## Investment Framework Consolidated Policy & Guidelines

October 2010 

## Contents

1. **Introduction....................................................................................................1** 
1.1 
Background...........................................................................................1 
1.2 
Structure ...............................................................................................2 
1.3 
More help and information ....................................................................3 
2. **Process overview ..........................................................................................5** 
2.1  
Introduction...........................................................................................5 
2.2  
Process overview..................................................................................5 
3. **Network Rail's role.......................................................................................13** 
3.1  
Network Rail's duty to facilitate enhancements...................................13 
3.2  
Template terms for investment ...........................................................15 
3.3  
Bespoke arrangements for schemes governed via the licence...........16 
3.4  
Remedies............................................................................................16 
4. **ORR approvals criteria................................................................................19** 
4.1  
Financing using the RAB ....................................................................19 
4.2  
Approval of charges............................................................................21 
4.3  
Approval of changes to the network....................................................23 
5. **Monitoring the investment framework.......................................................25** 6. **Investing at stations ....................................................................................27** 
6.1  
Introduction.........................................................................................27 
6.2  
Third party promoted schemes ...........................................................27 
6.3  
Franchised train operator promoted schemes ....................................27 
6.4  
Government sponsored schemes.......................................................29 
6.5  
Accelerated renewals..........................................................................30 
7. **Investing in the track...................................................................................31** 
7.1  
Introduction.........................................................................................31 
7.2  
Third party promoted schemes ...........................................................31 
7.3  
Franchised train operator promoted schemes ....................................31 
7.4  
Government sponsored schemes.......................................................33 
7.5  
Accelerated renewals..........................................................................33 
7.6  
Rebate mechanism.............................................................................34 
8. **Investing at depots ......................................................................................37** 
8.1  
Depot arrangements ...........................................................................37 
9. **Sale of land or rights to land ......................................................................39** 
9.1  
Introduction.........................................................................................39 
9.2  
Shared value.......................................................................................39 
9.3  
Hypothecated gains ............................................................................40 
Annex A. 
Example facility charge ................................................................43 

## 1. Introduction 1.1 Background

 1. 
Investment to enhance the rail network can be funded at periodic reviews, 
where we determine the outputs Network Rail needs to deliver as well as the amount of income it will receive for a 'control period' (five years at present). 2. 
There are advantages to funding enhancements in this way: in particular it 
allows Network Rail to plan its work efficiently over the medium term.  
However, stakeholders need a way of funding investment between reviews.  It is for these investments that we developed our investment framework. 3. 
The framework is a set of policies and guidelines describing how investments 
arising between periodic reviews should be treated.  It covers: 
 
- the process for investment; - what the different parties to an investment are obliged to do; - financing options - in particular the possibility of using the same 
mechanism for financing as used in the periodic review, that is adjustment 
of Network Rail's regulatory asset base (RAB); 
- how costs should be recovered through charges; and - the remedies available when problems arise. 4. 
It is designed to encourage investment and has been successful, with 
hundreds of millions of pounds invested in the rail network by government, operators and others. 5. 
However, the framework was developed over time and so is currently 
described in over 25 documents1.  Of these most contain proposals for 
consultation, or conclusions that have been updated since their publication. Ten contain current policy or guidelines for potential investors: 
 
- Policy framework for investments: conclusions (October 2005); - Policy framework for investments: guidelines on implementation 
arrangements and processes (March 2006); 
- Policy framework for investments - update on implementation guidelines 
(March 2007); 
- Proposals for a rebate mechanism for investors in large-scale 
enhancements - final conclusions (June 2007); 
- Investment framework - ORR conclusions on our review of the approach 
to third party investments (May 2008); 
- CP4 pre-tax rate of return for the investment framework (December 2008); 
- Investment framework - liabilities in Network Rail's template investment 
contracts - conclusions (March 2009); 
- Policy framework for investments - guidance on stations charges 
conclusions (March 2009); 
- Policy framework for investments - obstacles to investment conclusions 
(March 2009); and 
- Improved template investment contracts - approval for England and 
Wales (February 2010). 6. 
To make the framework more accessible to investors we have consolidated 
these documents into this single document. This consolidation is much shorter than the sum of all the previous documents because we have removed material where the policy or guideline has been superseded 
(because it was a proposal which has since been concluded, or because our policy has moved on).  We have also removed the explanatory text describing how we arrived at our conclusions. Hence this consolidated document 
describes what our investment policy and guidelines are - not the process for 
deciding them.  This process is described in the relevant conclusions 
document on our website2. 7. 
This consolidation has been undertaken on the basis that we are not 
changing policy but simply describing it more clearly. 8. 
This consolidation of policy and guidance does not include the mechanism 
under section 16a of the Railways Act 1993 that allows us to direct the improvement or construction of a railway facility. This mechanism exists outside the investment framework, and given the mechanisms and remedies in place under the framework, we envisage the section 16a provisions would 
be used only in exceptional circumstances.  We have a code of practice3 for 
applicants under section 16a. 

## 1.2 Structure

 9. 
This document is structured in three parts, as follows. 10. 
The first five chapters describe the investment framework process; the 
obligations on Network Rail; which ORR approvals are necessary under what circumstances, including how regulated charges should be calculated; and 
our approach to monitoring. 

## 

- Chapter 1 - Introduction 
 
- **Chapter 2 - Process overview** outlines the process for investing, what 
characteristics of investment schemes will affect the approvals that are necessary, and how costs should be recovered. 
 
- **Chapter 3 - Network Rail's role** sets out Network Rail's obligations to its 
customers, and describes what it is expected to do to facilitate investment. This includes the choice of contractual mechanisms for managing projects, and how Network Rail is held to account for delivery. 
 
- **Chapter 4 - ORR approvals criteria** sets out the conditions that must be 
met when an approval from us is necessary. 
- **Chapter 5 - Monitoring the investment framework**  outlines how we 
monitor the use of the investment framework and projects promoted using it. 
 
11. 
The structure of the second part reflects the fact that the process differs 
somewhat depending on where the investment takes place and who the 
promoter is. It consists of three chapters outlining the specific requirements 
for investing at **stations**, on the **track** (including signalling, electrification for traction etc), and at **depots**, each with separate sections by type of promoter.  
Our intention is that an investor can read just the chapters that apply generally (1-5) and whichever of the subsequent chapters apply to their particular investment - so some material is repeated in each of these three. 
 
- Chapter 6 - Investing at stations 
 
- Chapter 7 - Investing on the track 
 
- Chapter 8 - Investing at depots 
 
12. 
The last chapter covers the **treatment of land** and rights to land, which is 
often relevant to the funding and financing of investment schemes. 
 
- Chapter 9 - Sale of land or rights to land 
 
13. 
Our guidance requires costs for some types of scheme to be recovered 
through a 'facility charge'.  An example calculation of such a charge is 
provided on our website as a spreadsheet annex to this document. 

## 1.3 More Help And Information

 14. 
Network Rail has published a code of practice incorporating guidance on its 
investment process, available on its website4. 15. 
We can also provide advice and help.  Contact details are available on the 
'Investing in the industry' page of our website5. Our website also includes a glossary defining industry terminology6. 

## 2. Process Overview

 
2.1  Introduction 16. 
This chapter describes the main steps in the investment process, and how the 
guidelines and approvals required by us relate to the enhancement project lifecycle.  More detail on the approvals necessary is provided in Chapter 4. 

