Network Rail debt move goes off track
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Ministers are exploring ways to reverse the accounting changes that will next month see Network Rail’s £34bn of gross debts added to Britain’s national debt burden.
Following an EU edict, Network Rail, the state-backed organisation that owns and operates Britain’s railway infrastructure, is to be reclassified as a public body on September 1.
The changes will in effect mean an increase in the UK’s public sector net debt as a share of national income. They will bring to an end Network Rail’s ambiguous position as a publicly subsidised private company whose debts did not appear in the government accounts.
But the Financial Times has learnt that officials and ministers are discussing ways to structure the group that would allow the Office for National Statistics to perform a U-turn and classify the debts as off balance sheet once again. Insiders at the department believe that restructuring the group as a “govco” – or government company – could allow a return to the previous status quo. That, at a stroke, would once again appear to reduce Britain’s debt mountain.
“The idea is to get it off balance sheet again within two years,” said one person familiar with the talks. “There will be a real keenness to work with Network Rail to get it off balance sheet very quickly.”
Network Rail, which controls 2,500 stations, railway tracks, tunnels, bridges and level crossings, was set up in 2002 as a private company with no shareholders – but with its finances guaranteed by the government. It is held to account by 43 members who attend annual meetings and approve its appointments.
Ministers have not yet decided the precise structure but believe that having minimal government interference could pave the way for the ONS to change its stance.
“We need to ensure operational independence,” one Whitehall official said. “That would be consistent with the idea that we can get the ONS to reconsider.”
The plan is to model Network Rail on the Highways Agency, which is at present being spun out of the Department for Transport as a more independent govco or agency.
Despite that, however, there will be greater public accountability for the body as a matter of course. Patrick McLoughlin, the transport secretary, will have the power to appoint Network Rail’s chairman and to have oversight over some of the members.
The minister will also have to approve NR’s pay and remuneration structures that have caused public controversy in recent years.
It emerged earlier this year that the company had paid out bonuses of £1m at the same time as being fined £53m by the Office of Rail Regulation for failing to meet train punctuality targets.
Network Rail, headed by Mark Carne, a former senior executive at Royal Dutch Shell, said the change was a “statistical” one that would have little effect on passengers.
But it added that it would “mean greater accountability and transparency to parliament, the tax and fare payer, who rightly deserve to better understand the value of their significant investment in Britain’s booming railway”.
Experts warn there could be a danger of the body becoming a political football, despite claims it will maintain operational independence.
Stephen Joseph, head of the Campaign for Better Transport, said: “Ministers will have a more direct relationship with Network Rail. What will happen is that MPs will go to ministers, saying ‘if you want my vote on this or that I need better rail services in my constituency.’”
Another senior rail figure added: “Ministers will be more responsible. In the old days they took credit for the positive but when things were negative they hid behind the fact it was a private company.”
A previous transport secretary, Philip Hammond, privately considered the idea of privatising Network Rail completely.
By turning Network Rail into a govco the coalition is likely to prompt speculation that it wants to revive that idea in the medium-term. But ministers are understood to be more focused on short-term changes to its structure: “There is no secret plan to privatise it,” one coalition aide said.
Of Network Rail’s £34.2bn debt, £33.2bn is in listed bonds, meaning it has been paying an increasing amount of its income on servicing its debts. In the financial year 2013-14, it incurred £1.4bn in financing costs, representing 22 per cent of total revenues of £6.3bn.
Network Rail’s revenue comprises the grant (62 per cent), track access charges from train operators (34 per cent), and property and station retail income (4 per cent). The £38bn over five years consists of a £6bn-a-year grant from government, which includes £2.5bn of track access charges paid by train operators. The remaining £8bn comes from a mixture of property, retail income and loans.
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