 -141 -283 -182 52 131 -104 59 83 75 447 38 -18 0 0 -191 0 -139 -169 0 0 -215 -315 -187 0 0 -97 0 0 0 0 -1,330 0 7 21 0 2 0 0 152 82 0 0 0 41 140 0 57 51 76 291 920 -18 7 21 -191 2 -139 -169 152 82 -215 -315 -187 41 140 -97 57 51 76 291 -410 42 89 280 188 202 213 385 401 262 231 278 213 146 208 300 202 41 56 261 3,999 0 0 -1 -2 0 0 0 0 0 0 0 0 -1 0 -2 0 0 0 -27 -35 0 14 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14 0 42 89 278 187 201 213 385 401 262 231 278 213 145 208 298 202 55 56 234 3,978 24 83 300 -16 212 75 219 713 348 90 -5 31 197 340 194 262 138 131 682 4,016 25 95 299 -4 204 74 215 553 344 15 -36 26 186 349 201 260 106 131 525 3,567 As explained in paragraph 4.3 there are many reasons for variances between train operators’ costs/income and care is needed in interpreting our analysis. a There are differences in the amount of Government funding recognised in train operators’ and government financial statements. We understand that this is largely due to the income recognition criteria set out in accounting standards which require train operators to match receipts from government in the period in which the relevant expenditure occurs in their income statements. Therefore, the timing of the recognition of this income in train operators’ financial statements will not necessarily match the expenditure shown in government’s financial statements. b Care is required in comparing Southeastern’s income and expenditure to other franchised train operators due to some of Southeastern’s services use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 38 Table 4.3: High level analysis of industry financial information in 2012-13 by train operator Train operator Virgin Trains London Midland 7.5% -0.4% 5.3% 1.9% 5.4% 17.7% 8.7% 2.2% -0.1% 0.8% 4.9% 8.5% 4.8% 6.5% 3.4% 3.3% First Scotrail Arriva Trains Wales Merseyrail Trans Pennine Express 2.1% LOROL First Capital Connect 0.6% Abellio Greater Anglia South West Trains Southern South eastern a Northern Rail First Great Western East Midlands East Coast New Cross Country Funding / total income Chiltern Share of government funding c2c Rail £m Government funding Total 17.0% 100% 14.0% 32.6% 39.6% -2.3% 36.4% 10.3% 19.5% 68.9% 32.6% 10.8% -0.5% 5.0% 48.6% 64.5% 17.2% 45.4% 48.5% 65.8% Funding per pass. journey (£) 0.63 3.86 8.98 -0.85 8.82 0.59 2.25 7.94 2.05 0.52 -0.02 0.29 7.92 11.72 6.39 4.32 1.10 3.13 64.2% 30.9% 8.19 2.67 Funding per pass. km (£) 0.02 0.07 0.09 0.00 0.09 0.02 0.04 0.34 0.08 0.02 0.00 0.01 0.12 0.29 0.03 0.12 0.18 0.21 0.25 0.07 Per pass. journey (£) 3.58 6.77 12.43 32.11 12.67 4.62 8.03 2.44 3.75 3.69 4.00 4.82 7.13 3.99 28.02 4.16 1.00 1.09 3.57 5.12 Per passenger km (£) 0.13 0.13 0.13 0.12 0.14 0.14 0.13 0.10 0.15 0.14 0.15 0.14 0.11 0.10 0.14 0.11 0.16 0.07 0.11 0.13 24.95 23.57 21.88 29.62 23.24 23.24 24.37 21.63 31.25 23.69 22.74 22.78 23.23 20.41 28.47 23.14 38.15 28.77 20.58 24.17 0.17 0.22 0.22 0.13 0.23 0.19 0.18 0.46 0.24 0.19 0.16 0.16 0.25 0.41 0.17 0.24 0.37 0.31 0.34 0.21 0.09 0.10 0.10 0.08 0.12 0.09 0.10 0.20 0.14 0.10 0.08 0.08 0.12 0.18 0.10 0.12 0.26 0.18 0.16 0.11 Network Rail exp. per pass. km (£) 0.08 0.11 0.12 0.05 0.11 0.10 0.08 0.26 0.09 0.09 0.08 0.08 0.13 0.23 0.07 0.13 0.11 0.13 0.18 0.10 Train operator share of total costs (%) 51.2% 48.5% 46.5% 58.7% 50.4% 47.6% 53.9% 43.2% 60.5% 50.6% 49.7% 47.8% 47.5% 43.6% 57.7% 47.7% 70.1% 57.7% 47.0% 51.2% Income / expenditure Pass. income / industry exp. (%) 31.8% 62.6% Passenger income Industry expenditure Industry exp. per train km (£) Industry exp. per pass. km (£) Train operator exp. per pass. km (£) 79.4% 59.2% 58.2% 95.4% 58.6% 74.0% 75.5% 22.3% 63.4% 76.1% 92.8% 88.9% 45.2% 24.3% 82.9% 46.1% 43.2% 24.3% Income (excl. gov funding) less expenditure per pass. journey (£) -0.63 -3.45 -7.66 3.58 -6.22 -1.07 -1.34 -7.38 -1.67 -0.55 0.19 0.08 -7.42 -10.01 -3.03 -3.83 -1.16 -2.86 -6.67 -2.20 Income (excl. gov funding) less expenditure per pass. km (£) -0.02 -0.07 -0.08 0.01 -0.07 -0.03 -0.02 -0.31 -0.07 -0.02 0.01 0.00 -0.12 -0.25 -0.02 -0.10 -0.19 -0.20 -0.20 -0.06 As explained in paragraph 4.3 there are many reasons for variances between train operator’s costs and income and care is needed in interpreting our analysis. a Care is required in comparing Southeastern’s income and expenditure to other franchised train operators due to some of Southeastern’s services use of the High Speed 1 rail infrastructure. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 39 5. Methodology Source data Rail infrastructure financial data 5.1 Network Rail publishes both statutory and regulatory financial statements for each financial year running 1 April to 31 March. The format of the regulatory financial statements is prescribed by ORR and includes comprehensive information about the company’s income and expenditure26. The regulatory financial statements have been disaggregated between England & Wales and Scotland since 2006-07 and since 2011-12 include statements on income and expenditure for each regional operating route. 5.2 Because the regulatory financial statements have (a) arguably more meaningful and detailed categorisations of income and expenditure and (b) include regionally disaggregated information, we have used financial information from Network Rail’s regulatory financial statements rather than statutory financial statements within our analysis. 