## 2.2  Process Overview 17. We Want To Make Our Role In The Investment Process Clear To Investors.  This Section Outlines The Investment Framework Process In The Context Of:

 
- the project lifecycle from inception, business case development and 
design through construction to commissioning and acceptance into use; 
- Network Rail's guide to railway investment projects (GRIP) process for 
managing investment schemes, which sets the generic project lifecycle in a railway context; and 
- the means by which outputs are secured, that is whether the customer 
signs a contract for the delivery of its required outputs by Network Rail, or 
instead relies on the company's network licence to govern delivery. 
18. 
More detail on the governance choices outlined in Figure 1 can be found in 
Chapter 3 of this document, where we describe the role of Network Rail. 19. 
The required ORR approvals illustrated in Figure 1 are expanded on in 
Chapter 4. 20. 
The monitoring responsibilities during the project lifecycle are covered in 
Chapter 5. 21. 
The investment framework approvals process for enhancements on the rail 
network varies according to three main factors. 
 
- Who is promoting the enhancement.  Investment schemes can be 
sponsored by third parties (that is anyone besides Network Rail or 
Government7), franchised train operators (a special case of third party 
because of their franchise agreement with Government), or Government itself. 
- **What** is being enhanced (a station, the track, or a depot). - How the work is financed (particularly whether RAB finance is sought). 
 
Where a scheme is mixed, for example where it has more than one promoter, 
we will consider what guidance should apply on a case-by-case basis, so that the approvals processes can be simplified as far as possible, 22. 
The rest of this section describes our approvals process from the perspective 
of the three main types of investor: 
 
- third party investors (Figure 2); - franchised operators (Figure 3); and - Government (Figure 4). 
 
23. 
Each of these process diagrams refers to the detailed description (set out 
later in this document) of the criteria that must be satisfied and charging guidelines that should be followed. 24. 
Each diagram starts by setting out the business case decisions required.  In 
the case of RAB financed schemes approval of the scheme is contingent on the acceptance of the business case, because RAB finance requires a scheme to add economic value to the rail network.  Where RAB finance is not sought the business case still needs to be developed to the extent that the options chosen for delivery (and ultimately cost recovery) are clear. 25. 
Franchised operators are a particular class of third party, because they have 
a franchise agreement with Government (which in some circumstances 
described below stands behind commitments made by the franchise). They 
also have a pre-existing contractual relationship with Network Rail so it is 
straightforward for us to issue guidance as to how costs of investment should 
be recovered through changes to these contracts. 26. 
There is nothing to stop franchised operators acting as 'ordinary' third parties, 
and following the guidance we set out in this document for those third parties. Similarly a third party can request similar terms from Network Rail to those 
applied to franchised operators, so long as the terms result in similar risks for 
Network Rail (in particular in terms of recovery of the whole-life costs of the investment). 27. 
In almost all cases where a RAB addition is required to finance the scheme, 
an approval from Government is required.  The exception is for a class of 
schemes promoted by franchised operators which we refer to here as 'selffinancing *schemes*'. 
 
28. 
These are defined as schemes where a specific Government approval is not 
required if certain conditions concerning the scheme's business case, size 
and cost recovery terms are met8.  The investment framework process for 
these schemes differs again, as set out in Figure 3.  It is important to note that 
we are using this term (*self-financing schemes*) to refer to this specific class of schemes, and not any scheme which recovers its costs.

## Business Case Third Party Promoting

- Governance, procurement & project management arrangements

## Notes To Figure 2

c 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* Cost recovery guidelines set out in 4.2 Approval of 
charges and *6.2 Third party promoted schemes.* 
d 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* Cost recovery guidelines set out in 4.2 Approval of 
charges and *7.2 Third party promoted schemes.* 
e 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* No formal cost recovery guidelines for depots. 
f 
Promoter provides finance in this case, so no RAB approval or capital recovery mechanism necessary.  Incremental ongoing cost recovery arrangements are described in *4.2 Approval of charges* and *6.2 Third party promoted schemes*. 
g 
Promoter provides finance in this case, so no RAB approval or capital recovery mechanism necessary.  Incremental ongoing 
cost recovery arrangements are described in *4.2 Approval of charges* and *7.2 Third party promoted schemes* 
h 
Promoter provides finance in this case, so no RAB approval or capital recovery mechanism necessary.  No formal cost recovery guidelines for depots. 
 

## Business Case Franchised Operator Promoting

Needs to define: - Governance, procurement & project management arrangements - Delivery choices - Financing (RAB or otherwise) - Cost recovery arrangements (charging model & parameters that affect it, 
e.g. recovery period)
- Costs & benefits if RAB addition required
permitted for schemes >£50m) governance arrangements etc.)
covering both initial capital and maintenance, renewal & repair in station access 
covering both initial capital and operation, maintenance & renewal in schedule 7 of track access agreement
charging guidelines
covering both initial capital and maintenance, renewal & repair in station access contract (annex 9)
covering both initial capital and operation, maintenance & renewal in schedule 7 of track access agreement
charging guidelines
arrangement to recover 

## Notes To Figure 3

c 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* Cost recovery guidelines set out in 4.2 Approval of 
charges and *6.3 Franchised train operator promoted schemes*. 
d 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* Cost recovery guidelines set out in 4.2 Approval of 
charges and *7.3 Franchised train operator promoted schemes*. 
e 
RAB approval criteria are set out in section *4.1 Financing using the RAB.*  No formal cost recovery guidelines for depots. 
f 
RAB approval criteria are set out in section 4.1 Financing using the RAB. Self-financing *schemes* are a class of schemes where specific support for RAB funding is not required of Government; they must meet the additional conditions set out in 
section *6.3 Franchised train operator promoted schemes*.  Cost recovery guidelines set out in *4.2 Approval of charges* and 
6.3 Franchised train operator promoted schemes. 
g 
RAB approval criteria are set out in section 4.1 Financing using the RAB. Self-financing *schemes* are a class of schemes where specific support for RAB funding is not required of Government; they must meet the additional conditions set out in 
section *7.3 Franchised train operator promoted schemes*.  Cost recovery guidelines set out in *4.2 Approval of charges* and 
7.3 Franchised train operator promoted schemes. 
h 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* No formal cost recovery guidelines for depots. 
i 
Promoter provides finance in this case, so no RAB approval or capital recovery mechanism necessary.  Incremental ongoing cost recovery arrangements are described in *4.2 Approval of charges* and *6.3 Franchised train operator promoted schemes*. 
j 
Promoter provides finance in this case, so no RAB approval or capital recovery mechanism necessary.  Incremental ongoing 
cost recovery arrangements are described in *4.2 Approval of charges* and *7.3 Franchised train operator promoted schemes.*  
k 
Promoter provides finance in this case, so no RAB approval or capital recovery mechanism necessary.  No formal cost 
recovery guidelines for depots. 
Notes to Figure 4 
c 
RAB approval criteria are set out in section *4.1 Financing using the RAB.* Cost recovery guidelines set out in *6.4 Government sponsored schemes.* 
d 
RAB approval criteria are set out in section 4.1 Financing using the RAB. 
Cost recovery guidelines set out in *7.4 Government sponsored schemes*. 
e 
RAB approval criteria are set out in section *4.1 Financing using the RAB.*  No 
formal cost recovery guidelines for depots. 
f 
Cost recovery guidelines set out in *6.4 Government sponsored schemes*. 
g 
Cost recovery guidelines set out in *7.4 Government sponsored schemes*. 
h 
No formal cost recovery guidelines for depots. 

