Outlook: Spending at not-for-profit Network Rail spirals out of control

GUS unzipped; Dollar hammered
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The Independent Online

When Stephen Byers, the former Transport Secretary, put Railtrack into administration and created a "not for profit trust" to take over the running and financing of the railway, he should have added the rider "and not for loss either". Too late now. Network Rail yesterday reported a loss before tax of £290m for the year to the end of the March, compared with a £295m profit the year before. The culprit is easy enough to identify - too much debt as costs and spending spiral out of control.

This shouldn't really come as a surprise to anyone. Once the discipline of working for shareholders is removed, as it was when Railtrack was shunted into administration, all the usual controls on costs and spending are removed too, and in an effort to achieve the higher priority of improved customer service, managers let rip.

Network Rail's not-for-profit status make the controls laxer still. The Treasury has engineered it so that all the extra debt doesn't show up as part of the public finances, even though Network Rail wouldn't be able to borrow at all if it were not underwritten by the taxpayer. As a result, there's not much public sector control over the spending either. The Rail Regulator, Tom Winsor, describes the situation as unacceptable and insists he'll take all necessary steps to ensure that all the extra spending right down to the last pound is efficiently spent. We'll see. Still, in the meantime we are at least getting a shiny new train set. Or are we?

Despite all the extra "investment" there is as yet no evidence of improvement in performance.

To the contrary, late arrivals caused by infrastructure problems rose 9 per cent last year and things haven't improved much since. With train delays running at 14.7 million minutes in the year to last March, performance is still more than twice as bad as the pre-Hatfield Railtrack, which perversely looks almost like a golden age for the railway compared with the present shambles.

Ian McAllister, Network Rail's chairman, has got plenty of excuses. "Substantial growth in passenger numbers allied to a history of under investment has left us with a fragile network which is expensive to put right," he says, and yes, unfortunately sustained improvement in performance is going to take several years. Meanwhile, Network Rail has a clear plan and knows the direction it must take.

Neither the Government nor the regulators, where there is growing concern over out-of-control costs and spending, are at all convinced. There are only three sources of money for Network Rail's extra spending - higher access charges, which means higher fares, more taxpayers' money, or higher borrowings, which in effect amounts to taxpayers' money as it is the Government that must guarantee the debt. Fare increases over and above the rate of inflation are not remotely feasible until there is a notable improvement in standards of service. So for the time being it's muggins - yes you, the taxpayer - that must pick up the tab.

Mr McAllister's latest mission statement is that Network Rail must strive to achieve "sustainable improvement in performance at an acceptable cost to the nation". It is presumably for the rail regulators - the Strategic Rail Authority and the Office of the Rail Regulator - to decide what an acceptable cost amounts to, but whatever the answer, it won't be pleasant, and quite how you ensure efficient, economic spending when there are no incentives to make it so is no clearer now than it was when Network Rail was first established.

GUS unzipped

John Peace, chief executive of GUS, insists that his company is no conglomerate, yet it is hard to think of any other description for this oddball collection of unrelated businesses. GUS is the ultimate velcro company, a constantly changing, stick them together and rip them apart again hotchpotch of corporate assets. With this week's disposal of the original home shopping group to the Barclay brothers, the company now bears no relation whatsoever to the Great Universal Stores developed by the mail order legend Isaac Wolfson. Indeed, it doesn't bear much relation to the GUS of even six years ago.

Yesterday brought news of yet more disposals. Besides a partial flotation of the South African retail operation, GUS also admits to the possible demerger or flotation of Experian, the credit information business bought only four years ago and the business where Mr Peace originally earned his spurs. Along the way, purchases have included Argos and more recently Homebase. The disposal of Experian would admittedly leave GUS focused wholly on the retailing - Argos, Homebase and a majority interest in the recently floated Burberry - but even then, the conglomerate label still stands as there is little that unites these three very different concepts.

What's all this corporate juggling done for shareholder value. GUS was accused of overpaying for Argos, but actually it's proved an inspired acquisition, more than earning its keep. Burberry has obviously proved an inspiration too, but Experian has only served to confuse and the jury is still very much out on Homebase. Meanwhile, the original mail order business has suffered a calamitous decline.

The acquisitions have protected GUS from the decline in its original core business but the bottom line is that, over the past five years, the GUS share price has done no better than level peg the rest of the stock market. These things are impossible to prove, but I suspect shareholders would have done better had they been invested in the businesses separately. Still, at least GUS has helped keep the City in investment banking fees. There's purpose in that surely.

Dollar hammered

Nobody much seems to care about the depreciating dollar. In the US, the Bush administration appears actively to be encouraging it, while even in the eurozone, which needs a strong euro like a hole in the head, policymakers seem generally sanguine about its consequences. Britain as usual seems caught between the two - strong against the dollar and weak against the euro - but here too policymakers are blissfully unconcerned.

Why's everyone so relaxed about it all? From a US perspective, the dollar correction is a necessary and possibly quite healthy adjustment. At the very least it should help keep the deflationary bogey at bay by making imports more expensive, thereby helping US industry become more competitive. Furthermore, dollar depreciation will eventually make dollar assets look cheap again, helping to revive inflows of foreign capital, which should in turn help underpin a recovery in consumption.

All very convenient then, except that it is not as if the Bush administration has somehow waved its wand and the markets have delivered. The weak dollar also reflects genuine concerns about the burgeoning budget deficit, which with yesterday's ratification of $350bn of further tax cuts is about to get totally out of control. America is being punished by the currency markets as well as assisted.

Less easy to see is why the Europeans are so indifferent to the rise in their currency. Part of the explanation is that it allows for further steep cuts in interest rates - it's odds on for half a point next week - which again might provide the necessary catalyst for a revival in consumption, particularly in Germany, which desperately needs it. Cheaper goods courtesy of currency appreciation also mean greater spending power. The other side of the coin is that it makes European industry less price competitive. On the other hand that's the least of Europe's problems right now.

As for Britain, it's hard to know what to make of our piggy in the middle position. The Bank of England thinks it will help to make sterling weakness less inflationary than it has been in the past, while its depreciation against the euro will be a boon for beleaguered manufacturers. So in America, Europe and Britain, everything is working out for the best in the best of all possible worlds is it? Now why does that seem so unlikely?