Rail 849: Another potential rail scandal as short-termism wins out again

When Peter Hendy, the chairman of Network Rail, produced his review into railway overspending two years ago, he blithely recommended that the company could generate £1.8bn by disposing of non-railway assets. At the time, I wrote that this was a bit of smoke and mirrors since by selling off assets that were earning a rate of return, it would be simply foregoing a future revenue stream in return for a capital sum.

I was being too kind. In November, Network Rail announced it was planning to sell off its entire commercial estate and was seeking bidders. The portfolio consists mainly of the land underneath railway arches, but also includes thousands of redundant buildings at or near stations. The properties are currently mostly rented on a short term basis because of the possible need for Network Rail to repossess them in case, for example, the arches need structural work or a redevelopment or expansion of a station requires some of this property to be included. An insider told me that ‘this arrangement often suits the company renting the property as a short term lease does not burden them with long term responsibility’.

Therefore most of the properties are being used by small and medium sized enterprise and, indeed, Network Rail boasts that it is the country’s ‘biggest provider of business space’ to these types of company. The revenue brought in by these properties which are separate from those, such as stations and other buildings, leased to the train operating companies is around £90m annually. It is expected that the portfolio will bring in about £1bn which will go towards reducing Network Rail’s debt, now heading up to the £50bn mark.

In putting the property up for sale, Network Rail said it has decided ‘to sell the commercial estate business because it is a non-core property asset and is not essential for the running of the railway. This will allow the company to place even more focus on its core business of improving the passenger experience and running a safe, reliable and growing railway and help fund its upgrade plan’.

However, it is not that simple. The sale of the estate is likely to cause all kinds of problems for Network Rail in the long term. Take, for example, West Croydon, a site where the station – which of course will remain in NR hands – is surrounded by a series of shops owned by the railway that would be part of the portfolio to be sold off. The entrance to the station is very constrained and the connection with the tram outside anything but ideal. As the numbers using the station increase, it is highly likely that it will need to be redeveloped. Selling off the shops around the station will undoubtedly make any redevelopment harder and more difficult. Transport for London recognised this by responding to a consultation on the future of the station by saying ‘We would not support
any proposal that would prevent future passenger capacity and access improvement schemes at West Croydon, nor the ability to reconfigure the station to three through platforms if required’. It is precisely that sort of issue which will occur time and time again in the future. NR may argue that operational property will not be affected, but predicting which stations will grow massively in demand over, say, the next 20 years – let along the 125 term on which the lease will be sold – is a mug’s game.

Moreover, the sale will make it far more difficult for community groups to get the sort of deal on property that takes into account wider societal needs, rather than just money. According to my inside source, many property deals are done with local people, such as through Community Rail Partnerships where the social value of refurbishing existing buildings or maintaining the railway heritage has been recognised. In other words, the deal may not have been the most profitable in the short term for Network Rail, but in the long term it has done a lot of good for the local community and therefore helped the railway’s reputation for being more than just a money grabbing machine.

While such considerations may not resonate in these austere times – though gosh I wish they did – the sheer economics of the deal should raise a few hackles among opposition politicians as they simply do not make sense. Here’s the rub. The £90m revenue brought in by Network Rail may well grow as passenger numbers grow because some of that income is dependent on the income generated by the retailers who lease the properties. Selling the whole portfolio is expected to yield about £1bn which will go towards reducing Network Rail’s debt. At the moment – though this may, admittedly go up – the interest payments on £1bn amount currently to around £45m. So Network Rail is selling an asset that generates around double the amount it will save through the sale. It makes no economic sense and is just an exercise that looks good in terms of the books but is bad in practice.

Now for the killer blow. In 2013, a similar idea was being mooted and a study (which goes by the hardly seductive title ‘Assessment of robustness of property income forecasts of NR in the Strategic Business Plan’) was commissioned into the idea by the Office of Road and Rail. In its evidence to DTZ, the consultants, Network Rail argued strongly against a disposal of the income or, as it was put, swapping the benefits of a revenue stream for a one off capital sum. In fact, Network Rail stressed its preference was to have a greater revenue stream: ‘NR has highlighted to DTZ that they consider a shift to allow them greater freedom to receive income as opposed to capital would be beneficial to long term returns by allowing them to benefit from the predicted growth in railway usage’. This was because there was an expectation that its property holdings would increase in value beyond what the market would expect.

In the report, Network Rail cited half a dozen reasons why the sale of the portfolio would be a mistake:

  • As mentioned, the low cost of borrowing
  • The lack of expertise in the property sector to deal with such a difficult portfolio
  • The lack of separation between many of the properties and the active railway
  • Tax issues
  • The difficulty of ‘ring fencing’ the income stream between operational and non operational property
  • The likely pressure on management time (something, as I have written before, is in short supply in NR)

Yet, just two years after this analysis was published, Hendy went ahead to suggest that the whole lot should be sold off, ignoring all these counter arguments. Of course he was under pressure from the government to save money but ultimately the plan will cost NR more than it saves.

Ironically, in January the Ministry of Defence was slammed in a report by the National Audit Office for a similar sale of assets that took place two decades ago when all its property for housing military personnel was disposed of to a private company. The damning NAO report did not mince its words and suggested that the MoD was losing £200m every year – on a sale which fetched just £1.6bn in 1996 – because the estimate of house prices and property values had been pessimistic. Moreover, by losing control over the estate, the ministry was finding it difficult to house vital personnel.

This property sale is certain to raise the same issues. The proper value of the property will not be obtained as it will be a job lot whose price will be depressed by the potential needs of the railway to access it, and it will constrain future development and station expansions.

How can this crazy sale be stopped? Well, the Office of Road and Rail has been strangely silent on this issue. It presumably is unconcerned because the property is not operational. But as the examples above show, the dividing line between what is operational or may become relevant to the operations is a blurry one, and selling off this huge portfolio is bound to cause problems in many potential developments or station expansions in the future. There it should and must intervene, as should the Labour transport team. This is yet another example of ideological considerations overriding practical ones, and with all the fuss over Carillion, the East Coast and the MoD sale, the lessons should have been learnt by now.



Driverless car death raises doubts about this technology


Forgive me for mentioning driverless cars again in a railway magazine, but as I have argued before, this is relevant because transport ministers and other politicians, such as Philip Hammond and Lord Adonis, keep referring to them as a potential alternative to the railways.

Therefore the death of a pedestrian in Arizona who was run over by a driverless car in autonomous mode – although there was an operator who could have intervened – highlights the fact that this technology is unlikely ever to deliver the promised safety benefits and that it is nowhere near being able to handle all the difficulties encountered by human drivers every moment they are at the wheel.

Of course thousands of people are killed by cars every day (the worldwide figure is 3,200 daily) and we should be doing everything to reduce that terrible toll. However, jumping to an untried technology which has all sorts of other undesirable consequences, such as putting hundreds of millions of people out of work, is not the solution. As the massive recent progress in rail safety in recent years has shown, it is possible to make best use of existing technologies and to work at human factors in order to improve safety and reduce accidents. Arguing that we need to wait until driverless cars come on stream, which as I have argued may never happen, is a smokescreen that will prevent proper safety measures being implemented now.

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