When is maintenance at Fareham 'an investment'?

[HowardGWR]

This PR has just been published.
"Passengers in Hampshire to benefit from better, more reliable railway"
http://www.networkrailmediacentre.c...to-benefit-from-better-more-reliable-railway?

Passengers in Hampshire will soon benefit from a better and more reliable railway as Network Rail prepares to carry out a major track renewal project at Fareham.

The £4.6m investment will see Network Rail’s engineers replace nine sets of points, the crossings which allow trains to move between lines, as well as 240 metres of track, from 22 to 31 October. In addition, Network Rail and Hampshire County Council will be using this opportunity to jointly invest £1 million in upgrading Fareham station.

This package of investment will see upgrades to a number of areas, including a resurfaced forecourt, improved station access, a new accessible toilet on the island platform, and upgrades to the existing island platform toilets.

Ok, I'll cede the new toilet and improved forecourt, etc, but surely the trackwork renewal is what I would class as a revenue item in normal business practice. The new trackwork is expected to last 'a few decades'. To me, a capital item of expenditure should not have a foreseeable end-date. This point may be seen as splitting hairs but is actually vital when considering how much should be judged as an HLOS item.

Any accountants here have an opinion?

 

[Senex]

This PR has just been published.
"Passengers in Hampshire to benefit from better, more reliable railway"
http://www.networkrailmediacentre.c...to-benefit-from-better-more-reliable-railway?


Ok, I'll cede the new toilet and improved forecourt, etc, but surely the trackwork renewal is what I would class as a revenue item in normal business practice. The new trackwork is expected to last 'a few decades'. To me, a capital item of expenditure should not have a foreseeable end-date. This point may be seen as splitting hairs but is actually vital when considering how much should be judged as an HLOS item.

Any accountants here have an opinion?

In the very old days of the private companies any straightforward renewals were a charge to the revenue account and were not conisdered as investment. If a renewal included an improvement, there was usually an apportionment of so much to the revenue account and so much to the capital account.

The PR department hyperbole that seems to affect not just railways but all varieties of modern life seems to want to describe all expenditure as investment -- presumably because people think that sounds better than simply spending money on looking after your assets.

 

[swt_passenger]

Yes agree, and just because the NR PR department call it investment, doesn't mean the NR, ORR and DfT accountants do the same. They'll all be bound by normal accounting rules presumably.

 

[Townsend Hook]

On Network Rail renewals are generally carried out by dedicated 'Capex' (capital expenditure) teams rather than the 'Opex' (operational expenditure) maintenance teams.

 

[najaB]

Ok, I'll cede the new toilet and improved forecourt, etc, but surely the trackwork renewal is what I would class as a revenue item in normal business practice.

It depends on if it's like-for-like replacement (maintenance) or an improvement to the layout (investment).

The new trackwork is expected to last 'a few decades'. To me, a capital item of expenditure should not have a foreseeable end-date.

If you consider the track to be an asset then it's not unreasonable that it has a lifetime, as assets depreciate.

 

[edwin_m]

Even with the same layout, some of the spend might be considered investment if it covered something like a more reliable switch machine that would reduce points failures*. However I'm not sure if that would be so if the old layout was clapped out and unreliable, and the investment was just restoring the original performance.

*leaving aside the issue that the modern ones often seem to make things worse!

 

[deltic]

Would agree with najaB that if like for like its replacement and if its an enhancement its investment. However, from an accountancy point of view the track has an expected life of years and will therefore be depreciated over that period and the full cost of the spend will not appear in the annual accounts (except for cash flow).

 

[bramling]

This PR has just been published.
"Passengers in Hampshire to benefit from better, more reliable railway"
http://www.networkrailmediacentre.c...to-benefit-from-better-more-reliable-railway?


Ok, I'll cede the new toilet and improved forecourt, etc, but surely the trackwork renewal is what I would class as a revenue item in normal business practice. The new trackwork is expected to last 'a few decades'. To me, a capital item of expenditure should not have a foreseeable end-date. This point may be seen as splitting hairs but is actually vital when considering how much should be judged as an HLOS item.

Any accountants here have an opinion?

All started in the New Labour years. About the same time the terms "upgrade" and "world class" came into common use.

 

[snowball]

To me, a capital item of expenditure should not have a foreseeable end-date.

So the cost of replacing, say, the Tamar Bridge or Forth Bridge in 100 or 200 years' time should be divided into annual sums and counted as part of the running cost of the line?

 

[DarloRich]

This PR has just been published.
"Passengers in Hampshire to benefit from better, more reliable railway"



Ok, I'll cede the new toilet and improved forecourt, etc, but surely the trackwork renewal is what I would class as a revenue item in normal business practice. The new trackwork is expected to last 'a few decades'. To me, a capital item of expenditure should not have a foreseeable end-date. This point may be seen as splitting hairs but is actually vital when considering how much should be judged as an HLOS item.