## 3. Network Rail'S Role

 
3.1  Network Rail's duty to facilitate enhancements 29. 
Network Rail is the principal point of contact for investors in the rail network.  
It has a dedicated information section on its website: 
http://www.networkrail.co.uk/aspx/1536.aspx. 30. 
Network Rail's role in relation to enhancement schemes is underpinned by its 
obligations as network operator.  Network Rail's Licence Condition 1.1 states 
that it must secure: 
 
"the improvement, enhancement and development of the network … in accordance with best practice and in a timely, efficient and economical manner so as to satisfy the reasonable requirements of persons providing 
services to railways and funders, including  potential providers or potential funders". 31. 
The investment framework, and Network Rail's own processes and guidance 
for investment, have been developed to fulfil this objective. 32. 
Network Rail's role in investment framework projects is to: 
 
- identify, promote and deliver network investment schemes over and above 
those funded at periodic reviews using objective, transparent appraisal criteria. These schemes can then be 'logged up' for inclusion in the RAB at the next periodic review; 
- facilitate development of, and where appropriate deliver, schemes 
proposed by franchised operators or other third parties, or Government; 
- as part of that facilitation provide the services that only Network Rail can 
perform (non-contestable services) for investors; 
- where appropriate finance schemes proposed by franchised operators or 
other third parties through a RAB addition; and 
- prioritise between these different activities in accordance with its standard 
investment appraisal criteria. 
Delivery 
33. 
For many investment framework schemes Network Rail will act as delivery 
agent. We expect Network Rail to put in place efficient delivery arrangements for all schemes it is required to deliver, and to take on those risks which it is in the best position to manage, including design and construction risks where appropriate. 
Facilitation of schemes delivered by third parties 
34. 
Network Rail should facilitate schemes promoted and delivered by third 
parties, such as station improvements, by providing services on fair and 
reasonable terms. Part of being fair and reasonable in its terms means Network Rail must only recover its additional efficient costs when it is taking a facilitative role (for example when it is providing non-contestable services relating to its role as network operator). 

 
35. 
In many cases the third party will also want Network Rail to design, develop, 
finance and deliver schemes, whether or not the enhanced assets will then be owned by the third party or transferred to Network Rail following completion. However, in other cases the third party may wish to seek a price from other 
suppliers for the provision of contestable services9, for example design and 
delivery services. This competition can drive efficiency and create additional capacity in the market for scheme delivery. 
 
36. 
Network Rail should not use its monopoly position to require third party 
promoters to buy contestable services from it. Nor should it offer preferential treatment to customers who depend on its delivery of non-contestable services. 
Financing 
37. 
Network Rail should be prepared to finance schemes which add economic 
value to the rail network on appropriate terms, subject to any financing constraints.  Network Rail would receive an income stream over time and this income is generally given a contractual status with franchised train operators via a supplemental access agreement or the relevant station access documentation.  Similar arrangements could be put in place for third parties who do not have access agreements.  In such cases we would expect Network Rail to take steps to ensure the recovery of the income over time. 
Monitoring/change control/governance 
38. 
There are two broad models of project governance for investment schemes: 
 
- through Network Rail's network licence, which should be used for most 
projects sponsored by Government; or 
- through contracts - for third party sponsored schemes, contractual 
mechanisms will be put in place for each scheme, for example through 
template agreements approved by us under Part G of the network code10. 39. 
In the former the responsibility for monitoring progress on the project rests 
mainly with us unless bespoke arrangements are put in place (for example using a 'protocol', see section 3.3 Bespoke arrangements for schemes governed via the licence). 40. 
In the latter it is the scheme promoter who should monitor progress and 
Network Rail should provide scheme promoters with the necessary information to do this. It should also ensure that arrangements for changes to 
the specification of a project are set out in advance, and that responsibility for the financial consequences of any changes is identified as part of the risk allocation. 

 
3.2  Template terms for investment 41. 
Network Rail has drafted, and we have approved, a set of template contracts 
that investors may choose to use as the basis for contracts to deliver 
enhancements. Guidance, and the templates themselves, can be found on 
Network Rail's website11.  They are provided to reduce transaction time and 
cost for investors compared to negotiating a contract from scratch with Network Rail, and are designed to offer a fair balance of risk between Network Rail and investors. They are primarily designed for contract values of 
less than £50m; for larger schemes there might be a need for more tailored arrangements to cope with the particular risks of the scheme. 42. 
There are four main types of template: 
 
- **Basic Services Agreement**. A simple agreement, aimed at quickly 
putting in place a contractual relationship to cover pre-feasibility works to scope the scheme and develop the business case. 
- **Development Services Agreement**. For development and design work 
undertaken by Network Rail on behalf of a promoter. 
- **Implementation Agreement**. With Network Rail acting as a construction 
manager, this is an agreement for enhancement work on or about the 
controlled railway infrastructure to provide detailed design and 
implementation of the promoter's scheme with the contracting strategy 
agreed between Network Rail and the promoter. 
- **Asset Protection Agreement**. An agreement for promoter led works on 
the controlled railway infrastructure, where Network Rail facilitates the promoter's enhancement scheme interface with the operations, maintenance and renewals business. 
 
43. 
There are two options for the implementation agreement, either fixed price or 
emerging cost. There are basic versions of the asset protection and implementation agreements for simpler schemes.  
 
 
44. 
Customers may have particular concerns and individual projects may have 
particular risks.  We expect both parties to be open to negotiation of alternative provisions that suit individual circumstances, while acknowledging that they must control or manage the risks they take on. 45. 
The template contracts set out the terms for engaging with Network Rail on 
an enhancement project; there are almost always subsequent contractual 
processes necessary in order to deliver the enhancement. These include changes to leases; station, depot or network changes; and asset purchase 
agreements. 
Risk funds 
46. 
At each periodic review Network Rail is funded for costs and risks arising from 
the outputs required in the review.  It is not funded for third party enhancements that arise between periodic reviews, or for the cost risks 
associated with them.  In order to provide it with funding for the risks 
associated with investment using the templates, risk funds have been established to fund these costs. 47. 
Investors pay into two funds to cover Network Rail's potential liabilities arising 
from investment using the templates, and to cover specific industry cost risks: 
 
- **Network Rail fee fund (NRFF)**:  intended to cover Network Rail's 
potential liabilities arising from the template agreements. Network Rail must contribute £10m to this fund in the event it is exhausted to ensure it is incentivised to minimise the risk of calls on the fund. 
- **Industry risk fund (IRF)**: intended to cover low-probability, high-impact 
industry risks, such as the impact of an operational emergency elsewhere on the network on a scheme. 48. 
These contributions to the funds (the Network Rail fee and the industry risk 
fee) are calculated as percentages of costs. The percentages and the costs in scope are defined in the template agreements themselves. 
 
3.3  Bespoke arrangements for schemes governed via the licence 49. 
For some large schemes Government has asked for bespoke governance 
arrangements, for example to reflect a risk allocation which differs significantly from the default.  This approach has been used in the protocols 
set up for the Thameslink and Crossrail projects. 
 
