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Moving from a national level EBS mechanism to a regional level mechanism could increase the percentage improvement in NR performance that train operators would need to drive in order for NR to break even from an outperformance-only EBS
misc · 2011 · scenario_analysis
Moving from a national level EBS mechanism to a regional level mechanism could increase the percentage improvement in NR performance that train operators would need to drive in order for NR to break even from an outperformance-only EBS
 The relative attractiveness of an outperformance-only EBS mechanism and a symmetrical mechanism depends on how TOCs price these two mechanisms, and this is uncertain
misc · 2011 · diagnosis
The relative attractiveness of an outperformance-only EBS mechanism and a symmetrical mechanism depends on how TOCs price these two mechanisms, and this is uncertain
 Assessment of Option 2, outperformance only Regional EBS, and comparison with symmetrical EBS mechanism
misc · 2011 · comparison_table
Assessment of Option 2, outperformance only Regional EBS, and comparison with symmetrical EBS mechanism
 Potential ways of addressing the Option 2 negative scores
misc · 2011 · strategic_options
Potential ways of addressing the Option 2 negative scores
 Stakeholders at one of L.E.K.’s workshops suggested that NR could take a share of TOC revenue in exchange for a reduction in FTAC
misc · 2011 · strategic_options
Stakeholders at one of L.E.K.’s workshops suggested that NR could take a share of TOC revenue in exchange for a reduction in FTAC
 A percentage revenue share rate in the range of 5-20% might be appropriate to provide sufficient incentive to NR without unduly blunting TOCs' incentives
misc · 2011 · strategic_options
A percentage revenue share rate in the range of 5-20% might be appropriate to provide sufficient incentive to NR without unduly blunting TOCs' incentives
5-20% — Revenue share percentage
 TOCs' schedule 4 and 8 receipts from NR should be included in the revenue share arrangement. This would minimise the risk of perverse incentives
misc · 2011 · scenario_analysis
TOCs' schedule 4 and 8 receipts from NR should be included in the revenue share arrangement. This would minimise the risk of perverse incentives
4 — TOC revenue
 L.E.K. tested the revenue share concept at two subsequent stakeholder events. The response was mixed but generally positive
misc · 2011 · case_study
L.E.K. tested the revenue share concept at two subsequent stakeholder events. The response was mixed but generally positive
 Assessment: Option 3: NR shares TOC revenue
misc · 2011 · comparison_table
Assessment: Option 3: NR shares TOC revenue
 The sharing of TOC out/underperformance is an additional feature of Option 4 which is not included in Options 1-3. There are a number of significant issues with this aspect of the mechanism
misc · 2011 · strategic_options
The sharing of TOC out/underperformance is an additional feature of Option 4 which is not included in Options 1-3. There are a number of significant issues with this aspect of the mechanism
 TOC stakeholders are very strongly against the imposition of a full version of the cost and revenue sharing mechanism
misc · 2011 · key_messages
TOC stakeholders are very strongly against the imposition of a full version of the cost and revenue sharing mechanism
 Assessment: Option 4: Full scope for performance relative to a defined baseline
misc · 2011 · comparison_table
Assessment: Option 4: Full scope for performance relative to a defined baseline
 TOCs could be given a partial exposure to changes in FTAC charges (Option 5) in order to incentivise them to proactively engage with the ORR during periodic reviews
misc · 2011 · strategic_options
TOCs could be given a partial exposure to changes in FTAC charges (Option 5) in order to incentivise them to proactively engage with the ORR during periodic reviews
£800m — FTAC charges
 ... However, there would be a number of implementation challenges with the partial FTAC exposure approach
misc · 2011 · problem_statement
... However, there would be a number of implementation challenges with the partial FTAC exposure approach
 TOCs could be given partial exposure to changes in the ORR's efficient expenditure determination for OMR (Option 6) as an alternative to partial exposure to FTAC. On balance, L.E.K. has a preference for Option 6 over Option 5
misc · 2011 · strategic_options
TOCs could be given partial exposure to changes in the ORR's efficient expenditure determination for OMR (Option 6) as an alternative to partial exposure to FTAC. On balance, L.E.K. has a preference for Option 6 over Option 5
 Assessment: Option 5: Partial exposure to changes in FTAC at periodic reviews
misc · 2011 · comparison_table
Assessment: Option 5: Partial exposure to changes in FTAC at periodic reviews
 Assessment: Option 6: Partial exposure to changes in OMR baseline at periodic reviews
misc · 2011 · comparison_table
Assessment: Option 6: Partial exposure to changes in OMR baseline at periodic reviews
 Potential ways of addressing the Option 6 negative scores
misc · 2011 · strategic_options
Potential ways of addressing the Option 6 negative scores
 VTAC rates could be increased to give NR an incentive to accommodate additional train services
