Accounting for producer needs: The case of Britain's rail infrastructure

Abstract

Academic studies of the industries privatised in Britain since the mid-1980s have focused on regulation and performance. This paper discusses the impact of changes in accounting policies within the British railway industry, which has been almost completely neglected in the literature to date.

Keywords:

• British
• Railways
• Depreciation
• History
• Manipulation

Notes

2 It has been argued that the separation of train operations from infrastructure was mandated by the EU through Directive 91/440 (in July 1991), but this required only that the infrastructure be accounted for separately to allow access by international freight operators (Gourvish, 2002, p. 262).

3 Total passenger journeys have increased from 801m in 1996/97 to 1.59bn in 2013–14, and. passenger km from 32bn to 60bn (ORR, 2006, pp. 12, 14; 2014b, pp. 9, 12).

4 This was partly due to extremely high capital costs in Britain. In the 1880s an American engineer estimated that the US network had cost about £8000 per mile, compared to £40,000 in Britain. However, a lower level of receipts produced a US turnover to capital ratio of 11%, only slightly higher than the 9% prevailing in Britain (Dorsey, 1887, Tab. 16, p. 45).

5 This last point was controversial: whether the element of ‘betterment’ in replacement expenditure, most notably the replacement of iron rails by steel with a longer economic life, should be charged to revenue or could be treated as capital, was much discussed (Brief, 1965; Fishlow, 1996, p. 632; Simmons & Biddle, 2000, pp. 232–3).

6 The PSO grant was a state subsidy to BRB to support loss-making services which were ‘considered desirable to retain on social grounds’. This supported both ‘day-to-day operation of the railways (the revenue element) [and] the replacement of assets (the capital element)’.After privatisation, under European Commission regulations, PSO grants may be awarded as ‘part of a franchise agreement under which payments are made to private operators (BRB, 1992, note 1, p. 40; BRB, 1993, note 1, p. 46; Simmons & Biddle, 2000, p. 484).

7 NSE primarily served markets in London and Southeast England.

8 Strictly speaking two entities were created, Railtrack Group plc (which was floated) and its wholly-owned subsidiary Railtrack plc (which owned the infrastructure).

9 This followed the issue of FRS 15, Tangible Fixed Assets, which permits this treatment for a network or infrastructure system whose operational capacity has to be maintained indefinitely (ASB, 1999b, pp. 51–52).

10 The Rail Regulator, through the Office of Rail Regulation, is the independent statutory for Britain's railways, with responsibility for ensuring safety in the public interest (Gourvish, 2002, pp. 424–5).

11 Railtrack's accounts for the year to 31 March 2001, published before it was placed in Administration, included an exceptional charge of £641m relating to the costs of Hatfield (mostly compensation payments to train operating companies) (Railtrack plc, 2001, p. 15).

12 e.g. A company is ‘deemed unable to pay its debts if ... the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities’ (Insolvency Act, 1986, sec 123 (2)).

13 The ORR indicated that the RAB will increase ‘by an amount greater than the level of actual additions to the network, reflecting the additional expenditure on operating, renewing and maintaining the network in the two years to 31 March 2003. Without this increase [NR] would have needed to write down the carrying value of the network in its accounts, resulting in an additional impairment charge to its profit and loss account’ (SRA, 2003, p. 76). The RAB was set at £5.5bn for the beginning of the 2001–06 control period, and Railtrack was permitted a real pre-tax rate of return of 8% pa (ORR, 2000, paras. 6.28, 5.32).

14 At the time of writing (Spring 2014) the 1999 version of FRS 15 is still in force.