What it costs to run a railway

The 2012-13 Accounts for Network Rail make interesting reading. This public sector owned company escapes most comment and attention, because Ministers seem to think it is not their responsibility to tell us about its profits and losses or explain in any detail its peformance. It is a so called independent company, but one which in effect is taxpayer owned.

Taxpayers indirectly supply much of its income through the subsidies to the railways, routed into Network Rail via the access charges it places on operating companies. Most in the press seem to ignore what is a most interesting document, accounting for billions of public investment and cost.

Network Rail’s debts now stand at a large £30.3bn, an 11.3% increase over the last year. Operating costs rose by 9.5%, in part reflecting the big increase in capital. Capital expenditure ran at £5050 million for the year, an increase of 9.8%.

The current value of its large portfolio of derivative financial instrument liabilities is a negative £1208 million. Its current value of derivative assets is £673 million. Is this a good portfolio of assets and risks for taxpayers to own? Operating profits fell 5.5% in the year.

At a time when Ministers are planning further increases in rail expenditure, and are keen to promote more railway construction, they would be well advised to examine these accounts. They should be asking why costs went up so much last year, why profits fell, and how the balance sheet is constructed. They should be asking how much more of their planned future programme Network Rail could finance out of improved cashflow from improved financial performance. The debt build up is fast and large.

I am in favour of Network Rail improving its stations and facilities for travellers. I am also in favour of Network Rail financing more of this from property transactions bringing more railway property into more productive use, and harnessing private improvement, finance and development adjacent to the stations and tracks where there is land available.

On the day when the government is going to announce a reduced rate of increase in spending, proper demands for improved efficiency and effectiveness at NR would be a good idea as there is a lot of public money at risk here.


  1. lifelogic
    June 26, 2013

    Why subsidise rail and hugely over tax road and air transport? Rail, outside a few intercity and commuting routes, has very few advantages. It is generally more expensive, needs more staff, is unionised, is less convenient, does not go door to door and uses more energy and capital when considered in the round door to door.

    It is usually used as a back door way to do property development and drive compulsory purchases of other peoples’ properties.

    Why on earth are they speculating with the, largely government supplied, funds. Perhaps all quango and LEA cash should all be kept on deposit with the Bank of England until it is spent. Then they might not lose it all in Iceland, speculation and the likes.

    I am glad to finally see the back of Sir Mervyn King. Once a Liberal always a Liberal. After signing as one of the 364 economist the daft the letter to The Times condemning Geoffrey Howe’s 1981 Budget he was always suspect, even without his support for Aston Villa. Complaisant government by the state sector for the state sector, funded off the back of, and causing the slow death of the private sector.

    Even in leaving he still fails to understand the huge damage done by the top down, one size fits all capital rules, the failure of regulation and government intervention that caused the crash and consequential damaging lack of lending to real businesses. Mr Carney should spend 80% of his time talking to the real world of the private sector rather than live in the state sector dream world, ivory tower of the last one.

  2. lifelogic
    June 26, 2013

    I trust Mervyn King will enjoy his reported £6.3m pension from Bank of England, despite reportedly not putting penny in pot. The average state sector worker who picks up this bill has about £25,000 in their pots. And Osborne has now limited pots to £1.25M for mortals. Still we are all in it together as they satirically say.

    1. lifelogic
      June 26, 2013

      Certainly seems like a very high reward for such a dreadful performance. Just how many working years in private sector are needed to pay the taxes, just to cover this huge pension pot – perhaps 600 average worker years. They have about 1600 staff there too I understand so it is not just his pension.

      Is it any wonder why the private sector has such difficulty competing worldwide? Banks that suck cash back from them and all this state sector overhead throttling them at every turn. As an economist one assumes he know this, but perhaps he needs reminding?

    2. Hope
      June 26, 2013

      And so it came to pass the majority of half wits did not listen to you and voted for HS2. Economic madness by the Tory led coalition at the behest of the EU. Says it all really.

  3. Andyvan
    June 26, 2013

    Yet another public sector disaster. A litany of bad management making poor decisions untroubled by market forces. What on earth is a rail company doing losing £1208 million in financial derivatives? (various quesitons asked-ed) Again and again this attitude shows itself and is, apparently, condoned and even encouraged by incompetent minsters and complacent media reporting. A team of forensic accountants needs to go through their books (and every other company, bank, government department that has squandered public money) and determine who is responsible and (take appropriate action-ed)
    The reason that won’t happen is far too many powerful people have got their fingers in the pie and would greatly fear the truth of their involvement in so many scandalous deals.