3.4  Remedies 
 
50. 
Remedies are available to investors during the contract negotiation stage and 
after contracts are signed. 
Before contracts are signed 
51. 
If investors are unhappy with Network Rail's approach in negotiating a 
contract for investment, then in the first instance they should escalate the 
issue within Network Rail. 52. 
If that does not resolve the concern, or is not practical, investors may refer the 
matter to us.  We would raise the issue with Network Rail and if necessary decide if Network Rail was complying with its network management and stakeholder relationships licence conditions, and take enforcement action if 
necessary12. 
                                            

After contracts are signed 
53. 
After contracts are signed the available remedies depend on the scheme's 
governance model, i.e. whether it is governed through a contract or through Network Rail's network licence. 54. 
In the case of schemes governed through the network licence, if the investor 
cannot resolve an issue with Network Rail they can refer the matter to us.  We will raise the matter with Network Rail and escalate it as appropriate. 55. 
In the case of schemes using a contract-based approach, once signed, the 
template investment contracts incorporate an escalation and disputes process 
which either investors or Network Rail can follow in the event of a dispute. 56. 
Ultimately Network Rail still faces obligations under its network licence. If 
customers or potential customers consider that Network Rail is acting unreasonably they can refer the matter to us. In accordance with our enforcement policy we can then consider whether Network Rail was 
complying with its network management and stakeholder relationships licence 
conditions, and take enforcement action if necessary. 
 

## 4. Orr Approvals Criteria

 
57. 
Our approval is usually required during the investment process if any of the 
following apply: 
 
- Network Rail will be financing an enhancement through its RAB; 
- the cost recovery arrangements require new or amended regulated 
charges (for example, a facility charge is required to recover the costs of 
an enhancement, paid by the enhancement's promoter - see below) to be levied by Network Rail to pay for the work; or 
- a change approval is required under either the network code, the station 
access conditions, or the depot access conditions.  These change processes are usually required for any physical works, but also - 
depending on the scheme promoter and funding arrangements - they may 
also be used to establish or change charges. 

## 4.1  Financing Using The Rab

Approvals criteria 
58. 
This set of criteria only applies to investment where Network Rail has agreed 
to provide finance backed by a RAB addition; if customers pay cash for an investment this approval is not necessary. 59. 
The following criteria must be met before we will approve a RAB addition. 
 
- the expenditure must be incurred as a result of a reasonable requirement 
of Government (or another funder directly supported by Government), and 
Government must therefore be content to support the financial commitment arising from the associated RAB addition. 
- the expenditure must add to the economic value of the rail network. In 
cases where the expenditure does not add to the economic value of 
Network Rail's assets, the scheme funder or promoter and Network Rail should explain, with reference to Network Rail's appraisal criteria: 
i. 
why the proposed RAB addition represents an efficient whole 
industry solution, including why it is more efficient for Network Rail to finance the scheme; and 
ii. 
how the proposal will add economic value for the rail industry as a 
whole. 
- we need to be satisfied that Network Rail can afford to finance the planned 
expenditure, and has the capability to deliver. 
- the expenditure must be incurred efficiently. - the outputs of the scheme must have been delivered and Network Rail 
must own the enhanced asset. 
Which schemes do we assess, and why? 
60. 
The RAB addition approvals criteria set out above apply to any investment 
framework projects where RAB finance is sought.  However, in order to make the investment process as streamlined and accessible as possible, we review 
schemes at a level of detail that is proportionate to their size and complexity. Generally this means we will assess any scheme where the cost is more than 
£5 million against the RAB addition criteria.  We review smaller schemes 
(usually after implementation) on a sample basis or if they are particularly complex. 61. 
For schemes with a value below £50 million investors and Network Rail face a 
choice as to whether to seek approval for RAB financing before 
implementation, or to wait and seek approval of an outturn cost after completion. 62. 
If an 'in advance' approval is sought, that approval can be either: 
 
- **in-principle** (that is an approval that states the scheme costs would be 
eligible for RAB addition if they were demonstrated to be efficient); or 
- **capped/fixed price** (an approval for a RAB addition of an efficient price 
determined in advance, or an efficient cap on cost). 63. 
In order to carry out an assessment of a price during scheme development 
the scheme usually needs to have reached GRIP stage 4 or 5 in Network 
Rail's development process, i.e. when detailed design is complete (or nearly complete) but before Network Rail (or another delivery agent) has gone out to tender. It is at this stage that the detailed information required for our assessment should be available but is before contractual commitments have been entered into. If we receive information later, this may delay the 
assessment process and ultimately could result in an ex post adjustment to 
any RAB addition. 
 
64. 
We assess the arrangements (including cost estimates) for major schemes 
(costing above £50 million) in advance. 65. 
For these major schemes we require an in-advance submission (for in 
principle approval at around GRIP stage 3), along with early estimates of the cost of the work, in order to avoid the risk of significant cost being incurred 
which is ineligible for RAB addition. 
How we make our efficiency assessment 
66. 
In assessing whether a scheme is efficient, we consider whether: 
 

- the proposed risk allocation is appropriate (for instance, whether the 
consequences of any risk to the project would be felt by the party best able to mitigate the risk); 
- the procurement and governance arrangements, including management 
and cost control arrangements, are clearly specified and provide appropriate incentives on all parties. Design and implementation services 
should usually be procured through a transparent, competitive process to ensure market-tested prices are obtained; 

- outputs and acceptance requirements are clearly specified, so that it is 
clear when the scheme is complete and under what terms Network Rail will be paid; and 
- cost estimates put forward by Network Rail or the scheme promoter 
represent efficient prices. 67. 
When assessing cost estimates we look at market-tested values for each 
element of cost included in the estimate. Where appropriate we also take into account the potential for cost efficiency improvements during the project life. 68. 
The detail of cost estimates submitted to us should be commensurate with the 
size and complexity of the scheme.  In general the estimates should be 
disaggregated by: 
 
- development costs (showing any sunk costs); - estimated construction costs, including contractors' preliminary costs, 
showing unit costs and quantities assumed, any insurance costs due to the construction phase and any Schedule 4 or Schedule 8 costs expected 
to be incurred; 
- management costs incurred by Network Rail; - the allowance for identified, quantified risk usually estimated through a 
Quantified Risk Analysis (QRA) or similar process; 
- the contingency or allowance assumed for unidentified risks; and - other delivery costs, for example land purchase or legal fees. 

## 4.2  Approval Of Charges

Our role 
69. 
We approve most new charges and changes to regulated charges.  This 
includes the track access charges defined in operators' track access 
agreements with Network Rail, station charges defined in station access 
contracts and 'facility charges' associated with particular enhancements.  We do not regulate the level of the 'QX' charge, which is set to recover operating costs at stations. 
Rate of return 
70. 
For investments where the capital cost is recovered through regulated 
charges, the charges should be set so that the cost of capital is at the Network Rail regulated pre-tax rate of return. Network Rail must offer the 
promoter the following options: 
 
- to use the (pre-tax, real) return on the RAB, set at the most recent periodic 
review, for the duration of the charge; or 
- to use the (pre-tax, real) rate of return set at the most recent periodic 
review but to move to the rate of return determined at the next periodic 
review when the conclusions of that review are implemented; this rate is then the basis for the charge for the remainder of the recovery period. 71. 
This second option is to prevent any inappropriate incentive to change the 
timing of investment towards the end of a control period (arising from expectations of a change to the rate of return in the next periodic review). 
 
