Bill Jamieson: Losing track of the railway debt

Mind the gap: we’ve lost track of the railway debt gravy train, says Bill Jamieson

The Glenfinnan viaduct: the upkeep of rail infrastructure is expensive in Scotland. Picture: Getty

TICKING away in the dark and creepy storehouse of the UK government off-balance-sheet debt is an item yet to be configured in the liabilities of an independent Scotland: the debt liabilities of the railway network – and Scotland’s share of these on Independence Day. The figure is set to be as high as £3.6 billion this year, yet no mention of this has been made in the Scottish Government’s White Paper.

So what? You might think we’ve got enough liabilities to worry about without foraging around in such dark and murky recesses as UK off-balance-sheet debt. And anyway, surely the rail network can’t have that much debt to worry about?

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There are two reasons why we need to question these complacent assumptions, and do so urgently if we want the trains to continue running after Independence Day.

First, the debt figure for the UK rail network overall is a staggering £27bn and rising, reflecting in large part the annual track subsidy costs of between £4bn to £8bn. And second, this debt is soon to become a UK government on-balance sheet liability – part of the Public Sector Net Debt total with Network Rail being redesignated as a public sector company. This debt item will be out in the open – and impossible to ignore.

The change in the status of the state-owned company that manages Britain’s railway network is due to take place in September and is part of a series of adjustments that could add £112bn to how much the country officially owes – as if it is not scarily high enough already (2014-15 estimate: £1.35 trillion or 77.3 per cent of GDP). The change in the classification of Network Rail’s debt is due to our dear kind friends the European Union so that we conform to their statistical rules.

And, as Network Rail will now officially have to borrow from the government and be seen to do so, it would seem to follow that a Scottish Government on independence will also have to account for its share of Scottish rail debt (and interest costs) on its balance sheet.

How is this debt figure so huge? Here is a quick aide memoire on the size of the UK Network Rail operation. It employs, all told, more than 190,000, from train drivers to station staff. It manages and maintains the network’s 20,000 miles of track. There are also more than 2,500 stations and more than 40,000 bridges and tunnels to look after. Every year, there are more than 1.3 billion passenger journeys.

Who’s in charge of this clattering network? All aboard are the Department for Transport; Transport Scotland (responsible for letting the contract to operate train services within Scotland); Network Rail, responsible for the management of the track and signal infrastructure; the Office of Rail Regulation (ORR), the economic and safety regulator; the Rail Accident Investigation Branch; the British Transport Police; and Passenger Focus, a consumer watchdog.

Because of our expansive and rugged geometry we have some of the most expensive and heavily subsidised lines in the UK. We account for some 15 per cent of the UK’s route miles. Post-independence, it is envisaged that the ORR and Network Rail will continue to operate north of the Border. And the new Scottish Government would contribute towards the ongoing costs of the attributable network. So what would be the financial implications for us?

I am grateful to Peter Smaill, a financial risk analyst with more than 20 years’ experience of rail economics, for his beavering away at the rail accounts and tireless Freedom of Information requests to the ORR. Were Scotland’s share of Network Rail’s debts apportioned on the basis of population share, this would give, according to ORR data, a debt share last year of around £2.77bn, set to rise this year to £3.6bn and to hit £4.9bn in 2019.

No such figure – or figures – appear anywhere in the Independence White Paper. The financing costs are reckoned at £76 million. Then there is the rail subsidy that a Scottish Government would need to find – it currently pays out £290m annually to First ScotRail alone.

Why might the subsidy be larger than a pro rata population share? Transport Scotland has revealed that only 26 per cent of the rail operation in Scotland is funded by revenues from ticket sales. Thus, a £5 ticket has on average a subsidy of around £15. The comparable subsidy across the UK for a £5 ticket is £4. We have the most expensive part of the UK rail system to operate and finance.

Peter Smaill says: “As in so many areas of the independence debate, complex negotiations are needed to ensure transition. Many billions are at stake. And there is no recent precedent for just how we disaggregate an integrated asset like rail, or split up and/or fund staff pensions under new rules.”

The cost of servicing Scotland’s debt share of the rail network needs to be added to the shortfall in overall funding estimated by the Treasury last year at £1.6bn for Scottish taxpayers. Its estimate of the funding shortfall, carried out subsequent to the publication of the Scottish Government’s White Paper, included an assessment of three key policies – providing 1,140 hours of annual childcare for one-year-olds through to school age, cutting air passenger duty by 50 per cent and lowering corporation tax by up to three percentage points.

To this could usefully be added the cost of re-nationalising Royal Mail.

When it comes to that popular political word “delivery”, it helps to remember the trains. «