Network Rail (partial) privatisation

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All Line Rover

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More talk in recent days, including in the FT today, of the potential privatisation of parts of NR. I am strongly opposed to any such move, as the inevitable result of further fragmentation will be an increase in costs and, therefore, fare rises.

More details should be availabe in the coming days once a report from Nicola Shaw is published.
 
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thenorthern

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Be interested to see how and if its sold off given the history or Railtrack PLC I don't see who would want to purchase it.

With further devolution happening in Scotland I wonder if control of rail infrastructure will be devolved to Holyrood.
 

Domh245

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Interesting. Wasn't it only a few months ago that Network Rail was Quasi-renationalised? I also wonder what aspects of NR would be privatised - Railtrack proved that it definitely couldn't handle maintenance, but could you make a case for the upgrades to be privatised?
 

absolutelymilk

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Interesting. Wasn't it only a few months ago that Network Rail was Quasi-renationalised? I also wonder what aspects of NR would be privatised - Railtrack proved that it definitely couldn't handle maintenance, but could you make a case for the upgrades to be privatised?

I thought most of the physical upgrade work was already contracted out, but perhaps the planning behind it will be as well? I have also read that many stations will be sold off/run privately.
 

coppercapped

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Under the current arrangement, Network Rail's only source of funding is the Treasury. NR can no longer can increase its working capital by borrowing money as it has been able to do until recently.

Given that there are limits, whether one likes it or not(*), to the amount that the Government can spend and given that there will shortly be huge demands on Government money to build HS2 - I hope that people are clear that the level of expenditure on capital projects on the existing railway will be limited in future.

This may not be what people posting here actually want.

(*) All that all 'quantitative easing' and other such schemes achieve is that the price of Warhols go up.
 

yorksrob

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Under the current arrangement, Network Rail's only source of funding is the Treasury. NR can no longer can increase its working capital by borrowing money as it has been able to do until recently.

Given that there are limits, whether one likes it or not(*), to the amount that the Government can spend and given that there will shortly be huge demands on Government money to build HS2 - I hope that people are clear that the level of expenditure on capital projects on the existing railway will be limited in future.

This may not be what people posting here actually want.

(*) All that all 'quantitative easing' and other such schemes achieve is that the price of Warhols go up.

Some of us on here have been vocally concerned that the cost of building HS2 would have a negative impact on infrastructure funding for the classic railway.
 

ScotGG

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How do state railways in most of the EU access funding?

Even if NR is entirely dependent at the Treasury at the moment, it's incredibly stupid not to utilise 400 year lows in borrowing costs (10 year govt bonds with interest around 1%) to build infrastructure needed for record population growth.

Same old UK govt - don't borrow to invest in things which bring returns (which even the IMF is now suggesting), but make organisations such as NR or the NHS borrow from the market at 5 times the rate of interest, costing the population far more and offering less flexibility. Helps their buddies in the City though.
 

HH

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The obvious bit to privatise would be property. Property was what Railtrack loved, to the detriment of maintenance. The downside is that property profits would no longer subsidise maintenance, but such considerations have never stopped the Tories selling off the family jewels before.
 

thenorthern

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The finances of Network Rail are very unpredictable as things such as the landslip at Appleby and the closure of the West Coast Main Line at Lockerbie can't be factored into account when doing annual budgets for the year.

For that reason I don't think its a good idea to sell off Network Rail as is a very high risk and unpredictable company financially. I wonder if the government would look at franchising out Network Rail in a similar way to TOCs as I think that would offer passengers better value for money.

What is the legal status of Network Rail, is it still a company limited by guarantee that is a central government body? I know its not classed as a Statutory Corporation (like British Rail was) or a Non-Departmental public Body/Quango (like the Strategic Rail Authority was).
 

dstrat

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If there is a way to allow business to make a fast buck, they will make it happen.

I don't think anybody disagrees that having private firms running those train franchises that have never turned been turned a profit (even if their parent companies have !!!) and as such are subsidised by the public purse is madness but it still goes on with the farce that is TOC franchising.

And in a similar way to how that has been allowed to happen, one can easily see how private firms will given a hand in running the railway based on 'performance contracts' where the financial risk remains an issue for the balance sheet of the state and never for the firm taking on the contract. The Balfour Beatty's et al. of this world will be all over it !
 

LNW-GW Joint

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How do state railways in most of the EU access funding?
Even if NR is entirely dependent at the Treasury at the moment, it's incredibly stupid not to utilise 400 year lows in borrowing costs (10 year govt bonds with interest around 1%) to build infrastructure needed for record population growth.
Same old UK govt - don't borrow to invest in things which bring returns (which even the IMF is now suggesting), but make organisations such as NR or the NHS borrow from the market at 5 times the rate of interest, costing the population far more and offering less flexibility. Helps their buddies in the City though.

