Rail 476: Railways up for grabs as politicians struggle with debt

Network Rail’s debts are far in excess of BR’s. Christian Wolmar says there will come a point when government says ‘enough is enough’.

With the announcement of the regulator’s announcement on Network Rail’s access charges the railways will enter a world of never-never economics which poses the gravest ever threat to their future. A leaked report by the National Audit Office has revealed that it cost between £21m and £35m extra for Network Rail to borrow money using government backed loans instead of public finance to fund its debt.

There are two interesting aspects about this. It not only highlights the extra costs of having to pretend that Network Rail is a private company, but also, more importantly, it sheds light on what is the biggest problem facing the railways, the growing debt.

As we already know, Network Rail’s debt is scheduled to increase dramatically over the next few years. Indeed, attempts to try to fund the increase in access charges announced this week by Tom Winsor through some clever financial mechanism appear to have come to naught and there will be no alternative for the government but to allow NR’s debt to rise. Network Rail’s debt went up from £6.3bn to £9.4bn during the 2002/3 financial year and is currently £10.3bn. But if Winsor, as expected, grants Network Rail a substantial increase in spending, the debt will rise faster, possibly to as much as £37bn by the end of the decade according to one accountant’s estimate.

Savour that figure for a moment. Say interest rates go up a bit, and the debt requires 5 per cent. Not an unreasonable assumption. That means the railways will have to fork out a cool, £1,850m each year before a single train moves. Is there any expectation that any of this money will be paid back from profits of the industry? About as likely as a new North South high speed line ever being built, frankly.

Worse, what is there to stop the debt mounting further after that? Sure one can have arcane arguments about whether this was caused by decades of underinvestment, the fragmentation of the railways as a result of privatisation or the requirements of the safety culture, but that is irrelevant to the Treasury which has to fork out the money. The railways are not suddenly going to pay for themselves, and maintenance and renewal costs will remain at well above their historic levels. This is not sustainable. I cannot envisage the Treasury being prepared to pay not only almost £2bn merely to cover the railways’ debt interest but a further £3.5bn – if we are being optimistic about NR’s ability to cut costs – in annual subsidy.

By then the extra cost of pretending Network Rail is a private company could be over £100m, But in the new world of the privatised railway’s economics this is a trifling sum. Is there any chance that the government will do anything about it, even if the NAO’s final report is damning about the waste?

This rapid accumulation of debt represents a new way of financing the railways which has not been the subject of a public debate because few understand it outside the City pages. BR accumulated debts because the governments of the time failed to recognise the social value of the railway which could not be captured through the fare box, the fundamental problem of railway economics. Under BR, the railways were able to borrow to cover losses and the amount was periodically absorbed into the national debt. The 1968 Transport Act wrote off £1.2bn (say £13bn in today’s money), a further £600m in 1974 (£4bn now) and around £900m (£1.2bn) at privatisation of Railtrack in 1996. Such write-offs are not feasible in the current circumstances simply because no Chancellor will ever be in a position to take a debt of tens of billions onto the government’s accounts. Therefore the games with smoke and mirrors will keep on being played.

BR’s write offs were small beer compared with today’s accumulation of debt. The first write off, for example, took the first 20 years after nationalisation to accumulate, compared with just four years if NR’s present trends continue. Moreover, most of the BR debts were incurred on capital projects and improvements. The borrowing now is to pay for the maintenance and renewal of the railway, something appears to break Gordon Brown’s golden rule, that the government should only borrow to pay for capital projects.

Now, the debt is with a notionally private company and will rise every year. Tom Winsor argues that his intervention guarantees that Network Rail receives the money it needs from government and effectively protects the railways from the annual Treasury spending round. In the short term, that is true, but this method of building up an enormous debt for the railways is unprecedented and will not, as supporters of the current structure of the railway argue, free the railways from the Treasury yoke because the problem of what to do with it will become a political football.

