The public sector and derivatives

I have highlighted before Network Rail’s use of derivatives. In their last annual accounts to end March 2020 they report progress with winding down foreign currency futures, as they gradually eliminate the foreign currency borrowings previous managements had taken out.

They still had in place£12.5bn of hedges, mainly for interest rates. At year end the notional loss was a gross £895 million and a net £484m.. Why does a company that is entirely owned by the taxpayer and borrows with a state guarantee need to take out derivative contracts on interest rates? Why do we rarely see them making overall profits on these activities?

The BBC too has some of these derivative contracts. They also reveal unrealised losses on their foray into this complex market at their last balance sheet date. I haven’t heard BBC journalists asking questions about any of this.


  1. Richard Elsy
    September 17, 2020

    I’m simply astonished as to why two state owned enterprises have interests and staff employed in the arcane derivatives markets. It’s in the same irresponsible area of city and county council highly paid idiots parking the tax payers’ hard earned cash in iffy Icelandic banks fifteen years ago. Is there never any level of accountability for such behaviour? Premature retirement with a £50,000+ annual pension doesn’t really seem to be much of a sanction. The tax payer is still coughing up for them as long as they can manage to cough. It’s not fair, and a sense of fairness must be a key component of any and all public sector institutions. If we get things wrong in the private sector, especially in the SMEs which are the backbone of our economy, we pay a price. Why should state owned companies, and their staff be immune from this?

    1. Martin in Cardiff
      September 17, 2020

      As for public v. private sector, I see that Johnson has admitted that the UK covid19 testing system has “huge problems”.

      Well, it would help to call things what they are. It is NOT a covid19 testing system. It is a MONEY MAKING system, like all private sector operations, of which the requirement to deliver a service is a BURDEN to be MINIMISED in every way legally possible, or illegally, if there were no enforcement mechanism.

      That might just explain what is happening.

      1. Narrow Shoulders
        September 17, 2020

        on the right trach Marty but that is why competition is so vital. Public or private provision.

      2. Edward2
        September 17, 2020

        Gosh I thought it was organised by PHE and the NHS.
        Both nationalised organisations funded by the State.

    2. Peter
      September 17, 2020

      Yes. Too clever by half. Midlands councils dabbling in energy supply and making huge, expensive losses is another example.

      The basic problem with the railways are :-

      1) It is not a joined-up, national service.

      2) It is not accountable. Fragmentation enables one sector to blame another and duck responsibility.

      3) The conservative government are unwilling to admit failure.

      They tried to nationalise the whole lot -but incompetence and the Hatfield disaster meant they had to renationalise network rail/ rail track, or whatever you want to call it.

      They persist with a failed franchise model in a vain attempt to save face.

    3. JoolsB
      September 17, 2020

      Totally agree. Well said Richard.

    4. acorn
      September 17, 2020

      These public sector organisations (PSO) are doing what the Treasury told them to do, to put them on the conveyor belt to privatisation, back in the eighties.

      First you deregulate the sector the PSO is in. Second, you convert them to a private sector accounting and financing structure, including taking on private credit and financial derivative instruments; like currency and interest rates swaps. None of which is necessary if they are owned by a government that creates it own currency at no real cost.

      Thirdly, you incorporate them and finally privatise them at great expense via spiv city. You will likely have to nationalise their pension funds to make them saleable.

      BTW. Financial derivatives are pure Casino banking. Three out of four punters lose. The derivatives Casino is about ten times the size of world GDP; AND, the EU wants the Euro derivatives casino inside the EU, not in London post Brexit.

    5. Sir Joe Soap
      September 17, 2020

      Get it right, they look good and clever, get it wrong, they’re bailed out anyway.
      Losses should be deducted from pensions of anyone earning £50K plus.

    6. miami.mode
      September 17, 2020

      Absolutely right Richard, and you can imagine what fun they had playing and gambling on these markets with other people’s money at no cost to themselves.

    7. Hope
      September 17, 2020

      JR, somwhat has useless Shapps done about it or previois ministers like Grayling, or Villers? Your govt. has had ten years!

  2. Mark B
    September 17, 2020

    Good morning

    Solution ! Make it illegal for government bodies or organisations that are in receipt of taxpayer money to conduct such activities.

    After all, you seem to be banning much else 😉

    1. Martin in Cardiff
      September 17, 2020

      Banks, you mean?

    2. LB
      September 17, 2020

      I would go farther.
      No state organisation shall be allowed to run a loss on the balance sheet.
      So assets > liabilities [and all liabilities shall be on the books]
      If you like a bit of sharia law when it comes to debts for the state.

      It’s immoral that MPs force people into debt bondage as soon as they are born.

