Network Rail’s ability to destroy investment capital

Last year our equity value of Network Rail fell from £8.18 billion to just £6.39 billion. It is a very small sum for all that land, all those buildings, all that track and signal investment. Worse still, our equity value went down despite the railway spending another £6.47 bn on investment that year. I say our because of course Network Rail is owned by all of us, the taxpayers of the UK.

Let’s just look again at those numbers. Network Rail invested more in 2014-15 than its complete equity value at the end of the year. Despite investing so much, its equity value went down.

It takes a special management genius to be able to spend so much and to have so little equity at the end of it to show for it. It is true a lot of the investment was paid for by borrowings, but surely the idea is to add value, not to subtract it if you borrow to invest. When adding new investment to a well established investment and property, it is normal to show a profit on the investment when you put it in. Furthermore, Network Rail continued to enjoy high levels of subsidy/train operating company revenue from a rail system which remains heavily subsidised.

Overall last year it reported an after tax loss of £376 million. It did not have to pay large amounts of tax, but decided to write off tax losses it held as an asset, on the grounds that it was unlikely any time soon to be making sufficient profits to be able to use up the tax losses! However, if you turn to another of the financial statements that says the “total comprehensive(expense) for the year was (£1791 million)”,  that is a large negative sum.

So the owner of the some of the best property routes into the hearts of our cities and across our countryside, with a monopoly over them, is a big loss maker that invests in a way which reduces the equity value of its business. Network Rail is putting very large sums of capital into the railway, but seems to lack discipline over how much to spend and how to control the costs of individual projects. I was all in favour of a new Reading station and associated works, but did it really need to take a rumoured £900 million to do? What return will taxpayers receive on that and similar investments? Why can’t the railway earn a living on all this new investment? The fares are certainly high enough. The problems lie with the cost base, and with the large number of empty seats they run around the country without the marketing flair to fill them. Meanwhile commuters and people on busy routes at busy times of day suffer from too few seats and high prices.


  1. petermartin2001
    August 25, 2015

    Some of us thought that breaking up the old British Rail wasn’t the way to go. We didn’t like the idea of separating the ownership of the track from the operation of the rolling stock whether that was under public or private ownership. It doesn’t make any sense to penalise the owner of a branch line train for being late when it is waiting for passengers from a delayed main line train but that is exactly the kind of thing that started to happen after the breakup.

    It has to be remembered that the subsequently privatised “Railtrack” got itself into a real mess over the Hatfield train disaster, had to be bailed out by the taxpayer and at the same time was happy to hand out dividend payments to its shareholders.

    Whatever system is in place needs time to settle down and work. The politicians of the left only criticise the privatised parts, and the politicians of the right only criticise the nationalised parts!

    It’s no way to run a railway!

    1. A different Simon
      August 25, 2015

      Peter ,

      British Rail was notoriously poor at actually operating the network .

      If you were at a reasonably sized station , there were usually half a dozen employees lazing around and if you asked them a question they brushed you off and got back to chasing each other round the platform until they were tired and had to stop for a cigarette .

      South West Trains are far , far better than that and the trains are more reliable too .
      Their staff are courteous , professional and helpful and I have tremendous respect for them . The improvement over British Rail has been huge .

      Sadly I can’t say the same for some operators including Mr Branson’s . He’s been an innovator with first class seats in the airline business but trying to use his rail network is not usually a pleasant experience .

      1. Anonymous
        August 25, 2015


        “British Rail was notoriously poor at actually operating the network .”

        Actually, starved of investment, BR did surprisingly well. Undertaking more passenger miles per member of staff than any other European railway.

        1. yosarion
          August 25, 2015

          If they had stuck with the APT it would have worked out, of course if the unions of the day had not delayed the program over driver only trains that were pre production prototypes (nationwide shutdown) it may well have been up and running by the late seventies.
          The irony is the Italian trains tilting up and down the west coast today use refined equipment developed at Derby in the seventies.

    2. forthurst
      August 25, 2015

      “Some of us thought that breaking up the old British Rail wasn’t the way to go. We didn’t like the idea of separating the ownership of the track from the operation of the rolling stock”

      That was John Major deciding to comply in theory and in practice with EU law. This compliance has cost the taxpayer billions to add to the other billions that membership of the EU has entailed. Deutsche Bahn complied in theory but not in practice by creating separate subsidiaries into which the different components went but which remained part of one holding company. Of course the privatisation was much worse than that because much else besides was divested including track maintenance so we had a multiplicity of independent cost centres ripping each off with the taxpayer picking up the final tab.