5.3 Our analysis also includes a small component of expenditure by TfL on the East London Line. This information was provided in a submission to us by TfL. Franchised train operators financial data 5.4 There are currently 19 train operators which operate regional passenger services under franchise from government. As summarised in Annex A, DfT is the franchising authority for the majority of England & Wales franchises. Transport Scotland, TfL and Merseytravel have franchising authority for the ScotRail, London Overground and Merseyrail franchises respectively. 5.5 Statutory financial statements are available from Companies House for all train operators. However, due to the flexibility of the Companies Act financial reporting requirements, there are significant differences between the information presented within different train operators individual statutory financial statements. This limits the extent to which this information can be used to develop an understanding of whole industry income and expenditure. In particular: (a) train operators statutory financial statements have various financial year-ends complicating comparisons across consistent time periods27; 26 Our regulatory accounting guidelines for Network Rail are available at: http://orr.gov.uk/publications/guidance/regulatoryaccounts. 27 Of a randomly selected sample of eleven train operator financial statements downloaded from the Companies House website, two had year-ends in December, one in January, six in March and two in May. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 40 (b) items of income and expenditure are presented in different formats and with different levels of detail (in both the primary statements and the accompanying notes)28; and (c) differences in accounting policies may result in differences to reported income and expenditure. This is not expected to have a significant impact due to the similar nature of train operators’ businesses and our understanding of the similar accounting policies that are applied within the industry29. 5.6 Franchised train operators are also required to provide four-weekly management accounts to the franchising authorities as part of their franchise agreements. Using these management accounts avoids the problems noted above for the purposes of our analysis. In particular: (a) four-weekly management accounts can be collated over consistent twelve month periods, thereby avoiding the problem of different year-ends; and (b) the formats of management accounts provided to franchising authorities are largely standardised and include detailed information about income and expenditure. 5.7 For these reasons, with the agreement of train operators, we have used information from franchised train operators’ management accounts within our analysis. Disaggregation of financial information 5.8 There are various ways in which GB rail industry financial information can be analysed. These include: (a) at the national level for Great Britain in total and separately for England, Scotland and Wales; (b) at a regional level, for example, separately for each of Network Rail’s regional operating routes; (c) at the passenger service level, for example, separately for each franchise train operator, or in aggregate for similar types of passenger services (such as for long distance or regional operators); and (d) at a greater level of granularity, for example for individual train journeys. 5.9 As the usefulness of these different forms of analysis will depend on their intended use, there is no one right way, or best way to present our findings. For example, regionally disaggregated information is arguably more useful for understanding regional variances in investment, whereas disaggregation by service type is arguably more useful for understanding variances in passenger revenues. Using both is useful for understanding some items such as government funding. 5.10 In order to best achieve our objectives for this work30 we have chosen to present financial information separately at a national, regional operating route and franchise level within this report31. 28 For example, of the sample of eleven train operator financial statements, three did not disclose information about franchise payments to or from government. Within expenditure, non-staff operating costs were presented in five separate formats with different levels of detail. 29 For example, of the sample of eleven train operator financial statements, all reported under UK Generally Accepted Accounting Principles (‘UK GAAP’), used the same operating lease approach for train financing and had similar depreciation policies and asset lives for similar asset types. 30 These objectives are set out in Chapter 1 (Introduction). 31 Publishing information in this way is similar to the requirements of International Financial Reporting Standard (IFRS) 8 Operating Segments. IFRS 8 requires companies to segmentally report certain profit and loss and balance sheet items by geographical area and by business activity. