Cemex UK Operations Limited v Secretary of State for Transport

The following case was referred to in this decision: Cemex UK Operations Limited v Secretary of State for Transport [2025] UKUT 138 (LC) Introduction to the final decision

1. This decision is the sequel to the Tribunal’s interim decision (the “ID”) of 2 May 2025, following the hearing in January and February 2025, Cemex UK Operations Limited v Secretary of State for Transport [2025] UKUT 138 (LC) . This final decision takes the ID as read, cross-refers to it, and uses the same defined terms; it is not written as a self-contained document and cannot be understood by itself.

2. In the ID we expressed the hope that there would be no need for a further hearing. Alas, it was not to be. In July 2025 the forensic accountants – Ms Sara Fowler for the claimant and Mr Adam Smith for the compensating authority - produced further reports as directed, setting out their opinions about loss of profit in light of the Tribunal’s findings in the ID. Each report was about 100 pages long and each had another 100 pages of appendices. Whereas in February the claimant asserted a £59.2 million loss as a result of the compulsory acquisition while the Secretary of State argued for a £4.5 million gain, the gap has now narrowed; for the claimant Ms Fowler asserts a loss of £30,531,000 while for the authority Mr Smith now accepts that the claimant has made a loss, and puts it at £10,359,000. The parties are now therefore just over £20 million apart. Despite that narrowing, the notion of compromise, or even a willingness to agree elements which in our view were plainly in scope for accommodation, remained disappointingly elusive. The depth of disagreement remaining between the parties can be seen from the fact that when asked, shortly before the hearing, for an agreed list of issues for the Tribunal to determine they were unable to produce one.

3. We heard the accountants’ evidence, and the advocates’ closings, at a resumed hearing on 1 to 3 September 2025. Again we are most grateful to counsel whose digestion of the mass of evidence and supporting material has made it possible for us to write this decision. The structure of this decision

4. We have to decide how much profit or loss the claimant has made and will make in the real world, and how much it would have made in the no scheme world. We explained at paragraph 39 of the ID: “we cannot reach a final determination because we have not yet heard evidence about the claimant’s costs, which will generate sums for profit and loss, of which the future elements have to be discounted to give an overall figure at the valuation date. That missing evidence will be supplied by the forensic accountants from whom we have yet to hear…”

5. The evidence the accountants have now given has, as we said above, left the parties about £20 million apart. The accountants’ rival positions can be summarised as follows: Table A No scheme world profit £’000 Scheme world profit £’000 Claimant’s loss £’000 Ms Fowler 45,666 15,135 (30,531) Mr Smith 26,127 15,769 (10,359) Difference 19,359 634 (20,172)

6. It can be seen that while the accountants are (relatively!) close to each other’s assessment of the claimant’s financial position in the scheme world they are over £19 million apart in the no scheme world. The two worlds are further divided by the accountants into the pre- and post-acquisition periods, pre-acquisition being 1 April 2017 to 31 December 2019. The post-acquisition period is further split into the closure period (1 January 2020 to 31 March 2022) and the current/future period thereafter. Both accountants started from our findings about the volume; they have converted our figures from Network Rail’s financial years (beginning on 1 April each year) to the claimant’s financial years which are calendar years; thus in our paragraph 122 in the ID our volume of 370,000 for 2027/28 has become 365,000 in 2027.

7. Both accountants have provided their opinions on the cost of producing sleepers in both worlds. There is a major difference; it relates, in summary, to the purpose of volume surcharges, and specifically whether the surcharges imposed at low volumes (see paragraph 21b of the ID) operate only to preserve a constant profit margin per sleeper or whether they generate an additional margin per sleeper so as to sustain the profitability of the business as a whole. That disagreement accounts for all but about £3 million of the distance between them in their assessment of the claimant’s loss, and an examination of that difference and the reasons for it occupied most of the time spent in the hearing in September 2025.

8. The rest of the distance between the two parties is accounted for by differences in the accountants’ approach to a number of points which we were not able to decide in the ID because we were offered no evidence about them. For example, we heard evidence only about sleepers sold to NR and not about sales to other customers such as TfL, and we made no decisions about the claimant’s sales of specialist sleepers, which command higher prices. The accountants have had to fill the gaps by making some assumptions, and have made different ones. Again, a degree of co-operation might have been expected.

9. Our decision addresses first the major difference between the accountants in their approach to costs and the function of surcharges. We then look in turn at their evidence specific to four periods, or quadrants as Mr Glover KC called them: pre- and post-acquisition, in the scheme world and then in the no scheme world.

10. We have not attempted to show the accountants’ workings. The theoretical basis is simple: revenue = volume x price; revenue less cost = profit or loss. But the accountants’ calculations of each of those elements is immensely complex, involving hundreds of Excel worksheets. To set out just the calculations involved in determining the sleeper mix for different periods, for example, would take several pages, and to set out even a simplified version of the whole of the accountants’ calculations would have more than doubled the length of this decision. Instead, we have decided the issues between the accountants and have been able to generate a final figure as a result of the outcome of those issues, on the basis of the information the parties provided about the financial implications of those issues. The parties have checked the total on sight of the draft decision.

11. There are some issues between the parties which they do not ask us to decide because their cumulative effect is negligible; they are the date of commencement of the P3 contract at WWH in the no scheme world, as to which the accountants differ by a few weeks (again, this surely was capable of agreement); adjustments for vertical integration (by which the parties refer to the fact that the business at WWH used cement produced at WWH); rent paid by the claimant for leasehold properties; and the mix of sleepers sold from Rochester in the SW.

12. There is one further issue that we did not decide in the ID, namely whether the P3 contract at WWH in the no scheme world would have had volume surcharges. We decided that the prices in that contract would be those set out in the non-compliant P2 bid for production at WWH, adjusted for inflation (paragraph 189 of the ID). We did not notice that that bid did not include volume surcharges. The compliant bid took the form of a number of Excel spreadsheets, prescribed by NR. The claimant had to provide a number of sheets setting out the price and of the costs of producing all the types of sleeper to be sold under the contract (costs being split into fixed, semi-variable and variable) and the profit the claimant proposed to make, all at the assumed volume of sales set out in the ITT, which in the case of the P2 ITT was 480,000 per annum (being 450,000 to NR and 30,000 to TfL). Another of the sheets provided by NR set out the volume bandings at which, if it chose to do so, the claimant could impose a surcharge for volumes from 300,000 to 400,000 per annum and between 200,000 and 300,000 and offer a discount if more than 500,000 were purchased in a year. In the compliant bid the relevant boxes were filled in, stating that there would be a 10% and a 20% surcharge for the two lower volume bands, but with no discount offered for higher volumes.

