Dated: 6 February 2012

Commenting on the decision by Network Rail executives to give up their bonuses, Simon Walker, Director General of the Institute of Directors, said:

“This is a good day for owner activism: Justine Greening did not believe that senior executives at Network Rail merited their bonuses and said she would vote accordingly at the annual general meeting. We would expect this of shareholders in listed companies, and expected it of the Government in this case. Only through this kind of activism will executive pay be brought into line with performance”.

He added:

“Whether Network Rail is technically part of the public or private sector, it is effectively and regrettably a nationalised enterprise. The taxpayer through the Treasury underwrites it. Shareholder activism has never been more necessary than it is today. The Government is in the same position as the pension funds and investment institutions which own public companies. They should all take a vigorous role on remuneration matters.

“The Government should use this opportunity to review the governance arrangements at Network Rail, and consider if they are fit for purpose in delivering a sufficient level of management accountability to the organisation’s key stakeholders”.

 

Network Rail – Public or Private?

• On 28 June 2002, a National Audit Office press release stated: “Sir John Bourn, the Comptroller and Auditor General, has concluded that Network Rail should be accounted for as a subsidiary of the Strategic Rail Authority (SRA) and should be consolidated into the SRA’s accounts.  He makes this judgement in his capacity as statutory auditor of the SRA.  Sir John’s view is that the Government’s interest in Network Rail is akin to an equity shareholder’s interest.” http://www.nao.org.uk/pn/01-02/networkrail.htm
• Network Rail does not have shareholders, but 78 members, who hold the Board to account and have the power to appoint and remove directors.  The Department for Transport is a special member, with a power of veto over any alteration to Network Rail’s articles of association.
• Network Rail’s financing requirements are principally met by debt raised from the capital markets.  Its website says that its £20 billion debt funding programme “benefits from direct and explicit support from the UK government in the form of a Financial Indemnity from the Secretary of State for Transport, a Minister of the UK Government.”  In other words the Treasury underwrites Network Rail’s debts.  The members of Network Rail themselves have limited liability, of £1, and need only inject these funds if the company is wound up.
• The initial appointments to Network Rail were made by the Government, which is why the company was originally classified as public sector by the Office for National Statistics.
• The Government, through the Strategic Rail Authority, has a number of “reserve powers”, which allow it to take control of the company in certain situations.  In the event of a defined “fundamental financial failure”, the Strategic Rail Authority special member has the right to remove some of the other members, putting control of the company in the Strategic Rail Authority member’s hands.
• If Network Rail were ever sold the Government would get 100 per cent of the proceeds.
• The Department for Transport’s annual report 2007 says that, in 2006-07, £3.103 billion was spent on direct grants to Network Rail.