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 41 5.11 We have not attempted to analyse industry income and expenditure at a greater level of granularity, for example for individual train journeys. Whilst this could provide additional useful information it would require a significant increase in the amount of data and analysis required, and its value would be questionable as many items of income and expenditure cannot currently be accurately attributed at a more detailed level. National and regional analysis – basis of disaggregation 5.12 The methodology underpinning the national and regional operating route analyses presented in Chapters 2 and 3 is explained below. Network Rail financial information 5.13 The majority of Network Rail’s regionally disaggregated financial information included within our analysis has been taken from Network Rail’s 2012-13 regulatory financial statements. To prepare this information, Network Rail classified income and expenditure into three categories dependent on how the items are managed: (a) directly attributed - route managed. Income and expenditure in this category is currently managed at route level, e.g. signallers. As there is alignment between management responsibility and route, such items can be directly attributed to an individual operating route; (b) centrally managed – attributable to routes. For these items, management responsibility may not be locally based, however, the income and expenditure are incurred locally, so attributing these items to the applicable operating route is relatively straightforward. These include the majority of renewals and enhancements costs; and (c) centrally managed – network wide. Income and expenditure in this category is incurred for the whole network, for example, insurance costs. Network Rail has allocated network-wide income and expenditure to operating routes based on the total number of train miles travelled in each operating route. 5.14 Our analysis includes some items of expenditure (depreciation/amortisation, financing costs, corporation tax and rebates) that Network Rail has reported separately for England & Wales, and Scotland but not separately between England & Wales operating routes. Within our analysis these items have been allocated between England & Wales operating routes in proportion to train kilometres travelled within each operating route. This is considered the most appropriate approach for allocating these items based on currently available information. It is consistent with Network Rail’s approach for allocating network wide costs, our approach for allocating train operators’ expenditure and our approach in previous years32. Franchised train operators’ financial information 5.15 As explained in Chapter 1 (Introduction) there are significant overlaps between the geographies of rail franchises, between the geographies of rail franchises and regional operating routes, and between the 32 We have previously investigated the accuracy of using train kilometres for allocating financing costs for the Scotland operating route. We have found that using train kilometres travelled for allocating financing costs resulted in an allocation which was £3m (2%) lower than Network Rail’s actual attribution for Scotland. This is considered sufficiently accurate for the purpose of our analysis. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 42 geographies of rail franchises and countries. These overlaps significantly complicate any analysis of franchised train operators’ income and expenditure between regional operating routes and between countries. Our methodology for allocating train operators’ income and expenditure is explained below. 5.16 Train operators’ expenditure has been allocated between regional operating routes, and between countries in proportion to train distance travelled in each operating route in 2012-1333. This is considered a reasonable approach for allocating expenditure across operating routes as the majority of train operators’ expenditure (staff, rolling stock, fuel and maintenance costs) is expected to vary closely with train distance travelled. It also seems a reasonable approach for allocating centrally incurred train operator overheads and franchise payments to and from government. 5.17 We have allocated train operators’ income between operating routes / countries using revenue information from the rail industry’s central ticketing system, LENNON34. As explained in previous publications, we consider that this provides a better allocation of income than using train distance travelled. Analysis of regulated and unregulated passenger income 5.18 The analysis of regulated and unregulated passenger income presented in Figures 6 and 7 was sourced from the LENNON database. The LENNON income data was mapped to regulated and unregulated ticket types to produce a Fares Index Dataset which enables an analysis of the contribution of regulated and unregulated ticket types for each train operator’s total passenger income. 