  4. Brian Tomkinson
    June 26, 2013

    Thanks for highlighting this poor performance. I doubt any interest will be taken by your colleagues; its only our money they’re losing after all. Haven’t you heard, all government capital spending is good and we are to have more of it?

    1. Leslie Singleton
      June 26, 2013

      Brian–Have you heard?–Latest estimate for HS2 (seems only weeks since the original one) is over £40 billion–A phenomenal number on any basis, never mind for something that is just bound to lose money. I for one don’t even begin to buy the baloney about businessmen working on the train etc

      1. Lindsay McDougall
        June 28, 2013

        Hang on a moment. As I recall it, the original study showed a benefit to cost ratio for HS2 of round about 1.3 or 1.4. So a cost increase from £30 billion to £40 billion would make the project roughly break even, which isn’t good enough. I wonder if Mr Redwood could ask a question in parliament in order to determine the government’s revised B/C ratio estimate.

        Reply This point has already been made – the government’s ratio as you suggest falls in line with the rise in costs.I have explaiend in meetings why I think the business case offers too little benefit for the very large cost.

        1. lifelogic
          June 30, 2013

          There is clearly no business case for HS2, as can be shown in about half an hour with an envelope and a calculator. No unbiased, numerate, logical, engineer or economist could possibly think that there was.

  5. Bob
    June 26, 2013

    “Capital expenditure ran at £5050 billion for the year, an increase of 9.8%.”
    Are they building a wind turbine array to power the railways or something?

  6. Alte Fritz
    June 26, 2013

    You seem to be the only public figure who is interested in Network Rail’s derivatives, at least a quick google of the subject implies so. Simon Burns’s brush off in written answers last year was a joke in bad taste. (I seem to remember him as a leading light of the Oxford Labour Club).

    (sentence left out ed – queries derivative activities of NR) Such behaviour, the cloaking of culpable behaviour with a thin veil of legality and legalism, not only fails to address an economic disaster but even undermines respect for law and institutions. How can one respect them when such abuses are ignored by politicians who are supposed to be stewards of the public good?

  7. oldtimer
    June 26, 2013

    You raise extremely pertinent questions. In addition to Ministers asking such questions, what about the relevant parliamentary Select Committees? Do they quiz the industry on these issues and with what result? Is there any form of scrutiny by the public at large?

    On the data you supply it is difficult to see why Ministers think that pumping more billions into the suspect venture that is HS2 is such a good idea.

    Reply I asked Mrs Hodge to take this up through the PAC but she declined.

    1. 0ldtimer
      June 26, 2013

      That is shocking. Clearly double standards are being applied – one rule for state owned, another rule for private enterprise.

  8. margaret brandreth-j
    June 26, 2013

    The tax payer always seems to bail out where there are problems, whereas I for one as a tax payer would rather in vest my tax into something constructive and debt free. Tax problems ‘minor’ are more often than not brought about by employers not charging enough or too little. This is irritating and sometimes causes great stress, but when it is billions , it becomes wasteful on a grand scale.
    I for one have had a personal history of bailing people out and not always out of choice. I am tired of paying for peoples mistakes , deliberate or otherwise. When will people have a greater respect for the money they take from others to be used for public services?
    It does not seem long ago since the services were split between public and private ownership. I see Virgin is set to sue Network Rail due to let arrivals. Perhaps NR would be better to sell off.

    1. margaret brandreth-j
      June 26, 2013

      Apologies: a little bit of unintentional tautology there. Employers charge too much or conversely, too little.

  9. Tedgo
    June 26, 2013

    I am not sure about Network Rail financing more of its needs from property transactions, British Waterways tried this and it was a disaster leading to a lot of dept through empty office space and poorly run pub chains etc.

    I don’t understand why Network Rail is involved in derivatives at all, perhaps someone, who understand those instruments better, could explain.

    Equally I don’t understand why the taxpayer buys the engines and rolling stock and hands them over to the likes of Virgin Rail for them to turn a profit. Surely the train operators should buy and finance their own rolling stock, the present system is just corporate welfare.

    My current thinking regarding railways is that it is really no different to air routes. Take say Heath Row to Paris, there is effectively only one route because of air traffic requirements, but many airlines use that route.

