Rail 739 Back to the past as Network Rail comes back into the fold 3

February 8th, 2014 Rail Magazine

So it’s welcome back British Rail. I jest somewhat, but permit me to enjoy a few laughs at the sight of the government being forced to take Network Rail’s £30bn debt on to its books. The announcement by the Office of National Statistics that new European rules mean that the debt can no longer be considered as being in the private sector is, in fact, a long overdue adjustment to bring the UK into line with the rest of the European Union. It has long been seen in Brussels as inevitable.

It is, of course, Gordon Brown, who should be the butt of the jokes since it was his refusal to allow Network Rail to be renationalised in an honest way – rather than as a company limited by guarantee with no shareholders – that has now been exposed as the subterfuge we all know it to be. The fact that this is an embarrassment to the government was made clear by the release of the information a few days before xmas when everyone’s attention was elsewhere. Always a good time to bury bad news.

Is it, though, bad news, and if so for whom? My view is that while this is embarrassing for the politicians – more so for Labour than the Coalition, although few people will now Brown’s role in the creation of Network Rail – it might well be in the best long term interests of the industry as it could result in a more honest and transparent relationship with government.  There is, though, as I warn below, one major proviso. And there are lots of unanswered questions such as what happens to Scotland – or indeed London? And while the status of Network Rail for the time being remains unchanged, will it not put pressure on reforming it?

On the face of it, the question of the status of Network Rail’s debt is all nonsense, one of those ridiculous conventions that has no meaning in the real economic world. What does it matter if the borrowing is guaranteed by the government but not included on its books, or is actually part of its accounts? The theory, beloved of the Treasury, is that if the government debt is theoretically lower, then the international money markets will regard it more favourably. That, however, is assuming that the money markets are remarkably stupid and that those investing in a currency won’t look at the wider situation regarding debt. The whole Private Finance Initiative is based on this fallacy.

I was reminded of just how damaging this game-playing with financial arrangements for public bodies can be during a recent trip to Zagreb to give a lecture on the almost unbelievable story of the Public Private Partnership for the London Underground (see my book Down the Tube, available on Kindle). The PPP was a disaster from start to finish. The same Gordon Brown refused to listen to all the experts who counselled against and the final bill for the debacle, according to the authors of a must-get-for-xmas new book, Ivor Crewe and Anthony King, The Blunders of our Governments runs into the billions. One of its key motivations was to keep the upgrading of the Tube off the balance books, and in this, of course, it failed as both the two infrastructure companies, Metronet and Tube Lines, have now been taken back in house.

Network Rail and its debt was another similar game and as Tom Winsor, the regulator at the time of its creation never ceased to mention, the strange structure created following the collapse of Railtrack seemed anomalous and lacked accountability especially as mentioned above the debt was always guaranteed by government. One of the key reasons was not to take on Network Rail’s debt since it would supposedly have diminished the government’s potential to borrow but ironically we have in fact already lost our Triple A status (the highest and therefore allowing the government to borrow at a cheaper rate). Therefore the mere 2 per cent increase in the debt level represented by this measure, which will take effect in September this year, is trifling – though other changes such as the way that quantitative easing is counted (don’t go there) may make the amount taken on to the books much greater.

So now the game playing can now stop. Network Rail might not quite be British Rail yet but it will be regarded rather differently in future, as a kind of arms length government organisation. While that more transparent relationship is healthier in some respects, there are grave dangers ahead. The key to the success of the relationship is ‘arms length’. The current arrangements have worked well in terms of providing a steady flow of investment for the industry. The biggest benefit of privatisation and the reason why the late Sir Bob Horton, the first chairman of Railtrack, told me he was so determined to ensure it was in the private sector, was that the flow of investment would be guaranteed. British Rail was subject to the whims of annularity and unpredictable decisions from government.

Now the stable arrangements created as a result of privatisation are potentially at risk. While the process to fund investment in the rail industry remains the same, there will be more pressure from the Treasury to guarantee the size of the SOFA, the Statement of Funds Available, that is at the core of the system. The SOFA is determined by the government which provides the bulk of the funds but until now the fact that the process was all at arms length meant that the opportunity for ministers to interfere was limited. The one big proviso about whether this move will end up being damaging or not to the industry is on this issue. Will the railways find themselves bound up in the government’s austerity programme. Remember government spending is very much focussed on investment and the five year planning periods for Network Rail offer protection. But it is perhaps the franchising budget that may be under most pressure, which is bad timing since under franchising director Peter Wilkinson working under the new model created following the Brown review, for the first time there will be real quality and passenger benefit thresholds.