72. 
The pre-tax allowed real rate of return for CP413 is 6.0% p.a.  This rate of 
return differs from the 4.75% 'vanilla' rate of return14 which was used in the 
calculation of Network Rail's CP4 revenue requirement, because the 
investment framework rate compensates Network Rail for the expected 
corporation tax implications of additional investment. 
Calculating facility charges 
73. 
A facility charge is a charge set to recover the costs of an enhancement and 
is paid by the promoter of a scheme. These charges must be used for selffinancing schemes, where promoters can make use of RAB financing without specific government approval, subject to the conditions set out in paragraph 110 (at stations) or paragraph 132 (on the track). They can also be used by franchised train operators as outlined earlier in this document in Figure 3 
(where the facility charge is incorporated into an existing access contract with Network Rail) or by other third parties subject to Network Rail being satisfied that there is sufficient certainty that the scheme costs would be fully recovered from the promoter. 74. 
The facility charge should be calculated with reference to the following 
guidelines.  An example is shown in the spreadsheet at Annex A.  This 
charge is calculated in real terms; it should be inflated by the retail price index (RPI) over time in line with track access charges. 

## Recovery Period

 
75. 
The facility charge should be paid by the promoter (or in the case of a 
franchised operator, the franchisee and its successors) for the agreed 
recovery period. 76. 
The maximum recovery period is 30 years, and shorter periods can be agreed 
between Network Rail and promoters (for instance where the asset life of the 
enhancement is shorter than 30 years, or for *self-financing schemes* where a 
default maximum of 15 years applies). 

## Depreciation

 77. 
The default approach is that the depreciation should be calculated on a 
straight-line basis over the recovery period. This approach means that the 
capital element of the charge reduces over the recovery period. 
78. 
So that the charges for enhancements better reflect the likely timing of 
benefits arising from schemes, we will also allow an alternative (at the 
scheme promoter's request) to re-profile the charge (keeping its net present value constant) so that payments are constant in real terms over time.  An example of such re-profiling is shown in the spreadsheet at Annex A. 

## Allowed Return

 79. 
Network Rail should offer the promoter the options described in paragraph 70. 

## Incremental Ongoing Costs

 80. 
Incremental ongoing costs due to the enhancement (for example, for the 
operation, maintenance or renewal of the asset during the recovery period) 
should also be included in the facility charge. Network Rail is required to offer a fixed-price for the recovery of these ongoing costs over the recovery period. If the anticipated incremental costs from the scheme vary by year, the charge 
can be re-profiled so that it has a constant real annual value. This value 
should be calculated so that the charge has the same present value as the 
incremental ongoing costs over the recovery period.  An example incremental 
costs charge is shown in Annex A. 

## Minimum Threshold For Incremental Ongoing Costs

 81. 
To reduce negotiating and transaction costs, if the annual incremental 
ongoing cost of the scheme is below £50,000 then that cost should not be included in the facility charge. 82. 
Since this threshold is intended to remove the cost of negotiating small 
incremental ongoing charges, it should apply for each (station or network) 
change application (rather than at the level of an individual project within a 
change application, or at a broader programme-level). 
What happens at the end of the recovery period? 

 83. 
In the periodic review prior to the control period in which the charge expires, it 
is expected that allowance will be made for the enhanced asset, as for all other Network Rail assets. Network Rail would therefore be funded either to manage the asset beyond the recovery period of the charge, or to decommission it. 
 
4.3  Approval of changes to the network 84. 
If you are carrying out physical enhancement work it is likely that you will 
need to use a formal contractual changes process. 85. 
The network code15 provides a procedure by which changes can be made to 
the network which are likely to have a material effect on its operation. Part G 
of the code sets out the processes for proposing, consulting on and, implementing a network change. It also details the associated compensation and appeals procedures. 

 86. 
Proposals for network change can be initiated by either Network Rail or a 
train operator. 87. 
Part 3 of the independent station access conditions (which govern those 
stations managed by Network Rail) and part C of the national station access conditions (which govern most other stations on the network) outline the 
process for making a change to the common station services or amenities at a station (set out in annex 1 of the relevant access conditions). The change 
procedures in the access conditions apply when the proposed change will 
materially affect the condition, standard or quantum of the services or amenities that are offered to all users of the station. 
 
88. 
The station facility owner, Network Rail or any other operator at the station 
can make a change proposal. 89. 
The station access conditions can be found on our website16. 90. 
Changes to regulated depots are governed by the depot access conditions, 
guidance on which is also available on our website17. 

## 5. Monitoring The Investment Framework

 91. 
We monitor how the investment framework is working in terms of: 
 
- how well Network Rail is carrying out its obligations in general. For 
example we are currently carrying out a review of third party promoted 
investments to check how effective Network Rail's service culture initiatives have been in addressing some of the issues identified in our 
'obstacles to investment' review18; 
- calls on the risk funds, to establish if the fee levels are still appropriate; 
and 
- use of the variation mechanism included in the template contracts since 
the contracts rely on parties to the contracts being reasonable in requiring 
or objecting to variations. 92. 
We also respond to concerns raised with us by investors. 93. 
We welcome any feedback from customers - positive or negative - on their 
experience of the use of templates or of the investment framework more 
generally, including on Network Rail's responsiveness to customer 
requirements. 94. 
Where an investor has engaged with Network Rail through a template 
contract, or through another contract, it is the investor's responsibility to monitor and manage their project through that contract.  We do not monitor progress of third party schemes. 
 
95. 
Most projects sponsored by Government will be governed through Network 
Rail's network licence, and once the required outputs have been established 
these will be included in Network Rail's delivery plan19 and will be monitored 
against agreed milestones in the same way as projects funded through a periodic review.  These monitoring arrangements are set out on our website: 
http://www.rail-reg.gov.uk/server/show/nav.2231   
 

## 6. Investing At Stations 6.1  Introduction 96. This Chapter Covers Investment In Enhancements At Stations, And How The Costs Of Those Investments Should Be Recovered.

 
6.2  Third party promoted schemes 97. 
Third parties include any scheme promoter other than Government (DfT or 
Transport Scotland) and Network Rail. Examples might be a PTE, a local authority, Transport for London or a train operator. For schemes promoted by 
third parties we will consider applications for RAB financing according to the 
criteria set out in section *4.1 Financing using the RAB*. 98. 
Where a RAB addition is approved, third parties must pay for all capital costs, 
including financing costs, associated with schemes they promote.  The terms 
of repayment (for example the timing of payments) are a matter for 
negotiation between Network Rail and the promoter, and will depend on the costs and the risks involved. 99. 
Where no RAB addition is required and the promoter provides the finance 
there is no need for a charge to recover capital costs. 100. Whether or not there is a RAB addition, the incremental ongoing costs should 
be paid for by the promoter if they exceed a threshold of £50,000 per annum, 
or through a change to the long term charge where operators benefit from the enhancement. 
 