So when Tom Winsor comes up with his figure for the next five years, we are going to be entering a new world of railway economics. Ministers will try to pretend that nothing much has happened and that the economic issues of the railways will sort themselves out. Certainly, until the election expect a typical muddle through – but after that watch this space. The noises coming out of Whitehall, albeit sotto voce and so far very privately, suggest that everything about the railways – its structure, its economics, its service levels, its investment – will be up for grabs as politicians struggle with the debt mountain.

Safety reorganisation is next on the list

Indeed, there seems no end to the state of constant upheaval in the railways. No sooner has Network Rail announced its radical changes than the focus is on the way that safety in the industry is regulated.

The leaking – why does all the interesting stuff have to be leaked? – of the resignation letter from Alan Osborne, who recently left his post as director of rail safety at the Health & Safety Executive because of his dissatisfaction with the lack of autonomy for the railways within the organisation suggests that changes are afoot on the safety front, too. Osborne left the HSE after less than a year because of the turf wars and bureaucracy he faced, which he decided was doing neither the industry, nor its safety performance, any good.

The essential problem is that the HSE, which principally works to the Health and Safety at Work Act 1974, is an inappropriate home for the organisation which regulates safety on the railways. The core functions of the HSE are about safety for workers, rather than for the public at large. In the nuclear industry, for example, the two are completely indistinguishable. Any leak of radioactive material would not only put the employees at enormous risk, but be a major danger for the public at large.

The rail industry is not like that. There is a tension between the two. That is not to say that any rail company wants to put its workers at risk, but creating over-stringent safety requirements for when work can be carried out on the railway pushes up costs enormously and makes the whole industry less economically viable. It also increases delays and both those factors reduce demand for train travel.

Osborne struggled against this situation. He wanted a measure of independence for the railways inspectorate but found that his masters on the HSE would not allow him that freedom. Indeed, the policy makers at the HSE treat the rail industry, which is lumped together administratively within the organisation with the major hazard industries such as chemical and nuclear, tend to treat rail companies as the enemy who would kill lots of people were it not for the standard bearers of the HSE defending the workforce and the public.

That kind of attitude, combined with an ignorance of the railway industry, is demonstrated by the HSE’s attempt to find new types of points involving no maintenance after Potters Bar. It tried to use nuclear industry type thinking to urge the industry to change the design. Fortunately nothing much has resulted from this move except for some expensive consultancy work. However, given that the cause of Potters Bar remains unclear and the massive potential cost of any such change, which ignores 175 years of railway experience in developing and improving trackwork, only an organisation with no understanding of railway engineering or economics could ever have contemplated such a change.

Given the lack of trust between the HSE and the industry, characterised by a series of prosecutions whose purpose seems to be more about boosting the HSE’s empty coffers than improving safety, Osborne felt he had to go. As he concluded in his letter, one person could not struggle against the HSE – it needs radical surgery.

One example of the way the HSE is downgrading its railways work is that the wonderfully full and detailed annual safety report that used to be produced by the Inspectorate has been reduced to a small series of tables on the internet and a photocopied handout because of costcutting, a move that Osborne opposed. That shows the new regime at the HSE does not understand that the old kind of detailed publication was a way of demonstrating that the organisation was taking the issue of rail safety serious and that it knew its onions.

The short term solution could be to put a revamped Inspectorate into the new Office of Rail Regulation, which takes over from the Office of the Rail Regulator when the present incumbent, Tom Winsor, goes in July. That would be similar to the Civil Aviation Authority which has both the industry’s economic and safety regulation functions, though under clearly defined separate departments.

In the long term, safety may require yet more legislation on the railways, but this could not happen until after a general election. Indeed, despite the fact that Whitehall has recognised the shortcomings of the HSE, do not expect any change until after the election because Alistair Darling, the transport secretary, would not want to put his head above the parapet on an issue which could attract negative newspaper headlines.

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