13. The non-compliant bid took the form of a letter setting out a range of prices, with no mention of surcharges. Nothing was said at the February hearing about the absence of provision for surcharges in the non-compliant bid, and it may be that it escaped the notice of others as well as our own. In their evidence for the September hearing both Mr Jarvis and Mr Heubeck gave evidence that there would have been volume surcharges in the no scheme world P3 contract. Both accountants agreed that that would have been the case. We are content to proceed on the basis of that agreement, which we think is correct. As will be seen, this is a significant point.

14. The accountants have also agreed their approach to the adjustment of figures for inflation where necessary (being CPI inflation to the end of FY23, and 2% thereafter). They also agree their method of discounting, and that sums are to be discounted back to 15 May 2020.

15. Both accountants use the term “OCF” (operating cash flow) as a synonym for profit; both refer to “margin”, which is the profit earned per sleeper expressed as a percentage.

16. With that groundwork laid, we proceed to the issues we have to decide as set out above. (1) The accountants’ approach to costs and the function of surcharges Some general points

17. The following table sets out, for FY12 to FY19 (i.e. the “pre-acquisition” period) the number of sleepers sold to NR, the cost to the claimant per sleeper and the profit margin per sleeper, derived from the management accounts. The cost is calculated by taking into account the range of sleeper types sold and the proportion each type bore to the total sales volume, so it is a composite figure rather than representing the cost of a single identifiable sleeper; it is expressed after adjustment, for inflation, to a base year of FY17. The costs are taken from Mr Smith’s Appendix AS4A.2a(iii), and the OCF and margins from Ms Fowler’s Table 6 but we believe both sets of figures are agreed save for some minor differences in the accountants’ assessment of the claimant’s financial results for this period, which we discuss below but are not material at this point. Table B Year FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Volume 511,320 565,106 595,439 409,286 389,973 352,105 249,020 255,006 Cost per sleeper (£) 30.32 30.09 29.95 31.49 30.88 30.65 35.63 32.69 Total OCF (£) 4,880k 5,565k 3,916k 4,352k 5,412k 4,516k 5,486k Margin 23% 24% 28% 34% 33% 39%

18. The accountants used the management accounts for these years in order to derive the cost of producing a sleeper. Both sought to determine a figure, for use as a starting point, that was not distorted by unusual circumstances, in particular the scheme itself. Ms Fowler took the costs in FY16 (£30.88) while Mr Smith took the average of the costs in FY15 to 17, which he said was £32.50 adjusted for inflation to FY20 excluding distribution costs or £30.39 unadjusted for inflation and inclusive of distribution costs.

19. What the two accountants then had to decide was whether that cost could simply be applied to the volumes determined by the Tribunal. On that point they differed profoundly. They could not agree how costs behave when volumes change; do they remain constant, or does the cost per sleeper change when more or fewer sleepers are produced? As we said above the accountants are over £19 million apart in their assessment of the profitability of the no scheme world, and the vast majority of that difference arises from their different answers to that question. Ms Fowler’s approach to cost and volume

20. Ms Fowler’s answer was that cost per sleeper remains constant and total costs therefore vary in proportion to volume because the claimant is able to manage down its costs as volumes fall. So a single cost per sleeper holds good however many sleepers are produced, subject to inflation and type of sleeper.

21. We mentioned at paragraph 12 above that the claimant described its costs in the P2 bid documents as fixed, semi-variable and variable. It did the same in the management accounts, although we have shown just the totals in table B above. Ms Fowler’s position was that nevertheless pretty much all costs varied with volume. They would also vary with types of sleepers, some being more expensive to produce than others, but essentially everything was variable; she could not identify from the accounts a “floor” below which costs would not fall however low volumes sank.

22. That is significant because at the volumes predicted in the scheme world and in the no scheme world volume surcharges will apply. Ms Fowler’s view was that additional profits made from price surcharges at low volumes are not eroded by additional cost. For Ms Fowler, the relationship between price and margin can be seen in Table B when comparing the similar OCF achieved in FY14 and FY19 of £5,565k and £5,486k despite volumes being 595k units and 255k units respectively.

23. Interestingly, Ms Fowler considered what her position would be in case she was wrong about that and there was in fact a “floor” below which the cost per sleeper would not fall. She calculated that if a “floor” was reached at an annual volume of 200,000 sleepers then her assessment of loss would fall by just £400,000; if the floor was reached at 225,000 then her assessment of loss would fall by £1.5 million. Both those figures are well below the difference between Ms Fowler’s and Mr Smith’s assessment of loss, because Mr Smith’s approach assumes that unit costs rise as volume falls at all volume levels.

24. Ms Fowler has made three reports in these proceedings; her first (“SF1”) dated 31 July 2024, her second (“SF2”) on 20 November 2024 and her third (“SF3”) on 19 July 2025 following the ID. There is no inconsistency between her reports in terms of her treatment of the relationship between costs and surcharges. However, in her reports before the ID she assumed a constant volume of sleepers post-acquisition in the no scheme world (apart from a drop in volumes in FY20 and FY21 because of the pandemic), and so did not have to look at variation in volumes; moreover, as she candidly admitted in cross-examination, in her earlier reports she did not discuss surcharges because she “missed them”, which we took to mean she had forgotten about them, which is why her assessment of loss in the no scheme world has increased. Mr Smith’s approach to cost and volume

25. Our account of Mr Smith’s evidence is necessarily lengthy because his approach to this issue has changed significantly since he made his first report in these proceedings in July 2024, and we have to endeavour to explore what has happened. Mr Smith’s evidence in July 2024

26. In his first report dated 31 July 2024 (“AS1”) Mr Smith took the same view as Ms Fowler: cost per sleeper is constant, and total costs vary with volume. At this stage he was looking at very low volumes indeed, because Mr Heubeck’s opinion in his first report was that the claimant would sell 100,000 sleepers per annum for the future, in both worlds.

27. Like Ms Fowler, Mr Smith observed that the management accounts include costs categorised as “variable” and “fixed”, but asserted that there appeared to be a correlation between the quantity of sleepers sold and the changes in costs classified as fixed, so that the latter were better regarded as "semi-variable". For example, between FY13 and FY14 there was a drop in sleeper volume of 5%, and fixed costs reduced by 6%; between FY15 and FY16 volume dropped by a further 10% and fixed costs reduced by 11%. He supplied the following diagram to demonstrate that costs classed as “fixed” and “variable” track each other, and very closely:

28. At his paragraph 5.24 Mr Smith said: “As I am unable to identify reliably any significant fixed costs that do not vary with volumes sold, for my assessment I assume that all costs associated with the Sleeper Business are variable in nature.”

29. He added that the only cost that did not fall significantly when volumes drop was insurance, which is insignificant (both accountants treated rent differently, and agree on their treatment of it, so we do not need to be concerned with it). Staff costs, he said, were classed in the accounts as fixed costs but were not fixed: “I would expect management to be able to manage the size of the workforce in line with longer term expectations of demand”; and he referred to Mr Heubeck’s comment in his first report that Cemex would have reduced staffing to match demand.