Network Rail has already burnt its way through £40 billion or so.
How much further do you think they can go?

FS (Italian State Railways, includes infrastructure and operations) is in the process of selling a 30% stake to avoid financial collapse.
DB is in deep financial trouble and may have to sell off Schenker and Arriva to keep afloat domestically.

NR will not get the job of building HS2. That, like HS1, will be controlled by the Treasury, probably with a large proportion of private funds.
They are trying to lever the vast funds sloshing around in pension schemes for infrastructure investment.

This thread is like all the previous ones, calling any inward NR investment "privatisation" and therefore "bad".
It would be better to call it "refinancing", and an attempt to put NR on a sustainable footing, because it surely is not at the moment.
 

The Ham

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Some of us on here have been vocally concerned that the cost of building HS2 would have a negative impact on infrastructure funding for the classic railway.

In the same way that Crossrail's Elizabeth Line and Thameslink has drawn all the resources and NR aren't making much in the way if other improvements!?!?

(Yes I know a sizable chunk of that is being funded by London Taxes, but they are still drawing resources).

Yes, HS2 could have some impact on what can be spent,. However, I would argue that that would be money that would be needed to improve lines which will see improvements due to being releaved by HS2.
 

yorksrob

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In the same way that Crossrail's Elizabeth Line and Thameslink has drawn all the resources and NR aren't making much in the way if other improvements!?!?

(Yes I know a sizable chunk of that is being funded by London Taxes, but they are still drawing resources).

Yes, HS2 could have some impact on what can be spent,. However, I would argue that that would be money that would be needed to improve lines which will see improvements due to being releaved by HS2.

Well, I could be being pessimistic.
 

6Gman

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The obvious bit to privatise would be property. Property was what Railtrack loved, to the detriment of maintenance. The downside is that property profits would no longer subsidise maintenance, but such considerations have never stopped the Tories selling off the family jewels before.

I'm intrigued by the use of that phrase.

If I inherited some family jewels (or silver) I'd happily sell it off to buy something more useful!

Why is there an assumption that selling is wrong?
 

yorksrob

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Why is there an assumption that selling is wrong?

Because you're substituting a short term gain, which will likely benefit the treasury more than the railway, for a long term income stream that could subsidise operations in perpetuity.
 

SPADTrap

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I'm intrigued by the use of that phrase.

If I inherited some family jewels (or silver) I'd happily sell it off to buy something more useful!

Why is there an assumption that selling is wrong?

To take it literally is missing the point in a rather large way.
 

HSTEd

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Why is there an assumption that selling is wrong?

Because the cost of state capital is lower than that of private capital.
Which means that the price at which the private sector will buy is inherently lower than that at which the reduction in the overall debt burden will more than offset the states loss of income through reduced income payments.

In other words, if I sell off property generating income of £1 per annum the private sector will pay roughly ~£10 for it.
But £10 would only reduce the interest burden on the public debt by ~10p. So the state loses out.

It only becomes worthwhile if you assume that the glorious free market is inherently superior than the moribund state because it is and all who question this are communists worthy only of scorn and summary obliteration.
 

coppercapped

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In the same way that Crossrail's Elizabeth Line and Thameslink has drawn all the resources and NR aren't making much in the way if other improvements!?!?

(Yes I know a sizable chunk of that is being funded by London Taxes, but they are still drawing resources).

Yes, HS2 could have some impact on what can be spent,. However, I would argue that that would be money that would be needed to improve lines which will see improvements due to being releaved by HS2.

Not quite. About half of Crossrail's funding has come from sources other than the Treasury - some from an increase in business rates, some from Heathrow Ltd, some from local Government and so on. None of the individual contributions have been huge, but in total they've reached some £6 billion.

The point is that these sums have not come from the Treasury and therefore do not count towards the public sector net cash requirement.

It doesn't matter what the money is spent on, hospital extensions, destroyers or rail improvements or HS2, when expenditures on government activities in the public sector of the economy exceed the income the resulting deficit is then financed by borrowing. This is usually done by the government selling gilts on which interest has to be paid.

Governments can borrow huge amounts, but at some point the markets will take fright and either the interest rates will be notched up or the exchange rate will suffer or some combination of the two. Borrowing is not a pain-free alternative even at current low interest rates.

There is no guarantee whatsoever that if the Government foregoes expenditure on HS2 the available funds will be spent on the existing network. It is quite possible that the Government would not spend any of the money on infrastructure but could buy back some of the gilts when they fall due, rather than rolling them over. In this way it would reduce the interest burden in the future.
 