      The question raised by JR’s post, however, is what exactly is meant by ‘investment’ in the context of Network Rail. Will it enable more trains to run to carry more passengers more radidly to their destinations? Will it encourage more passengers to spend more money on using the railways? Will it reduce costs by reducing the manpower required for operation and maintenance. Are these questions ever asked or answered? Is some ‘investment’ simply the replacement of worn out plant and equipment? When will trains be able to operate without drivers, before or after the advent of driverless cars? Also, why are we supposed to care which profit centre is at fault when a train is late?

      1. outsider
        August 25, 2015

        Dear Forthurst, I do not know how much the EU had to do with it but some influential Government ministers became obsessed by the early Major years with competition in privatised utilities, conveniently retrospective in the case of British Gas and British Telecom.
        The complex matrix of rail privatisation was geared to there being genuine competition between operators on the same lines. It became clear before privatisation that this was not going to happen; there were few if any reasonable franchise bids on that basis. But they just went ahead with the structure although, with tiny exceptions, competition was abandoned.
        To complete the debacle, Railtrack was privatised earlier than had been envisaged in order to spite Labour, who were by then bound to win the 1997 election.
        That was clearly not going to work when Labour wanted a huge state-funded investment programme. No fault of Railtrack, which was then deliberately sabotaged by the incoming Labour Government.
        Much better if the Major Cabinet had just privatised the companies complete with lines and stations, ( perhaps eight rather the the old four) with a regulator to impose best practice as a substitute for competition, as in water. Much better if Labour had simply negotiated change with Railtrack shareholders, which would have been cheaper and avoided the prolonged disruption during Administration.
        In each case however, political priorities came before passengers.

        Reply I was on the rail, privatisation committee and recommended companies that owned train track and signals on a regional or line basis. The majority favoured splitting track and trains. We were never told we had to do that for EU reasons!

        1. ian wragg
          August 25, 2015

          No you were never told it was to comply with EU directives. That goes for most things since you have signed over control to Brussels for 90% of the country.

          1. outsider
            August 25, 2015

            Not sure of the dates Ian but there was a period when it was the UK Government taking the lead in pressing the EU to force competition in such areas.

        2. outsider
          August 25, 2015

          Thanks for reply Mr Redwood. What a pity your practical advice was not heeded. These complex admin schemes either do not work (remember the separate rail maintenance organisations) or they are swiftly collapsed by market forces, as in electricity, with bad unintended side effects.

          1. forthurst
            August 26, 2015


            “The aims of the directive are to create a more efficient rail network by creating greater competition. To achieve this aim member states are required to ensure that organisations operating the infrastructure (track, signalling etc.), and those operating services (trains) are separate and run on a commercial basis.” wiki

        3. Lindsay McDougall
          August 28, 2015

          “The majority favoured splitting track and trains. We were never told we had to do that for EU reasons!”

          Come now, John Major was Prime Minister. Did you expect truth and transparency from that source? This is the man prattled on about warm beer, cricket of the village green and old maids cycling through the mist, while signing over huge chunks of our sovereignty to the EU – notably the totally unelected Commission – in the Maastricht Treaty.

          Reply John Major was not on the Cabinet committee doing it

  2. Richard1
    August 25, 2015

    With Jeremy Corbyn likely to win the Labour leadership it seeMs we are going to have to return to the public debate of the 1980s – whether the state or private capital are better owners of businesses. Perhaps in this respect Network Rail is useful – it can stand as an example of how utterly useless and wasteful a state owned monopoly can be. The reason of course is it has no market discipline when it wants to spend money and has no competitors. But it seems Labour are to return to having nationalisation of industry as a core policy despite all the decades of evidence from the UK and around the world as to what a terrible idea it is!

    1. petermartin2001
      August 25, 2015

      ….evidence from the UK and around the world as to what a terrible idea it is!