30. Mr Smith made use of the claimant’s own forecast for the Rochester business in order to ascertain the costs to be anticipated in the scheme world in the future. We have no information about the provenance of this document except for Mr Smith’s description of it as “a forecast document which I understand to have been prepared ahead of the relocation to the Rochester site.” Mr Smith repeated at paragraph 5.69 that his approach was “to treat all costs in the Rochester Forecast (both variable and fixed) as variable costs that move in line with the volume of sleepers adopted in my assessment. … i.e. the average cost of £28.16 would remain the average cost per sleeper at any volume ” (our emphasis). Again at paragraph 5.71: “As my approach adopts an average cost per sleeper that remains constant at different volumes my OCF per sleeper remains the same whether 100k or 350k sleepers.” It is important to appreciate that he was assuming a constant volume of sleepers; he was not saying at paragraph 5.71 that margin per sleeper remains the same at all volumes while costs vary. He was saying that because cost is constant, OCF per sleeper is constant. He acknowledged that if there were any costs that did not vary with volumes then he might have overstated the performance of the claimant’s business at Rochester in the future, but that this would be balanced out by the fact that he had done the same in the no scheme world.

31. As to the no scheme world, Mr Smith adopted an average cost per sleeper from FY15 to FY17 as his starting point, as we said above, and took that as £30.39 in AS1. He calculated price for the post-acquisition period in the no scheme world from the 2019 WWH offer letter (see paragraph 33 in the ID) in line with Mr Heubeck’s opinion.

32. On that basis Mr Smith made the following calculations for the years from 2024 to 2030 (where his predictions ended in AS1) in both worlds. He deducted from the relevant price a cost per sleeper of £28.16 in the scheme world and £30.39 in the no scheme world. That produced a profit per sleeper of £5.57 at Rochester in 2022 (paragraph 5.78 of AS1), rising with inflation thereafter, and of £0.64 at WWH in the no scheme world in 2022 (paragraph 5.150 of AS1) – which makes it easy to see why the compensating authority asserted that the claimant had made a profit out of the compulsory acquisition. The Tribunal has rejected Mr Heubeck’s predictions both of volume and of price, but the important point here is that Mr Smith had no difficulty in his first report in adopting a cost, from the management accounts for the no scheme world and from the Rochester Forecast in the scheme world, and applying that cost per sleeper, adjusted only for inflation, to the starkly low volumes predicted by Mr Heubeck.

33. There were no volume surcharges in the 2019 bid letter, and in AS1 Mr Smith did not suggest there would be any in the no scheme world. As to the scheme world, the Rochester contract does contain volume surcharges, and Mr Smith said this: “5.70 As noted at paragraph 5.59 above, the Rochester Contract allows for different prices depending on expected annual sales volumes to NR, whereby higher volumes of orders attract a decreased price (and vice versa). I assume this volume related price adjustment is to reflect that there are certain costs that cannot be managed directly in line with volumes and, for example, relatively higher prices for lower volumes enables the supplier to retain approximately the same levels of profitability on a per sleeper basis … 5.71 As my approach adopts an average cost per sleeper that remains constant at different volumes my OCF per sleeper remains the same whether 100k or 350k sleepers, i.e., maintaining a level of profitability per sleeper on lower volumes. Therefore, I do not consider it necessary to adjust my assessment of price derived from the Rochester Forecast for a volume adjustment.”

34. This is the one point in AS1 that might appear to resonate with the approach Mr Smith took in AS2 and AS4, and indeed Mr Glover KC referred to it in re-examination of Mr Smith at the hearing. It is quite difficult to understand what Mr Smith meant in paragraph 5.71, given his consistent view in AS1 that the cost of making a sleeper is the same at all volumes. He may have been saying that surcharges were imposed in the belief, on the claimant’s part, that unit cost actually did rise with volume, and that since he disagreed with that view he had not adjusted his price to reflect the volume adjustment. Or he may have been saying that if in fact, contrary to his view there was a rise in cost, then it was taken care of by the surcharge and did not need to feature in his calculation. We do not know exactly what he meant, and indeed it may be the case that Mr Smith had not at this stage given very much thought to the role played by surcharges. Mr Smith’s evidence in November 2024

35. In November 2024 Mr Smith wrote a further report (“AS2”), in the light of new evidence and information. By now Mr Heubeck’s predicted volumes were a little higher, rising to 147,000 per annum in CP9 in the scheme world and to 171,500 in CP9 in the no scheme world. CP9 will end in 2039, so in both worlds the business was now assumed to continue rather longer than it had done in AS1. Some of the information available to Mr Smith about the mix of sleeper types had changed. He made the stockpiling adjustment to which we referred in paragraphs 64 and 87 of the ID. And he re-calculated prices, partly in view of new information about sleeper mix, by making an adjustment for an extra charge for USPs on 25% of the sleepers, and also on the basis that the volumes predicted would attract a 5% surcharge (footnote 200 to the table at paragraph 6.28). His new weighted average price was £49.69 for Rochester in the scheme world from FY24 onwards, and £36.22 under the P3 contract at WWH from FY20 onwards.

36. As to costs in AS2, Mr Smith’s starting points remained the same: the average of FY15-FY17 in the no scheme world, and the Rochester forecast in the scheme world. But the way those costs were expressed underwent a significant change.

37. At paragraph 5.18 he said that in light of the way Ms Fowler and the sleeper experts presented their evidence he had revised his approach and would now “assume that OCF per sleeper is a constant percentage … rather than an absolute fixed amount.” At 6.46, looking at the scheme world, Mr Smith said: “My updated approach is that rather than calculating OCF per sleeper on an absolute basis (i.e., £5.57 per sleeper), as indicated above, I instead use a percentage margin taken from the average price and OCF in the Rochester Forecast. I then apply this margin to my updated assessment of the Scheme World price. I calculate the percentage margin expected in the Rochester Forecast as 17%.”

38. £5.57 is 17% of £33.73, which was the price Mr Smith used in AS1, because cost per sleeper was £28.16. So where he had taken the margin to be £5.57 in 2024 in Rochester, he now took it to be 17%, and then applied that 17% margin per sleeper to all future years in AS2; obviously that means costs amounted to 83% of price. He did so despite the fact that he was now using a higher price. In paragraph 6.49 of AS2 he said: “As in AS1, I assume throughout my assessment, in both Scheme World and No Scheme World, that all costs vary with volumes, and therefore the same margin (in percentage terms) would apply on lower volumes”.

