The role of efficiency estimates in UK regulatory price reviews: The case of rail

This paper reviews the methods that have been applied to assess the efficiency performance of Britain's rail infrastructure provider since privatisation. The paper shows that a wide range of approaches has been adopted by the ORR. However, we argue that, in contrast to the other regulated sectors, the benchmarking methods developed in rail have not been sufficiently robust to restrain costs to efficient levels. We suggest that the main problem stems from a lack of external comparators based on hard data, such as international benchmarks or comparisons with previous experience under British Rail. Although, during the 2003 Interim Review, the ORR obtained an external perspective through bottom-up consultant reviews, we suggest that such studies are not an adequate substitute for quantitative analysis. Looking forward we suggest that more work needs to be done to obtain a better understanding of the reasons for recent cost increases, and also to develop robust international benchmarks against which to judge Network Rail's relative efficiency position. International comparisons are not straightforward, of course, and it is therefore important to start now, rather than wait until the next review of Network Rail's finances, by which time it will be too late.