      I’m personally agnostic on the question of nationalisation. If we look at how the railways were nationalised in the first instance, ie by swapping shares of the old railway companies for government issued British Transport Stock paying a guaranteed 3% it is surprising that it is such a popular idea with the left. The railways may or may not have made any profit after 1948 under private ownership. Railway shares may, or may not, have provided dividends to the holders. Government stock guaranteed those ‘dividend’ payments. There’s a strong case to be made that the terms were far too generous to the former owners.

      However, the subsequent semi-privatisation hasn’t been a happy story either. British railways are now the most expensive in Europe. I’d say the privatisation of telecoms has been a success story – but that’s because there have been huge changes in the technology involved. On the other hand, the privatisation of the utilities hasn’t been successful. The technology changes have been far less there.

      It’s unlikely the privatisation of the Royal Mail will be any better. But, that doesn’t mean that we should renationalise it. It was sold off far too cheaply. However, if and when it is ever renationalised it will be bought back at too high a price. There’s always those middlemen to pay off whenever any change is made.

      So, I’d argue that Govt should concentrate on making sure that all industries function as effectively as possible and make far fewer compulsory changes to their ownership. Changes to ownership are only necessary when a key industry becomes bankrupt and, the case of Rolls Royce springs to mind as an example of a successful nationalisation when that happens.

      Reply Swapping shares in companies which should increase profits and dividends for government stock with a fixed income is not ideal for the shareholders, though they can of course sell the stock and buy other shares. UK utilities did cut costs and offer a better deal to consumers after privatisation.

  3. Gary
    August 25, 2015

    we have the worst of the private – public world’s in the railways. The management are pocketing the money that we are giving them. Privatise the profits, socialise the losses.

    Another half baked effort by clueless govt. Corbyn is not wrong, if we are going to pay then don’t do a half baked job, nationalise the entire thing. And if we are going to do QE, then give us the money, not the elite.

    Of course, I think we should do neither, we should get the govt out of the economy, it is hopeless

    1. petermartin2001
      August 26, 2015

      There is another option which is neither complete nationalisation nor complete privatisation.

      For many years the British Government had a half share (or maybe 49%?) in BP. That worked well enough. Even a bit of a lefty like myself can understand that there are some benefits in not having complete govt control over everything.

      So, we could have that again with the railways. Its hard to see how there could be no government involvement in their operation. They are needed as much for social reasons as economic reasons. There will be a requirement to find funding for new projects which the finance market may not wish to provide.

      So, if government does provide cash, it should be on the basis of a swap for cash for equity but not necessarily a full nationalisation.

  4. David Cockburn
    August 25, 2015

    There does seem to be a major problem with the financial management of Network Rail.
    In our local example they spent over £4M on upgrading Canterbury West station but the ability of the asset to produce additional turnover or profit was not thereby increased.
    I understand these changes were driven from the Dept of Transport. Is that where responsibility for the profitability of Network Rail lies or is profitability not really something that interests them?

  5. Ian wragg
    August 25, 2015

    They have learnt well from the government which wastes 50% of everything it receives. We have Gordon of save the world fame abolishing boom and bust only to reign over the biggest crash in history. We have Gideon borrowing a fifth of everything he wastes and an EU incontinent with other peoples money.
    All these monopoly outfits destroy value as they are run by placemen and cronies

    How goes the secret negotiations that we will be asked to vote on.

    1. fedupsoutherner
      August 25, 2015

      Ian, I suspect the negotiations are non existent!!

  6. Pete
    August 25, 2015

    When was the last time any state sector “business” was well run? When has anyone seriously said they provided a good service at a good price? The only businesses that do provide good service and good prices are ones that have competition and rely on profits to stay in business. There is no other way.

    1. fedupsoutherner
      August 25, 2015

      Exactly, all these subsidised industries don’t have to worry about actually working or making a profit – they’ve already managed that without doing a days work with the money our governments throw at them.

  7. alan jutson
    August 25, 2015

    Are the accounts really truthful, with full value being given to all assets, or are they simply writing down everything they can to avoid tax.

    I guess HS2 will add to the loss of equity, because all of that will be built with borrowed money as well.

    Certainly makes you wonder about the reported £60,000,000 performance bonus to management

    1. Mark
      August 25, 2015

      Patrick McLoughlin announced in Parliament “First, none of Network Rail’s executive directors will receive a bonus for the past year.”