Any accountants here have an opinion?

I think your view of Capital Expenditure is slightly off. Without getting in to the accounting world taken at its most basic level capital expenditure is defined as:

money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

It can then be further broken down to include some of the following items amongst others:

• acquiring fixed, and in some cases, intangible assets
• repairing an existing asset so as to improve its useful life
• upgrading an existing asset if it results in a superior fixture
  

In the railway environment I would say that track replacement works are CAPEX spends whereas daily maintenance tasks are OPEX spends. A like for like replacement with no improvement would in my mind be an operational expenditure. OPEX being described as:

an ongoing cost for running a product, business, or system.

I guess it depends on your view of track and the work done to it. If it is an an asset then improvement works should be CAPEX if the track quality or items forming the track are improved it should be CAPEX. I would say maintenance and repairs are certainly OPEX spends.

The point about life of a product is I feel a bit of a misnomer. Buying a new train is a CAPEX spend. That will have a life of, say, 25 years attached to it. it has a foreseeable end date albeit some distance off.

 

[richieb1971]

NR just build and maintain don't they?

If its cheaper to maintain than replace, then maintaining is an investment.

 

[HowardGWR]

Thanks for the replies. Yes, I saw my 'don't know when it will expire' idea was a bit daft but I decided to let it stand and I think we can say that renewal costs are more than a bit in the grey area.

I've altered the title to include Fareham, as I am interested also in what folk think of this blockade, especially as the discussion of LSW Southampton line has arisen.

This is going to be a major problem on what is very much a long distance commuter line isn't it?

 

[swt_passenger]

I've altered the title to include Fareham, as I am interested also in what folk think of this blockade, especially as the discussion of LSW Southampton line has arisen.

This is going to be a major problem on what is very much a long distance commuter line isn't it?

A relatively short thread had already been running about the blockade when you started this one.

http://www.railforums.co.uk/showthread.php?t=136036

 

[DynamicSpirit]

Ok, I'll cede the new toilet and improved forecourt, etc, but surely the trackwork renewal is what I would class as a revenue item in normal business practice. The new trackwork is expected to last 'a few decades'. To me, a capital item of expenditure should not have a foreseeable end-date. This point may be seen as splitting hairs but is actually vital when considering how much should be judged as an HLOS item.

Any accountants here have an opinion?

I'm not an accountant, but I run a business, so need to deal with accounts. There are all sorts of detailed regulations about what counts as current and what counts as capital, but the basic principle as I understand it is that stuff tends to count as capital expenditure if its expected lifetime is longer than a year. On that basis, something that lasts a few decades is very definitely in the 'capital' category. If I buy a new computer, that counts as capital expenditure, and I definitely wouldn't expect a computer to last anything like that long before it becomes obsolete.

However, what counts as 'capital expenditure' for tax/accounting purposes is not really the same as what would reasonably be considered 'investment' when you're talking about infrastructure projects. Intuitively, you'd probably expect something to be considered 'investment' if it constitutes an improvement on whatever infrastructure is currently there - either by virtue of allowing better services (eg. linespeed improvements) or by virtue of requiring less maintenance, or having a longer expected life. But by that measure too, the track replacements you're referring to would sound to me like they could reasonably be described as 'investment'.

 

[DarloRich]

NR just build and maintain don't they?

If its cheaper to maintain than replace, then maintaining is an investment.

no they don't just build and maintain.

maintenance an investment if it improves the product. Day to day maintenance is not a capital investment.

 

[Marklund]

no they don't just build and maintain.

maintenance an investment if it improves the product. Day to day maintenance is not a capital investment.

The NR trend is to reduce OPEX, while increasing CAPEX.
The way that OPEX is being reduced is for another thread, but I'm not impressed in the thought process, as it's never been devised by a maintainer...

 

[The Ham]

So the cost of replacing, say, the Tamar Bridge or Forth Bridge in 100 or 200 years' time should be divided into annual sums and counted as part of the running cost of the line?

Effectively yes, but it shows up in the accounts as an asset and the depreciation is what shows up as the annual "cost", even though the payment for it could have been made some time ago.

 

[snowball]

Effectively yes, but it shows up in the accounts as an asset and the depreciation is what shows up as the annual "cost", even though the payment for it could have been made some time ago.

My question was not about how it's done but about HowardGWR thinks it should be done, in view of his remark which I quoted. I would imagine in real life any project to replace the Forth Bridge would be regarded as capital expenditure but he seemed to be saying it shouldn't be.