Shaw report - future shape and financing of NR

[DarloRich]

The NR property portfolio is an interesting thing - for certain, NR shouldn't be investing man hours and money into developing some sites - selling a 50% stake in the business and leaving much of it in the hands of a proper property developer, collecting half the profits would probably be the most efficient and profitable way to monetise the real estate.

I understand that argument. I just don't agree.

It is often suggested that the property function of NR in some way diverts attention from the job of looking after the tracks, signals bridges etc. I dont feel it does. After all it is not as if the people running the property section are being diverted away from fixing the tracks. They aren't. They are specialists in property. They also do a very good job at maximising revenue to the railways through commercial schemes and managing the return from the real estate through rental payments and selected disposals etc.

They turn a good profit ( which in my view is why the government wont allow them to remain in public hands) and that profit goes back into supporting the rest of the company. Who makes up that funding shortfall?

However, Network Rail isn't working either. IF they were running up £34n of debt but at least meeting their CP4 commitments, I could try to defend them. IF they were efficient at what they did (but overspending) I would try to be supportive.

I bought into the idea of a "public" infrastructure - I'd love it to work. But it isn't. Privatisation didn't work and nationalisation isn't working. I don't know where we go from here.

Meanwhile NR gets the discipline of having to deliver the returns promised by their professional input.
Currently they have got off scot-free from bungling the £6 billion electrification programme.

With respect I am not sure you quite understand how we come to be in this position. The fault is wider than Network Rail.
--- old post above --- --- new post below ---

The problem is, it's the things that people want to buy that subsidise the nuts and bolts of the infrastructure. You sell them off and get one big hit then it's gone.

Land developments are the easy sells, and it is suggested that these are sold off to the private sector to develop because "NR doesn't have the expertise to do this". Yet, if you do this, you inevitably sell before the developed value of the asset has been realised and lose the potential income stream anyway.

If NR requires the expertise to do this, it would be better for it to allow a developer to take a stake (20 - 25%) and for NR to retain the rest of the ownership. At least it would then get the income stream. With regards to stations and retail, this seems to already be a nice little earner for NR, so needs to be kept.

NR has the experience to do this - the property arm is very successful : £256m income last year ( up from £238m the previous year)

The way forward should be partnership or collaboration (rather than privitisation) to develop large scale property schemes with a view to keeping as much income as possible for the Railway.

Although a book value of the property estate of around £1bn makes it a very easy sell off!

 

[yorksrob]

Although a book value of the property estate of around £1bn makes it a very easy sell off!

As you allude, I expect that's why the powers that be will do it.

 

[LNW-GW Joint]

With respect I am not sure you quite understand how we come to be in this position. The fault is wider than Network Rail.

I quite agree NR isn't the only one at fault, but they are the only ones capable of planning electrification (with consultants) on their property.
The 2009 electrification RUS was utter pants (on costings). Who produced that?

 

[Philip Phlopp]

I quite agree NR isn't the only one at fault, but they are the only ones capable of planning electrification (with consultants) on their property.
The 2009 electrification RUS was utter pants (on costings). Who produced that?

The 2009 electrification RUS was a fair and realistic analysis of the situation at the time. We've certainly found lots of unexpected issues since then, but very little of the problems are actually down to electrification.

We've been shafted by that utterly useless Windhoff train, by Balfour Beatty and Carillion being more interested in their shareholders than their customers, and a little bit by NR's own in-house incompetence. We've had volatile commodity prices, inflation and construction costs to contend with.

The biggest problem we've faced though, and everybody knows it, is the mess of signalling cables which were either laid into the ballast during the last resignalling (maybe 20+ years ago, or were moved into the ballast for security during the more recent cable theft spates.

Oh, and there were silly things like changes in legal requirements and specifications - higher parapets and the like.

Baseline capacity has been difficult to agree upon too - what was planned in 2009 is no longer sufficient. If electrification allowed a 50% increase in capacity over and above 2009 figures, we're now looking at needing 100% or 150%. 12x20m services are being seriously evaluated in and around Manchester, when the RUS was drawn up it was 6 x 23m because longer platforms couldn't (then) be justified. Now they're going to be essential.

The actual electrification works, when we've got piles going into the ground properly, without causing signalling to fail, is generally as planned, mast erection and TTC/portal erection is going well, and wiring as we saw last night, is going well.

 

[D1009]

Quite interested in this, from page 22:

2.19 One related issue to consider is the impact that an organisation’s culture has on its ability to recruit and retain the people it needs to perform. Clearly, remuneration is also an important consideration when thinking about these issues – there has been a suggestion (as yet not borne out with hard evidence) that Network Rail loses some of its best people, particularly at the leadership and senior management level, because it cannot compete on pay. There is also a concern that this may be a growing problem now that it is subject to public sector recruitment processes and pay constraints. But motivating people to want to work for an organisation goes beyond purely financial considerations, particularly in an industry like the railway that evokes such loyalty among its employees. Culture is also important, and the sense of belonging to a high-performing organisation doing work that matters can be a very strong motivating and binding factor for staff.

Anyone else think NR's senior management are underpaid?