39. But that “therefore” does not follow. He said in AS1 that cost per sleeper remained the same no matter how many sleepers were produced (so that total costs vary in line with volume; paragraph 30 above); he claimed in AS2 to be making the same assumption, and claimed that further information now made available to him confirmed that costs defined as “fixed” vary directly with volumes (paragraph 4.29, and again at 5.15). Yet if that was the case then the profit per sleeper (whether expressed as a sum of money or as a percentage) would rise when prices rose. Mr Smith’s “weighted average price” in AS2 was £49.69 in the scheme world at Rochester. If cost remained the same, i.e. £28.16, the profit would be £21.53 or 43%. Yet Mr Smith assumed a constant margin per sleeper of 17% whatever the price. He claimed to have made the same assumption as in AS1 about the behaviour of cost when volumes change, yet his new approach to cost as a constant percentage of price is incompatible with the assumption he made in AS1.

40. As to the no scheme world, Mr Smith again assumed a constant margin, expressed as a percentage, rather than a sum in money as he did in AS1. But this time he calculated it by subtracting the cost derived from the management accounts, now taken to be £32.50, from a new weighted average price for FY20 of £36.22. Subtracting one from the other gives a profit per sleeper of £3.73, or a margin of 10%. So the margin, this time, is calculated by reference to a price that has been updated by reference to new information/assumptions about the sleeper mix and the additional charge for USPs. When calculating the overall profit of the business, however, Mr Smith applied volume surcharges (which were not set out in the 2019 WWH bid letter, but which he constructed, by analogy with the ones in the Rochester contract). The volumes predicted by Mr Heubeck were still very low and a volume surcharge would have been payable every year from FY20 to FY36; for example, the weighted average price in FY20 was stated to be £35.58. Therefore all the prices in that period would have been higher, according to Mr Smith, than the price he used to calculate the margin per sleeper.

41. Accordingly, again, Mr Smith applied a percentage margin per sleeper calculated by reference to a lower price than the one he says would in fact have been charged. If it remained his view that cost per sleeper does not vary with volume, it must follow that that cost would not vary with volume surcharges and that the margin achieved, per sleeper, at lower volumes would have been higher than his 10%. But he did not say, in AS2, that his view of the way costs behave had changed. Mr Smith’s evidence at the September hearing

42. Mr Smith made a further report in January 2025 (“AS3”) which we do not need to look at in this context. His latest report of 21 July 2025 (“AS4”), made in preparation for the September hearing and in light of the findings in the ID, set out a new explanation of the behaviour of costs as volumes change.

43. In AS4 Mr Smith began with the proposition that, generally speaking, costs fall into three broad categories: fixed costs which do not vary with the volume of sleepers produced (for example rent and insurance), costs that vary directly with volume (such as raw materials), and semi-variable costs that vary with volume but not in direct proportion to it (for example, machinery hire will be fixed across a range of volumes but then an extra machine will be needed once volumes rise beyond a certain point). Therefore, he said, it was “my expectation, based on my experience, that in terms of general behaviour in heavy industry or manufacturing unit costs increase with lower volume” (paragraph 2.14).

44. He then turned to the available management accounts and said that the information available “is not sufficient to enable me to assess the ‘elasticity’ of costs at different production levels and therefore model how different categories of costs behave as volumes change” (paragraph 2.18). That statement appears to follow from two difficulties; one was that the volumes determined by the Tribunal were in his view too low for the real world data to indicate how costs would behave at those volumes, and the other was that he found it difficult to say which costs were truly fixed; many of those described as “fixed” in the accounts were not in fact fixed, and there were a number of semi-variable costs which must have a fixed element. Therefore, he said at paragraph 2.18, “I need to make an assumption in relation to cost behaviour in order to model costs”.

45. Mr Smith then turned to the volume surcharge in the claimant’s contracts and asserted that it provided helpful evidence because “one of the reasons” for the surcharge is to protect the claimant’s margin per unit from erosion as a consequence of the expected increase in unit costs at lower volumes. At paragraph 2.20 he said: “I assume that with the support of the volume surcharges, the margin % achieved by Cemex from sleeper sales remains constant at all levels of production.”

46. That was the assumption he made in AS2, where he claimed to be treating cost in the same way as he did in AS1 but in fact assumed that it rose as volumes rose (which follows from the assumption that margin remains constant), although in AS2 he did not justify the assumption by reference to volume surcharges and indeed did not acknowledge that his assumption was inconsistent with his position in AS1.

47. Returning to AS4, Mr Smith said that in making that assumption of a constant margin he relied on evidence from the management accounts, on the bid documents, and on the evidence given at the February hearing. His point about the management accounts and the bid documents was that both of them separate costs into fixed and variable. As to the evidence given at the hearing, this was given by Mr Neil and Mr Heubeck and we come back to it later.

48. Mr Smith further explained that he was using volume surcharges as a “proxy”; his assumption is that the purpose – indeed the only purpose - of the volume surcharge is to pick up the extra cost incurred by the claimant at lower volumes, as a result of the fact that some costs are fixed and do not vary with volume. In other words the purpose of the surcharge is to protect the claimant from the erosion of its profit margin per sleeper at lower volumes (as a result of the fact that fixed costs do not fall).

49. It must follow from the assumption of a constant margin that as volumes fall the claimant would make less overall profit; but Mr Smith was confident that the customer, NR, would not tolerate price increases except in order to cover the supplier’s costs (paragraph 5.57).

50. Mr Smith then had to determine the margin at which the claimant will operate in the real world from 2024 when the management accounts come to an end, and in the no scheme world past and future. He predicted a 16.5% margin for the future at Rochester, calculated a 22.7% margin for the no scheme world before the start of the P3 contract at WWH, and an 18.5% margin for the P3 contract and its extension to 2036 in the no scheme world.

51. It is not clear to us how the 16.5% margin for Rochester was calculated; it is said (at AS4 paragraph 6.34) to be taken from the Rochester forecast. It is not far from Ms Fowler’s assessment of cost and pricing for the future at Rochester which gave rise to a margin of 16.3%. For brevity therefore in the rest of this analysis we look only at Mr Smith’s calculations in AS4 for the no scheme world.

52. As to the pre-acquisition period, Mr Smith calculated a weighted average price of £39.31, using the prices determined by the ID without a volume surcharge and on the assumption that the mix of sleepers sold would continue to be the same as in FY16 (we say more about this later). From that he subtracted the cost calculated from the management accounts for FY15 to FY17, this time reverting to the original £30.39, to give a profit of £8.92 or 22.7%. This, he said, would be the margin at all volumes during this period.

53. At paragraph 112 of the ID we set out NR’s requirements (the same in the real world and the no scheme world) for sleepers in the three years from 2017/18 to 2019/20: 400,000, 450,000 and 440,000, and we determined at paragraph 173 that the claimant would have supplied 50% of that market. It is likely that that would have attracted a surcharge (although we made no findings in the ID about the precise terms of the extension contracts that would have been in operation at that date). The effect of applying a constant margin is that of any additional charge at low volumes only 22.7% is profit and 77.3% is additional cost. Ms Fowler’s approach, by contrast, assumes that the whole of the surcharge represents additional profit because all costs vary with volume.

