Review of the basis of Network Rail's allocation of costs/recharges to the Scotland route

Tender description

The backdrop for this requirement is our PR18 periodic review of Network Rail which needs to take into account: • Network Rail's reclassification as a public sector arm's length body; • a revised funding structure for the CP6 control period ; • our route level approach for PR18; and • the separate funding arrangements and periodic review determination that apply to Scotland. We wish to commission a report that sets out whether Network Rail's allocation of costs to its Scotland route (about 10% of the total) is reasonable, and consistent with best practice. The report will feed into the work of ORR's Regulatory Finance team on the financial framework for PR18. We expect to publish minded to positions on a range of financial issues in spring 2018 and our draft PR18 determination in June 2018. The consultant will be required to produce a report that addresses the following questions: In the context of the separate funding settlement for Scotland - 1. Are Network Rail's cost allocations to Scotland reasonable and consistent with best practice for each type of cost? These costs include overheads (e.g. HR costs), central activities (e.g. timetabling) and central programme costs, e.g. digital railway. 2. How could the Scotland route participate in any company-wide risk fund pooling or self-insurance arrangements? If Network Rail has used an approach, is the calculation of the contribution to be paid by Scotland reasonable? 3. Are there instances where Network Rail uses a top down approach to cost allocation (e.g. allocating HR costs by number of staff) where it could instead use a bottom up approach? For example, what is the cost of providing HR services to Scotland? A further example of this issue would be the allocation of working capital balances in the NR financial model. 4. Where relevant, how robust is NR's bottom up challenge to its top down allocations? How extensive has this been and how does this compare to best practice? 5. Is a policy of allocating some project development costs across all routes, even where the project may not have commenced in some routes (for example trial costs associated with new technology) reasonable with respect to the Scotland route, given its separate funding? 6. Are there any arguments for moving away from a policy under which infrastructure projects costs are always attributed to the route in which the infrastructure is built (for example Carstairs junction). Reference can be made to the question we asked on this issue in our first consultation on the financial framework and the responses received. Reference may also be made to earlier review work commissioned by ORR on this point.