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Network Rail privatisation

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All very laudable, but:

 

a) multi-functional possessions have long been an aspiration (and multi-functional projects are the pinnacle of that aspiration)

 

B) in a multi-functional project possession, the multi-disciplinary project manager/project director has direct control and total responsibility for all activities in his/her possessions. The buck stops there for whatever happens and that is not only fair but perceived as fair.

 

c) in a maintenance or renewal possession, the owner is normally the functional department with the most work (it used to be the case that it was the person in the first dept to book the possession on the graph, but that was changed even in my time). BUT that means that other departments using that possession, if allowed by the possession owner, do not cede control of their work to the possession owner (other than train movements and isolations between work sections within the possession). Hence, if the possession overruns, or there is a safety incident, the possession owner normally carries the can, at least initially. Thus

 

d) possession owners have no incentive to allow other works on to their site, beyond a general call to best practice/industry benefit/jolly good chap and all that. There is wide acceptance that other works should be accommodated where possible and sensible, but (unless things have changed in the last three years) a great disincentive for anyone to actually do it. Just look at the hoo-hah following the over-runs last Christmas, where just one element in each worksite caused mayhem, and an awful lot of grief for the possession owners.

 

Sort out © and then (d) will become more likely, and efficiency will improve. In our multi-disciplinary, national projects team, we offered, many years ago, to provide a third party possessions management service for maintenance and renewals. Internal politics made that still born, and it would have added cost to works anyway, but there must be a solution.

It does not sound good to be honest.  Firstly with Rules of The Route possessions they are there for whoever needs them to do whatever they need to do.  if the Rules are constructed properly there should be enough scope in them to cater for normal maintenance work which actually requires a possession and let's face not every available possession is going to be used by any one dept.  Secondly within most possession any work on the track will inevitably at some stage have an S&T involvement - even if t is only checking and testing - that should be built in at the possession planning stage although it admittedly took BR some years to get it right.

 

Finally I find the idea that the 'possession owner' carries the can for someone else getting it wrong to be more a matter of management by fear rather than anything else so no wonder people don't like.  Simple situation - Work Sites within a possession are the responsibility of the person/dept running them and it is the PICOp's responsibility to make sure they have finished work before giving the line back.  A PICOP from one dept/engineering discipline can hardly fairly be tasked with supervising the work of another dept.  It might make more sense in that context to go back to the old principle of the operating dept being the ones who take the overall possession? 

 

But all this sort of detail should be meat & drink for the pre-planning meeting while overall engineering requirements should have been fed into developing Rules of The Route - if those basics are not dome properly one can hardly be surprised if the system (assuming there still is a system) doesn't work.

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You are right Mike, except that the trend has been growing for there never to be enough possessions in the ROTR, especially with the move to shorter night shutdowns and the yo-yo of Big Bangs falling in and out of favour. As others have said, projects normally get first call, and the tricky s0ds like me used to make sure we booked a number of contingent possessions following the planned works, in case of problems, which rapidly fill the graph. On top of that, a high percentage of maintenance possessions are given over to emergency repair or check/test reactions to failures or recent performance issues, further hampering planned maintenance.

 

Add to that the increase in the number of projects overall, which very often require the presence of one more of the maintenance depts, and the resources available each week to undertaking maintenance falls further, as whilst project resources are created for each project (in most cases), maintenance resources are finite.

 

Going back to the thread topic, pressure on cash flows from being nationalised now, will not help NR's planning and delivery (as was the case in BR days), and the deferment of two major projects was almost inevitable, given the projected outturns on GW electrification (old NR would just have borrowed a bit more). But we also know that privatisation equally has been no great friend of infrastructure maintenance in the past.....

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And this is also part of a wider national malaise. It is much easier to get funding for new projects than funding to continue them once they have had the capital expenditure, the official opening and the publicity.

 

I wonder if this is why so  much of what I would regard as renewals on the railway gets called capital expenditure - to make it sound as though you are getting something new instead of looking after what you have.

 

Oddly enough, the private railways often classed what could have been called capital expenditure as renewals because capital was just that, something to be raised from shareholders. So locos were rebuilt to the point where about all that was left was the number plate (until they were renumbered).