5.19 Whilst we consider that the approach that we have used is sufficiently robust to provide a high level summary of the relative contribution of different ticket types to train operators’ income, we recognise that there are limitations with the approach that we have used. Firstly, the underlying LENNON income data was only available for the calendar year January to December 2012 whereas the rest of our analysis is for the period April 2012 to March 201335. Also, there are limitations to the number of ticket types that are captured in LENNON so some revenues may be excluded (for example, where a ticket covers more than one mode of transport). We think that this is more likely to affect the data for Merseyrail and London Overground due to the greater use of flexible travelcards by passengers on these operators. Franchise level analysis – basis of disaggregation 5.20 The methodology underpinning the franchise level analysis presented in Chapter 4 is explained below. 33 This information was provided to us by Network Rail and is considered the most appropriate currently available to the industry. Network Rail has identified some issues relating to route boundaries which it is currently improving. However, these are likely to have only a minor effect on our analysis. 34 The LENNON database holds information on the majority of rail tickets purchased in Great Britain and is used to allocate the revenue from ticket sales between train operating companies. 35 Our analysis of regulated and unregulated passenger income date was done on a calendar year basis as per the source data. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 43 Franchised train operators’ financial information 5.21 As explained earlier in this chapter, the train operator financial information included within our analysis has been taken from train operator’s cumulative management accounting submissions to government for the period 1 April 2012 to 31 March 2013. 5.22 As shown in Table 2.4, 3.4 and 4.2, there are differences in the amounts of government funding recognised in train operators’ and government’s financial statements. We understand that this is largely due to the income recognition criteria set out in accounting standards which require train operators to match receipts from government in the period in which the relevant expenditure occurs in their income statements. Therefore, the timing of the recognition of this income in train operators’ financial statements will not necessarily match the expenditure shown in government’s financial statements. These differences can be quite large in any one year for some train operators. 5.23 The operating model for London Overground is different to that used by other train operators. Instead of franchising the services out, Rail for London (RfL), a subsidiary of TfL, has entered into a concession agreement with London Overground Rail Operations Limited (‘London Overground’) to run services. This operating contract means that RfL retains risk on revenue, and reports the passenger income, whilst leaving the train operator to manage performance of the service. As the majority of ticket income is with RfL the revenue and cost split between the London Overground and RfL is very different to that between other train operators and government. To support our analysis, London Overground and TfL worked together to provide consolidated information for London Overground that is consistent with the financial information for other train operators. Network Rail financial information 5.24 Network Rail’s expenditure (and its income from non-franchised train operators) in each regional operating route has been allocated to franchises in proportion to train distance travelled by each franchise operator in that operating route. This is essentially the same approach as we have used for allocating train operators’ expenditure to regional operating routes. 5.25 We have investigated using alternative approaches to allocate Network Rail’s expenditure to franchises, for example, in proportion to fixed track access charges paid by franchise operators. As explained in our PR2008 determination36, England & Wales franchised train operators pay fixed track access charges on the basis of timetabled vehicle miles by region. Network Rail assign forecast maintenance and renewals expenditure on the basis of timetabled vehicle miles. Common costs such as British Transport Police were allocated to franchise operators at a national level. However, a different approach was adopted for Scotland because only ScotRail pays fixed track access charges in relation to these costs in Scotland. 36 This is available at http://orr.gov.uk/__data/assets/pdf_file/0011/2180/383.pdf. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 44 5.26 Given the amount of detailed work that Network Rail has undertaken over the past three years to attribute its costs at a regional level as part of its devolution to regional business units37 we consider that allocating Network Rail’s regional expenditure in proportion to train distance travelled by each franchise operator in each operating route provides the best allocation that is currently practicable for the purposes of this report. A cash-based approach for Network Rail’s capital expenditure 5.27 The majority of Network Rail’s renewals and enhancements expenditure is capitalised and amortised (or depreciated) over the life of the assets for regulatory and statutory financial reporting purposes. Network Rail’s amortisation in our PR08 determination is based on the long-run annual average investment expenditure that is required in order to maintain the network in a steady state38. 