Network Rail revaluation causes uncertainty

Uncertainty surrounds news that Network Rail faces a massive revaluation of its fixed assets.

The Sunday Telegraph recently reported that revaluation could ‘add at least a £100bn’ to the accounts, though declined to provide a source for this information or to spell out the financial implications for Network Rail.

The national rail infrastructure provider has been in the public sector since reclassification in September 2014. The current valuation for property, plant and equipment is £54.1bn (according to the last NR annual report FYE 31.03.15), but this is much lower than the £111.9bn valuation for Highway England, the body responsible for England’s motorways and major A roads.

The Telegraph stated that Network Rail’s current valuation was due to an ‘accounting quirk of privatisation’ and is based on historical cost convention, whereas the Highways England figure is based on replacement cost.

The government is already struggling to cope with NR’s burgeoning debt, currently set at £37.8bn but expected to reach £50bn by 2020.

The  change is being made to bring NR accounting into line with the Government Financial Reporting Manual.

21CR approached the ORR to see how this change would impact on Network Rail’s finances. A spokesman said: “There is currently no plan to change the basis of the calculation of the Regulatory Asset Base (RAB) as a result of this move to depreciated replacement cost accounting for Network Rail. While the statutory asset value (i.e historic cost accounting -ed) of Network Rail might change in CP5, the regulatory asset value should not be affected by this (holding all other things equal) . . .

“The basis of the access charges levied on operators is the regulatory asset base. Therefore, this should not in itself have an impact on charges operators pay. However, other potential changes in CP6, such as the work to gain a better understanding of the drivers of fixed costs or the potential changes to how Government channels public money through the industry, might have an impact on the charges operators pay”.

The problem arises that the RAB (currently valued at £53.1bn) is based almost entirely on the £54.1bn fixed assets which are calculated on a historic basis. It is difficult to see how this can be increased without also increasing the RAB.

NR acknowledges that its current valuation is below replacement cost by at least £37bn. Following an Ove Arup 2009 assessment of the serviceable lives of major asset categories, NR accounts now also show a valuation based on an inflation-adjusted depreciated replacement cost of the network.  Excluding the replacement cost of embankments, cuttings and tunnels this was estimated at £89.3bn for 2014-15 as against a comparable historical cost convention of £52.3bn.

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