      Search for 1067 on the page to find the start of his statement.

      1. alan jutson
        August 25, 2015


        “None of Network rail’s Executive Directors will receive a bonus this year”

        Good job too, but £60,000,000 has been set aside for bonuses for others, (which do not include Executive Directors) according to a number of press reports.

        Whilst I have no problem with paying sensible bonus amounts, for above target performance under employment agreements.
        I do often wonder about the level that such targets are set, and how they are measured.

  8. Lifelogic
    August 25, 2015

    Like most state owned organisations they are run main for the benefit of the senior staff & for political reasons. Customer service, making a profit and investing wisely are not really something that concerns them very much.

    If you are buying something for someone else & using someone else’s money you care not what you get nor what you pay. But having a nice office, high pay and pensions for senior staff is certainly a major consideration.

  9. Antisthenes
    August 25, 2015

    China is currently in meltdown and may take us all with it. One of the factors contributing to this woeful state of affairs are the state run enterprises. They are inefficient with all the other deficiencies that comes with state run businesses and have to be heavily subsides to keep going. So when a downturn comes they become a millstone around the states neck and siphon off money that would be better put to use assisting the private sector get back on it’s feet.

    These state run enterprises coupled with the state directing a lot of private business’s investments has lead to gross malinvestment. So that a lot of productive capacity is available where it is not needed and assets have been purchased at greater cost than their now true value and has become another source weakening the states economic health. China has to address these problems by divesting itself of state ownership. relinquishing control of the private sector and get rid of restrictive practices in the financial markets. It would also help if they actually enforced their laws many of which are good ones. Doing all that I suspect would be economically painful in the short term and the Chinese people will be a lot less well off for a while but no doing so will result in the same for lot longer. We may well see tanks back on the streets as we did a decade or more ago or even worse(that does not bear thinking about as the current crisis will put the government under enormous pressure from disgruntled citizens And we know that totalitarian states often resort to conflict to encourage their citizens to take their frustrations out on foreigners and not them).

    What has this got to do with Network rail you may ask. Well. Not a lot but your article made me think about the dangers of state run businesses and I thought the China situation best illustrated it. It also shows us that Network Rail the way that it is structured and run is not an asset(despite what the left believe) to the UK and with all other UK state enterprises structured and run the same way if another recession comes(if I am right in what I say in my first sentence then come it will) they will also be drag on the economy especially as the UK has already a debt they cannot add too for bail outs(which will prove to the Corbynistas that the magic money tree does not really exist).

  10. Iain Gill
    August 25, 2015

    I personally know some of their senior and middle managers who were dismal failure BS merchants in their previous roles, so quite why network rail hired them is beyond me.

    1. Antisthenes
      August 25, 2015

      The old adage goes “those who can do do those who cannot teach”. Well that needs upgrading from teach to public sector servant as the public sector is full of people the private sector would not touch with a barge pole. Apart from all the other reasons why the public sector performs so badly is also because it is so heavily populated by the useless.

      1. Know-Dice
        August 25, 2015

        Or to put it another way…

        The Peter principle – “employees only stop being promoted once they can no longer perform effectively, and “managers rise to the level of their incompetence.”

        1. fedupsoutherner
          August 25, 2015

          Yes, when I worked for the civil service it was always the useless ones that got promotion and if you were good at your job they kept you down. Funny that.

  11. Old Albion
    August 25, 2015

    What this is JR, is a thinly disguised attack on some Labour representatives who have suggested re-nationalising the rail network.
    I’ll not attempt to argue with your figures, but whatever is wrong needs sorting out.
    When I was a child we had a national rail network, it seemed to work, but i neither knew or at that time, cared about the cost.
    Now we have a national railway line system with private companies providing the trains and it’s a disasterous mess.
    So what is the solution JR?

  12. English Pensioner
    August 25, 2015

    It would be interesting to compare these figures with that of RailTrack before it was stolen and taken into public ownership. I was, we are told bankrupt because it wanted too much subsidy – how does that compare with what is paid out now?

  13. Bill
    August 25, 2015

    Not that it is an exoneration, but I seem to remember that all the British Rail hotels were sold off at some point to pay an earlier debt.