6.3  Franchised train operator promoted schemes 101. Train operators are a special category of third party, but can choose to 
promote schemes in the same way as any other third party, according to the 
guidelines set out in section *6.2 Third party promoted schemes.* 102. In addition a train operator's existing access agreement with Network Rail 
means scheme costs can be recovered through a facility charge included in 
the operator's station access contract (rather than relying on negotiated repayment terms as is necessary for other third parties). 103. If the investment is RAB financed the initial capital costs and incremental 
maintenance, repair and renewal (MRR) costs of the enhancement will be 
recovered through a facility charge paid only by the promoter of the scheme. 104. Although each facility charge is paid by the scheme promoter alone, station 
users can themselves arrange to share the costs of an enhancement through joint promotion of a scheme. 105. Guidelines on calculating a facility charge are set out from paragraph 73. At 
stations the following specific requirements apply. 
 
Incremental ongoing costs 106. At stations incremental ongoing costs are defined to be expected 
maintenance, repair and renewal costs associated with the enhancement 
during the recovery period.  Operating costs at stations are recovered through 
the QX charge, the level of which we do not regulate. 
 
Station access contracts  
 
107. The initial capital and incremental MRR charge components need to be 
calculated and set out separately in annex 9 of the station specific annexes 
which form part of the station access contracts.  
Self-financing schemes at stations 108. Additionally, schemes promoted by franchised train operators but financed by 
Network Rail can qualify for treatment as *self-financing schemes*. The term self-financing is applied to schemes that: 
 
- do not require government's financial support; and - do not otherwise generate liabilities for government. 109. Under this approach, schemes are financed through additions to Network 
Rail's RAB, the costs being recovered by Network Rail through a facility charge, without the need for specific government approval of the RAB financing. This approach can facilitate schemes promoted by a franchised passenger operator with a strong business case but which do not pay back within the remainder of a single franchise period. 110. The eligible schemes should meet the following key conditions. 
- the estimated cost is less than £10 million, although schemes above this 
value can be included on a case-by-case basis with government approval. 
- the scheme promoter prepares the business case and must pay for all the 
costs resulting from the scheme (including any relevant incremental maintenance, renewal and repair costs that fall within the charge recovery period, subject to the £50,000 threshold described in paragraph 81) for an 
agreed period. For franchisees this will generally be the remaining term of the franchise agreement, which should have at least two years remaining - successor franchisees then usually take on the payment obligations at the end of the promoter's franchise. Franchisees with less than two years remaining can qualify if government supports the case. - Network Rail must confirm its support for the scheme in writing and 
confirm that the scheme is consistent with other relevant policies and 
strategies (including its delivery plan and relevant route utilisation strategies). 

- the scheme must satisfy our criteria for adding investment expenditure to 
the RAB. 
 
111. Costs should be recovered through a facility charge. For self-financing 
schemes a default recovery period applies. 
 

## Recovery Period For *Self-Financing Schemes*

 
112. For *self-financing schemes* the default maximum recovery period is 15 years, 
so that most franchisees will pay a reasonable proportion of scheme costs, and so the business case must be robust to provide a return on investment.  
We recognise that there may be good schemes for which a longer recovery 
period is appropriate and we are prepared to approve schemes with longer recovery periods by exception, but in such cases we need confirmation of Government support.  
 
6.4  Government sponsored schemes 113. Government sponsored schemes are those which are promoted by DfT or 
Transport Scotland that were not required by their high level output specifications (and so were not funded in the periodic review). The approach to cost recovery for these schemes mirrors the approach taken to setting 
stations charges in PR0820. 
 
- The efficient enhancement spend is added to the RAB. We would 
generally expect payments for the incremental investments to begin at the point at which Network Rail incurs expenditure on those investments, 
rather than logging up the financing costs within the control period and 
adding these to the RAB at the next periodic review.  At the next periodic review the amount of the RAB addition would be reviewed to ensure it was 
both efficient and represented the economic value added by the investment.  It is then expected that the investment would be reflected in 
an increase in access charges or government grants at the next periodic 
review. 
- Any incremental maintenance, repair and renewal costs arising from the 
scheme would be recovered either 
o from a change to the long term charge from the point in time when the 
costs occur (if the operators at the station accrue the benefit of the enhancement); 
o on a pay as you go basis from Government until the next periodic 
review; or, if Network Rail agrees 
o from the start of the next control period through inclusion in the next 
periodic review (with Network Rail bearing the costs until then). 
                                            
At the next periodic review these incremental maintenance, renewal and repair costs of the enhancement will be considered together with those of other assets in determining Network Rail's revenue requirement and charges. 

- Operating costs are recovered through QX, the level of which we do not 
regulate. 
6.5  Accelerated renewals 114. The focus of this document is investment in *enhancements* of the network, 
but investors might also want to bring forward a like-for-like renewal, for instance so that it can be coordinated with an enhancement to minimise 
disruption to services. 115. If Network Rail brings forward renewals - either from within the current control 
period or from a future control period - to deliver periodic review outputs in the current control period it will not receive any extra income. 116. But where a promoter wants to bring forward a renewal from later in the same 
control period the promoter should pay Network Rail for any increased financing costs arising from the timing difference. 117. If renewals are brought forward from a future control period, Network Rail is 
not funded for the renewal.  Network Rail should supply the scheme promoter 
with an estimate of the additional financing costs resulting from the 
accelerated renewal and the funder should pay for these additional costs until 
the renewal costs are added to the RAB.  The efficient costs of the renewal works should be logged up and remunerated through the RAB at the next periodic review. 

## 7. Investing In The Track

 
7.1  Introduction 118. This chapter covers the specifics of investment in enhancements to the 
network outside stations and depots - in other words, on the track. 
 
7.2  Third party promoted schemes 119. Third parties include any scheme promoter other than Government (DfT or 
Transport Scotland) and Network Rail. Examples might be a PTE, a local authority, Transport for London or a train operator. For schemes promoted by 
third parties we will consider applications for RAB financing according to the 
criteria set out in section *4.1 Financing using the RAB*. 120. Where a RAB addition is approved, third parties must pay for all capital costs, 
including financing costs, associated with schemes they promote.  The terms 
of repayment (for example the timing of payments) are a matter for 
negotiation between Network Rail and the promoter, and will depend on the costs and the risks involved. 121. Where no RAB addition is required and the promoter provides the finance 
there is no need for a charge to recover capital costs. 122. Whether or not there is a RAB addition the incremental ongoing costs should 
be paid for by the promoter if they exceed a threshold of £50,000 per annum; where multiple operators benefit from the enhancement, implications for 
existing track charges need to be considered. This flexibility is necessary to prevent a barrier to investment for parties that do not have access contracts 
with Network Rail. 
 
7.3  Franchised train operator promoted schemes 123. Train operators are a special category of third party, but can choose to 
promote schemes in the same way as any other third party, according to the 
guidelines set out in section *7.2 Third party promoted schemes*. 124. In addition a train operator's existing access agreement with Network Rail 
means scheme costs can be recovered through a facility charge included in 
the operator's access contract (rather than relying on negotiated repayment 
terms as is necessary for other third parties). 125. If the investment is RAB financed, the initial capital costs and incremental 
operations, maintenance and renewals (OMR) costs of the enhancement will be recovered through a facility charge paid only by the promoter of the 
scheme. 
 
