Sir George probes Government on Network Rail
20 Jul 2004
Sir George Young (North-West Hampshire) (Con): I should like to add a brief footnote to the excellent speech of my hon. Friend the Member for Christchurch (Mr. Chope). I begin by commending him on his choice of subject. He might not get the coverage that he deserves in tomorrow's press because of rival attractions—indeed, we might be asked what we were doing when the House was debating Iraq, and the answer will be that we were debating definitions of public expenditure.

However, as my hon. Friend said, the topic is important because the Government have set themselves standards of probity in fiscal and monetary policy. They have set themselves many rules, and it is important to know whether and how they are being adhered to. If the public, the City and financial commentators suspect that the rules are being kept through some accounting sleight of hand—I have a quotation to support that notion—the whole purpose of having rules, which is to maintain confidence in financial prudence and integrity, begins to disappear. Yes, the Government might be keeping their rules, but they might be doing so in such a way that their behaviour and borrowing are put in a very favourable light, and the totality of the commitments into which they are entering on behalf of the taxpayer of the future is not revealed.

I shall focus on Network Rail and whether it is a private or a public sector company. There have been two views on that question. I go back to 21 June 2002 and quote from the Financial Times:

"But in a move that shocked financial experts, the Office of National Statistics acceded to Treasury requests that the big liability would not be included in the government's accounts. The row concerns the Strategic Rail Authority's role in underwriting the debts of Network Rail."

We were then talking about some £9 billion. The ONS view, as stated in its press release of 5 July 2002, was that Network Rail's borrowing would be classified as private sector borrowing in the national accounts. That decision was taken after advice from the head of accountancy profession at the Department for Transport, whose view was that that support was considered a contingent liability of Government and so was unlikely to be called on. It goes without saying that had that decision gone the other way, the finances of the Department for Transport would have been in serious difficulty, because it would have had to find £9 billion from the rest of its budget.

The reasons for that decision were amplified in the statement "Setting the record straight on Network Rail" on 11 July 2002. In it, the ONS said:

"In national accounts, the guiding principle for classifying institutions as public or private is who exerts control over general corporate policy, including the appointment of directors."

I shall return to that in a moment. However, the National Audit Office took a different view. The Financial Times said on 5 December 2002:

"Sir John Bourn told the Commons Treasury sub-Committee that Gordon Brown should make it clear that the Government might have to raise an enormous sum of money, over and above its published estimates for debt, in certain circumstances."

Sir John said:

"If this had been in the private sector, and I had been auditing this, I would have said that this is essentially a subsidiary company and I would have expected it to be put on the balance sheet."

He continued:

"The government is providing security through the SRA to the providers of debt and it is acting as a lender of last resort to Network Rail so it is assumed that there are liabilities that could accrue."

The NAO went on to classify Network Rail's debts as public sector borrowing, taking a different view from the ONS. I wonder who would have lent any money at all to Network Rail without the Government standing behind it, particularly after the Railtrack debacle. The NAO also determined that Network Rail would be on the balance sheet of the SRA—indeed it now features on the SRA's consolidated Companies Acts-style accounts, because of the degree of influence that the SRA could exercise over Network Rail.

The disagreement between two professional accountants caused some concern to the Treasury Committee, on which the hon. Member for Yeovil (Mr. Laws) then sat. A rather unsatisfactory truce was agreed after the intervention of the Statistics Commission and a joint statement was issued in October 2002, in which they agreed to disagree because they came to the issue with different perspectives.

Last Thursday, the Secretary of State made a statement on Network Rail. I want to deal first with the balance sheet issue. The Secretary of State announced:

"It follows, therefore, that the Strategic Rail Authority will be wound up, and that the majority of its functions, including all its financial obligations, will be transferred to the Secretary of State."—[Official Report, 15 July 2004; Vol. 423, c. 1547.]

One might therefore assume that, if the SRA's liabilities were absorbed into the Department for Transport, Network Rail would end up on the balance sheet of the Department, which is of course part of the Government. In that case, it would be on the Government's balance sheet. Perhaps the Minister can confirm that that is what will happen. On control, the position has fundamentally changed. Whatever it may have been in the past, the Secretary of State's announcement last Thursday fundamentally changed the position of Network Rail, and the ONS should now review its earlier decision. The White Paper that was published last week, "The Future of Rail", states:

"Under this new structure: Government will have clear control of the strategy for the railways".

Chapter 3 states:

"The Secretary of State . . . will take responsibility for setting the national-level strategic outputs for the railway industry, in terms of capacity and performance."

Elsewhere the White Paper states:

"This means that the Government will be responsible for deciding the overall size and shape of the network; the key time-table outputs; policy on regulated fares; minimum performance targets; enhancement priorities; and policy on information provision and accessibility."

Later, we read that

"The Government will specify the very largest projects, such as the construction or upgrades of major lines, and will determine the overall approach and by whom they are delivered".

Any notion that Network Rail is an ordinary private sector company is strictly for the birds. It is a company that does what the Government ask it to do. It is not a company that is controlled by its directors or members, which is the key definition used by the ONS. The question asked by ONS is: who is exerting control over general corporate policy? There is only one body doing that, and it is the Department for Transport. One of the reasons for the Secretary of Statement's statement last week was that the Government felt that they did not have enough control over Network Rail. Can the Financial Secretary confirm that the time has come to end the fiction that Network Rail is a private sector company? Will she give an undertaking that the borrowings will in future score as Government debt?

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Copyright Sir George Young Bt. 2015