    3. Hope
      September 17, 2020

      How about local authorities investing in foreign banks during the crash and losing our money!

      How about the NHS wasting £34 billion on a computer system that did not work! It just wasted £11.8 on NHX for a failed testing app! The man in charge still in post not qualified for the job just a mate of Osborne!

  3. Ian Wragg
    September 17, 2020

    It’s only taxpayers money.
    Jail those involved then watch it stop.

  4. Tabulazero
    September 17, 2020

    Derrivative contracts protect the balance sheet from fluctuations in interest rates. It is hard to conclude anything simply from the headline number.

    1. Robert McDonald
      September 17, 2020

      So the BBC did not lose money from the derivatives it took out ? As it clearly did, then how is that protecting it’s balance sheet ?

    2. matthu
      September 17, 2020

      How much have interest rates fluctuated over recent years?

    3. Edward2
      September 17, 2020

      Apart from the big losses.

    4. Lynn Atkinson
      September 17, 2020

      Network Rail is active purely in the Sterling Area. It’s hard to see why it needs to borrow billions in foreign currency then hedge that borrowing.

      1. Tabulazero
        September 17, 2020

        Because borrowing rates in some foreign currencies can be lower than in Sterling and you may want to take advantage of that, assuming you can hedge out FX risk.

        Derivatives are just tools. They can be good or bad depending on what you do with them.

    5. Ian Wragg
      September 17, 2020

      Derivatives are naked gambling. If they want to use their own money let them do it.
      If they protect the balance sheet how come they’ve lost a billion.

  5. DOM
    September 17, 2020

    And yet YOU and your party never call for the dismantling and privatisation of the BBC. This tells its own story and reveals the true nature of the Tory party and their duplicity with and embrace of the BBC’s political mission to destroy identity and turn people into mere entities

    It is my belief that you and your party have ‘signed off’ (subtle acceptance) on a Devil’s Pact with this most vile leftist organisation that is now pursuing a most vicious propaganda project against the majority population.

    The Tories have become part of the problem, not the solution to the threat most now face from this most vicious of human, cultural and ideological assault on our world

    My identity is white, heterosexual and male.

    1. JoolsB
      September 17, 2020


    2. Peter
      September 17, 2020

      ‘My identity is white, heterosexual and male.’

      You are Sir Herbert Gussett and I claim my five pounds.

    3. Fred H
      September 17, 2020

      your last para speaks for quite a high percentage of the electorate – but watching and listening to the BBC you would think we are a tiny number.

    4. Edwardm
      September 17, 2020

      I have deep concerns about the cultural aims of the once Conservative party.
      I am a traditional Conservative and their is no political party in the HoC that overall represents my traditional values – and I dare say traditional Labour voters find the same.
      I recognise that many Conservative MPs do have traditional values, but they are clearly not in the majority.

  6. Hank Rearden
    September 17, 2020

    Possibly because it’s “exciting and clever ” and people can pretend to be a master of the universe rather than the tedious and difficult business of helping trains to run on time

  7. Adam
    September 17, 2020

    Much of the BBC has been dumbed down and should be dumped.

    1. Lynn Atkinson
      September 17, 2020


  8. Everhopeful
    September 17, 2020

    Basically this is gambling with public money.
    They’ve been doing it for years and JR has been warning about it since at least 2017 ( prob before too). The losses put up fares!
    Isn’t this similar to what local govts were found to be doing when the 2008 crash came?
    Some years back the railway, civil service, local govt., schools were encouraged to become like businesses and lot of of inept-in-the-market-place people got ideas above their station.
    They thought they could “thrust in the market place” and “make a difference”and “embrace change” and much other rot.
    Well they couldn’t. They were not city “whizz kids” and they lost £££millions ( of other people’s money).

    1. Peter Parsons
      September 17, 2020

      Wrong. Completely wrong.

      Organisations use these sorts of contracts to lock in a price or a cost. Airlines do it all the time with fuel so they know the price they will be paying. If the market price goes up, they are in “profit”, if it goes down they are making a “loss”, but that is less important than an organisation locking in the cost and therefore knowing exactly what they have to budget for.

      It’s the equivalent of taking out a fixed rate mortgage on your house rather than something like a base rate tracker.

      1. Edward2
        September 17, 2020

        But in the private sector, if you got it so wrong you would be sacked.

        1. Mark B
          September 18, 2020

          Exactly ! And it would be the private investor who would pay not the taxpayer. The private investor knows both the risk and the reward and so can CHOOSE in invest or not. The taxpayer has no such choice, they have to hand over their cash by government dictat.