 

Jonathan

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I wonder if this is why so much of what I would regard as renewals on the railway gets called capital expenditure - to make it sound as though you are getting something new instead of looking after what you have.

Only an accountant really understands what capital expenditure actually is ... and even then two of them would would argue over which of the three definitions would apply. If you buy something new ( a replacement for old ) that is definitely capital expenditure.

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If you buy something new ( a replacement for old ) that is definitely capital expenditure.

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But does depend on how you list your assets, is rail an asset of itself or is it a spare part for track? Which influences whether new rail is capital spend or maintenance. The reality is that you can define things according to which budget you prefer to spend the money on.

Regards

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In the old days it was capital expenditure if it increased the asset base of the company, which also normally was accompanied by a share issue. So renewals and repairs were not capital expenditure, as they merely maintained the value of the company. Widening or adding extra rolling stock was. I know there were lots of fudges, especially when capital was short. Also, railways didn't want to increase their capital base because it diluted the earnings, which the existing shareholders didn't like. Unless of course they were being given extra shares for nowt, as sometimes seems to have happened. Many railway companies were hopelessly over capitalised anyway in terms of their ability to pay a dividend on the share capital. Hence all the reconstructions.

 

These days anything which involves major replacement or reconstruction of existing assets seems to be called capital expenditure, even though it does nothing to increase the value of the company, merely maintain it. So my trains wear out and I buy some new ones. In the past that was out of revenue, only any increase in their value being charged to capital. Now it is all called capital expenditure. I think it is because it SOUNDS as though you are improving things rather than merely keeping up.

 

Jonathan

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And this is also part of a wider national malaise. It is much easier to get funding for new projects than funding to continue them once they have had the capital expenditure, the official opening and the publicity.

 

I wonder if this is why so  much of what I would regard as renewals on the railway gets called capital expenditure - to make it sound as though you are getting something new instead of looking after what you have.

 

Oddly enough, the private railways often classed what could have been called capital expenditure as renewals because capital was just that, something to be raised from shareholders. So locos were rebuilt to the point where about all that was left was the number plate (until they were renumbered).

 

Jonathan

 

Very true but there are a number of modern complications to that. The original Regulator (Mr Tom Winsor, for it is him, and not Sir Tom, for ruffled too many feathers did he) adopted the concept of Modern Equivalent Asset (emerging from Modern Equivament Form), in his renewal allowances for Railtrack. For example, it would be unlikely, although it still happens, that you would replace bullhead rail with more bullhead rail. So if you replace it with flatbottom, which requires new sleeper fixings, and almost certainly new sleepers with a deeper formation, he would argue that this was not an enhancement but a renewal. The argument raged back and forth, that this was actually an enhancement, as it theoretically increased the performance of the asset. One gets treated as current expenditure, and so not negotiable (other than in efficiency terms) but the other is treated as additional capital expenditure, on the difference between like-for-like and the enhanced asset, which could be treated as additional expenditure, and therefore Enhanced Asset Value (which therefore automatically increases allowable track access charges). Not-Sir-Tom argued, with some credible evidence, that it was actually cheaper to upgrade, both in initial capital (bullhead rail is by special order only now) and in whole life costs (you don't need so much human intervention to maintain flatbottom, continuous welded rail). Similar arguments can be paraded for signalling, electrification and rolling stock, on both sides.

 

Accountants in the Treasury and of course, the Revenue, make the same arguments across all industries, partly because capital expenditure usually attracts tax relief, whereas current expenditures do not, but also no doubt the same debate 

 

Try that out, when thinking about whether to replace your Peco track with P4 or EM handbuilt jobbies, and your Ratio non-working semaphores with suitably expensive Absolute Aspects MAS. It's a great argument to use with the Purveyor of the Purse Strings........ The latter worked for me, as I nearly bored her into an early demise.

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Accountants in the Treasury and of course, the Revenue, make the same arguments across all industries, partly because capital expenditure usually attracts tax relief, whereas current expenditures do not, but also no doubt the same debate 

 

Its actually the other way round - revenue expenditure (expenses) reduces profits so gets the full relief, capital expenditure does not. However the capital assets can be depreciated and the relief taken on the depreciation (capital allowances). Spend £100k on loo roll and you get £20k tax relief that year. Spend £100k on machinery and you might only get £5k that year. 

