Outlook: Network Rail spends away, but is it really value for money?

Executive pensions; EasyJet losses

British Rail ran the rail network for about £2.5bn a year. Under the privatised Railtrack, the cost was a little less. This past year, under the newly formed Network Rail, the cost will be more than £5bn and there it will stay in all probability for at least the next three years. The consequent increase in public subsidy has been equally dramatic. This year alone, approximately £3.7bn of taxpayers money will be invested in the railway, equivalent to the cost of the Iraqi war or 2p in the pound on the rate of income tax.

Are we getting value for our money? Certainly not yet. The railway is presumably already a little safer than it was, but it would be hard to justify spending on this scale for safety purposes alone on any reasonable analysis of the benefits derived. Around 300 people a year are killed on the railways, but the vast majority are suicides, and no safety net is ever going to catch them. True enough, there has been a cluster of accidents, but there have also been much worse periods in the railway's post-war history. As far as saving lives is concerned, it would be infinitely more efficient to spend the money on hospitals.

So what about standards of service? Not much sign of improvement there either, as anyone who uses the railway will know. The number of minutes delay attributable to Network Rail is on an improving trend, but at 14 million last year, it is still more than double the level of the pre-Hatfield Railtrack. The performance in April was similar to the same month last year, which was the worst ever.

In the meantime, the numbers employed by Network Rail are strongly on the rise, up by about 25 per cent since Railtrack went into administration. I'm not saying that all this extra spending is a waste of money. A large proportion of it is on the West Coast upgrade, which presumably will be a great success if ever it comes to be completed. Furthermore, insists Iain Coucher, Network Rail's managing director, the railway is being forced to deal with a huge backlog of overdue maintenance and underinvestment.

But the trouble with Network Rail, a not-for-profit trust established by Stephen Byers (RIP) for the purpose of instilling the disciplines of public service into the railway, is that it is no longer properly accountable to anyone. In such circumstances the engineers are taking over. All they want is a shiny new train set, whatever the cost or the purpose, and with the lid now wholly lifted on Government spending, they are determined to get it. Is all this extra investment economic? Almost certainly not.

One of the purposes of the interim, or periodic, review rail regulators are due to begin next month is to attempt to answer just this question. What kind of a railway do we want, and how much of this spending is really necessary? In the meantime the order of the day is just spend, spend, spend. After all, it's only your money, and with no need to return a profit and bonuses linked mainly to the achievement of improved service, there's no incentive whatsoever to watch the pennies.

Executive pensions

One of the most shocking aspects of the current season of executive pay disclosure is the amounts being put aside for director's pensions. A pension is a form of deferred pay, so in calculating a director's total remuneration for any particular year, it is necessary to include the increase in the transfer value of his pension pot, or in other words, the extra money the company has to find to fund his long-term pension entitlement.

Accounts filed over the past few months have shown some truly awesome increases, in many cases dwarfing the very large salaries and bonuses already paid as real money. Sir Geoff Mulcahy, former chief executive of Kingfisher, has been in the news this week for the £2.2m increase in the transfer value of his pension, taking his total pot to £15m, but there are plenty of other not dissimilar cases. In the FTSE 100 alone, there are 14 chief executives who saw increases in the transfer value of their pensions of £1m or more, six of them in excess of £1.5m.

In theory, the excesses of this form of deferred pay should by now have been working their way out of the system. As long ago as 1989, the Government put an earnings cap of £99,000 on the salary that could be earned for the purposes of providing a pension from a defined-benefit scheme. But this only applied to new employment, so anyone still working for the same company as they did back then would not be caught by it.

There are a surprisingly large number of them. According to Sue Bartlett, a partner of Watson Wyatt Human Capital Group, the annual cost of funding this legacy of gilt-edged pension benefits for top management has risen to as much as 50 per cent of their combined salaries in some FTSE 100 companies.

Many companies only continue to fund the extraordinarily high costs of their final-salary pension schemes because of the huge benefits their senior executives stand to gain from them. Certainly the excesses of final-salary schemes encourage time serving among executives, with many staying on long beyond their sell by date. Shareholder value is damaged and executive change is discouraged by the continuation of such largesse.

Government proposals, due to come into force either next year or the year after, to cap the size of any individual pension pot at £1.4m, will drive a further nail into the coffin of the obesely sized pension pot. Any contributions to a pension over and above that amount will lose their tax free status. There will also be a "tax recovery charge" levied at a rate of 33 per cent on any excess, making it virtually pointless for companies to continue paying into their final-salary pension schemes for any individual once the £1.4m ceiling has been reached.

In time, then, these large and tax efficient forms of deferred pay perks will become things of the past. However, that doesn't necessarily mean the total size of executive remuneration will moderate. Executive pay obeys the squash down principle ­ squash it down in one part and it merely rises up in another.

Already the remuneration consultants are all over the issue like a rash, suggesting any number of alternative forms of deferred pay for the purpose of executive retention. Let them go is what I say. The last thing you want in any company is an over the hill chief executive hanging on in there for the sake of his pension and deferred bonus. For some reason this doesn't seem to be a popular point of view on boardroom remuneration committees.

Some companies will use the loss of the tax benefit for high earners in final-salary pension schemes to reduce deferred pay all round. But many will not. They will just find other ways of doing it, and because the tax break is gone, it will become even more expensive to fund than ever. Hey ho.

EasyJet losses

EasyJet sank deep into the red during the first half, against a £1m profit in the same period last year, but it would be premature to start writing the company's obituary. Number of passengers up 40 per cent, number of aircraft up 38 per cent, load factor up from 81 to 82 per cent even taking account of the increase in aircraft, revenues up 25 per cent, costs down 8 per cent, net cash up to £280m ­ these are not the sort of numbers associated with a company in its death throws.

The loss is mainly down to an 11 per cent fall in the average yield per passenger, due to stiff price competition. Michael O'Leary, chief executive of Ryanair, reckons he's got easyJet on the run. Bullocks, says easyJet's Ray Webster, who claims the two low-cost operators serve completely different markets. For the time being the stock market is more with Mr O'Leary than Mr Webster, but it wouldn't pay to underestimate the quietly spoken Kiwi. EasyJet is here to stay, however much Mr O'Leary might like to be the only no-frills operator left in the sky.

jeremy.warner@independent.co.uk