"The Network Rail Credit Card"

[3141]

Can anyone explain this in simple terms?

Page 6 of the June issue of Modern Railways says this is “industry slang for the system whereby NR borrows to pay for investment, the enhancements are then added to the Regulatory Asset Base (RAB), and the Regulator applies a rate of return on the RAB which pays the interest on the borrowing, with the help of a direct grant from the taxpayer”. In the next paragraph this is described as a “magic money machine”.

Modern Railways has previously described this arrangement in similar terms, but I can’t follow it. Presumably the RAB is the total value of NR’s assets, as defined under relevant legislation. But when the Regulator “applies a rate of return” on the RAB, who then pays the resulting sum of money? I imagine it must be Network Rail. If that’s so, why cannot the same arrangement continue now that NR is effectively renationalised? And what is the reason for regarding this as a credit card? It appears to me that if NR was previously borrowing in the money markets, and in future will have to borrow from the Treasury, the most important factor is the rate of interest the lender requires from the borrower. Maybe in the future the Treasury will be willing to lend less to NR than it has been able to raise in the money markets, which would reduce the amount of investment in new infrastructure. But I can’t see how that is connected to a rate of return based on NR’s assets, or the absence of such a rate of return in the future, or why there should no longer be a supposed rate of return.

I hope my lack of understanding of all this doesn’t mean that I’ve asked the wrong questions, and I hope someone can provide understandable answers. Sorry if this has been covered elsewhere, but when I searched for “Network Rail credit card” I didn’t get anywhere.

 

[snowball]

And anything that might have been true about this in the past will be changing now, with NR debt becoming government debt, as discussed for example on pages 22-23 of the same Modern Railways.

 

[WatcherZero]

NR previously borrowed through the issuing of corporate bonds bought by investors, these would have a fixed interest rate and redemption date, it would periodically issue new bonds to replace expiring ones or 'refinance' its debt.

At the same time investments in infrastructure by NR were added to the RAB and given a variable rate of depreciation e.g. 20 years, depending on their lifespan before requiring renewal This asset value was what underwrote their borrowing.

This investment was then broken down on a geographic level and proportion of each tocs services operating on the route, this was then paid for by the TOC's in the form of fixed track access charges with some grants from the Government to TOC's to help them afford it, this generates a sizeable proportion of NR's income. So for example if NR wanted to spend £100m on a line upgrade between Wigan and Southport it might recoup it through charging Northern Rail £20m more a year in track access charges for five years.


So in essence borrow through issuing debt against regulatory asset base, invest in infrastructure, recoup the investment over a period of years in the form of higher track access charges.

 

[TEW]

And the reason it might not continue in the current format is because it is now classified as government debt. Previously this offered a way for government to fund enhancements on the railway network without incurring additional government debt. This trick no longer works. Since it is government policy to reduce debt at the moment there may well have to be changes to the way Network Rail fund enhancements.

 

[Bald Rick]

The rate of return is the % profit that NR makes on its assets, effectively return on capital employed. It is paid for by NRs income, ie regulated access charges, govt grant and other 'single till' income, eg freight and open access charges, and property income.

What happens to the return? It comes through in the books as profit.

What happens to the profit? As NR is not for dividend, it uses the profit to pay back debt, invest more in the network, pay profit share to TOCs (v complicated), and also pays back some to Central Govt.

The allowed rate of return is set by the ORR, and is similar to the principle applied to other regulated industries, eg water.

 

[AE]

Everone seems to focus on the NR debt that has now been transferred to the government's books. But surely the NR assets, which have increased in value, are also now the government's as well. Do they not balance out in some way?

 

[reb0118]

.......ut surely the NR assets, which have increased in value, are also now the government's as well. Do they not balance out in some way?

Shhhh!

 

[DownSouth]

Everone seems to focus on the NR debt that has now been transferred to the government's books. But surely the NR assets, which have increased in value, are also now the government's as well. Do they not balance out in some way?

No. You can't break off a chunk of an asset to pay some staff, settle an invoice from a contractor or purchase some equipment. You need cash reserves for those things.

 

[Jonny]

No. You can't break off a chunk of an asset to pay some staff, settle an invoice from a contractor or purchase some equipment. You need cash reserves for those things.

That is why a business that runs out of cash is effectively out of business.

 

[AE]

I wasn't making a point about how NR is run day to day.

I was pointing out that posters seem concerned that the debt now effectively belongs to the government without also pointing out that the assets also now belong to the government. The government now has an asset it didn't have before and could sell it at some point and then pay at least some of the debt off.

 

[Bald Rick]

The government has lots of assets worth lots of money - schools, hospitals, aircraft carriers, motorways etc, but that doesn't affect how much debt the country has.

In the same way that I have a house worth x, but the record shows that I am in hock to the bank to the tune of a little less than x.

 

[AE]

If I acquired your house complete with its mortgage, yes I would have acquired a debt but I would also have acquired an asset with which I could pay off the debt. I wouldn't just acquire the debt on its own.

 

[Bald Rick]

If I acquired your house complete with its mortgage, yes I would have acquired a debt but I would also have acquired an asset with which I could pay off the debt. I wouldn't just acquire the debt on its own.

Indeed. But we're counting debt. Not net assets.

 

[AE]

Quite.

That's where I came in. Everybody seems to be focussing on the debt and paying little attention to the fact that the worth of the assets is also increasing. I realise that a lot of debt is not good but it's even worse if your assets are not increasing in value.

 

[alexjames]

The problem with that thesis is that most of the railway's capital assets are valueless. Marylebone station, for example, is worth a substantial sum as a redevelopment site. Its current realisable value is negligible if it continues as a railway station. Meanwhile, NR's debt requires servicing with cash.

And that is the railway's problem. It has loads of assets that cost vast amounts of money to acquire and build but are of trivial value if they continue in current use. Thus NR's balance sheet is totally misleading. Billions of assets, net of depreciation, are shown. That is broadly matched by billions of debt liabilities. Those liabilities have to be paid in cash. But the assets are not capable of being turned into cash unless the railways are abolished. If NR's balance sheet was recalculated on the basis of what those assets are worth in current use, the company would be hopelessly insolvent and, under current law, would be obliged to cease trading. But NR is immune from such troubles because it is guaranteed by HMG.

So please be careful when referring to railway asset values. Most are worthless. My favourite example is the DLR. It cost a vast amount to build but is utterly worthless as a railway enterprise. It cannot and will not ever make a profit as a railway. But if you closed it and sold off the land etc....