While the Memorandum of Understanding (available online) on the change by the ONS attempts to minimise the implications of this move, it rather contradicts itself by saying that the government will look at ways that the ‘corporate governance’ must change and mentions in particular ‘executive director pay and incentives’.  It is well known that ministers were exasperated by the way that Network Rail continued to pay its senior staff large bonuses when performance on the key punctuality measure had declined. Putting on my Mystic Wolmar hat, I reckon there is no doubt that changes to the scheme will be made.

But will that be all? The Memorandum also says that ‘The Secretary of State is considering whether to appoint a Special Director to Network Rail’s Board to promote an open and transparent working relationship with Government’. I rather like those weasel words but they do little to disguise the inevitable greater interference from government.

This is complicated territory. On the one hand, given the importance of the industry to the functioning of the economy and the large amount of subsidy it absorbs, it is quite right that the government has a role to play in the railways. That should be at a strategic and macro level, but not be an attempt to micromanage. There was an interesting case in point a few years ago when Lord Adonis, as transport secretary, stopped SWT from closing some of the ticket offices where it wanted to reduce hours. This could be seen as a perfectly good example of protecting passengers’ interests, or as unnecessary interference in commercial decisions. I incline to the latter but many in the industry do not.

What this episode shows is the point I have made numerous times in this column. In many respects the railways have never been truly privatised and cannot be. As I mention in an article I have just written for House, the magazine aimed at Parliamentarians (available on my website), just consider all the decisions that are made invariably by ministers or civil servants rather than the private companies: the timetable, ticket office openings, rolling stock investment, station renewals, regulated ticket prices, reopenings…and so on.  One could conclude, therefore ‘privatisation, what privatisation?’.

 

Mystic Wolmar sticks his neck out

 

OK, by popular demand (thank you for the three contributions on Twitter), here are my half dozen for 2014

 

  1. The East Coast franchise will be reprivatised but then nationalised – to a state owned foreign bidder. Richard Branson will be very angry.  All franchise extensions will go to the incumbent, and Directly Operated Railways will not be called in.
  2. Patrick McLoughlin will see the year out as Transport Secretary  but Philip Hammond, the Defence Secretary,  will  be out on his ear.
  3. After much prevarication, Ed Milliband will come out in favour of taking back some franchises back in-house.
  4. Growth of passenger numbers will flatten out to 2 per cent.
  5. Complacency will lead to a serious rail incident, hopefully not fatal.
  6. The lack of diesel trains will cause a capacity crunch which will generate considerable publicity

 

Oh, and, forgive me,  QPR will go up. And I hope we all have a great 2014.

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  • Christian Schmidt

    Christian, you’re quite mistaken if you believe that having triple-A or not makes any difference to the cost of government debt. When the UK lost its triple-A rating it made no difference to debt costs, and the same happened when the US lost theirs. For a nation issuing debt in their own currency (and which thus cannot go bancrupt or fail to repay the money), what basically determines long-term interest rates is the market’s expectation of future short-term rates. And short-term rates are set by the Bank of England in accordance to economic conditions. In other words, long-term interest rates will stay low as long as the market things the economy will continue to do badly, and will increase when the market things like look better.

  • Paul Holt

    Paragraph 3: should “…will now…” be “…will know…”?

    “arms length” should be “arm’s length” (three instances).

  • Bresm

    I would be more than content if Network Rail became a nationalised company with a complete free rein to function in a commercial manner. Eventually expanding their portfolio by making acquisitions in a similar vein to globally successful Deutsche Bahn. However, breath must be firmly held.

  • @Manifietso :)!

    Retweet Reply Favorite (about 18 hours ago)
  • @PaulBigland1 @zelo_street There may be a capacity issue but HS2 is not the best or indeed only way to address it! And no environmental case

    Retweet Reply Favorite (about 21 hours ago)
  • @PaulBigland1 @zelo_street @Captain_Deltic Do they really?There are some key issues about the failings of the scheme that need addressing

    Retweet Reply Favorite (about 22 hours ago)

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