Return to Archive -by date - by topic.

INFORMED SOURCES June 2004

Support needed tops £5billion this year

Railtrack's borrowing conceals a 40% increase in the taxpayers' support for the rail network

In the February 2003 Informed Sources, there was a brief moment of smarty-pants hubris when I emerged from some heavy duty number crunching to reveal that public support for the railway in 2003/04 would reach £3billion. For reference, at the peak of the last economic cycle British Rail needed roundly £1billion at today's prices.

Nemesis followed instantly, in the form of the Strategic Rail Authority's 2003 Strategic Plan. My shock horror revelation was eclipsed by the official figure of £3.8 billion.

Manipulation

Meanwhile, Rail Regulator Tom Winsor was carrying out the Interim Review. His final determination was more than the DfT and the SRA could afford, so since Tom is an accommodating chap and since he has a duty to take the SRA's budget into consideration, he agreed to a bit of financial manipulation.

For the first two years, Network Rail doesn't get the full amount determined by the Interim Review and borrows to cover the shortfall. Table 1 shows the details

Table 1

Network Rail Income and borrowings 2004/05-2008/09

Source:ORR

Note that both in the current financial year and next, Network Rail is borrowing around £1.5billion so that track access charges can be kept constant. The direct grant payments are also a few hundred million short of the steady-state financial position starting in 2006/07 when Tom Winsor has said that Network Rail must be paid in full.

It goes without saying that these borrowings are a short term fix, which we, the taxpayers and farepayers, will still have to pay for long term – and with interest. Part of the fudge is sticking the cost of unaffordable large projects, like the Southern Region Power Supply Upgrade, on Network Rail's Regulatory Credit Card, sorry Regulatory Asset Base.

Anything in the RAB, earns in perpetuity a return funded by the taxpayer. This return is much higher than Network Rail's actual cost of debt.

More support

So what does the Interim Review do to the £3.8 billion a year support? Well, on 31 March SRA published its latest Corporate Plan and in Table 2 I have used the financial data to update the budgets in the 2003 Strategic Plan.

Now the presentation of data in the two publications is not entirely compatible. For example DfT expenditure is not listed in the Corporate Plan nor are Freight Grants itemised separately. But as Table 2 shows, the data are coherent.

Columns one and two are as originally published here in March 2003. Column three, taken from the Corporate Plan, updates and revises the budget for 2004-05 to take the Interim Review into account. And to give the complete picture, I have added Network Rail's borrowings.

All this financial morphing means that while the public money going into the railways remains in line with the SRA's budget, this is not a true picture of the cost of the railways to the taxpayer. The bottom line is that the railway as a whole now needs £5.37 billion over and above fares and freight charges to keep running.

Table 2

Public funding for the railways

Source: SRA plus RBI analysis

*Includes freight grants

Now whichever way you look at this it cannot be sustainable. Indeed I cannot get my head round the fact that after seven years of sustained economic growth, the railway is now costing over five times the total subsidy in BR's best year.

Nostalgia

Talking to the Financial Times at the beginning of May, Transport Secretary Dr Kim Howells remarked that people ‘tend to look back now on British Rail with rose tinted spectacles'. Well I bet his civil servants do over their afternoon Earl Grey and cucumber sandwiches.

You can imagine them waxing nostalgically over the days when you could call Bob Reid or John Welsby in and demand 5% cost cuts because times were hard. This is, of course, why so many old-BR managers supported privatisation. It was a divorce made in heaven, the Treasury got the running sore of the railways off their books and the railwaymen got the gradgrinds of the DfT off their backs.

Today, Network Rail has indeed got stable funding, thanks to the Regulator. It knows how much it has to spend over the next five years and what efficiency targets it has to achieve.

But even though the Treasury must know that it is not getting value for money for the billions it is spending, it still has to go on forking it out. And the biggest irony is that the private sector status of Network Rail, which is one reason why we have an omnipotent Regulator, is maintained only to keep £13 billions of Network Rail debt off the Treasury's Books.

Negative EFL?

Meanwhile, an old-BR chum, to whom I was recounting these latest figures, gave me pause for thought. He pointed out that BR's £1 billion subsidy at the end of the 1980s resulted from a combination of rising traffic and pressure from the Department of Transport for cost reductions.

Had BR not been privatised, that combination would have been repeated from the mid 1990s onward. A lot of former BR managers who say ‘Think what we could have done with half that money', overlook this, according to my chum.

He reckons that even with a Labour Government, we would have seen BR's subsidy coming down. After all if the privatised railway, with track access charges and rolling stock leases to pay, was expected to cost less year on year, then the battle-hardened veterans of BR would certainly have made hay while the economy boomed. BR might even have had a negative External Finance Limit by now.

Come to think of it, Kim, I doubt if your civil servants need rose tinted spectacles for a bitter tear to drop into the after-hours amontillado (That's enough stereotyping – Ed.)

Continues.........

Return to Archive -by date - by topic.