  9. agricola
    September 17, 2020

    To me it is an indulgence in gambling activities with public money. As such are there no rules as to how they conduct themselves financially. In the case of the BBC it does not seem to affect the enormous salaries they pay to, in many cases mediocre people. The appointment of a new Director General has seemingly little effect, was it just a smokescreen excercise to damp down the enormous disquiet there is with the BBC.

    1. formula57
      September 17, 2020

      ” gambling activities with public money” – exactly so!

      There should have been prosecutions for breach of fiduciary duty at some of these companies.

    2. Lifelogic
      September 17, 2020

      All state sector companies should be prevented from this gambling and indeed prevented from being unfair tax payer subsided competition for the private sector in say transport, energy, housing, healthcare, education, BBC broadcasting … otherwise you kill efficient well run business and augment badly run state ones. This is hugely damaging to jobs and the economy.

      Just looked at the top BBC earners. Some on more than £1 million it seems. Are any of these really worth more than £150K tops?

      Fiona Bruce – £450,000, Vanessa Feltz – £405,000, Andrew Marr, all those lefty dopes on Newsnight ……

      1. Lifelogic
        September 17, 2020

        We have a Competition and Markets Authority but they never address the main source of unfair competition which is the tax payer funded & subsidised state sector in the areas I list above.

  10. Martin in Cardiff
    September 17, 2020

    Your party was foremost in encouraging, or rather in pressurising, the public sector to behave as if it were the private sector, for instance the BBC’s breaking itself up into “business units” and turning parts of itself into “wholly owned subsidiaries”, whose managements were expected to behave exactly like their private sector counterparts.

    Well, in many areas they have done precisely what you wanted.


    Well done!

    1. Edward2
      September 17, 2020

      They are free to take decisions they feel are best for their well funded quangos.

  11. Narrow Shoulders
    September 17, 2020

    As you know Sir John, projects are costed with an expectation of FX costs or interest rates values. It is prudent to purchase contracts that secure those assumed rates.

    Imagine the outcry if we have to devalue sterling and prices sky rocket. Imagine the outcry if interest rates return to a reasonable cost for money.

    So, if this is what the contracts are for then the losses are not really losses, they are bookkeeping.

    If, however there is speculation involved with public money…………

  12. Nigl
    September 17, 2020

    And why does the BBC pay such ridiculous amounts to its journalists? I do not want my money to go towards the millions earned by Ms Zoe Ball And Mr Gary Lineker etc. I see no reason to hedge rates with their income stream, it was pure speculation and unless you have foreign currency earnings only borrow in sterling, again just gambling.

    You might add Nottingham and Bristol councils setting up energy companies costing their electorate millions and leading to a cut in services although Nottingham managed only to blame Covid in their press release.

    Actually it had good people operationally but inept councillors with zero experience or management experience in charge. With Network Rail and Transport for London’s plus HS2, the PPE scandal and now the testing shambles clear evidence our public sector is not fit for such purposes and why Labours nationalisation policies would spread the economic misery even further.

    1. Mark B
      September 18, 2020

      Bristol Council has just sold Bristol Energy.

  13. Mike Wilson
    September 17, 2020

    I was heartened to hear the other day that 250,000 people have not renewed their TV licence. It’s a good start but we need millions to do it. As for trading in derivatives with our money, the mind boggles. Is there nothing they won’t waste our money on. Sack the culprits at once and close the positions.

    1. Fred H
      September 17, 2020

      There is likely to be an enormous number refusing to pay each month as it becomes due. I think the licence count is something like 26m.
      I believe 1.6m have informed them they do not need a licence.

    2. Mark B
      September 18, 2020


      I long ago have up any hope of reform to the way the BBC was funded. I long argued that it should have gone over to a subscription model like BSKYB. But I was wrong ! The best solution is for each and everyone of us to force market conditions on the BBC and other broadcasters. Namely, we need to vote with our remotes / wallets and starve the beast.

  14. Ian @Barkham
    September 17, 2020

    As we all know we have a Government that supports playing fast and loose with taxpayer money.

    That is why there isn’t enough to pay for the basic of security, infrastructure and health.

    Maybe HS2 should be funded directly by Network Rail. You have to question if the taxpayer is going to through £109Billion at them how are the actually going to spend it.

    With the BBC being funded by taxpayer money, logic is it is owned by the taxpayer. Maybe it should be commercialized and the taxpayer gets a proportionate value in shares related to the years they have paid in. Then as owners they get to authorise the pay of the staff and the direction it takes. No one else is acting on behalf of the taxpayer. The flaw as far as the BBC is concerned is that those over 75 will have the largest shareholding

  15. Tabulazero
    September 17, 2020

    Coming to a conclusion on whether derivatives are good or bad require hard work and the careful reading of the accounts’ footnotes and questioning management.