54. Turning to the post-acquisition period from FY20, when the claimant would be operating at WWH under the P3 contract in the no scheme world, Mr Smith took his new weighted average price of £37.70, again without reference to volume surcharges, subtracted the now-familiar £32.50 (we cannot comment on the apparent toggling between this and £30.39) to derive a profit of £5.20 or 13.8%.

55. Then Mr Smith modified the calculation by reference to volume surcharges (the first time he had done so in calculating any of his margins). He acknowledged that his cost was generated from the WWH management accounts in FY15 to FY17 when an average of 380,000 sleepers were sold per annum. Assuming (as we have accepted we should assume, see paragraph 12 above) that the non-compliant P2 bid includes the surcharges specified in compliant bid, an output of 380,000 sleepers would fall within the 300,000 to 400,000 band and would therefore attract a surcharge of 10%.

56. Putting the weighted average price up by 10% (but before adjustment for USPs; we know not why) gives a price of £40.64, and a profit of £8.14 or a 20% margin. That he, said, was probably an overstatement because profit would only be at that level at the top of the volume banding; 13.8% was likely to be an understatement since the price in the P2 non-compliant bid assumes a volume of 450,000 per annum, higher than the volumes on which the cost was derived. He took the view that the correct margin would be near the upper end of the 13.8% to 20% range, and so between 16.9% (being the average of the two figures) and 20%, he adopted 18.5% as the mid-point.

57. That margin of 18.5% was then applied throughout the WWH P3 contract period at all volumes, including those where the volume surcharge would in fact be 20% - which would have been the case throughout the P3 contract: see our findings at paragraphs 122 and 206 of the ID about NR’s requirement for sleepers and the market share the claimant would have achieved. Mr Smith’s assumption of a constant margin involves an assumption that 81.5% of the additional cost paid when the surcharge is applied represents fixed costs which do not vary with volume. Ms Fowler’s approach, by contrast, assumes that the whole of the surcharge represents additional profit because all costs vary with volume.

58. Two things strike us as extraordinary about Mr Smith’s evidence. The first is his change of view between AS1 on the one hand, and AS2 and AS4 on the other, about the behaviour of costs when volumes fall. In AS1 he expressed no discomfort about using the management accounts to predict costs at volumes as low as 100,000 per year. Yet he now professes to be unable to use the management accounts to predict cost at the volumes determined by the Tribunal, which are higher than those he was using in AS1 and some of which are higher than those seen in FY18 and FY19. Moreover in AS1 he treated cost per sleeper as a constant sum of money, the same no matter what the price (see paragraph 30 above), whereas in AS2 and AS4 he treated it as a constant percentage of price and therefore rising, per sleeper, as prices rise at low volumes.

59. The second extraordinary feature of Mr Smith’s evidence is the absence of explanation of that change of view. It seems to have occurred at some point between AS1 and AS2, yet it is neither explained nor even acknowledged in AS2. It is actually denied; we do not know whether Mr Smith was aware of the inconsistency, but at any rate in AS2 he claimed to be taking the same view of cost per sleeper as he did in AS1. We are left wondering why his view changed so radically between June and November 2024 and why he either did not recognise that change or chose to deny it. His new view of the relationship between cost and volume is explained in AS4, but there is no acknowledgement in AS4 that his current view is different from the one he took in AS1, nor any indication of what it was that made him change his view. Indeed, at paragraph AS4A.2c.5 he asserted that in AS1 he had worked on the basis that costs per unit increase as volumes fall and that the surcharge simply offsets rising costs (so that margin is eroded). That is in direct contradiction to what he said about cost in AS1. Mr Smith was asked in cross-examination about the inconsistency of his current evidence with what he said in AS1, and his response was that he took the view he expressed in AS1 out of necessity, because of the absence of information in the accounts. We accept that that is what he now thinks about what he did in AS1, but we do not believe that that was what he thought when he wrote AS1 because he did not say in AS1 that he was taking that approach out of necessity; he gave clear, positive evidence that all costs vary with volume, and that the cost of producing a sleeper in the no scheme world would be £28.16 (subject to inflation) however many sleepers were produced.

60. Neither of those features of Mr Smith’s evidence inspires confidence.

61. We turn to look at some of the points of comparison between the accountants’ approach to costs. The accountants’ views compared: (a) the management accounts

62. The parties expressed disagreement with each other’s forensic accountancy expert on a great number of points, and we focus here on the most important ones. First, each said that the other’s evidence was inconsistent with what can be seen in the management accounts about the behaviour both of margins and of costs when volumes change.

63. Here for ease of reference is Table B again. Table B Year FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Volume 511,320 565,106 595,439 409,286 389,973 352,105 249,020 255,006 Cost per sleeper 30.32 30.09 29.95 31.49 30.88 30.65 35.63 32.69 Total OCF 4,880k 5,565k 3,916k 4,352k 5,412k 4,516k 5,486k Margin 23% 24% 28% 34% 33% 39%

64. It will be recalled that the 2012 contract was in effect until the end of March 2017, and was followed by a series of short-term contracts until operations at WWH came to an end. Volumes dropped from FY16 onwards. Ms Fowler pointed out that margin rises to 33% and then 39% in FY18 and FY19; on her thesis, margins rise as price rises. Ms Fowler was able to demonstrate that had the 2012 contract still been in effect in 2018 and 2019 the prices and margins (at least in FY17 and FY18) would have been very close to what they were under the short-term contracts; price would have risen as volume surcharges took effect. Ms Fowler accepted that the 24% margin in FY15 was in line with the preceding years, despite there being a surcharge in effect that year; she agreed that a surcharge will not always raise the margin but said that other factors are also at work.

65. Mr Smith did not accept that the margins seen in the real world during this period supported Ms Fowler’s view. He focused instead on the years from FY12 to FY15 where margin is constant despite the fact that there would have been a volume surcharge in 2015. He attributed the raised margin in 2016 to a fall in variable unit costs rather than to the volume surcharge that would again have been in effect. As to FY18 and FY19 Mr Smith argued that these years do not represent normal trading as business was being done in the shadow of the scheme. However, he conceded in cross-examination that there was no evidence of a constant profit margin relationship between price and costs.

66. We agree with that concession. In our view the margins seen in the real world pre-acquisition do not support Mr Smith’s thesis; only FY15 could do so, and the evidence from the following years is that Cemex’s pricing is designed not just to sustain a constant margin, but also to support the profitability of the business. The fact that the prices in the last couple of years are under separate contracts does not detract from that.