misc · 2011 · strategic_options
VTAC rates could be increased to give NR an incentive to accommodate additional train services
 A VTAC based incentive mechanism could be an improvement on the status quo. However, Option 3 appears to be a more attractive way of incentivising NR to accommodate additional traffic
misc · 2011 · strategic_options
A VTAC based incentive mechanism could be an improvement on the status quo. However, Option 3 appears to be a more attractive way of incentivising NR to accommodate additional traffic
 Assessment: Option 7: Higher VTAC rates
misc · 2011 · comparison_table
Assessment: Option 7: Higher VTAC rates
 At four workshops, stakeholders put forward the proposal that the cost / revenue sharing mechanism should be based on bespoke, “line-of-sight”, deals rather than a more comprehensive sharing mechanism
misc · 2011 · strategic_options
At four workshops, stakeholders put forward the proposal that the cost / revenue sharing mechanism should be based on bespoke, “line-of-sight”, deals rather than a more comprehensive sharing mechanism
 There are many different types of “bespoke, line-of-sight deals” ranging from a simple handshake to agree a different way of working through to a joint venture or other form of alliance
misc · 2011 · strategic_options
There are many different types of “bespoke, line-of-sight deals” ranging from a simple handshake to agree a different way of working through to a joint venture or other form of alliance
 Bespoke, line-of-sight deals are not a new concept. There are many examples of where NR and train operators have reached commercial agreements on issues of common interest
misc · 2011 · case_study
Bespoke, line-of-sight deals are not a new concept. There are many examples of where NR and train operators have reached commercial agreements on issues of common interest
 Stakeholders highlighted that many of the larger VfM improvements would require some change or override to contractual or regulatory mechanisms. It is often very difficult to obtain the necessary approvals from the DfT or ORR
misc · 2011 · problem_statement
Stakeholders highlighted that many of the larger VfM improvements would require some change or override to contractual or regulatory mechanisms. It is often very difficult to obtain the necessary approvals from the DfT or ORR
 A cultural change would be required in order for bespoke, line-of-sight deals to make a significant contribution to improving rail industry VfM. The industry needs to move from a centralised, contract based approach to a more devolved, relationship based approach
misc · 2011 · strategic_options
A cultural change would be required in order for bespoke, line-of-sight deals to make a significant contribution to improving rail industry VfM. The industry needs to move from a centralised, contract based approach to a more devolved, relationship based approach
 Horizontal separation of NR would be an important enabler of bespoke line-of-sight deals. However, funders and the ORR would also need to carry out a number of actions
misc · 2011 · implementation_plan
Horizontal separation of NR would be an important enabler of bespoke line-of-sight deals. However, funders and the ORR would also need to carry out a number of actions
 Option 8 is a carrot-based option not a stick-based option. Allowing train operators and NR to develop their own approach to bespoke line-of-sight deals would maximise the scope for innovation
misc · 2011 · strategic_options
Option 8 is a carrot-based option not a stick-based option. Allowing train operators and NR to develop their own approach to bespoke line-of-sight deals would maximise the scope for innovation
 Assessment: Option 8: Bespoke line-of-sight deals
misc · 2011 · comparison_table
Assessment: Option 8: Bespoke line-of-sight deals
 Options 3, 7 and 8 appear to be the most attractive in the short term. However, Options 3 and 7 are focussed on the same objective
misc · 2011 · comparison_table
Options 3, 7 and 8 appear to be the most attractive in the short term. However, Options 3 and 7 are focussed on the same objective
 Achieving better alignment of incentives should be viewed as a journey. It is important that the industry makes the first steps on that journey imminently in order to set expectations for industry participants
misc · 2011 · key_takeaways
Achieving better alignment of incentives should be viewed as a journey. It is important that the industry makes the first steps on that journey imminently in order to set expectations for industry participants
 Indicative timeline for implementation programme
misc · 2011 · timeline
Indicative timeline for implementation programme
 The GB rail sector is relatively complex. It comprises a large number of public and private sector organisations which interact through a complex set of contractual, regulatory and governance arrangements
misc · 2011 · process_diagram
The GB rail sector is relatively complex. It comprises a large number of public and private sector organisations which interact through a complex set of contractual, regulatory and governance arrangements
 Total GB rail industry revenue is c.£7.9bn and costs are c.£12.9bn p.a.
misc · 2011 · process_diagram
Total GB rail industry revenue is c.£7.9bn and costs are c.£12.9bn p.a.
