By Elizabeth Anderson Friday, 23 November 2012

Network Rail - passengers, debt and profits all rise

Not many companies can combine high levels of debt with high profits - but Network Rail is managing it.

More people are travelling on the trains than ever and Network Rail, the government-backed company which manages all UK rail infrastructure apart from the trains, is struggling to keep up.

As a result, the group’s debts have soared by almost £1bn (£843m) to £28bn in the last six months alone. This was mainly because of a £2bn investment in lines and stations, which included redeveloping Reading Station and making improvements on the East Coast and West Coast main lines. But there is some method behind the madness. Overall, Network Rail’s profits after tax jumped to £573m – more than four times the £136m made a year ago.

The £28bn debt pile is still largely a hangover from its creation a decade ago. The group was created by government decree in 2002 after the Hatfield crash in which four people died as a result of maintenance failures by its predecessor, Railtrack. And after inheriting an ageing system, Network Rail's management are struggling to bring Britain’s rail infrastructure up to date (over 1.4 billion passenger journeys are expected to be made on Britain’s trains this year.)

Network Rail gets £3.5bn of taxpayer money each year. This helps fund some of the improvements (around 40%), while the rest is funded mainly through debt and track access charges. Network Rail benefits from lower borrowing rates, because its debts are guaranteed by the government. Taking advantage of that, debt is likely to grow by about £1.5bn a year until 2019.

The group's FD, Patrick Butcher, is unfazed though, saying Network Rail needs to borrow to invest in making the railway bigger, because more and more people want to use it. He also compared the company’s roughly 50-50 asset:debt ratio to utility companies like National Grid or Thames Water. But  if Network Rail really is a nice safe utility-type investment, then its management team should be paid by that rather less generous benchmark. They can’t have it both ways. Click here for the story of Network Rail.

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