    I have some sympathy with the railway managers, even if the management of the physical asset is incompetent or short-sighted. In general they work hard to sort out, say, a signal failure or the troubles that occur when all the copper wire running beside the tracks is stolen by gangs wanting the metal for scrap. When you add that to the number of suicides who jump onto the lines each year and the disruption that causes, one has to admit the job of keeping everything running on time is not simple.

    Earlier this year our train was cancelled after a suicide and, of course, the police treat the area as a crime scene while the transport police want to clean everything up and get the trains moving. And then, if the drivers actually see the suicide hit the front of the train, they will need counselling. And that then messes up the rota.

    My worry about the train system would be a forced return to the 1970s when the railway workers could bring the whole country to a standstill because there was only one network and one big union. By breaking up into regions into various regional companies, this danger is averted.

  14. Bert Young
    August 25, 2015

    The post today is , yet again , another example of the poor – if not non existent , supervision of Government expenditure . The tax payer deserves better service than this and should demand a) that those involved are sacked and b) that they are recompensed for the wasted money . If private organisations an be punished for bad performance , then the same should apply to the public sector .

  15. Mitchel
    August 25, 2015

    I wouldn’t be surprised if ,ultimately,the whole thing gets into such a mess financially and operationally that the government of the day(Corbyn aside)hands it over to a consortium of investment banks,infrastructure and hedge funds who will strip its assets and return it to a semblance of efficiency before selling it back to us at an enormous profit.

    August 25, 2015

    Either have a road system or a rail system. Unless you can somehow build and separate them on this tiny built-out island so they do not obstruct and interfere one with the other as accepted practice.
    Either have privatisation or nationalisation. Unless you can separate them so the priorities and values of each does not interfere with the workings of the other as accepted practice.
    Does British transport and its infrastructure whether ostensibly socialist or capitalist but always in effect controlled by the government do a good job. No? But it is true the catering has improved, expensive, but improved.

    For ever patting ourselves on the back and blaming “the System” whether it be private or public for “temporary” ridiculousnesses, we just cannot accept that we are no good at the transport game.

    Communist East Germany as was pointed out by Conservative Prime Minister Ted Heath at the time had a better standard of living than the UK. I’m not sure that was true but it was correct that the railways system in many parts of the Eastern Bloc at the time was far superior to the UK simply because :

    1. There was not a continually expensive and disruptive re-nationalising and privatisation process.

    2. The railways were the main form of transport without much interference from road traffic.

    3. The placement of housing and work enterprises was not left to higgledy-piggledy pick-and-mix dumb cluck individuality and alternating values and priorities ( such as Labour and Tory ) in planning and authorisations.

    4. And most important… they were not British and therefore were not naturally culturally disposed to make a hash of transport systems.

    Reply East Germans were much poorer than UK citizens, and of course lacked freedom. Hardly a great model for us to follow

    1. Grumpy Goat
      August 25, 2015

      actually we have had success Crossrail, Kings Cross Reading station upgrade Bathgate Ardrie extension we are getting better

      August 25, 2015

      I see where you’re coming from.

    3. Miami.mode
      August 25, 2015

      As the saying goes – Houston we have a problem.

      To state that we need a rail or road system is a ludicrous suggestion. How on earth would commuters get into large cities without rail and the needs of commercial activity such as building or retail would be impossible without a road system. Additionally despite what JR often comments on, I think railways will always need some sort of subsidy due to the complex and expensive infrastructure such as bridges, level crossings and foolproof signalling systems. I would agree wholeheartedly with him that Network Rail should look at the huge amount of spare land they have with a view to leasing it out or selling some. They need someone with a bit of commercial nous.

  17. Grumpy Goat
    August 25, 2015

    Hmm the last time the track was in private hands it did not cover itself in glory, people died due to cost cutting. How we fund a growing railway based on Victorian infrastructure is a problem. The real issue NR was funded by off balance sheet funding. Since it is now under Treasury control its borrowing falls the under the national debt. The Days when NR could just reach for the credit card if there were cost overrun are gone. All for privatising NR, but we must learn from the lessons from Railtrack . Perhaps the split between the Rail operating companies and the track should looked at again, or look at the TFL business model. By the way, if the rail carriage is full of empty seats it is the private train operators fault, not NRs

    Reply Unfortunately people also died in railway crashes when it was fully nationalised before Railtrack.

