Rail 439: Let’s stop playing ‘pretend capitalism’ with the railway

With the taxpayer effectively bankrolling and bearing the risk for the new Network Rail, why try to play semantic name games by claiming it is anything other than a nationalisation, asks CHRISTIAN WOLMAR.

So farewell Railtrack and hello Network Rail. The transition has been about as smooth as a ride on a branch line in a Pacer. Last-minute constipation meant the announcement, scheduled for June 22/23, did not actually emerge until the following Thursday.

And you can see why. The whole thing is horrendously complicated, with so many loose ends that it is going to take, on Network Rail’s admission, 18 months to begin to sort them out during which the company will be finding its feet (or its tracks).

Press coverage has tended to focus on the fate of shareholders who, actually, are not getting a bad deal – around £2.50 per share, compared with £2.80 at which it closed in October, though those who bought the shares three years ago at £16 or £17 may not think so.

There are a myriad of obfuscations surrounding the birth of the new company that do not augur well for its long-term future. Right at the outset, there were two lies surrounding the demise of Railtrack. First, the Government insisted that Railtrack was bankrupt when it was ‘forced’ to step in to rescue it. In fact, Railtrack was always a political construct supported by large amounts of taxpayers’ money and therefore everdependent on Government benevolence. Once the Government decided to turn off the tap – quite rightly, as it turns out – the company was effectively bankrupt, but it was dishonest to pretend that it had not been the Government which made it go bust.

Secondly, the transfer of Railtrack to NR was a rigged process. The proof is the absence of any other bidders. Why were there no bidders? Why did the about-to-belaunched Harris Wolmar Rail decide not to express an interest? Simple – no-one knew what they were buying. The Government never set out a clear proposition for what was on offer in terms of Whitehall support to enable anyone else to come forward. Because Stephen Byers and the Treasury chose the indirect form of nationalisation – of forcing the company into administration instead of simply coming to a deal with the shareholders over pulling the plug – they had to go through a pretend process of seeking other bidders. But they never wanted anyone else to bid and, indeed, then reneged on a promise of no taxpayers’ money going to shareholders in order to hurry the process along.

And now the creation of NR (I suppose we better get used to the initials) is a nationalisation in all but name, despite Government promises to the contrary. The key point is: who is taking the risk? Since there are no shareholders and the company can only borrow at reasonably cheap rates if the loans are supported by the Government, then it is clear that the risk is being taken by the Treasury and ultimately you and me. All the smoke and mirrors which NR executives use to explain that really this is not a Government company are a ridiculous barrier to a proper discussion about the state of the railways and their future.

In a speech to the Railway Forum, Iain Coucher, the Managing Director of NR, said it would very much be a private company but then in the next breath he confirmed it would be a subsidiary of the SRA. Now, in my world, rather than Planet Fantasy, a company that is a subsidiary of a Government organisation is not in the private sector. Or I am being very stupid?

He reiterated, as did Alistair Darling, making his debut speech as Transport Secretary, that the industry did not need any more structural changes. But, my dears, it is currently undergoing a structural upheaval and there is only one thing that is certain: the industry is not in a stable situation.

Indeed, to say that the future is uncertain is a gross understatement. This new creature which we must learn to love in the same way as its predecessor is a strange construct. Indeed, it is yet another unique experiment, something the rail industry has suffered too much of in the past decade. In a brilliant lecture at a recent Oxera conference, Dieter Helm from the department of Economics of the University of Oxford, argued that the new organisation was neither fish nor fowl. Helm was concerned that NR would neither have the disciplines of a profit-making company, which would be forced to behave efficiently because of its dependence on private capital, nor be subject to the kind of rigorous control by the Treasury endured by BR in its 50-year history.

When pushed, Helm said that in an ideal world he would favour an equity-funded Network Rail, backed by a steady and constant stream of Government cash which did not vary according to the whims of ministers and the short-term circumstances of the economy. Given that this ideal world would never exist, he accepted that the best option was a renationalised Network Rail because it would have access to cheaper borrowing.