5.28 Network Rail’s expenditure presented in Tables 1, 2.1, 2.3, 3.1, 3.3 and 4.1 includes the annual depreciation / amortisation charge for capital expenditure taken from Network Rail’s regulatory financial statements39, rather than the amount of cash spent on these renewals and enhancements projects. This is consistent with the accruals-based accounting approach to recognise the cost of an asset over its useful life. However, it is also informative to understand the actual cashflows of the rail industry as well as income and expenditure as reported on an accruals basis. We have therefore presented industry income and expenditure, including Network Rail’s capital expenditure on a cash basis in Tables 2.5 and 3.5. Adjustments to determine industry income and expenditure 5.29 Similar to the consolidation adjustments that are required to prepare group statutory financial statements, adjustments are required to our analysis to avoid overstating industry income and expenditure for financial transactions that are internal to the industry. 5.30 Network Rail’s income from franchise operators includes fixed and variable usage charges, traction electricity charges and stations income. Network Rail’s regulatory financial statements include information on these items for each franchise operator. This information has been used to determine the appropriate consolidation adjustment to Network Rail’s income and train operator’s expenditure to avoid overstating industry income and expenditure. 5.31 Franchise operators perform a variety of services on behalf of other operators including station access, train maintenance and staffing. However, franchise operators have informed us that these services typically represent less than 2% of turnover. No adjustment has been made in our analysis for this internal industry income on the grounds of materiality. 37 See http://www.networkrail.co.uk/devolution.aspx for further details. 38 See Chapter 15 of our PR08 determination for further details. 39 Our regulatory approach for calculating the amortisation of capital expenditure is explained in Chapter 15 of the PR08 determination. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 45 Industry surplus / (deficit) 5.32 Table 1, and similar disaggregated tables included within our report, show the net difference between industry income and expenditure (either a surplus or deficit) based on companies’ management and regulatory accounting information. This amount will be different to aggregate statutory profits due to statutory financial reporting adjustments for the treatment of deferred tax, pension schemes, derivative fair values, dividends etc. There are also timing differences between Network Rail’s revenue and expenditure due to its ability to phase the timing of its expenditure differently within a control period compared to the assumption in our periodic review. Freight and open access operations 5.33 To improve transparency about the finances of the whole rail industry, we have also undertaken a limited analysis using the most recently available statutory financial statements, to estimate the income and expenditure of freight and open access train operators. Table 5.1: Non-franchised train operators’ income and expenditure £m Freight operators Turnover Operating costs Other costs / income Profit after tax 90 151 429 21 60 85 147 429 21 56 -2 -1 10 0 -2 3 3 10 0 2 181 932 173 911 -2 3 6 24 27 27 0 0 65 23 115 60 22 109 -1 1 0 5 0 5 829 777 38 91 1 a GB Rail Freight (part of the Eurotunnel Group) a Colas Rail (part of the Colas Group) a DB Schenker (part of Deutsche Bahn AG) a Mendip b Direct Rail Services (part of the Nuclear Decommissioning Authority) b Freightliner (part of the Freightliner Group) 2 Open access operators a Grand Central (part of Deutsche Bahn) a Heathrow Express (part of Heathrow Airport Holdings) b First Hull Trains (part of First Group) Open access operators (international) a c Eurostar (owned by SNCF & LCR & NMBS/SNCB ) a Year ended 31 December 2012. Year ended 31 March 2013. c Société Nationale des Chemins de fer Français & London and Continental Railways & Nationale Maatschappij der Belgische Spoorwegen / Société nationale des chemins de fer belges. 1 Freight operators paid £54m of access charges to Network Rail in 2012-13 (source: Network Rail). 2 Open access operators paid £23m of access charges to Network Rail in 2012-13 (source: Network Rail). b 5.34 Care is required in using this analysis due to some freight operator financial statements including nonGB freight specific business activities. For example, Colas Rail’ s business includes the provision of rail maintenance machinery (so called yellow plant), so Table 5.1 overstates Colas Rail’s income and costs from freight by the same amount. Similarly, we understand that GB Rail Freight’s income and costs include Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 46 the company’s Eurotunnel activities and that that some of DB Schenker’s freight activities are managed and reported under different legal entities. Table 5.1 has also not been adjusted for the different accounting periods covered in these companies’ financial statements. 