£12.9bn — Industry cost/revenue
 Passenger train operators: There are 19 franchised passenger rail operators and a further 4 open access passenger rail operators. All operators are private sector except East Coast which is temporarily in public ownership
misc · 2011 · market_landscape
Passenger train operators: There are 19 franchised passenger rail operators and a further 4 open access passenger rail operators. All operators are private sector except East Coast which is temporarily in public ownership
 Passenger train operators: The franchising system has changed a number of times since privatisation. The current system is based on tightly specified 7-10 year franchises but the DfT has announced its intention to move to longer, more flexible franchises
misc · 2011 · timeline
Passenger train operators: The franchising system has changed a number of times since privatisation. The current system is based on tightly specified 7-10 year franchises but the DfT has announced its intention to move to longer, more flexible franchises
 Freight train operators are open access users of the network and pay only variable charges
misc · 2011 · situation_overview
Freight train operators are open access users of the network and pay only variable charges
 Network Rail is the owner-operator of the national network
misc · 2011 · situation_overview
Network Rail is the owner-operator of the national network
 Network Rail's required outputs and funding for Control Period 4 were set by the ORR's 2008 Periodic Review
misc · 2011 · context
Network Rail's required outputs and funding for Control Period 4 were set by the ORR's 2008 Periodic Review
30% to 50% — efficiency gap
 NR's capex on renewals and enhancements is added to its regulatory asset base (RAB). The RAB amortisation allowance and allowed return are used to calculate NR's revenue requirements
misc · 2011 · financial_analysis
NR's capex on renewals and enhancements is added to its regulatory asset base (RAB). The RAB amortisation allowance and allowed return are used to calculate NR's revenue requirements
26,728 — Gross revenue requirement
 Network Rail will be provided with an allowed return for CP4 that reflects its risk-adjusted cost of capital. After meeting financing costs, this is split between a risk buffer and a ring-fenced investment fund
misc · 2011 · data_table
Network Rail will be provided with an allowed return for CP4 that reflects its risk-adjusted cost of capital. After meeting financing costs, this is split between a risk buffer and a ring-fenced investment fund
8,561 — CP4 baseline total
 NR's Management Incentive Plan for Executive Grades includes annual and long-term incentive components. The annual component rewards performance based on a range of measures
misc · 2011 · kpi_dashboard
NR's Management Incentive Plan for Executive Grades includes annual and long-term incentive components. The annual component rewards performance based on a range of measures
100% — Bonus percentage
 A “percentage achievement” score is awarded for each performance measure
misc · 2011 · process_diagram
A “percentage achievement” score is awarded for each performance measure
100% — Percentage achievement
 The Management Incentive Plan for Bands below Executive Grades has a different format
misc · 2011 · process_diagram
The Management Incentive Plan for Bands below Executive Grades has a different format
 Network Rail has launched a Transformation Programme to help it deliver the required efficiency savings in CP4
misc · 2011 · initiative_list
Network Rail has launched a Transformation Programme to help it deliver the required efficiency savings in CP4
3.3 — CP4 Target net benefit (£bn)
 The ORR included two incentive regimes in its PR2008 determination with a view to aligning incentives between NR and train operators
misc · 2011 · situation_overview
The ORR included two incentive regimes in its PR2008 determination with a view to aligning incentives between NR and train operators
 An Efficiency Benefit Sharing scheme was included in PR08 to provide an incentive for operators to work with Network Rail to improve its efficiency. However, two key issues have undermined its effectiveness
misc · 2011 · diagnosis
An Efficiency Benefit Sharing scheme was included in PR08 to provide an incentive for operators to work with Network Rail to improve its efficiency. However, two key issues have undermined its effectiveness
 Volume Incentive: Network Rail receives a bonus payment for providing capacity growth beyond a baseline annual growth rate
misc · 2011 · problem_statement
Volume Incentive: Network Rail receives a bonus payment for providing capacity growth beyond a baseline annual growth rate
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