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Railways Bill

My Lords, Amendment 314 in my name, supported by my noble friend Lord Moylan, enters the arcane world of Treasury theology—what is and what is not public expenditure. It would require the Secretary of State to report on the impact of the Bill on public finances. This is important because the Government constantly emphasise, rightly, their commitment to the fiscal rules to contain borrowing, build market confidence and reduce upward pressure on interest rates and taxes.

One of the fiscal rules is the investment rule: public sector net financial liabilities— sometimes known as PSNFL—which is a broad measure of national debt, must be falling as a share of the total economy by 2029-30. Another is the stability rule: the Government must forecast a surplus on day-to-day spending by 2029-30, meaning that regular public services are funded entirely through tax revenues rather than borrowing.

Clearly what GBR spends is public expenditure, but expenditure or borrowing by private companies can be classified as public expenditure if certain qualifications are met. Decisions on that are taken not by the Government but by the Office for National Statistics, and it operates according to international definitions. It does not allow for consideration of political or commercial significance when making its classification decisions; they are essentially statisticians.

The Minister may not have read “UK Economic Statistics Sector and Transaction Classifications: The Classification Process”—he may not even have heard of it—but it is relevant to Amendment 314. I shall summarise: the difference between the public and private sectors is determined by where control over the organisation lies rather than by “ownership” or whether the entity is financed from public funds. Control is the ability to determine general corporate policy. I will come on in a moment to the relevance of this to the rolling stock companies where, under the new scenario, GBR will be the principal customer, but there are two relevant instances where attempts by government to circumvent these rules have come unstuck, with consequences for the balance sheet.

One that will be familiar to the Minister was Network Rail. Network Rail was set up in 2002 as a private company limited by guarantee, primarily to keep its massive debt off the Government’s balance sheet. By structuring Network Rail as a private company limited by guarantee without shareholders, the Government could then borrow large sums of money for infrastructure upgrades without adding those billions to the official national public debt.

However, in 2014, ONS reclassified Network Rail as a central government body in the public sector, and this resulted in roughly £30 billion of debt moving on to the Government’s balance sheet. The Minister will have had direct experience of the consequences of that at Network Rail. We know because we have the Hendy report, which sets out the consequences for Network Rail of this reclassification. Debt was controlled, capital was rationed, assets were sold off and upgrades were postponed. I think the last thing the Minister wants to do is to write another Hendy report, mark 2, when rolling stock is classified as Network Rail is.

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The other example is housing associations, which were previously in the private sector with the ability to borrow without it affecting the PSBR. In 2016, the ONS reclassified housing associations from private non-financial corporations to public non-financial corporations. This change was decided following legislative and regulatory changes brought about by the Housing and Regeneration Act 2008. The Government then had to legislate through the Regulation of Social Housing (Influence of Local Authorities) (England) Regulations 2017 to get them reclassified. The Explanatory Memorandum for that SI explicitly stated that the regulations were

“aimed at reducing public sector control over private registered providers to enable the Office for National Statistics (ONS) to reconsider the classification of private registered providers”,

which is what it did.

I come to the railways. In 2020, the ONS reclassified train operating companies that entered into EMAs—emergency measure agreements—with the UK and Scottish Governments during the Covid-19 pandemic as public sector organisations, because nearly all the risk and revenue under those arrangements rested with the Government. As a result of this Bill, all passenger services operated under contract with DfT will be expected to be transferred to public ownership by the end of 2027. But what about the rolling stock companies? Investment there is running at an average of £800 million a year, and between now and 2050, it is estimated that some £26 billion will be invested.

The main customer will be GBR. The industry will be dependent on what economists call a monopsony—a monopsony is when there is only one buyer; a monopoly is when there is only one seller. GBR will specify exactly what the rolling stock companies will build, and when, and, of course, will undertake to pay for it, probably through a lease. The question raised by this amendment is: will this bring the industry, in the eyes of the ONS, into the warm embrace of the public sector, with a hit on government borrowing?

The ONS has stated that it expects to conduct an assessment of the railway industry if the Railways Bill receives Royal Assent. In particular, it intends to review the classification of rolling stock leases. I had to read this several times before I understood it, but it summarises its view as follows:

“A statistically important question relates to the rolling stock leases. The statistical framework maintains a distinction between operating and finance leases. Rolling stock leases have been historically considered operating leases, for statistical purposes. This means that the rolling stock assets and the associated imputed loan liability were not reported on the public sector balance sheet in fiscal statistics. We expect to review the treatment of rolling stock leases as part of the wider review of the rail sector”.

My amendment says that, within six months, the Secretary of State should consult the ONS on this and then publish a report setting out the fiscal impact of the Bill on the public finances. This might sound like an abstruse matter, but if there is a reclassification, the consequences could have a severe impact on the department’s budget. I will listen carefully to the Minister’s reply, which I expect will follow very closely the script prepared by his officials.