67. The next table sets out some, but not all, of the components of the cost per sleeper, labelled as they are labelled in the management accounts; these components were the ones referred to in cross-examination. All are taken from Mr Smith’s appendix AS4A.2a(iii); the final line, “Wages etc” is an amalgam of three of his categories: Table C Year FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Fixed cost per sleeper 12.56 11.63 11.55 12.67 13.80 12.77 14.39 13.4 Selling costs 0.20 0.22 0.28 0.37 0.35 0.38 0.47 0.82 General & Admin Costs 0.31 0.21 0.22 0.29 0.33 0.31 0.44 0.32 Wages etc 7.42 7.18 7.53 8.37 8.3 8.45 9.43 8.12 Other fixed costs 1.02 0.84 0.76 0.9 0.85 1.04 0.74 0.79

68. Each party used these costs figures to put their own case about costs to the other’s accountant. So Mr Glover KC put it to Ms Fowler that unit cost decreases with higher volumes and increases with lower volumes. Thus the figure for “Other fixed costs” is £0.76 in FY14, the highest volume year, and is £1.04 in FY17, the lowest volume years. However, as Ms Fowler pointed out in response, the figure for FY12 when volume was high was £1.02, and in FY18 and FY19 both volumes and costs are down. In FY16 this cost is £0.85 at 390,000 sleepers, and £0.84 in FY13 at 565,000. Accordingly Ms Fowler saw no correlation between “other fixed costs” and volume.

69. Turning to “Selling costs”, again Mr Glover KC pointed out that as volumes decrease from FY14 to FY17, selling costs increase from £0.28 to £0.38; and “General & Admin costs” exhibit a similar trend. Ms Fowler pointed out that that cost in FY12 is the same as in FY17, and remained of the view that there is no relationship between cost and volume.

70. Mr Humphries KC used a different line in the table; he put it to Mr Smith that the figure for “Fixed costs per sleeper” for FY12 is much the same as that for FY17, at very different volumes, and that that was inconsistent with his view that fixed cost per sleeper must rise when volumes fall; and Mr Smith agreed. Likewise the numbers on this line in FY16 and FY19 are very similar, again at differing volumes.

71. Wages/salaries was the largest component of the total cost per sleeper. Below is Mr Smith’s depiction of the total cost to the business of wages and salaries, which on Ms Fowler’s thesis should decline with volume and which Mr Smith thought (in contrast to his view in AS1, see paragraph 25 and following above) must have a fixed component because there would be a “minimum headcount” to operate a shift.

72. Mr Glover put it to Ms Fowler that this shows that there is no direct relationship between wages/salaries and volume, and that the two diverge as volumes fall; Ms Fowler took the view that there was a “pretty close” relationship. Mr Humphries KC put it to Mr Smith that this graph shows a very close relationship between falling volumes and falling costs; Mr Smith asserted that there is a divergence, but as Mr Humphries KC said it is very small.

73. Mr Smith produced a number of graphs showing that some categories of cost do rise in FY18 and FY19 as volumes fall, for example insurance, and general admin costs. But as Mr Humphries KC pointed out, those costs are, relatively, very small – tens of thousands per annum for insurance, up to £300,000 per annum for general admin – whereas the costs of wages and salaries runs to millions, and does not rise as volumes fall.

74. So far as evidence of costs and their relationship to volume is concerned, we find that the evidence from the management accounts supports Ms Fowler’s view rather than Mr Smith’s. There is no trend for unit costs to rise as volumes fall;, and it is not possible to identify a category of costs that is fixed and remains constant, across the business, as volumes fall. Such variation as there is supports the view that costs are very largely, if not entirely, managed down by Cemex. The accountants’ views compared: (b) other evidence

75. We mentioned above (paragraph 47) that Mr Smith relied not only on the management accounts but also on evidence given to the Tribunal by other witnesses.

76. At the hearing in February Mr Neil explained volume surcharges as follows: “Normally when we get a tender, it asks for a volume annually, which could be 500,000 sleepers a year, 600,000 sleepers a year. But to price it, we have to pick a price point where we can actually price a product. We can get a variable cost, but our fixed costs are then amortised over a volume. So we pitched an optimum volume of 350,000 sleepers, priced accordingly with our fixed and variable costs and our profit margin, and then if Network Rail bought below the optimum price volume, there was a surcharge in a band, which you can see at the top of the page. If they dropped from 300,000 to -- well, between 349,999 and 300,000 sleepers, there was a surcharge of 12 per cent". “And equally when they went up through the bands, then the further reductions would apply. So there's an incentive if they bought more, and a penalty if they bought less. But again, that was to amortise fixed costs that we were trying to recover.”

77. That view is consistent with Mr Smith’s position in AS2 and AS4, as indeed Ms Fowler acknowledged, and Mr Smith relied upon it. Mr Humphries KC put it to him that Mr Neil’s view was not consistent with the management accounts, which – as asserted by Mr Smith in AS1 and by Ms Fowler – do not demonstrate that any costs are truly fixed (aside from rent and insurance whose effects are agreed to be negligible). Mr Smith agreed, and had to resort to the suggestion that “there may be certain costs that aren’t included in the management [accounts]. I have not been able to demonstrate that.”

78. Mr Smith also relied on what Mr Heubeck said about volume surcharges, which was: “These are designed to maintain profitability under a scenario where orders are more modest than anticipated, which would be especially important for a large, volume-hungry operation such as the factory at the Property."

79. Both experts were asked about this in cross-examination; to Ms Fowler, “profitability” refers to the profitability of the business, whereas to Mr Smith it means margin per sleeper. In other words Mr Smith took this comment as support for his proposition that the only purpose of the surcharge was to spread the claimant’s fixed costs over a lower volume of sleepers while maintaining the margin per sleeper.

80. In our view, Mr Heubeck’s evidence supports Ms Fowler’s view rather than Mr Smith’s. “Profitability” is a general term used more readily about a business than about the margin on a single unit (much as we used it above in paragraphs 7 and 19 above). Ms Fowler’s view accords with business sense; it is likely that Cemex in raising its prices for low volumes had an eye to the overall profitability of the business rather than just to the margin on an individual sleeper; indeed, to confine the price rise to cover that cost was to make it inevitable that if volumes fell there would be a serious down-turn in the financial health of the business. The accountants’ views compared: (c) Mr Smith’s worked example

81. Mr Smith gave what he described as a worked example of his assumption that margin per sleeper remains constant. He explained that for this to be the case the low volume surcharge has to be calculated to cover a little more than the increased cost per unit, so as to maintain the margin; a surcharge that only covered the increase in costs would erode the margin. He produced the following diagram which he said shows how this works, on the basis of the prices and surcharges in the P3 contract in the no scheme world at WWH, using (as the parties have agreed) the surcharges in the P2 Bescot bid:

82. The same example is expressed in the following calculation:

83. Neither the diagram nor the calculation is easy to understand. If we start with the latter, it seems that the idea is that the cost to the claimant of producing 450,000 sleepers at a margin of 18.5% is £30.73 per unit or £13,826,473 in total. But when 350,000 sleepers are produced, if the unit margin stays the same at 18.5% (as Mr Smith assumes) that means the unit cost is £33.80 (since cost = price less profit). The difference between that cost, and the cost of producing 450,000 sleepers, is £3.07 per unit or £1,075,392. And that, said Mr Smith, must be the fixed costs; that figure is about 8% of the total cost of producing 450,000 sleepers, which he regarded as a reasonable proportion; he therefore regarded this calculation as evidence that his assumption was reasonable. He performed the same exercise on the figures applicable when a 20% surcharge is incurred when only 250,000 sleepers are purchased; the implied fixed cost is £1,536,275 which is 11% of the cost of producing 450,000, which again he regarded as a convincing outcome. Those implied fixed costs are the blue sections in the diagram above.

