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Network Rail debt guarantee criticised

The Government guarantee for Network Rail’s debt “blunts the incentives” for the company’s management to operate efficiently, a Whitehall spending watchdog said.

There were no shareholders to “exert pressure on Network Rail management to find efficiency savings more quickly”, the report from the National Audit Office (NAO) claimed.

Yesterday the NR altered its top bosses’ bonus scheme following criticism of the £2M award the main directors got in total last year.

Annual bonuses, scrapped for this year, will from now on be reduced by 40%.

The NAO said the Office of Rail Regulation (ORR) had found it “difficult to reconcile the levels of management bonuses with its own assessment of Network Rail’s performance”.

The report added that NR had no shareholders and it was financed by debt guaranteed by the Government and held “a national monopoly over the rail network”.

The NAO said Network Rail’s net debt at the end of March 2010 was £25.6bn.

The report also said that limitations on Network Rail’s information on its own costs were hampering the ability of the ORR to judge the genuineness of the efficiency savings reported by Network Rail.

It states that at the start of March 2009 the most efficient European rail infrastructure companies were “evidently considerably more efficient than Network Rail”, and that Network Rails “geographic monopoly” meant the ORR was unable to compare its efficiency with other UK companies in the same industry.

There was also limited pressure from customers for Network Rail to reduce costs.

Commenting on the report, House of Commons Public Accounts Committee chairman Margaret Hodge said: “This committee has previously criticised the Regulator (the ORR) for its lack of urgency and effectiveness in challenging NR’s efficiency. This report provides further evidence that the Regulator has no teeth.

“It has set efficiency targets which have not been met and limited cost information means that it cannot challenge Network Rail’s costs effectively. It is not enough for the Regulator to stand by and comment that the savings are there to be had when there is so much public money at stake.”

NAO head Amyas Morse said: “The gap between Network Rail’s efficiency, as a monopoly provider, and that of comparative European rail infrastructure managers has been effectively identified by the ORR.

“It is so wide that it has served up to now to drive forward improvements in efficiency by Network Rail. However, further progress will depend on the Regulator developing significantly better information on Network Rail’s costs.”

The NAO report said that, between 2009 and 2014, Network Rail intended to raise new debt of around £4.4bn on an unsupported basis and envisaged that all new debt thereafter would be unsupported by the Government.

But the report added that Network Rail had “not yet pursued the intention, due to adverse financial market conditions”.

Under the new scheme a five-year long-term scheme will replace the existing three-year management incentive package.

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