    1. Grumpy Goat
      August 25, 2015

      Granted, but NR has given us 8 years without a railway death. granted you get suicides, trespass and level crossing accidents. That is perhaps NR greatest success. One could on average expect a rail death roughly ever 18 months under Rail track or BR Worth noting this Railtrack skimped on maintenance and paid the penalty. I am no fan of nationalised industries, but any private solution must take in to account safety

  18. majorfrustration
    August 25, 2015

    Reminds me of the comments around the demise of British Leyland ” you have to build an awful lot of cars to lose that amount of money”

    August 25, 2015

    Railways have been around for the last 200 years in the UK. So, still not sorted out financing.

    Schools rather longer. Still not sorted out financing and even priorities of learning therein.

    Hospitals, over 1000 years. Still not sorted our financing and priorities.

    The UK Parliament needs a dose of syrup of figs to get it moving, after a long debate of course and a Chilcott style enquiry.

  20. margaret
    August 25, 2015

    I don’t use the railway much at this point in my life , so haven’t much interest, but I was hoping that you article would be about the Chinese problem with a little explanation what it was all about .You see you may not have decided to take lecturing as a career , but you still have students.

    Reply I wrote about China recently. The authorities lost control of the Stock market and have shown there are growing pains as they shift both the Stock market and the currency onto a more market based footing. I don’t think the share collapse heralds a major problem around the world – if I did I would write about it. I did predict that China will loosen money policy more to keep her economy growing. Today she did just that by announcing interest rate cuts and other monetary measures. The government also appears to be more relaxed about share price falls, recognising that their power to stop it is limited.

    1. margaret
      August 25, 2015

      Thank you for your reply. I might even repeat it elsewhere and sound terribly knowledgeable.

    2. petermartin2001
      August 25, 2015

      It will be interesting to have a discussion on China. Ultimately the problem there is caused by the indebtedness of those in China who have borrowed money to fuel asset and share prices. Reducing interest rates of course staves off the problem temporarily but a more lasting solution to a private debt problem can never be to create more private debt. The Chinese will end up with an economy in deep recession with close to zero interest rates. What then?

      Reply I did set out my thoughts on China recently. There is no evidence that China will have a bust like the west 2007-8 and end up with zero rates.

  21. Anonymous
    August 25, 2015

    Reading – £900 million pounds.

    To put in perspective the Royal Liverpool Hospital is £429 m to build from scratch. The Olympic Stadium (used only once) built from scratch cost around £700m.

    Reading had to be rebuilt within and around old infrastructure whilst running a fully timetabled railway through it and without injuring or killing travellers or workers. Perhaps you might request a site visit with an engineer to show you how vast and impressive this project actually was.

    Reply I have visited and used the station during and after the works. It came out at around double the original forecast, following changes to spec and cost escalation.

    1. Anonymous
      August 25, 2015

      Reply to reply – True. But in view of how much it cost to build a stadium or a hospital the cost of Reading was clearly underestimated: it included a stadium sized station with all the intricacies of pointwork and signalling, major rail junctions, a large flyover, a large depot and yard and all the attendant costs of day-to-day traffic managed around the works as they happened. This meant the installation and dismantling of various signalling layouts at each stage of the development – each were to the exact standard of permanent railway signalling even though they were temporary.

      The development also included the creation of diversionary routes and link up of the B&H line direct to Didcot without having to pass through Reading at all.

      It does seem a case of underestimation as much as it does overspend (which I’m sure there has been.)

      It is certainly better value than HS2, the Millenium Dome or the Olympic stadium in terms of what it can return to the country and the region.

      1. Anonymous
        August 25, 2015

        What the Reading development lacked was charisma. It had neither the exciting and innovative techniques of Crossrail (not needed) nor the aesthetics of a flash City tower block. All it is is bland and functional concrete and most of it out of view.

        None of this makes the work or its impact on travel any less magnificent. One wonders how it could possibly have been done for the original estimate.

  22. outsider
    August 25, 2015

    Dear Mr Redwood, Writing off Network Rail tax losses is just recognition of Mr Brown’s elaborate failed attempt to pretend that it was an independent company rather than a nationalised industry.
    (then takes up hypothetical tax loss issue for a private company which seems an unlikely forecast ed)

  23. Jon
    August 25, 2015

    Cycling has really taken off in London but dangerous. They could sell/lease land at the side of the routes into London for cycleways, mopeds and shops. Strikes if not banned should be required to reimburse costs. It costs £50m a day so charge it back to the strikers rather than the workers having to foot the bill along with the accidents that take place on the streets when a strike takes place.