    But since reading things in detail does not appear to by your forte, as evidenced by you voting the Withdrawal Agreement into law before finding that it was not to your liking nine months later, I question whether you went beyond simply reading the headline number.

    The only thing you should be able to conclude at this stage is that both the BBC and Network Rail use derrivatives.

    1. Edward2
      September 17, 2020

      And the record shows that they lose millions.

  16. Pat
    September 17, 2020

    Good morning Sir John,

    Lineker gloats and shows his contempt for the Little People, like me, forced to pay his salary, under criminal sanction: “Oh dear. Thoughts are with the haters at this difficult time.”
    He also publicly defies the recent BBC ruling on political campaigning via twitter, “Nah” and is immediately exempted.

    Zoe Ball given a £1 million pay rise after massive loss of listeners to her radio show.

    This after the appointment of a new DG.

    Please support BBC defunding.

    1. Mark B
      September 18, 2020


      You do have a choice. There are other providers of entertainment and news and you do not need a TV license to view it.

  17. Bryan Harris
    September 17, 2020

    This kind of thing is not limited to the BBC or Network Rail – Far too many council plough our money into schemes or investments that frequently cost us taxpayers dearly.
    They invest in art for their own offices, or buy hotels, or part invest our taxes in local money making projects that become a sinkhole.

    It is time that those who make these decisions, where our money is lost, be made to repay the loss.

  18. glen cullen
    September 17, 2020

    It happens for one reason and only one reason – this government allows it

  19. Lynn Atkinson
    September 17, 2020

    Excellent as usual.

  20. A.Sedgwick
    September 17, 2020

    Local government and the BBC – Titanic institutions.

  21. LB
    September 17, 2020

    You won’t hear the BBC, or MPs for that matter ask the difficult questions.

    Look John, you’ve worked in banks. You understand a balance sheet.

    Why is it that PFI is off the books? Why are the EU debts off the books? Unpaid wages and invoices? Losses on insurance contracts? Civil service pensions are off the books? Why? State pension is off the books? Why? Nuclear clean up, another debt or liability, off the books.

    And no questions raised as to why why the state says it adheres to IFRS accounting standards and all of those things listed are required to be on the books, are the debts left off?

    The BBC doesn’t ask the question. No MP asks the question. Seems there’s a lot to hide.

    Here we have derivatives losses being reported. On the books. Hard to hide those.

    But the big debts, the big losses or liabilities, why aren’t you asking questions?

    Perhaps its because there’s an element of shoot the messenger. If you rock the boat on the true debts, you are the one who will be targeted for letting the cat out of the bags. Perhaps too many metaphors, but there we go.

  22. Sakara Gold
    September 17, 2020

    Warren Buffet – the Sage of Omaha – once described dervatives as “weapons of financial mass destruction”. Apparently he has now changed his views and has embraced them – to hedge many of his equity positions. He has also recently opened a postion in a large, profitable gold miner

    Holding a modest amount of physical gold bullion, vaulted and insured overseas, seems a sensible precaution in these interesting times. The banksters find it difficult to print gold.

  23. glen cullen
    September 17, 2020

    I do not believe for one second that these publicly funded quangos/bodies started trading derivatives without the knowledge and consent of the government

  24. Edwardm
    September 17, 2020

    This just shows that senior executives need to have part of their large remuneration withheld for a few years and only paid if their decisions prove to be good or profitable in the long run.

  25. Lindsay McDougall
    September 17, 2020

    They behave like this because it’s not their money that they’re spending and because all nationalised organisations are incompetent and arrogant. What’s Notwork Rail’s accumulated deficit? £40 billion? £60 billion? And is it getting bigger? And in what way is the BBC ‘independent’? It’s a self perpetuating oligarchy.

  26. ukretired123
    September 17, 2020

    Keep it simple should be the spirit and letter of public institutions so everyone knows what the true assets and liabilities are. Pushing the boat out for future taxpayers like PFI started with Major but Labour had PFI on steroids paying astronomical sums for 60 years.

    Keep to the core business as anything else is irresponsible and ultra vires.

  27. Mark
    September 17, 2020

    Perhaps one of the biggest uses of derivatives in the public sector is the Low Carbon Contracts Company, whose losses on CFDs are compulsorily insured by the electricity buying public.

  28. Sea Warrior
    September 17, 2020

    The size of councils’ financial reserves are also worth an examination – and tighter control. If they’re not using them now, just what are they for?

  29. Richard
    September 17, 2020

    This is, of course, a scandal.

    There are very many ways (eg HS2, overpriced PPE, £100bn pa Covid testing,foreign aid) that the public purse is looted.

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