126. Although each facility charge is paid by the scheme promoter alone, 
operators can themselves arrange to share the costs of an enhancement 
through joint promotion of a scheme.  For some investments, promoters may 
also be able to secure a financial contribution from users of infrastructure 
which they have enhanced, as set out in our rebate mechanism policy 
described in section *7.6 Rebate mechanism*. 127. Guidelines on calculating a facility charge are set out from paragraph 73. The 
following specific requirements also apply for investment in the track. 
 

## Incremental Ongoing Costs

 128. On the network outside stations incremental ongoing costs are defined to be 
expected operations, maintenance and renewal costs associated with the enhancement during the recovery period. 
 

## Access Contracts

 129. The facility charges should be included as a supplement to the operator's 
track access agreement, in Schedule 7. 
Self-financing schemes on the track 130. Additionally schemes promoted by franchised train operators but financed by 
Network Rail can qualify for treatment as *self-financing schemes*. The term self-financing is applied to schemes that: 
 
- do not require government's financial support; and - do not otherwise generate liabilities for government. 131. Under this approach, schemes are financed through additions to Network 
Rail's RAB, the costs being recovered by Network Rail through a facility 
charge, without the need for specific government approval of the RAB financing. This approach can facilitate schemes promoted by a franchised passenger operator with a strong business case but which do not pay back within the remainder of a single franchise period. 132. The eligible schemes should meet the following key conditions: 
- The estimated cost is less than £10 million, although schemes above this 
value can be included on a case-by-case basis with government approval. 
- The scheme promoter prepares the business case and must pay for all the 
costs resulting from the scheme (including any relevant incremental operations, maintenance and renewals costs that fall within the charge recovery period, subject to the £50,000 threshold described in paragraph 81) for an agreed period. For franchisees this will generally be the remaining term of the franchise agreement, which should have at least two years remaining - successor franchisees then usually take on the payment obligations at the end of the promoter's franchise. Franchisees 
with less than two years remaining can qualify if government supports the case. 

- Network Rail must confirm its support for the scheme in writing and 
confirm that the scheme is consistent with other relevant policies and 
strategies (including its delivery plan and relevant route utilisation 
strategies). 
- The scheme must satisfy our criteria for adding investment expenditure to 
the RAB. 
 
133. Costs should be recovered through a facility charge.  For self-financing 
schemes a default recovery period applies. 
 
Recovery period for *self-financing schemes* 
 
134. For *self-financing schemes* the default maximum recovery period is 15 years, 
so that most franchisees will pay a reasonable proportion of scheme costs, and so the business case must be robust to provide a return on investment. We recognise that there may be good schemes for which a longer recovery 
period is appropriate and we are prepared to approve schemes with longer recovery periods by exception, but in such cases we need confirmation of Government support.  
 
7.4  Government sponsored schemes 135. Government sponsored schemes are those which are promoted by DfT or 
Transport Scotland but that are not required by their high level output specifications (and so were not funded in the periodic review). The approach to cost recovery for these schemes mirrors the approach taken to setting 
charges in PR08. 
 
- The efficient enhancement spend is added to the RAB.  We would 
generally expect payments for the incremental investments to begin at the 
point at which Network Rail incurs expenditure on those investments, 
rather than logging up the financing costs within the control period and 
adding these to the RAB at the next periodic review.  At the next periodic review the amount of the RAB addition would be reviewed to ensure it was 
both efficient and represented the economic value added by the investment.  It is then expected that the investment would be reflected in 
an increase in fixed track access charges or government grants at the next periodic review. 
- Government must fund any ongoing OMR costs on a pay-as-you-go basis 
until the subsequent periodic review. 
- At the next periodic review these incremental OMR costs of the 
enhancement will be considered together with those of other assets in determining Network Rail's revenue requirement and charges. 
 
7.5  Accelerated renewals 136. The focus of this document is investment in *enhancements* of the network, 
but investors might also want to bring forward a like-for-like renewal, for 
instance so that it can be coordinated with an enhancement to minimise disruption to services. 

 137. If Network Rail brings forward renewals - either from within the current control 
period or from a future control period - to deliver periodic review outputs in 
the current control period it will not receive any extra income. 138. But where a promoter wants to bring forward a renewal from later in the same 
control period the promoter should pay Network Rail for any increased financing costs arising from the timing difference. 139. If renewals are brought forward from a future control period, Network Rail is 
not funded for the renewal.  Network Rail should supply the scheme promoter 
with an estimate of the additional financing costs resulting from the 
accelerated renewal and the funder should pay for these additional costs until 
the renewal costs are added to the RAB.  The efficient costs of the renewal works should be logged up and remunerated through the RAB at the next periodic review. 
 
7.6  Rebate mechanism 140. The rebate mechanism is designed to allow third party investors in large-scale 
enhancements to recover a fair proportion of the costs incurred in funding an investment scheme where other parties benefit from the use of the 
enhancement. 
 
141. While in most cases we have sought to consolidate all our investment policy 
and guidelines into this document, in the case of the rebate mechanism we 
refer investors to our conclusions on the mechanism21.  This is because the 
rebate mechanism conclusions are self-contained (no further references are 
required), and these guidelines would otherwise be significantly longer.  The rest of this section outlines the mechanism. 142. Once an enhancement to the network is operational, any train operator can 
apply to Network Rail for access to it. If granted, the charge for access is 
payable to Network Rail, and as a general principle reflects the marginal cost of providing access. Under current arrangements, therefore, a third party 
funder cannot charge operators directly for access to an enhancement in which it has invested. Consequently, operators may be able to 'free ride' on the investment of others. 143. This 'free rider' problem means that the investor could be at a competitive 
disadvantage, reducing the incentive to invest and ultimately meaning that beneficial investments may not go ahead. 
 
144. Third parties investing in large-scale track infrastructure22 enhancements to 
the network can apply to Network Rail for a rebate charge to be put in place. 
This charge will be levied on operators that access and benefit from the enhancement. Government-funded schemes are outside the scope of the mechanism. 

 145. Investors will only be eligible for the rebate mechanism if they can 
demonstrate to Network Rail (and us) that they satisfy one of two criteria: 
 
- The funder is a private sector third-party funder and: 
 
o is not being funded for the investment through other mechanisms (e.g. 
franchising arrangements or grants);  
o there is a stand-alone business case for the investment in the absence 
of the rebate and free riding;  
o there is a real likelihood of free riding on the investment by 
competitors, which would mean that the project could not be undertaken without the prospect of such higher charges; and  
o the funder has explored thoroughly the possibility of joint funding 
arrangements before applying for the rebate mechanism.  
or - The funder is a public sector third-party funder (e.g. Transport for London 
(TfL), Passenger Transport Executives (PTEs)) and:  
 
o is not being funded for the investment through other mechanisms (e.g. 
Transport Innovation Fund (TIF) grants);  
o the scheme represents value for money in the absence of the rebate; 
o funding constraints mean that the scheme could not proceed, or would 
be delayed with significant adverse effects, without the prospect of 
recovering higher charges via the rebate, due to a lack of available funding;  
o the prospect of recovering higher charges via the rebate would ease 
the funding constraint; and  
o the funder has explored thoroughly the possibility of joint funding 
arrangements before applying for the rebate mechanism.  
The rebate charge 
146. The rebate charge will be an (index-linked) tariff levied per benefiting path, 
and will be payable to Network Rail as a premium to the access charge. Network Rail will then have responsibility for distributing the tariff received to the appropriate investing party(ies), the rights to which will be set out in the relevant access contract or access option. 147. The level of the charge should be calculated by Network Rail and be based 
on the average annual cost of the investment per relevant path available. The charge will be applicable only for the ex ante payback period of the investment, as set out in the access rights or options of the investing entity. If the original investor loses its access rights with respect to the enhancement, the mechanism for paying rebate charge to the investor will survive, unless the investor has been appropriately compensated for its investment. 148. The mechanism will be implemented through applications under section 17 to 
22A of the Railways Act 1993. The level of the rebate charge and the expiry 
date of the charge should be set out in schedule 7 of the track access contract. 
  

