I have pointed out in past years that Network Rail, our nationalised railway industry, is very good at losing large sums of money on trading and owning derivatives. Yesterday I looked at charities close to the state and in receipt of large grants that have made a financial success out of it. Today I want to start a review of a nationalised business that receives far larger sums from the state and has made large losses out of it.
The Network Rail management claim they need to deal in derivatives, as they have substantial long term borrowings where the interest rate might go up when they need to refinance. Worse still the company has borrowed considerable amounts in foreign currencies, meaning they have a foreign exchange risk which would require them to pay back a larger sum if the pound falls whilst they owe the debt. They call what they do hedging.
Their latest annual account for 2014-15 states ” Some derivatives do not qualify for hedge accounting and are therefore classified as held for trading. Changes in the fair value of derivative financial instruments that do not qualify for cash flow hedge accounting are recognised in the Income statement as they arise.” This is a complex way of saying that although they claim all their derivatives are needed against borrowings they have made, accountants regard some of them as trading activities. When these go wrong they have to declare the loss each year as it occurs and put up more collateral – more cash – against the position they are running. Last year they needed to find an extra £690 million of cash to sustain their derivatives. The reported loss on derivatives was £982 million.
Is this what a nationalised.l railway should be doing with taxpayers money? Is this Jeremy Corbyn’s dream way to run a nationalised railway? I don’t think they should be borrowing in foreign currencies in the first place, and am glad they are now treated as a business owned for taxpayers by the Department of Transport, using the Treasury to borrow money for them in sterling. Their revenue is in pounds so it is better their debts are in pounds.
When we are trying to control public spending it does not help when a large taxpayer owned business does this in derivative trading.