    The same concept could be applied to the railways, I see no reason why Easy Railways could not buy 6 to 8 trains and run them from Glasgow to London stopping at its choice of stations. Equally Virgin Rail and others could do the same. There is no need for exclusive franchises.

  10. Iain Gill
    June 26, 2013

    Yes the way the railways are organised is in many ways worst of both worlds, neither state sector or private really.

    It looks like Network Rail are in little better financial position than Railtrack was when the labour party pulled the plug, and they got hammered for trading while insolvent. (incorrect financial allegation removed-ed)

    My own approach would be to give the west coast main line to the main passenger operator on the west coast main line and tell them to run it. Same with the east coast main line. And the line from Paddington west. And so on. So the train operator and the track company can no longer blame each other. But force them to allow other operators too.

    I am fascinated to see things like “Grand Central” running up the east coast mainline significantly undercutting the main east coast operator, owned by the German state owned railways, and apparently not yet in profit. I think they brought a bit of innovation going to cities forgotten about by the railway otherwise. But I don’t really understand how having German publicly owned industries running our own train services makes sense? Its not really competition when ownership is by a foreign state which can choose to subsidise behaviours etc that private business would not.

    Moving onto East Coast itself. This passenger service is currently in UK state hands and paying a mighty dividend to the treasury (granted the fares are far too high, and in many cases it’s a monopoly provider). I am not convinced that retendering to the usual contenders to franchise it again is the best way ahead. I would tend to say the current team running East Coast have done a magnificent job, I would just give them the franchise and let them take it forward. But incentives need to be in the system for them to keep prices down.

    I would also tend to make the sleeper services to both Scotland and Cornwall one franchise, as they are very similar operations and not really like the daytime services they are bundled up with. I have seen some very good articles on how the sleeper services could be made profitable and rolled out to many more cities if the next generation of rolling stock was done properly (powered independent coaches, so that trains could be run at any length dynamically according to demand, and so that smaller trains could be run to new destinations). The overnight capacity on the train system is a great under utilised resource, of course scheduling with maintenance becomes more of a challenge but it would reap its rewards. All of this needs some innovation.

  11. Denis Cooper
    June 26, 2013

    Off this topic but catching up on a recent topic, in a comment here:


    “itdoesntaddup” says that if the gilts held by the Bank of England are held to redemption then total receipts will be £48 billion less than total acquisition cost.

    But as Osborne has been withdrawing “profits” as a monthly income, the shortfall to be made good by the Treasury will be higher than that.

    However I suppose that it could be worse: watching Newsnight I was astonished when it said the Fed has been buying 90% of all the new bonds issued by the US government, so its losses will be staggering.

    (Incidentally, JR, a very good performance on your segment.)

    Reply Thanks

  12. Denis Cooper
    June 26, 2013

    What are these derivative financial instruments?

    Were some of them hedges against interest rate rises which haven’t yet happened, and/or sterling external exchange rate falls which haven’t yet happened?

    It seems unlikely that it was mere speculation, but if so some heads should roll.

  13. Mike Wilson
    June 26, 2013

    I admire you all for taking an interest in all these matters. I am getting old and cynical. Nothing will ever change. How can anyone run an organisation with 1.4 million employees – the NHS? How can anyone run, maintain and develop a rail network over a whole country with 60 million people in it?

    If you give a sector of society the right to raise tax and enforce the raising of tax by law – everything else that follows is completely predictable. Those in charge will pay themselves more and more for doing less and less – whenever they can get away with it. Inefficiency, empire building, corruption … they will all be features of any public sector. It’s the same the world over.

    I’m seriously thinking of buying a small holding and becoming as self sufficient as possible – so I contribute as little as possible to the overall scheme. Look at the pensions MPs have given themselves. The adjustment package when they lose their seat. Look at the package paid to Baroness Ashton when she retires – what is it – some big percentage of her salary for 3 years to allow her to ‘adjust’. And it you and I who pay for this. We are SUCKERS and MUGS.

    But, hey-ho, the weather’s nice so it’s not all bad.

    1. M Davis
      June 26, 2013

      … becoming as self sufficient as possible …

      That’s the way to do it, starve the beast!

  14. forthurst
    June 26, 2013

    Having looked at the Notes to the Accounts, see Notes 19 & 20 (pp 119-123), it would appear that all the derivative purchases relate to Network Rails’ cash raising through bond sales. Why does NR have to sell bonds denominated in foreign currencies and then hedge the cost of adverse currency movements? The sterling denominated bonds are very largely index-linked for which interest-rate swaps appear to have been purchased.

