Mark Rowney is a research fellow at IPPR.
Network Rail announced today a new infrastructure investment programme of £37.5 billion to be spent from 2014 to 2019, which is to be welcomed. Infrastructure projects add to the UK’s long-term productive capacity and, according to the OBR, are the most effective form of public spending or tax cuts on growth.
The implication of the announcement is that this new investment will be paid from efficiency savings but the sums do not appear to add up.
Future Government subsidy reductions
Network Rail’s income for 2012 was roughly £6 billion. Of this, around £2 billion came from franchised track access charges from train operating companies and around £4 billion from a direct government subsidy. Network Rail has announced its intention to reduce this public subsidy to between £2.6 billion and £2.9 billion by 2019 – a saving of £1.1 billion to £1.4 billion.
National Rail’s Strategic Business Plan sets out that it will reduce its operating costs by 20 per cent from 2009 to 2014 and then by a further 18 per cent by 2019. Network Rail’s operating costs were £3.616 billion in 2009 (£3.866 billion in today’s prices). To meet their efficiency goals this would need to fall to £2.536 billion by 2019 (again in today’s prices). Achieving this would mean an efficiency saving over the period of £1.330 billion – just enough to pay for the reduction in the subsidy and leaving nothing at all for new investment. Sadly, however, Network Rail is way of track having achieved a meagre 5.4 per cent efficiency saving between 2009 and 2012 with current operating costs at £3.657 billion.
Network Rail’s Current Debt Profile
On the other side of the equation, Network Rail’s debt currently stands at £28.043 billion, up from £6.146 billion in 2004. Most of this money has gone on addressing the neglect under Railtrack and British Rail, rather than on modernisation or new infrastructure.
Network Rail’s current borrowing ability is provided under a £4 billion ‘Euro and US Commercial Paper Programme’ (for working capital) and a £40 billion Multicurrency Note Programme (for long term capital). Network Rail cannot raise equity funding since it is a not-for-dividend company and will therefore have to increase its borrowing capacity in order to fund the new investment announced today.
This should not be problematic. Network Rail’s debt is irrevocably and unconditionally guaranteed by the government over the long term (i.e.until 2052). Since debt must be repaid, this guarantee gives investors confidence in Network Rail’s credit worthiness. The government simply has to approve an extension of the guarantee.
On a day-to-day basis, the current repayment schedule is met by Network Rail’s current income. However, since any possible efficiency savings would be eroded by the proposed reduction in Network Rail’s direct subsidy, it is unclear how this new debt will be repaid.
Implications for passengers
The missing link in the analysis is the repayment profile for the new debt, which has not yet been announced. Indeed, in all likelihood, Network Rail has yet to commence these negotiations.
We do know that of the current £2 billion that Network Rail receives from train operating companies, about a quarter of this comes from a direct government subsidy (£477.5 million in 2010/11).
Current government policy is to try to reduce this subsidy, Network Rail’s subsidy and therefore increase the amount of funding that railways receive from passenger fares. Passenger fares have just gone up for the 10th year in a row and Network Rail continues to expect fares to increase above inflation (albeit they will be capped on average at RPI+1%).
Without knowing the repayment profile for the new debt, it is impossible to know what additional income will be needed by Network Rail. The rapid increase in Network Rail borrowing over the last 8 years has coincided with years of painful passenger fare rises. It would seem implausible that an even larger increase in borrowing to fund the new investment, particularly at a time when the Government intends to reduce the taxpayer subsidy, could result in anything other than many more years of pain for rail passengers.