Peer review: Chris Bolt
Former Rail Regulator and LU PPP Arbiter
By itself, the decision to reclassify Network Rail changes nothing. What matters is the scope it has given the Secretary of State to interfere in the running of a major company, with the risks that this will undo the progress of the last 20 years. So, how did we get here?
There are two popular arguments for greater central government control of Network Rail. Both are invalid in my view.
The first is that the scale of grants going to the company requires close Government involvement to ensure that value for money is achieved. But an independent regulator surely provides all the assurances needed about value for money? Why should civil servants in Great Minster House be more effective at this task than the regulatory experts in One Kemble Street?
The second is that the scale of its debt is so great that direct funding from the Exchequer would be cheaper even than borrowing with an indemnity. This argument is even more misconceived. What matters is not the cost of Network Rail’s borrowing, but its risk. As the National Audit Office has put it: “As a customer, the Government can sometimes benefit from the delivery of policy objectives at a price below the real cost to the business.” And that real cost has arguably gone up, because of the political risks following reclassification.
It is worth remembering that the only reason Network Rail’s debt is so high is because of the way DfT itself has played fast and loose with the biggest credit card it has at its disposal.
The original concept of a Regulatory Asset Base was that the cost of maintaining a network would be charged to revenue, averaged over the medium term, with only enhancements adding to the RAB.
But strong pressure was put on the regulator in 2003 to agree to renewals being added to the RAB, coupled with the introduction of grant paid direct to Network Rail rather than via the TOCs. Ironically, this was to satisfy various statisticians that Gordon Brown’s so-called Golden Rule was being met.
The Rail Regulator’s acquiescence to those changes has led directly to the current position whereby the independent role of the regulator is being significantly undermined.
Why does all this matter? Principally, because it moves the governance and management of Network Rail away from the well-established UK model of independent regulation of private sector network companies within a framework of government strategy, back to the inefficiency of Secretaries of State running major delivery activities. Remember the Postmaster General?!
Even the last Labour Government understood that railways operated best (very well summarised in the 2004 Rail Review) as “a public and private sector partnership… a public service, specified by Government and delivered by the private sector”.
Is there an alternative? Yes indeed, there is. It would separate the strategic responsibilities of the Secretary of State for Transport from ownership responsibilities, placing those with the Shareholder Executive (as with companies such as the Post Office and NATS). As the NAO says: “Balancing public policy and shareholder value objectives... is difficult.”
The NAO has supported the Shareholder Executive model. Why has DfT not listened? We need an answer.
