Lies, damn lies and accountancy - Network Rail, debt and deficit

 

The Government tried to put proceeds from Network Rail’s controversial sale of its commercial property portfolio towards cutting the Government’s fiscal deficit, despite assurances to the contrary – but failed to do so.

An accounting mix-up involving a transfer of staff eventually resulted in half a billion pounds spent by Network Rail being added to the deficit, it has emerged.

”Local

The disclosure comes in a report on the sale from the National Audit Office (NAO), which discloses that two-thirds of the £1.5bn raised from the sale was put towards cutting the (long-term) national debt.

The report also criticises Network Rail for doing too little to protect the interests of tenants when it sold the portfolio, most of which consists of property beneath railway arches. It said it was ‘of some concern that the impact on tenants was not an explicit sale objective and was only considered late in the sale process’.

Network Rail completed the sale of the portfolio in February 2019. Auditors said the sale price of £1.46bn exceeded its valuations while noting that it forgoes around £80m revenue per year.

The report discloses that one of four objectives for the sale was to ‘reduce government’s main fiscal measures, public sector net borrowing (PSNB; ‘the deficit’) and public sector net debt (PSND)’.

This contradicts what the Department for Transport (DfT) told Transport Network in May 2017. A spokesperson said: ‘Network Rail is continuing to sell assets to generate more funding for the Railway Upgrade Plan. These proceeds will not be used to pay off (sic) the deficit.’

It is not clear whether this statement was a reference to annual public sector net borrowing – known as ‘the deficit’ but unable to be ‘paid off’ – or long-term public sector net debt. However, given the disclosure that the cash was intended to be used for both, it was untrue.

In response to a request for an explanation for this, a DfT spokesperson said: ‘This sale ensures that Network Rail can continue to invest in improving our railways and that the diverse, independent businesses in rail arches can continue to thrive.’

Network Rail's firesale and bailout - how £2.5bn became £800m

The sale was part of a 2016 plan to contribute £1.8bn towards Network Rail funding black hole of £2.5bn for the 2014-19 Control Period (CP5) through the sale of non-essential assets. Network Rail was to borrow the remaining £700m from the Government.

It was reclassified as a public body in 2014, limiting its ability to borrow externally, and meaning that its borrowing and debt count against government targets.

The report states that in April 2017 the DfT revised Network Rail’s £1.8bn target from asset sales to £800m. The Treasury stipulated however that, to count towards reducing Network Rail’s funding shortfall, the sale would need to reduce the Government’s deficit.

‘This meant the structure of the sale would need to meet certain financial accounting and reporting requirements’ and be completed before the end of March 2019.

Lies, damn lies and accountancy - the £500m

However, under the agreement, Network Rail could use up to £500m from the property sale to pay for its CP5 projects, ‘regardless of the ultimate accounting treatment’. If the sale proceeds were ultimately not classified by the Office for National Statistics as reducing the national deficit, the Treasury would take on the ‘accounting risk’ of the transaction.

In the event, because the sale of the portfolio required the transfer of around 100 Network Rail staff to run the business, the accounting treatment of the proceeds meant that they did not count against the national deficit – but the spending added to it.

The report discloses: ‘The sale agreement includes a transfer of staff, and Network Rail and the Department only realised the impact of this transfer on the accounting treatment in March 2017. This feature means the sale proceeds will likely not reduce the deficit.’

However, as agreed, Network Rail was allowed to put the £500m towards its CP5 funding shortfall. ‘This will increase the deficit by £500m,’ the report states.

The Treasury did take nearly £1bn as a contribution towards the long-term national debt.

The report states: ‘The remaining proceeds were used to offset against expected borrowing from the Department, by reducing the loan facility available to Network Rail. The sale reduced public sector net debt (PSND) by £960m.’

The report points out that the £500m meant that Network Rail balanced its funding position for CP5.

It adds: ‘However, this also follows the cancellation of projects (such as electrification works), efficiency targets imposed in April 2017, and £1.8bn of additional grant and loan funding from the Department.'

 

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