‘Not our problem’: UK Government’s fiscal obligations towards the privatised railway network
Analysts of public finance are devoting increasing attention to what have been termed implicit fiscal obligations of government, those that are not recognised in public sector accounts or budgets, but are nonetheless real, in the sense that future resource commitments have been potentially incurred. For example, an aging population in many countries implies that future expenditures (on pensions, health care, etc.) will increase more rapidly than revenue, given current tax rates. In theory, the projected deficits could be reduced by reducing pension or health entitlements, but this may be politically difficult if not impossible. Heller (2003) has attempted to draw attention to this and other long-term fiscal implications and has urged that governments need to recognise these challenges in order to increase transparency of potential government commitments.
Implicit commitments may also take the form of guarantees by the state in respect of some private sector concerns, for example the underwriting of the debts of providers of public services. Such contingent liabilities are typically unrecognised in public sector National Accounts, but result in implicit obligations. Even if no legal guarantee exists, there may still be what the (US) General Accounting Office (2003, p. 3) defined as ‘implicit exposures’ which arise, not from ‘a legal obligation of … government but rather from implied commitments embedded in the government’s current policies or in the public’s expectation about the role of government’.
Determining the extent of a government’s implicit obligations may, as Heller noted, involve considerable ‘hazards and complexities’ but is an essential step ‘towards a more comprehensive picture of a government’s overall potential debt exposure’ (p. 64).
Organisations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have urged countries to reform their national accounting practices to ensure transparency in state budgeting and the disclosure of implicit as well as explicit liabilities, and some countries have taken steps in that direction1 (IMF, 2001a and IMF, 2001b; OECD, 2001).
Emphasis on more extensive disclosure of contingent liabilities was particularly evident in the IMFs Code of Good Practices on Fiscal Transparency (IMF, 2001b). The IMF calls for, inter alia, an assessment of contingent liabilities and for implicit debt to be identified and, if possible, quantified.
The OECD also supported the IMFs concern about contingent liabilities in governments’ financial policy commitments, and its Code on Budget Transparency (OECD, 2001) specifically highlighted policy commitments that might have a significant future financial impact and which should be taken into account in the formation of national budgets.
Overall, there is increasing recognition that failure to budget for fiscal obligations such as those represented by contingent liabilities ‘induces governments to take risks that may imbalance future budgets’, and that ‘it is absolutely crucial that the fiscal consequences of existing commitments be explicitly disclosed’ (Schick, 2002b, p. 19; Heller, 2003, p. 169).
One area where implicit government commitments may exist is in relation to the economic infrastructure, even where such infrastructure is privately owned (Irwin, Klein, Perry, & Thobani, 1999). Privatisation of infrastructure is typically justified as a means, inter alia, of transferring commercial risk and fiscal obligations from the state to the private sector but, in practice, this may be more apparent than real. Frequently, the debts of the private sector operator are underwritten by the government, but the contingent liabilities thus created are typically ignored in governmental National Accounts (Polackova, 1998). By their very nature, contingent liabilities may not be necessarily costless, and should be properly accounted for and valued (Mody & Patro, 1996). Even if no formal indemnity exists, governments may find it politically impossible to allow the failure of an infrastructure private operator (perhaps because the infrastructure in question is crucial to the functioning of the national economy). In practice, government may be compelled to rescue an operator that found itself in financial distress: there is a de facto guarantee and an implicit fiscal obligation. The promised divestment of risk may be illusory, and it has been argued that governments need to manage their exposure to such risks and value them properly in their accounts (Lewis & Mody, 1998; Brixi & Mody, 2002; Ehrhardt & Irwin, 2004).
This paper focuses on the UK Government’s management and reporting of its fiscal obligations in respect of the railway network, after the collapse of the privatised rail infrastructure company Railtrack in 2001, and now proceeds as follows: Section 2 outlines the events leading up the collapse of Railtrack and the impact on both the company’s investors and the government’s response; Section 3 details the structure of its successor body, Network Rail; Section 4 analyses the way in which the borrowings of Network Rail have been treated in the National Accounts; Section 5 contains a discussion and some conclusions.
2. The privatisation of the railways
In 1996, the then Conservative government commenced the privatisation process of the UK railway industry. The resulting arrangements were complex. The infrastructure (stations, track and signals) of the former state-owned British Rail was transferred to Railtrack plc and the equity issued to private sector investors: its revenue came from user fees (‘Track Access Charges’) mostly from the private sector train operating companies (‘TOCs’) who were awarded franchises (initially 25) to operate passenger services. To minimise abuse of its monopoly by Railtrack, the government set up the Office of the Rail Regulator (‘the Regulator’)2 to regulate Railtrack’s activities and to determine its return on capital. Train franchises were awarded, and the performance of franchisees monitored, by the Office of Passenger Rail Franchising (OPRAF). In 2000, the Labour government established the Strategic Rail Authority (SRA), which acquired the functions of OPRAF in an attempt to plan more effectively the strategic direction of the railway industry as a whole.3
Tags: Railway network