Network Rail treads uncertain track

It’s still not clear at this stage what significance should be attached to the proposed revaluation of Network Rail. Clarification sought by 21CR from the ORR on this point has not been successful and the situation remains somewhat ambiguous.

As reported elsewhere, Network Rail’s assets have been depreciated on a historic cost basis, as distinct from replacement cost. As things currently stand NR’s valuation is £54.1bn, whereas that of Highways England – based on replacement cost – is more than twice this amount.

However there is nothing new about the current situation: Traditionally the railways were overstating profits and understating costs for years by failing to lay aside sufficient funds for replacement.

British Rail’s former chief economist, Stewart Joy, wrote in 1973: “By using historical cost for its depreciation calculations, British Rail in common with nearly every other firm in Britain, has been overstating its profits or understating its losses throughout its life. The annual provisions for depreciation in BR’s accounts have never been anything like the amount which needed to be spent on replacing worn out and obsolescent plant to maintain existing capacity.”

Joy was referring to the dire financial predicament the state-owned railway network found itself in during the pre-Beeching epoch. In the first 21 years of nationalisation (1948-1968), BR spent £1,822.1m on investment but only provided £717.7m in depreciation. Even the early profitable years (1948-55) were not really profitable when the true costs were factored in.

Poor accounting like this simply compounded the other problems BR then faced, and a certain Dr Beeching was brought in to sort out the mess. We all know what came next.

Despite this, BR continued to use the historic cost basis (albeit in modified form).

Unlike rolling stock (which is replaced), infrastructure is generally patched up.  A train or a bus will end up on the scrap heap after giving so many years in revenue-earning service. But the same rule does not apply to infrastructure; most stations, tunnels and viaducts, for example, are well over 100 years old and could, in theory, still be in use in the next century. Their capital costs have already been paid for; but they need to be renewed, not replaced.

BR ran both trains and track, but NR only provides the latter.

So what are the implications for this move? Is it just some paper book-keeping exercise that will have little impact on NR’s finances, or does it portend some more serious underlying problem? Until there is firm evidence to the contrary, the suspicion remains that the real cost of looking after the rail infrastructure could be considerably higher than it is currently made out to be. If that were to be the case, what would the consequences be? Higher usage charges, more taxpayer support, or greater debt? Or perhaps even cutbacks and closures?

Only time will answer these questions.

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