  24. Mark
    August 26, 2015

    The decline in equity in analysed on page 90 of the accounts, and principally comprises the £982m reduction in the fair value of derivatives we discussed before, and £488m reduction in the valuation of the Property, Plant and Equipment (PPE), the £376m loss for the year (itself largely driven by a large tax charge, and lowered revenue under the latest ORR settlement), and £159m of actuarial loss on the pension fund due to lower discount rates for forward liabilities (surely a hedgeable item?).

    The tax charge (which looks like some “kitchen sinking”) is explained in Note 10:

    Under IAS12 deferred tax assets can only be recognised where it is probable that taxable profits will be available against which the deferred tax asset can be utilised. In the year Network Rail has derecognised the deferred tax asset in respect of tax losses. During the year, Network Rail has been reclassified as a Central Government Body. As a consequence of a change in assumptions in the second half of the year regarding the uncertainty over the regulatory determination of income in future control periods, it is no longer considered probable that Network Rail will return to the level of taxable profits that would have allowed for the continued recognition of the deferred tax assets.
    Consequently, the deferred tax assets of £864m (£597m carried forward losses and £267m current year losses) in respect of tax losses have been derecognised.

    The PPE aspect is interesting. The traditional approach to valuing PPE is to record investments at cost and deduct accumulated depreciation to arrive at a net value. There may additionally be a revaluation reserve for non-depreciating assets such as land. Such accounting detail is entirely absent here. The notes reveal that the valuation according to the historical cost convention is £52,255m
    (2014: £47,468m). That is about the same as the entire projected cost of HS2, which is perhaps an indication of the poor value for money of that project. A further note reveals the inflation-adjusted depreciated replacement cost of the network (after excluding the replacement cost of embankments, cuttings and tunnels) is estimated at £89.3bn (2014: £87.5bn) – which still makes HS2 seem like poor value, but is at least consistent with the announced £38bn of upgrade spending that has had to be put on the back burner (see McLoughlin’s statement to Parliament). The remaining useful life of the network is assessed as an average of 30 years, which is used to factor the depreciation charge. There is no residual value given to land The management view of the value of the PPE (£54,091m) is however based on something else altogether:

    Given the interdependency of the assets comprising the railway network, the group has concluded that the railway network is a single class of asset. The railway network is carried at its fair value, which is measured as the estimated future cash flows that are expected to be generated in perpetuity, discounted at a pre-tax rate of return, as set by the independent rail regulator, (the ORR), in its “Periodic Review 2013: Determination of Network Rail’s outputs and funding 2014-19”.
    The Regulatory Asset Base (RAB) is a proxy for the present value of future cash flows
    As there is no active market in railway infrastructure assets, the group has derived the fair value of the railway network using an income approach. The income approach assesses the discounted future cash flows that would be generated by the railway network using a market rate of return. This valuation is carried out twice a year and revaluation gains and losses are reflected in other comprehensive income.
    The income approach to determining the fair value of the railway network involves using the RAB, which is a proxy for a discounted cash flow calculation, adjusted for forecast performance variations.

    By varying the assumptions in the calculation the management can signal stress to the ORR: the valuation becomes part of the negotiation for the regulatory settlement.

    reply Yes, a longer way of agreeing that the income generating capacity of these assets is low relative to their cost

    1. Mark
      August 26, 2015

      I think the annual £6bn+ subsidy to rail tells us that, with the threat that it will get much bigger if we build HS2.

  25. Lindsay McDougall
    August 26, 2015

    Follow the argument where it leads. What is the best method of ensuring that the railways are profitable, making no demands on taxpayers, embodying the principle that the costs of a transport service are borne fully by the people that use it?

    Perhaps vertically integrated privatised regional railway companies are the answer. The overheads involved in leascos, franchises, lawyers and consultants would be lessened. Competition would mainly come from other transport modes.

    Ensuring that trains run fuller would involve paying attention to off-peak frequencies and probably having more locations where rolling stock can be temporarily stored during the day.

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