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Lurpi

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To talk about Network Rail's debt is to miss the point in a rather unfortunate way. It's not a case of either keep NR public and the debt will get even more massive OR privatise it and the Treasury can breathe a sigh of relief.

The irony of NR's debt is that the reason it is so big is precisely because it used to be in the private sector, at least in name.

Under this arrangement, NR's accountants would agree a figure with ORR against which it could borrow, the so-called regulated asset base. The RAB was related to the value of NR's assets, so naturally, the more NR upgraded the railway through enhancements and reduced the overall age of railway assets, the higher the RAB and the amount it could borrow.

This mechanism existed precisely because NR was treated as being a private sector monopoly like a water company or regulated airport, and therefore in need of regulation as to how much it could borrow, invest and charge.

Now NR is public sector, the RAB has been done away with, and with it the ratchet mechanism that increased its debt. Highways England (formerly the Highways Agency) doesn't have a ton of debt, because it doesn't have NR's past, but it still spends billions a year on a transport network.

But I'm sure George Osborne will manage to persuade the rest of the cabinet of the false choice at the top of this post and get his £40 billion haircut as a result. When his successors at the Treasury realise that the cost of a privatised railway goes through the roof and the government still has to subsidise (more expensive) infrastructure upgrades and franchises just like they do now, AND is still ultimately on the hook for the whole show, well, they might have pause for thought.
 
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The Ham

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Not quite. About half of Crossrail's funding has come from sources other than the Treasury - some from an increase in business rates, some from Heathrow Ltd, some from local Government and so on. None of the individual contributions have been huge, but in total they've reached some £6 billion.

The point is that these sums have not come from the Treasury and therefore do not count towards the public sector net cash requirement.

It doesn't matter what the money is spent on, hospital extensions, destroyers or rail improvements or HS2, when expenditures on government activities in the public sector of the economy exceed the income the resulting deficit is then financed by borrowing. This is usually done by the government selling gilts on which interest has to be paid.

Governments can borrow huge amounts, but at some point the markets will take fright and either the interest rates will be notched up or the exchange rate will suffer or some combination of the two. Borrowing is not a pain-free alternative even at current low interest rates.

There is no guarantee whatsoever that if the Government foregoes expenditure on HS2 the available funds will be spent on the existing network. It is quite possible that the Government would not spend any of the money on infrastructure but could buy back some of the gilts when they fall due, rather than rolling them over. In this way it would reduce the interest burden in the future.

I did point out that not all Crossrail's funding came from the Government, however the point I was making was that there have been some big railway projects and yet lots of other investment is continuing. Including some other substantial projects like Northern Hub, GWML electrification, Reading Station rebuild and planning of further electrification.

That's before you consider the amount of new trains that are due to arrive over the next 5 years.

I doubt that BR would have done as much in a similar length of time (mostly due to NR having resources that BR could have only dreamed of), so we don't necessarily need to view NR with the same view that we did with BR where there were VERY tight constraints and it was thus project or that and nothing else.
 

NSEFAN

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The Ham said:
I doubt that BR would have done as much in a similar length of time (mostly due to NR having resources that BR could have only dreamed of), so we don't necessarily need to view NR with the same view that we did with BR where there were VERY tight constraints and it was thus project or that and nothing else.
I think this is one of the problems. BR had to be efficient because of the Treasury's stranglehold on it, but it at least it employed enough "useful" people and kept them busy with infill projects so as to maintain skilled workers. That culture combined with more money would have been wonderful, but sadly the way that the industry was smashed to pieces in the mid 90s saw that whole regime removed, and the experienced staff with it.

And now just as it looks like NR is starting to get a grip (despite the very demanding upgrade programme it's had to agree to) there's a risk of breaking it apart again and undoing all the efforts to try and get some stability. It's like something out of a pantomime...
 

The Ham

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I think this is one of the problems. BR had to be efficient because of the Treasury's stranglehold on it, but it at least it employed enough "useful" people and kept them busy with infill projects so as to maintain skilled workers. That culture combined with more money would have been wonderful, but sadly the way that the industry was smashed to pieces in the mid 90s saw that whole regime removed, and the experienced staff with it.

And now just as it looks like NR is starting to get a grip (despite the very demanding upgrade programme it's had to agree to) there's a risk of breaking it apart again and undoing all the efforts to try and get some stability. It's like something out of a pantomime...

...oh no it isn't... (sorry I couldn't resist)
 

coppercapped

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To talk about Network Rail's debt is to miss the point in a rather unfortunate way. It's not a case of either keep NR public and the debt will get even more massive OR privatise it and the Treasury can breathe a sigh of relief.

The irony of NR's debt is that the reason it is so big is precisely because it used to be in the private sector, at least in name.

