Ill omens for rail’s next five-year plan

Network Rail is under siege. Lateness and budget overruns on high-profile projects are an embarrassment. Brigades of angry passengers at London Bridge and Finsbury Park feature on TV news bulletins. It doesn't look good.

If Network Rail were entirely to blame, it would be game over. But it is not. The programmes and budgets are not set by Network Rail but by a tripartite process involving Network Rail, the ORR and the DfT (and Transport Scotland). The DfT arrives at the table fuelled with its own aims and ambitions, stoked (over the last five years) by ministerial appetite for more capital investment. In the face of relentless demand growth, who could say it was wrong?

And how seductive this all was when Network Rail's private sector credit card was available, its use safely recorded off the Government's balance sheet. But then the ONS reclassified Network Rail in response to the
European System of National Accounts 2010 which came into force in the EU last September.

The secretary of state and the DfT said ahead of the event: "The ONS decision on the classification of Network Rail does not affect the planned improvement and investment in the railways, including Network Rail's £38bn settlement for the planned running of and investment in the railway in the five years from 2014."

But like it or not, with this change comes Treasury control of Network Rail's budget. All its funding now has to be sourced from the Treasury and it cannot continue to draw from the markets, for which Network Rail offered a very safe bet, complete with its near watertight government guarantee.

You might assume that this obligatory change in the source of funding is another Eurostat convention of public sector accounting – but it isn't. The way nationalised industries (sorry, that's what Network Rail has become) are funded is a matter of political choice. And here's the proof, in a short history lesson (I am indebted to ex-SRA colleague Richard Davies for knowing the Hansard references).

In 1956, nationalised industries were the norm. Not just in the transport sector, but the whole of the energy sector too – in fact electricity accounted for half of all nationalised industry capital expenditure at the time.
Herbert Morrison invented the genre, but he preferred to call them "socialised industries" and insisted they would go to the market, not the taxpayer, for their capital requirements.

It was a Conservative government and chancellor – Harold Macmillan – who changed that arrangement in the Finance Act of 1956. As he told the committee debating the matter late into the night on 12 June: "At present the nationalised industries, other than the Coal Board... raise their capital either by temporary borrowing from the banks or by stock issues in the market, with Government guarantee. I propose that for the next two years
– and that limitation, I am glad to see, has the approval of my honourable friends – the nationalised industries shall cease to borrow on the stock market and have their capital requirements met by finances from the Exchequer."

The committee evidently attracted the rising political Whether Network Rail is allowed to raise funding on the capital markets or whether it must draw on Treasury funds is a political decision stars of the day. Future Prime Minister Harold Wilson had said: "Probably the chancellor's motive... [in] doing this [is] because it is impossible for him to manage the capital market, to 'rig the market' in the best sense of the word... The Treasury has to do it every day of its life, and is probably doing it now. To do this, the chancellor cannot allow these large items of capital expenditure to be carried out in what he would regard as an unplanned way from the point of view of raising the capital."

Backbench Conservative MPs, and Liberal Party leader Jo Grimond, were unhappy with the change; but Labour could at least see the merits of better planning and "rigging the markets" – a phrase which the Chancellor of the Exchequer was happy to adopt. But far from lasting only for two years, Macmillan's measure is still in force. Later, in the 1980s and 1990s, Labour would propose allowing British Rail to borrow from the markets again.

History lesson over. Here's the point. Whether Network Rail is allowed to raise funding on the capital markets (which it did for 12 years) or whether it must draw on Treasury (taxpayer) funds is a political decision. Since the ONS determination means that public sector net debt has risen by 2% of GDP, the fiscal benefit of getting it back into the private sector is obvious.

But to do so will mean – among other things – overturning a temporary measure from 59 years ago that became permanent. My guess is that, in time, someone will find a way. But meanwhile, the omens are not good for Control Period 6 (2019-2024), for which the budget will be set through this year's spending review.

Reference: Transport Times, September 2015 Issue

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