News in the Financial Times that the British government is trying to keep the £34 billion (US$57bn) debts of Network Rail, the owner-operator-maintainer-improver of Britain’s rail infrastructure, off balance sheet can only accelerate the debate about how to pay for the railways in the long term.
The government’s current problem has arisen because the statistics authorities have decided, and who can blame them, that since Network Rail’s debt is protected by a government guarantee on repayment, and since it is only solvent because it receives public subsidy from government, it is a state owned company. Hence the problem of an extra £34 billion of debt appearing on the public books from next month.
But whether or not ministers manage to fend off Network Rail’s debt, they need to consider if its financial model is sustainable. The way Network Rail raises money is such that as things stand, the cost of the railways to the taxpayer, freight train operator and passenger can only really get more expensive.
In a nutshell, the way Network Rail gets paid is this. The Office of Rail Regulation assesses the value of NR’s assets, how much investment it plans to make over the next five years, and the effect of inflation and depreciation, to arrive at a figure on which its income is then based. NR’s income is not determined by how much it can charge its customers, the train operators; it is planned and regulated. Why? Because the railway is a natural monopoly; market forces can’t apply. The planned income is allocated between track access charges paid by train operators, income from station and property rental; and government subsidy.
The slowly growing problem is that, as NR – laudably – invests in improving the rail network to deal with increased demand, adding new track, bigger stations, electrification and so on, the value of its infrastructure assets goes up, and with it, the amount of money the regulator calculates it’s entitled to earn. NR’s regulatory asset base – the figure that determines the income – roughly quadrupled between 2001-2 and 2008-9, according to the ORR. This has not gone unnoticed in Whitehall, but no solution has yet been proposed. Meanwhile, NR plans to spend £25 billion on upgrades and renewals between 2014-15 and 2019-20, pushing its costs up yet further.
Simply privatising NR wouldn’t change its financial model, a model used already by the privatised water utilities. Abolishing the regulatory framework would be one option – but the government would likely balk at that, since it would make the division of the funding burden between taxpayer and farepayer even more politically contentious than it is now.
Or, the government could abolish Network Rail and hand over the rail network, in regional chunks, to train operators to run themselves as concessions. This has previously been mooted by former rail regulator Tom Winsor and by law firm Berwin Leighton Paisner in a decidedly self-serving paper a few years ago. They could raise money by charging other operators to access their network, as well as ticket revenues and subsidy.
Unfortunately, that would destroy the much-needed strategic thinking that NR has brought to the railways, which would require a new rail authority to be set up to make up for that… and authority making strategic decisions about infrastructure… which the private rail companies would demand to be able to make an economic return from, as well as a government guarantee… in which case we’d have the Network Rail model but with private profit margins, and therefore even higher costs.
I never said I knew the answer…
p.s. The regulatory asset base model is also being considered for High Speed 2, as I explained in an article for Modern Railways magazine in March.