84. We see two problems with this analysis. The first is that if the figures of £1,075,392 and £1,536,275 do represent fixed costs, they represent only a proportion of the fixed costs rather than the whole. Fixed costs are already included within the cost of producing 450,000 sleepers, and the additional cost per unit is only part of the total fixed costs (imagine producing 100 widgets with fixed costs of £10 in total or 10p per unit; if 50 widgets are made, the fixed costs attributable to each widget will be 20p, but the price rise (whatever it is, and whatever else it represents) has to cover only the extra 10p). So the two figures of £1,075,392 and £1,536,275 do not tell us anything about the total fixed costs of production; whatever they are, they cannot be either 8% nor 11% of the cost of producing 450,000 sleepers.

85. The second is the fixed costs of the business cannot be both 8% and 11% of producing 450,000 sleepers. The fixed costs of the business – as opposed to the fixed cost attributable to one sleeper – cannot vary. Unless the blue segments in the diagram above occur in each column and are the same size in each, they do not represent fixed costs.

86. In reality, the figures of £1,075,392 and £1,536,275 tell us nothing about fixed costs. They are simply 81.5% of the total surcharge imposed (being the inverse of Mr Smith’s supposed unit margin). They cannot be found to represent a cost unless there is other evidence that they do so; and in the absence of other evidence they have to be taken to be additional profit, as Ms Fowler says. The accountants’ views compared: (d) their margins

87. Whilst Mr Smith started by working out a margin and thereby calculating costs, Ms Fowler’s calculation of costs when deducted from price obviously generated a margin. In the pre-acquisition no scheme world her margin was 38.3%, much higher than Mr Smith’s 22.7%, and in the post-acquisition no scheme world it was 27.7%, again higher than Mr Smith’s 18.5%. In cross examination Mr Glover KC put it to Ms Fowler that her margin on specialist sleepers came out at some 48%, which he regarded as implausibly high; Ms Fowler disagreed with his calculation. Conclusion on costs and the function of surcharges

88. Taking that last point first, we do not think that this comparison of margins is useful. Ms Fowler’s margins are higher; hers are generated from a calculation of costs while Mr Smith by starting from a margin is in a sense assuming what he sets out to prove, namely the profit made by the claimant. To compare the two margins, when the two are derived in completely different ways, does not seem to us to be informative.

89. We agree with the claimant and with Ms Fowler, and with Mr Smith’s assessment in AS1, that the management accounts indicate that total cost varies with volume. No other evidence contradicts that save for Mr Neil’s understanding of the way surcharges are calculated, and the evidence from the accounts has to be preferred to his view. Margin per sleeper is not constant, and tends to rise as volumes fall. Mr Smith’s methodology is inconsistent with such financial evidence as we have and, as we saw in paragraphs 81 to 86 above, produces absurd results.

90. For those reasons we reject Mr Smith’s approach to cost and accept Ms Fowler’s. We acknowledge, as does Ms Fowler, that her approach may not be perfect. There may be some fixed costs, but they are so negligible that it is not possible to find a “floor” below which cost does not fall. Costs are to be calculated, post-acquisition in the real world and throughout the no scheme world, in accordance with Ms Fowler’s approach.

91. We now turn to the evidence of the claimant’s financial position in the two worlds pre- and post-acquisition. (2) The real world pre-acquisition

92. The claimant’s financial position in the real world pre-acquisition should have been easy to agree since we have the management accounts throughout this period. When asked at the hearing why the accountants had not agreed it Ms Fowler’s response indicated that it had not occurred to them to do so. Mr Smith’s response was that their differences arose from different methodologies and so they were unable to compromise. Nevertheless the parties themselves could and should have been able to reach agreement about this period in which the accountants differed by £73,000, Ms Fowler assessing the claimant’s profit at £13,658,000 and Mr Smith at £13,731,000.

93. In a short note produced immediately before the hearing the accountants gave us their reasons for not agreeing the claimant’s results throughout the period for which we have management accounts, i.e. to the end of FY23. Those reasons related to the production of specialist sleepers by the claimant at its factory at Somercotes, to capital expenditure and to lease costs. There was no cross-examination on those issues for this period and we were offered no argument about it. We therefore have no means of deciding between them, and we split the difference, with a little rounding, as the parties should have done; we find that the claimant’s profit in the real world pre-acquisition was £13,700,000.

94. Somercotes was not mentioned in the ID because it was not relevant to anything we had to decide. It is a much smaller operation than either WWH or Rochester. Production of some specialist sleepers was moved there after WWH closed and some sleepers are still produced there. (3) The real world post-acquisition

95. As we said at paragraph 6 above, this period can be divided into the closure period, to the end of FY23, and the current/future period to 2036 when the claimant is producing sleepers at Rochester. The closure period

96. The difference between the accountants in the closure period was £10,000 (Ms Fowler put the claimant’s profit at £49,000 and Mr Smith £59,000); again, we have the management accounts for this period and there is no reason why the parties could not have agreed it. The accountants differed for the same impenetrable reasons as they did in the pre-acquisition period in the real world, and again we have no means of deciding so we split the difference and find that the claimant made a £54,000 profit in the real world between acquisition and the end of FY23.

97. In light of the closure one might wonder why any profit was made at all, but (a) there were some sales of sleepers from WWH in early 2020 after production ceased and (b) specialist sleepers were being sold from Somercotes and Rochester during the closure period. The post-closure period

98. Sales from Rochester began in 2022 and so we have two years of the actual results at Rochester, but for the most part this period involves the unknown future. The difference between the accountants for this period is £551,000; Ms Fowler put the claimant’s profit, to the end of 2036, at £1,428,000 while Mr Smith put it at £1,979,000 (after discounting). Again we have to express surprise that the parties could not agree the figure for this period, since in the context of the total at stake this is a minor difference (and indeed in closing Mr Humphries KC invited us to treat the real world position as “de facto agreed”). However, we have heard evidence and argument about the reasons for the difference, and the amount in issue is not such that it is appropriate simply to take a half-way point; we have to make an assessment of the evidence and arguments.