Under this arrangement, NR's accountants would agree a figure with ORR against which it could borrow, the so-called regulated asset base. The RAB was related to the value of NR's assets, so naturally, the more NR upgraded the railway through enhancements and reduced the overall age of railway assets, the higher the RAB and the amount it could borrow.

This mechanism existed precisely because NR was treated as being a private sector monopoly like a water company or regulated airport, and therefore in need of regulation as to how much it could borrow, invest and charge.

Now NR is public sector, the RAB has been done away with, and with it the ratchet mechanism that increased its debt. Highways England (formerly the Highways Agency) doesn't have a ton of debt, because it doesn't have NR's past, but it still spends billions a year on a transport network.

But I'm sure George Osborne will manage to persuade the rest of the cabinet of the false choice at the top of this post and get his £40 billion haircut as a result. When his successors at the Treasury realise that the cost of a privatised railway goes through the roof and the government still has to subsidise (more expensive) infrastructure upgrades and franchises just like they do now, AND is still ultimately on the hook for the whole show, well, they might have pause for thought.

The way that Network Rail's debt built up is as you describe. Debt is, of itself, neither a good thing nor a bad thing - but it does have costs. It is one of the sources of working capital that a company needs in order to function - the other being equity. One difference between the two is that if times are hard the dividends on the equity can be reduced or not paid at all, but the interest on the debt must be paid.

The point you make in your first sentence conflates, to my mind, the issue of NR's debt and the public/private issue. NR's debt is now no longer increasing - although it is now effectively in the public sector - as it now has to work within cash limits set by the Treasury and it can no longer borrow money on the open market. However NR's expenditure - on enhancements and paying the interest on its accrued debt - exceeds its income. The Government is not adding to NR's debt by loaning it money to cover the gap but covers it by the annual Network Grant which the Government does not expect to be paid back - the clue is in the name.

For the last three or four years in England and Wales the day-to-day railway just about balances its books - the income from the TOC and FOCs covers the costs of day-to-day operation and maintenance of the trains and, via the track access payments, nearly covers the day-to-day operational, maintenance and replacement costs of the infrastructure. If the Government is willing to 'park' NR's debt then the current situation is analogous to that of Highways England - ignoring that part which services the debt, the Network Grant pays essentially now only for enhancements.

At the moment I can see no advantage in selling all or part of NR to private investors - if it was sold then they would have to take on some of the debt as working capital as well. And looking at the capital demands for enhancements over this control period, some £2.5 billion per year, anyone with half an idea about money would realise that the sale of even the 10 largest stations over this period would not make much of a dent in the total sum. It might help around the edges - but not much more. For raising the amounts of money that NR requires - it's a non-starter.
 
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LateThanNever

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The way that Network Rail's debt built up is as you describe. Debt is, of itself, neither a good thing nor a bad thing - but it does have costs. It is one of the sources of working capital that a company needs in order to function - the other being equity. One difference between the two is that if times are hard the dividends on the equity can be reduced or not paid at all, but the interest on the debt must be paid.

The point you make in your first sentence conflates, to my mind, the issue of NR's debt and the public/private issue. NR's debt is now no longer increasing - although it is now effectively in the public sector - as it now has to work within cash limits set by the Treasury and it can no longer borrow money on the open market. However NR's expenditure - on enhancements and paying the interest on its accrued debt - exceeds its income. The Government is not adding to NR's debt by loaning it money to cover the gap but covers it by the annual Network Grant which the Government does not expect to be paid back - the clue is in the name.

For the last three or four years in England and Wales the day-to-day railway just about balances its books - the income from the TOC and FOCs covers the costs of day-to-day operation and maintenance of the trains and, via the track access payments, nearly covers the day-to-day operational, maintenance and replacement costs of the infrastructure. If the Government is willing to 'park' NR's debt then the current situation is analogous to that of Highways England - ignoring that part which services the debt, the Network Grant pays essentially now only for enhancements.

At the moment I can see no advantage in selling all or part of NR to private investors - if it was sold then they would have to take on some of the debt as working capital as well. And looking at the capital demands for enhancements over this control period, some £2.5 billion per year, anyone with half an idea about money would realise that the sale of even the 10 largest stations over this period would not make much of a dent in the total sum. It might help around the edges - but not much more. For raising the amounts of money that NR requires - it's a non-starter.
And privatisation is dogma. If Britain can do Quantitative Easing for the banks it can do it for the railway or for any infrastructure - or for any investment come to that.
Why else do we bother to keep Sterling as a sovereign currency? We are acting as if we were part of the Euro being bossed around by the European Central Bank! The government issues Sterling (indeed the British banks would all be bust if it didn't) so let's make sterling work for us and not just the confounded banks!
 
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