British Railways (Hansard, 17 March 1980)

§ Mr. Fowler

The various commercial businesses of the British Railways Board need clear financial objectives and financial targets must be established for them. Work is proceeding to this end. I can now make a statement about the railway freight and Inter-City businesses.

These businesses have to operate commercially in competition with other transport modes. The objective for each is that as soon as possible they should be able to support the renewal of their assets by earning a current cost operating profit sufficient to achieve the required rate of return on investment, after covering all their proper costs including a proper share of the railway indirect costs. I am discussing with the board how quickly these objectives can be reached.

I have, meanwhile, endorsed the decision of the British Railways Board as a first step to set interim financial targets for the management of these businesses, so that progress can be shown towards the objectives I have described and so that continuing investment in them can be decided in the light of improving business performance. The board and I 3W agree that these interim targets should be challenging ones, but that the businesses should aim to achieve them sooner if market circumstances allow.

To achieve them will demand significant changes and developments in the businesses. The freight business in particular will have to secure major improvements in productivity. The businesses will continue to be free to set their prices in the markets where they compete. These markets are themselves significantly exposed to movements in the national economy, from which the rail business could not be insulated.

The interim targets now settled are as follows: The form of the target for the Inter-City passenger business relates to its contribution to the total indirect costs of the railway, after charging all direct costs of train services and terminals, provision for full current cost depreciation and amortisation of the assets, interest, and the net cost of train catering on Inter-City services. In 1978 the contribution made by Inter-City on this basis was £94 million—equivalent to £105 million in 1979 prices. The target now settled is that the 1982 contribution is to increase to £133 million—in 1979 prices. The freight business in 1978, after meeting its direct expenses of operating trains and terminals and its agreed contribution to indirect expenses of tracks, signalling and administration was able to cover 30 per cent. of its total depreciation and amortisation charges on a current cost basis. This is before interest. The target that is now settled is that the business should in 1982 aim to cover two-thirds of its current cost depreciation and amortisation, on the same basis, with further progress thereafter. The board will each year in its annual report set out the achievement in the forms described above—with appropriate revaluation for the Inter-City figures—and comment on progress towards the targets.