 

Thats a simplification of course and currently capital spending up to £250k? can be treated as expenses as a temporary measure to encourage small business investment (an attempt to increase our stagnant productivity.) I have no idea what arrangements NR have with HMRC though, I imagine they are not straightforward!

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Its actually the other way round - revenue expenditure (expenses) reduces profits so gets the full relief, capital expenditure does not. However the capital assets can be depreciated and the relief taken on the depreciation (capital allowances). Spend £100k on loo roll and you get £20k tax relief that year. Spend £100k on machinery and you might only get £5k that year. 

 

Thats a simplification of course and currently capital spending up to £250k? can be treated as expenses as a temporary measure to encourage small business investment (an attempt to increase our stagnant productivity.) I have no idea what arrangements NR have with HMRC though, I imagine they are not straightforward!

 

Quite true, but only if you are making a profit!! And in the peculiar world of regulation, "capital" spending allows your income to be increased in the following control period. 

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Quite true, but only if you are making a profit!! And in the peculiar world of regulation, "capital" spending allows your income to be increased in the following control period.

If you don't make a taxable profit, you'd usually carry forward the tax loss to use in future, hopefully profitable years

 

In the world of regulation, the addition of capex to the RAB forms the basis of the allowable income for future periods. It's designed to give investors a clear line of sight to recovering the investment in the business. Otherwise why would they put their capital (debt in the case of NR) into the business?

 

Now the issue with NR is that as the RAB increases and hence the allowable revenue, the overall farebox may not increase at the same rate leading to a position to make the cash numbers in the system as a whole balance grant, either direct to NR or via the TOCs as subsidy, needs to increase

 

It's worth bearing in mind that very few rail schemes make sense without grant. A good example is ctrl/hs1. Cost c£5bn to build. However, even with the implied subsidy in the javelin service, the private sector only valued the cash flows generated by the line at £2.2bn. Overall the non financial benefits of the line/wider contribution to UK plc in DFT's business case needs to be more than 3bn.

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If you don't make a taxable profit, you'd usually carry forward the tax loss to use in future, hopefully profitable years

 

In the world of regulation, the addition of capex to the RAB forms the basis of the allowable income for future periods. It's designed to give investors a clear line of sight to recovering the investment in the business. Otherwise why would they put their capital (debt in the case of NR) into the business?

 

Now the issue with NR is that as the RAB increases and hence the allowable revenue, the overall farebox may not increase at the same rate leading to a position to make the cash numbers in the system as a whole balance grant, either direct to NR or via the TOCs as subsidy, needs to increase

 

It's worth bearing in mind that very few rail schemes make sense without grant. A good example is ctrl/hs1. Cost c£5bn to build. However, even with the implied subsidy in the javelin service, the private sector only valued the cash flows generated by the line at £2.2bn. Overall the non financial benefits of the line/wider contribution to UK plc in DFT's business case needs to be more than 3bn.

 

I agree with most of that, although I would add that the individual business cases for each scheme tended to make the case for individual increases in the RAB, over which the ORR decides an overall, consolidated figure following review towards the end of the control period. Thus the question of grant/income increase is not actually decided at the time each project (other than mega ones) is approved, especially those authorised near the beginning of a control period.

 

incidentally, HS1 cost c.£6bn in the end, and whilst the LCR franchise was bought out at £2.1bn, and Bechtel and insurances covered some of the cost overruns and major property developmen will cover much of the cost, the external, economic regeneration benefit was forecast (in the post completion report) at £10bn over fifty years (the length of the longest duration bonds sold as part of the government financing package). Whilst the actual usage had not met projections within the BCR by the time of the National Audit Office's report of 2012, it has now, so there is a lag but, given the "unexpected" recession, not entirely surprising. Whilst this is tangenital to the thread, it does preview a possible model for future, major rail investment, which would possibly suggest a removal of NR debt from such schemes, making privatisation an easier option, financially anyway, provided cheap government bonds were allowed to support it.

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