    The total deficit on the defined benefit pension scheme seems to have doubled since 2012 (Note 27 pp 133-5).


    We would appear to have a situation where the infrastructure of this country has been packaged up and sold off whether through PFI or bonds issued on Utilities. It is not clear that we were worse off when infrastructure was funded out of current taxation and owned by the taxpayer because paying the interest on all these bonds whether as taxpayers or Utillity users is as much taxation as PAYE and appears to be increasing at a much faster rate. The only thing worse than public ownership is state sponsored corporatism where the public underwrite profits through the taxation system and through the charges imposed by monopoly suppliers.

    The existing structure of the railways should never have been created. Network Rail is a pretend (not for dividend) private company providing profits for bond investors, bankers and suppliers and debts for the public, most of whom do not use it.

    1. Denis Cooper
      June 26, 2013

      “Why does NR have to sell bonds denominated in foreign currencies and then hedge the cost of adverse currency movements?”

      Good question.

      Could it be that NR expected to buy goods and services from abroad and so it had borrowed in the appropriate foreign currencies?

      Or was it just that it could borrow from abroad at lower interest rates, but it would then be exposed to the risk of adverse currency movements, for example if it had borrowed in euros but the pound then fell against the euro?

      One might think that the National Audit Office should be going through this with a fine tooth comb.

      1. 0ldtimer
        June 26, 2013

        It looks like yet another scandal brushed under the carpet. In reply to my earlier question, JR says that Hodge (PAC Chair) has refused to call network Rail in for a grilling on its accounts.

  15. PT
    June 26, 2013

    Shifting slightly off topic, am I right in thinking that most of the network operators lease rather than own their stock due to the short term nature of contracts?

    We seem to plough ridiculously high subsidies into our rail system, yet fares remain astronomical. Is it the case that all this money is being captured by multiple layers of coorporate and rent seeking entities?

    1. lifelogic
      June 26, 2013

      Indeed huge subsidy and yet hugely expensive fares what on earth make people think trains are efficient?

      1. Bazman
        June 26, 2013

        Most expensive fares in Europe. Trains are efficient in some countries. Maybe a blind and dogmatic belief in the market is responsible ever thought of that one?

  16. Mike Wilson
    June 26, 2013

    They should get rid of Network Rail and all the rail franchises and let Disney run it.

    1. Bazman
      June 26, 2013

      They might in fact be doing so as investors.

  17. Peter
    June 26, 2013

    I’ve got a nasty feeling that the taxpayers is going to end up with a huge bill when this burden of debt becomes unsustainable.

    Network Rail really is a nightmare of an organisation – bureaucratic and top heavy, with not much of a clue about business. It claims to be “private” but it is obvious that it’s just a front for state ownership – BR without the trains if you like, but far less accountable. It is clearly not free to manage its assets even if it knew how to do so.

    The best thing to do would be to break it up into regional units – its so-called “routes” already behave like disjointed separate companies anyway – and hand them over to the major train operators in those areas.

    But no one else in politics seems to take any interest in this financial disaster waiting to happen.

    1. Jerry
      June 26, 2013

      @Peter: “The best thing to do would be to break it up into regional units – its so-called “routes” already behave like disjointed separate companies anyway – and hand them over to the major train operators in those areas.

      How do you propose competing train operating companies to run these ‘routes’ (and what of the routes that over-lap, using the same tracks and having equal running rights), it was this problem that brought about Railtrack in the first place and now Network Rail.

      Of course if you understood anything about the UK rail system and its history you would know the answers already as this “question” has already been answered, some 90 years ago – we actually needs a repeat of the Railways Act 1921 (effective from 1923).

  18. Dan H.
    June 26, 2013

    This underlines why we really do need experienced businessmen in government; they know how a business is run, and ask searching and pointed questions of this sort, which need to be asked.

    What is worrying is that no other politicians seem to be asking these sorts of questions.

    1. Jerry
      June 26, 2013

      @Dan H: Not just businessmen but people who actually understand the industry in question, whilst admittedly causing other issues [1], this was one advantage of how Labour MPs often became MPs having first been union officials or Tory MPs who had held senior positions within a listed company before ever considering politics as a career.