5.35 As explained in Chapter 1 (Introduction), our analysis for the industry (in Chapters 2 to 4) does not include freight and open access train operators’ income and expenditure as, financially, these are smaller components of the industry than franchised train operators, information is less readily available for freight and open access train operators and there is a lower need for public accountability as they are not direct recipients of government support. 5.36 Our analysis includes Network Rail’s income from freight (£54m) and open access operations (£23m) in 2012-1340. Our analysis also includes, but does not separately identify, Network Rail’s costs incurred from freight and open access operations so as not to overly complicate our analysis41. High Speed 1 5.37 To improve transparency about the finances of the whole rail industry, we have included below some high level analysis of HS1, the rail infrastructure concession that connects London to the Channel Tunnel. 5.38 The focus of our analysis is the GB franchised rail industry and our analysis does not explicitly include High Speed 1 Ltd (‘HS1’), due to the difficulty of reliably separating HS1’s costs arising from national and international train operations42. However, our analysis does include franchised train operators’ income and expenditure from operations on HS1 (specifically the Southeastern train operator). 5.39 HS1’s latest statutory financial statements are for the 12 months ended 31 March 2013 and are summarised in Table 5.2. Table 5.2: Summary of HS1’s income and expenditure for the 12 months ended 31 March 2013 £m Turnover 292 Operating expenditure -216 Net interest payable -156 Reversal of impairment of fixed assets 653 Profit before tax 573 Increase in cash 159 5.40 Excluding the one-off impairment reversal, HS1 made an approximate £80m loss on its day-to-day operations, and its cash reserves increased by approximately £159m during the 12 month period covered 40 These items are included within the Network Rail other income category. 41 As part of our 2013 periodic review we estimated that freight avoidable costs are around £300 to £400m per annum. This represents the element of Network Rail’s fixed costs which we estimated is attributable to freight services. 42 This is a similar issue to the difficulty of separately identifying Network Rail’s infrastructure costs in relation to freight and open access operations which is explained above. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 47 in our analysis. Extending our analysis to including HS1 would therefore not have a significant effect on our analysis. Non-financial information 5.41 We have included some non-financial information in our analysis to inform users’ interpretation of the financial information presented. This non-financial information has been taken from the ORR data portal, ORR’s official database of railway statistics43. 43 Information about National Rail Trends is available at http://orr.gov.uk/statistics/data-portal. Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 48 Annex A – Geographical overlap of rail franchises and regional operating routes Table A1: Distance travelled by train operators in each regional operating route in 2012-13 Franchise Franchise operator Franchising authority Essex Thameside Chiltern Cross Country East Coast East Midlands Greater Anglia Greater Western Northern South Eastern South central South Western Thameslink Great Northern Trans Pennine Express Wales & Borders West Coast West Midlands London Overground Merseyrail Electrics ScotRail c2c Rail Chiltern New Cross Country East Coast East Midlands Trains Abellio Greater Anglia First Great Western Northern Rail Southeastern Southern South West Trains First Capital Connect First Transpennine Express Arriva Trains Wales Virgin Trains London Midland LOROL Merseyrail First ScotRail DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT DfT TfL Merseyside PTE TS Total train distance travelled (km millions) Anglia Kent LNE LNW Midland Sussex Wessex Western Wales Scotland Total train km travelled (millions) 6.8 0.0 1.2 0.0 1.2 33.9 0.0 0.0 0.0 0.0 0.0 1.9 0.0 0.0 0.0 0.0 4.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 31.6 2.7 0.0 1.0 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 6.4 19.3 4.7 0.0 0.0 23.6 0.0 0.0 0.0 11.1 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.2 8.1 0.0 1.5 0.0 0.1 21.5 0.0 0.7 0.0 0.0 7.5 3.8 32.4 22.3 1.2 6.6 0.8 0.0 0.0 4.3 0.0 15.1 0.0 0.0 0.4 0.0 0.0 0.0 7.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.0 0.4 29.0 0.1 4.0 0.0 0.0 0.0 0.0 1.5 0.0 0.0 0.0 0.0 1.6 0.0 0.0 0.0 3.3 0.0 0.0 2.7 39.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 7.9 0.0 0.0 0.0 35.2 0.0 0.0 0.0 0.7 0.0 0.0 0.1 0.0 1.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 0.0 3.3 0.0 0.0 0.0 0.0 0.0 0.0 19.4 0.6 0.3 0.0 0.0 0.0 0.0 0.0 2.0 2.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.1 0.0 3.0 0.0 0.0 0.0 44.6 6.8 10.4 32.6 21.7 22.4 33.9 42.5 45.5 32.0 35.1 39.9 25.3 17.0 23.4 36.0 23.6 7.6 6.5 45.4 49.7 35.5 73.5 116.5 27.2 35.5 46.8 45.1 24.6 53.1 507.6 Operating route Office of Rail Regulation | April 2014 | GB rail industry financial information 2012-13 49 © Crown copyright 2014 You may reuse this information (excluding logos) free of charge in any format or medium, under the terms of the Open Government Licence. 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