We all know Network Rail needs loads of subsidy to run a railway. What has gone unremarked is how good they are at losing money on buying and holding financial derivatives. In the year to March 2011 Network Rail reported a loss of £251 million on these instruments by marking them to market, and in the year to March 2012 another £93 million. At their last annual balance sheet date they showed total liabilities of £1.2 billion in derivatives, as if they are running their own investment bank.
So what is the case for the defence? They say they are not taking speculative positions. They say they are hedging their currency and interest rate risks.It’s part of their financing. It is difficult to see why a national UK railway company with predominantly sterling revenues and sterling grant paid by the taxpayer should have currency risk problems. They seem to arise mainly because the company has a penchant for borrowing in foreign currencies. It has chosen to borrow in Swiss francs, US dollars, Norwegian krone, yen, Canadian dollars and Australian dollars. It is difficult to know why it needs to tap these more exotic bond markets, when there is a large and fairly reliable sterling bond market which would avoid all the hassle.
The Group has also had a wish to borrow using index linked bonds. This tends to be a dear form of financing given the persistently high inflation rates experienced in this country. They may have lost money on interest rate hedges because interest rates have been low or falling rather than rising. Most longer term borrowers protect themselves against rising interest rates by borrowing at a fixed rate, and borrowing long if rates are low. This apparently is too easy an approach for Network Rail.
So it all means the poor old taxpayer has to pay for the costs of an investment bank type operations as well as the losses on the railway. Surely someone could get a grip on this, and take Network Rail out of the derivatives business?
To sort out Wokingham’s traffic problems and to cut the risks on the railway we need a bridge or underpass in place of a level crossing. That would be small beer besides the costs of these exotic financings and hedges. It would also be a much more popular way of spending the money, if replicated around the country.