## 8. Investing At Depots 8.1  Depot Arrangements 149. Contractual, Operational And Charging Arrangements At Depots Are Different From Those In Place At Stations. Our Role In Enhancements At Depots Is Limited To The Light Maintenance Depots Owned By Network Rail.

 150. These depots provide a range of services, dependent on the size and 
structure of the depot, its technical capabilities, the equipment used, and the 
type of rolling stock provided for. Therefore, parties negotiate access to a depot depending on their specific circumstances and the services required. 151. For this reason we have not published formal guidelines on the process for 
investing in enhancements at Network Rail owned light maintenance depots, although Network Rail must comply with its licence condition obligations. 152. The situation is different if RAB financing is sought, as in these cases the 
scheme will be subject to the considerations set out in section 4.1 Financing using the RAB.  In many cases expenditure on enhancements at light 
maintenance depots owned by Network Rail would be eligible for a RAB 
addition in principle. 153. For such RAB financed enhancements, charges to recover costs should be 
included in the annexes to depot access conditions, which form part of the depot access contracts. 154. If stakeholders think that more detailed guidelines from us would be useful in 
this area, we will consider this once this consolidation of existing investment 
advice is finalised. 

## 9. Sale Of Land Or Rights To Land 9.1  Introduction 155. This Chapter Deals With Two Types Of Land Related Transaction That Sometimes Accompany Investment Framework Enhancement:

 
- changes to the value of land as a result of access to the land granted by 
another party ('shared value'); and 
- the potential for Network Rail to take an asset, or work done to enhance 
an asset, in lieu of a cash payment for land ('hypothecated gains'). 

## 9.2  Shared Value

Background 
156. Shared value is the term used where a land owner seeks a share of the 
increase in value created when it grants property rights in respect of its own land, to a developer, and this increases the value of the developer's land. 157. For example, a developer owns a piece of land to which access is difficult 
because of intervening land (e.g. a railway). If the owner of the intervening land grants access rights to the developer's site over its land, then the value 
of the developer's site will rise. The land owner would then normally seek a share of this increase. 158. The principle behind seeking a share of any valuation uplift as a result of 
granting such rights is part of established property valuation practice. 
Guidelines 
159. Network Rail can seek to share in the benefit of an increase in land value 
where that increase has been unlocked by providing developers with access to its own land or over its land. In doing so Network Rail must comply with relevant legislation. We would expect Network Rail to be mindful of relevant precedents, and not to frustrate developments from going ahead or significantly delay their implementation by adopting an unreasonable position. 
Where proposed developments have either direct or indirect rail-related benefits, we would expect Network Rail to have regard to this when negotiating with developers. 160. While there may be circumstances in which competition concerns might be 
raised, it should be noted that our role in enforcing the Competition Act 1998 only applies to services relating to the railways. It is likely therefore that 
competition issues relating to developments that are not connected to the railways will fall outside the scope of our powers. 
 
161. With these points in mind, it is a matter for the parties concerned to agree 
between them whether, in particular circumstances, shared value principles apply and, if so, the appropriate level of shared value. 162. If a developer thinks that Network Rail is unreasonably frustrating 
developments from proceeding it can take its case to the Lands Tribunal but Network Rail offers other options in order to resolve disputes, including 
mediation. Network Rail has also confirmed that it is willing to discuss other possible dispute resolution mechanisms with investors. 

## 9.3  Hypothecated Gains 163. 'Hypothecated Gains' Are Assets Taken (By Network Rail In This Case) In Lieu Of Cash. They Occur Where A Developer Offers To Carry Out An Enhancement In Return For, For Instance, Acquiring Network Rail Land For Development.

 164. If Network Rail accepted cash from a developer, it would benefit directly from 
those receipts, whereas the value of enhanced assets taken instead of cash typically falls to other parties such as TOCs, passengers and funders.  We want to incentivise Network Rail to take hypothecated gains instead of cash in 
those scenarios where developers can offer an asset whose value exceeds 
any cash payment they are prepared to make. 165. In our PR08 determination we accepted Network Rail's forecast of 
hypothecated gains of £255m in CP423.  We monitor Network Rail's progress 
in achieving this figure, and Network Rail will not benefit from RAB additions for hypothecated gains up to this value.  Once this total is achieved in CP4, we will allow RAB additions on the basis set out below, in order to incentivise 
Network Rail to pursue hypothecated gains where they are of greater (whole 
industry) benefit than any cash alternative. 166. We have established a formula for calculating a total value for RAB addition in 
order to achieve this incentive effect. The total value added to the RAB should be: 
 
TVRAB = CV + x% (IV-CV) where: 
TVRAB is the total value added to the RAB; 
CV is the forgone cash equivalent; 
IV is the economically efficient value of investment (usually the efficient initial capital cost); 
And therefore (IV-CV) is the incremental gain; and x% is a percentage as described below. 

r the 
167. We have set x at 25% to provide enough incentive on Network Rail to accept 
assets where their value materially exceeds any cash alternative24. The 
closer the equivalent cash value is to the value of the asset, the stronge incentive on Network Rail to take cash; where the value of the asset is 
significantly greater than the equivalent cash value Network Rail faces a 
strong incentive to take the asset. 168. Where Network Rail can demonstrate that the equivalent cash value is either 
zero or impossible to estimate, the formula set out above should apply with 
CV set to zero. 169. There will be some additional transaction costs when Network Rail accepts 
assets in lieu of cash, but we think that in most cases these will be small 
when compared with the value of the RAB addition. 170. To summarise the approach, a proportion of the value of assets received as 
hypothecated gains by Network Rail above the PR08 forecast level of gains for CP4 would be eligible for addition to the RAB, subject to certain conditions: 
 
- confirmation from Network Rail that the value of each asset represents an 
efficient price for delivery of the investment received, and adds to the 
economic value of the rail network by an amount greater than the cash 
contribution Network Rail has foregone. For hypothecated gains which result in physical changes to a station, all users of the station would also 
be consulted through the station change process; 
- a maximum RAB addition for hypothecated gains of £5 million per 
scheme, with all gains above this value requiring explicit approval from us, in consultation with government; 
- an annual cap on such RAB additions for hypothecated gains of £50 
million (over and above the PR08 forecast), again any gains above this value can be recognised as long as we provide explicit approval, having 
consulted government; and 
- other incremental costs resulting from the hypothecated gain would be 
treated as set out in the earlier chapters of this document (in the same way as for any other scheme cost). 171. Network Rail must set out details of expected hypothecated gains in its 
annual plans, to inform customers and funders. 
                                           

## Annex A. Example Facility Charge

 
An example calculation of a facility charge is included in the spreadsheet accompanying this document, available on our website: http://www.railreg.gov.uk/server/show/nav.190