Botched U.K. Rail Revamp Forces Selloff to Plug $3.8 Billion Gap

  • Network Rail plans property auction, borrowing increase
  • Key electrification projects three years behind schedule

Network Rail Ltd., the state-backed owner of Britain’s train tracks, plans to sell off assets spanning station shops to locomotive depots after a botched project to electrify key routes resulted in a 2.5 billion-pound ($3.8 billion) funding gap.

The auction will contribute about 1.8 billion pounds, with a further 700 million pounds to be raised through borrowings after the government agreed to ease existing caps, London-based Network Rail said in a statement. Net borrowings stood at 39.2 billion pounds as of Sept. 30, 25 times its six-month net cash.

A combination of inadequate planning and inaccurate pricing has caused a slew of engineering projects to suffer delays and cost escalation. The electrification of diesel-only lines aimed at cutting journey times, adding capacity and curbing emissions has proved particularly problematic since Network Rail hasn’t undertaken a similar wiring project for two decades, the company said.

“Although progress has been made, it has proven difficult to keep pace with the stretching targets,” Network Rail said in an earnings release Thursday after Chairman Peter Hendy issued a report on the funding gap late Wednesday. Selling assets including capacity on a track-side telecoms network will reduce future income and “means more will have to come from elsewhere,” it said.

Falling Behind

The opposition Labour Party said Prime Minister David Cameron’s Conservatives had sought to hide news of Network Rail’s “black hole” by publishing the report hours after a government budget statement. Electrification costs that were ignored by ministers prior to May’s general election have jumped more than 70 percent, “and passengers and taxpayers are paying the price,” it said.

Even with the extra funding and a reduction in day-to-day renewals work, Network Rail will still be unable to deliver all of the upgrade projects it had committed to complete by 2019, the company said.

Electrification of the Transpennine route in northern England, suspended after the funding crisis was first revealed, won’t be completed until 2022, while the Midland Main Line from London will be wired to Sheffield only in 2023. The Great Western upgrade program, unaffected by the previous freeze, will cost as much as 1.2 billion pounds more than previously agreed with regulators.

Network Rail said Thursday that only about 89.5 percent of trains in Britain currently arrive on time, short of the 90 percent target, and that improvements have been introduced. The not-for-profit company spent 1.7 billion pounds on enhancements and 1.5 billion pounds on renewals in the fiscal first half through September, and will re-invest all of its 246 million pounds in pretax earnings.

Network Rail suggested it’s comfortable with plans for a breakup into smaller regional businesses that’s likely to result from a review of its future shape and financing due to be published next spring, saying the step would “provide sharper focus.”

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