Instead, we have a kind of ‘pretend capitalism’ where NR will be expected to build up a store of capital – an equity buffer, it is called – in order to be able to ride future risks. An excellent paper by the Office of the Rail Regulator* (dated June 14, which shows when the NR announcement should have been made) outlines the issues facing NR, which include its stewardship of the network, the adequacy of funding and future funding, its structure and its role in enhancements.

Money is the overriding issue. The sums now being talked about in relation to the new organisation are staggering – the total available to NR in the first five years will probably be around £20bn and yet that amount is talked about as if it were what your grandmother kept under her bed. The establishment of NR is being funded by borrowing from banks, supported by the SRA, to the tune of £9bn. Most of that is being eaten up by the debts of Railtrack which have risen to more than £7bn and the rest is working capital. In the long term, NR is to be funded by securitisation of its future revenue.

That means the Government will promise to pay, say, £x billion to NR every year for, say, 20 years and on that basis NR will be able to raise around £10x billion to fund its work on the railways. One may ask, in passing, why London Underground cannot do that rather than be subjected to the crazily complex Public Private Partnership, but I must be missing something. Perhaps someone from the Treasury will explain. The key point for NR, however, is that this arrangement implies it will be receiving a guaranteed amount of money from the Treasury for a long period, something BR was never allowed.

The fundamental issue is whether NR will manage to bring costs in the industry under control. This has major implications for the future of rail investment. I suspect that the Treasury is already getting itchy about the amount of money going into rail and is asking whether it is getting value for money. The answer must be no. Indeed, as the Regulator puts it, “Railtrack has spent and is spending far more on OM&R [operations, maintenance and renewal] than envisaged at the time of the periodic review”.

The Regulator then says: “It is important that NR funding reflects the cost to a well-managed and competent operator and that there is transparency about the way in which the Regulator intends to deal with any additional costs.” Given that Network Rail is a creature of Government, it seems to me that whatever the Regulator says, at the end of the day, it will be the taxpayers coughing up, just as we have had to do as a result of the demise of Railtrack. Do we really need a regulator to spend a lot of time determining what NR should get through a lengthy and costly review only for it to be rendered irrelevant, as the current one was, because costs are out of control?

This raises questions about the role of the Regulator. The current incumbent, the deeply cerebral and knowledgeable Tom Winsor, reckons he has ensured the future of the organisation, given the announcement that a board will be appointed to oversee his work but that his future independence will be guaranteed. Personally, I’m not so sure his glee is justified. We are in uncharted waters. No other regulator controls an organisation which is, effectively, nationalised. His decisions will have a direct impact on the Treasury which is not known for allowing others to have their hands in its till. Winsor may have convinced himself that he remains independent, but let us see when he comes up with the results of the interim review of the current access charge regime which, despite denials from NR, is bound to be undertaken.

Finally, there is the structure of NR. Dieter Helm was pretty sceptical about the ability of the stakeholders – the 100 or so members of the company who oversee its work – to do much. They will meet infrequently and their role will be limited, he reckons. Anthony Smith of the Rail Passengers’ Council disagrees. He thinks that the independent representatives such as his organisation and Railfuture can work together to effect real changes to NR policy. Again, we are in uncharted waters.

The issues facing NR are incredibly complex and the organisation will take a couple of years even to begin to settle down. Meanwhile, the whole refranchising process seems to be stalled with very little progress, even where preferred bidders have long been selected. As I write this, a press release plops into my inbox explaining that a £29m benefits package has been secured for South West Trains passengers. What, in fact, the release says, is that SWT is to receive a further £29m in subsidy to help introduce new rolling stock and to get a few extra trains. Now SWT is one of the most profitable franchises on the network but its appetite for more money is insatiable.

It raises the question – what are franchises for? We know they don’t take the risk, as eight have thrown in the towel and Virgin’s two will effectively follow suit. And, on the upside, they just pocket the cash from an industry that is inherently loss-making. In simple terms, this means that instead of the industry crosssubsidising itself, now the profits are taken out by the private sector while the rising losses are met by taxpayers. It is difficult not to argue that we were better off a decade ago.

* The proposed acquisition of Railtrack plc by Network Rail, a statement by the Rail Regulator and proposed licence modifications, June 2002

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