      [1] mostly due to certain undemocratic unions or the old school tie network of old

  19. Terry
    June 26, 2013

    Network Rail? Sounds like a transport agency doesn’t it? So why are they dealing in derivatives? High risk trading = gambling and with someone else’s money. Our money.
    If tax payers money is propping them up, why aren’t they summoned before the appropriate MP’s committee explaining their foray into the financial black arts?

    Isn’t it a fact that the Public Sector treat’s tax payers money as their own? Where do the responsibilities lie? Why aren’t the Managers held to account as they would be in the Private Sector? Is there any Department within the Public Sector that is not over spending without fear of redress because our Government leaders are too afraid to challenge their authority?

    This is madness – another “hidden” Government debt of £30 Billions (and climbing) right here and NOTHING is done about it.

    Wake up George! It is not coffee you are smelling, it is the rotting corpse of a nation. Our Nation.

  20. Lindsay McDougall
    June 26, 2013

    Why is the Network Rail debt off balance sheet? It seems to be a case of don’t ask, don’t tell. If we are going to return Network rail to the private sector, we are going to have to let it set track access charges in accordance with market forces, with no political interference (successors to John Prescott and Stephen Byers, please note). The frequency of track maintenance must be affordable and if there are safety implications, the government will have to choose, on a line by line basis, between subsidy and closure.

  21. Jerry
    June 26, 2013

    Sorry John but the pigs ear your party/government made of rail privatisation in the 1990s hardly give any Tory MP the right to criticise anything now, unless they also wish to criticise the whole franchise system and thus even the need for a separate infrastructure/access company (NR). True that Network Rail is somewhat different to a TOC and the franchising system and was a ‘company’ created during the last Labour government, but it only needed doing so due to the failings of Rail-Track and that excuse of a private company was only invented to make the franchise system workable in the first place. Ho-hum…

    I know, if I remember correctly, that you were personally against how the Major government carried out the privatisation of BR, but unless I’ve missed you doing so (and I would love to be proved wrong on this) you don’t seem to be asking for a better -consolidated- private rail system (perhaps based on the pre-war Big Four rail companies), in the same way as many in the Labour and even the LibDem parties are promoting rail re-nationalisation.

    The whole Bl**dy system is in a mess and needs sorting out [1], root and branch, whilst passenger numbers might have increased, as I think I’ve said before, is this because of real improvement in rail travel (timetable improvements, ticket pricing, over-crowding etc.) or is it simply that road/parking pricing and congestion have forced people onto the trains as the lesser of the two evils. Have your ever asked your commuting constituents is they would prefer to travel by rail or road – all things being equal?

    Apologies for the length and straying a little off the exact topic, although I believe the issues are linked.

    [1] and that isn’t going to happen any time soon if this government is handing out new franchises, simply because they can raise some dosh in the run up to the next election, we need an end to the muddle and short-termism

  22. Mark J
    June 26, 2013

    Privatisation of the railways isn’t working and it is about time the Government woke up to this fact. It highly annoys me that the Government is so ignorant to this and continues with the re-tendering of the East Coast franchise despite overwhelming public support for it to be the starting point for returning the railways to public ownership.

    Train Operating Companies do not supply any of their own funds towards infrastructure improvements or rolling stock. How much did FGW contribute towards the rebuilding of Reading station for which they benefit? Train Operating Companies expect the taxpayer to fund improvements whilst fleecing them at the same time with sky high ticket prices.

    The system is a sham, losses are nationalised whilst profits are privatised with shareholders and executives the winners out of this shambles.

    It is high time that the public owned British Rail was brought back into existence under the new guise of National Rail. It would be cheaper to run, cheaper to improve and cheaper for passengers. Profits should be re-invested back into the system rather than end up in someone else’s pocket.

  23. Bazman
    June 26, 2013

    Maybe John could answer Bob Crows question of why any state can run our railways as long as it isn’t the British state? Travellers are boosting the profits of state-owned railways in Germany, France and Belgium as well as private investors as far away as the Gulf. Fair point.

    Reply The UK state does run Network Rail, which is a public interest company owned by the taxpayer.The railways overall are heavily loss making before subsidy.

    1. Jerry
      June 27, 2013

      @JR reply: I think Bazman was referring to TOC’s, and of course the state does run the default services should there be no franchise and in the case of the East Coast Main Line does so very well, better than any previous franchise… Bazman (and Mr Crow!) do have fair questions that need to be answered by this government, considering their plans to franchise off the ECML once again even though the history of this line suggests that the franchising model doesn’t work.

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