 

[68000]

On the property bit, there is some nonsense from the NR property team, they sell of slivers of land beside the railway to some speculative landowner who then charges NR for project laydown / storage areas. Why?

 

[Gareth Marston]

The 2009 electrification RUS was a fair and realistic analysis of the situation at the time. We've certainly found lots of unexpected issues since then, but very little of the problems are actually down to electrification.

We've been shafted by that utterly useless Windhoff train, by Balfour Beatty and Carillion being more interested in their shareholders than their customers, and a little bit by NR's own in-house incompetence. We've had volatile commodity prices, inflation and construction costs to contend with.

The biggest problem we've faced though, and everybody knows it, is the mess of signalling cables which were either laid into the ballast during the last resignalling (maybe 20+ years ago, or were moved into the ballast for security during the more recent cable theft spates.

Oh, and there were silly things like changes in legal requirements and specifications - higher parapets and the like.

Baseline capacity has been difficult to agree upon too - what was planned in 2009 is no longer sufficient. If electrification allowed a 50% increase in capacity over and above 2009 figures, we're now looking at needing 100% or 150%. 12x20m services are being seriously evaluated in and around Manchester, when the RUS was drawn up it was 6 x 23m because longer platforms couldn't (then) be justified. Now they're going to be essential.

The actual electrification works, when we've got piles going into the ground properly, without causing signalling to fail, is generally as planned, mast erection and TTC/portal erection is going well, and wiring as we saw last night, is going well.

Yes all the big private sector construction companies everything is contracted to and still the flavour of the month with the pledge on capital expenditure being protected.until the recent interest in rail enhancements they'd being going massively over budget on road schemes for years.

 

[furnessvale]

Baseline capacity has been difficult to agree upon too - what was planned in 2009 is no longer sufficient. If electrification allowed a 50% increase in capacity over and above 2009 figures, we're now looking at needing 100% or 150%.

I can certainly agree with that. Going back to the early 1970s we were being instructed to design new track layouts that could only accommodate 75-80% of the traffic currently being carried, on the basis that rail use was shrinking.

Guess what, when the new layout was installed, it only carried 75-80% of the previous traffic and the upper echelons congratulated themselves on the accuracy of their estimates!

 

[CdBrux]

I doubt many people on this forum will like him, but there is an interesting blog from John Redwood on this report today. I may not agree with some of his NR ideas but this one does seem sensible to me:

Nicola Shaw has recently published her invitation to us all to send in our ideas on how Network Rail should be structured and financed in future.

I will be sending in evidence. My first three conclusions for her are
1.As a business with all UK sterling revenues it should not borrow in foreign currencies again
2.All the time it remains a nationalised business with a full Treasury guarantee it should be lent money by the government at government rates, borrowed by the government in the gilt market in the normal way.
3.It should stop all derivative hedging and trading.



When I first argued that Network Rail should not trade in derivatives in July 2012 it followed their reports acknowledging substantial losses in the year to March 2011, and again in the year to March 2012.

The year to March 2012 saw £409 million of losses in derivatives that were not hedge accounted and a further £45m of such losses in the year to March 2013.

I wrote a letter to the members of Network Rail, the group responsible in those days for the corporate governance and strategy of the business on behalf of the taxpayers who pay the bills. I asked them to explain their derivative strategy and why they thought it was good thing to be doing. My own view was it should be stopped.

Network Rail continued with derivatives, and reported losses of £982 million on them in 2013-14. Their response claimed that although some of their derivatives were accounted as trading, they saw them as a hedge against foreign currency borrowings which for some unknown reason they had chosen in preference to borrowing in pounds, and as a hedge against rising interest rates during a long period of ultra low rates.

Now Network Rail is fully under the control of the Treasury and Department for Transport I am asking again that all open derivative positions be closed down, or matching positions the other way be taken out to stop all future losses on these dangerous instruments. They have had to ask for more taxpayer cash to put up against some of these positions, so they do matter within the budgets of the state

 

[WatcherZero]

If they borrowed in foreign currency and not in pounds they will have actually had a significant return on the move over the last few years from the high pound.

Don't think they should be trading in derivatives though, they were just looking for somewhere to park their cash and earn a quick buck before they spent it and it was a high risk high reward strategy they shouldn't have been doing.

 

[Bletchleyite]

I understand that argument. I just don't agree.

I'm with you there.

You may be aware as a part-time local, or maybe not, but the parks and public open spaces in Milton Keynes are funded on an unusual model. At inception, the Milton Keynes Parks Trust was set up as an independent charity, with a long lease on most of the parks and open spaces in MK, but also on a good quantity of commercial property. The income from said commercial property, and from chargeable activities in the parks, funds their maintenance and development, thus removing them from any vulnerability from political meddling.

This model would seem perfectly appropriate for Network Rail. If the commercial property is profitable, keep it. It provides a solid income for operating the business.

 

[HowardGWR]

I read this report (GHM) and found it a waste of taxpayer's money. Full of unnecessary jargon, it proved so well what an industry has sprung up in exercises to obfuscate straightforward issues.