99. The most important issue in this period, as in the no scheme world, is the assessment of costs and the way they behave at low volumes. We have rejected Mr Smith’s approach. In principle we accept Ms Fowler’s methodology, which is to start with an assessment of cost (rather than a hypothesis about margin), to take all the costs as variable and therefore to multiply cost from volume, subtract the total revenue and thereby derive profit.

100. So much is clear. The difficulty that Ms Fowler faced in the current/future scheme world was finding the unit cost for production at Rochester in order to make that calculation.

101. Both accountants use the “Rochester forecast” as a source of information about costs at Rochester; the forecast takes the form of a number of Excel worksheets and includes calculations up to 2030 of revenue, costs and profit, on a projected volume of 350,000 sleepers per annum from 2022 onwards (which of course is now known to have been unrealistic). As in the management accounts costs are broken down into a number of different elements, and categorised as variable and fixed (although we accept Ms Fowler’s evidence that there are no truly fixed costs here).

102. We have the claimant’s management accounts for 2022 and 2023, the first two years of production at Rochester. In those two years the fixed costs of producing a single sleeper were £57.93 and £53.45 respectively. Yet the Rochester forecast put the fixed cost per unit at £5.44. Ms Fowler took the view that it would be “unpalatable” to suppose that fixed costs would continue to be over £50 per unit. Then again, she said, it was clear from the actual results from FY22 and FY23 that costs were not going to fall as low as £5.44 “any time soon”. We agree.

103. Ms Fowler’s method for bridging the gap between the two figures for costs was, by her own admission, rough-and-ready. She took the fixed cost of £5.44 and adjusted it by inflation to 2027, by which time she thought that costs and production would have stabilised at the new carousel plant, to give a unit cost of £5.93. She then multiplied that cost by 350,000, the volume in the Rochester forecast, and divided the result by what she takes as the volume for that year, 147,000. That figure is derived by taking the volume determined by the Tribunal for that year, 109,500, plus the 12,440 sleepers Ms Fowler reckons will be sold to TfL, to give a unit fixed cost of £16.41, which she further adjusted by assuming that the claimant would make an efficiency saving of 1.5% per year.

104. Mr Glover KC argued that Ms Fowler’s calculation involves a contradiction: it assumes that cost per unit increases at lower volumes. We agree that it looks that way, but we accept that that was not her evidence and that no contradiction was intended. It only looks that way if Ms Fowler is taken to have accepted the £5.44 as an accurate forecast for the higher volume, and we do not think that was what she intended. She described her calculation as simply a way of bridging the gap between the two unrealistic figures.

105. We accept that that was the intention. But as a method of calculating cost we are sorry to say that it is worthless. There is no reason why it would yield a more accurate result than Mr Smith’s method of assuming a constant margin, nor than any other figure lying somewhere between £5.44 and £53.45.

106. It is for the claimant to prove its loss, and in order to do so it has to prove what its costs were or would be. It has chosen to rely on its forensic accountant, rather than to adduce evidence from one or more experts in the production of sleepers who would be able to give evidence about cost from their practical experience. Ms Fowler was not able to show what the cost of production at Rochester would be, and without that evidence there is no purpose in assessing her further evidence about price, which depended on her views about sleeper mix. We therefore accept Mr Humphries KC’s invitation to take the position in the scheme world as “de facto agreed”, and adopt the compensating authority’s position about the profit to be made at Rochester in the scheme world in the current/future period, namely £1,979,000.

107. We stress that we accept that figure not because we accept the methodology by which it was calculated – we do not – but on the formal basis that that is the figure that the compensating authority is willing to accept. Since the claimant has not been able to prove that the profit was any lower, the authority’s figure stands as our finding.

108. As we said, there is therefore no need for us to assess the other points in issue about this period, which are mostly about sleeper mix (principally the volumes to be sold to TfL), since we have an overall figure for the period. Looking back at Table A at paragraph 5 above, the difference between Ms Fowler’s and Mr Smith’s is resolved at [£13,700,000 + £54,000+ £1,979,000 =] £15,733,000. (4) The no scheme world pre- and post-acquisition: costs

109. Under this head we look just at costs, which accounts for the vast majority of the difference between the experts, deferring to heading (6) a bundle of issues about volume and pricing in the no scheme world.

110. The pre-acquisition period in the no scheme world spans FY17, FY18 and FY19. There was no threat of compulsory acquisition, but the claimant had not secured the Bescot contract and faced closure, sooner or later, until the very end of 2019 when planning permission for the Bescot site was refused. So morale was low and operations must have been difficult. There was no stockpile, though, so at least one complication of the real world is absent. The management accounts for the scheme world for this period cannot be used to represent what would have happened in the no scheme world because of the effect of the scheme and of the stockpile. And of course the post-acquisition period from FY20 onwards is even further distant from the real world.

111. For both pre- and post-acquisition periods in the no scheme world Ms Fowler took the costs of production in FY16 as her measure of costs. She regarded that as the final year of straightforward trading, unaffected by the scheme, and therefore a realistic measure of what the business would have looked like from FY17 onwards in the absence of the scheme. Mr Glover KC took issue with her use of FY16 for costs since costs per unit in that year were lower – albeit by pennies rather than pounds – than the preceding and following years. He argued that it would be better to take an average of FY15 to FY17 as Mr Smith had done (see paragraph 18 above).

112. The difficulty with Mr Smith’s approach is that it involves the use of FY17, which fell under the shadow of the scheme and spanned the end of the 2012 contract. We think FY17 is not reliable for this purpose. It is impossible to be scientific about this or to say which of several possible approaches would be best; we accept Ms Fowler’s choice of FY16, a year which was clear of the scheme and also of the distortion in the market caused by Doncaster not being at full capacity in the earlier years, as sensible and we accept it.

113. Essentially Ms Fowler took the costs incurred in FY16 and adjusted them for inflation for the following years. The costs in the accounts were divided into fixed and variable, and Ms Fowler calculated the updated values separately; and she calculated variable costs separately for different customers, noting that TfL sleepers cost more to make.

114. Mr Glover KC asked Ms Fowler a number of questions about the way she calculated costs in view of the fact that on her evidence (which we will come to later) the proportion of TfL sleepers to NR standard sleepers rose in the post-acquisition period. He argued that that made her unit cost inaccurate; her response was that the cost “did not have that granularity”. We take the view that there is inevitably some level of approximation in the calculation, and we agree with Ms Fowler that TfL and other customers make up such a small proportion of the claimant’s business that this sort of discrepancy really makes no significant difference.

115. One further issue was about USPs; it will be recalled from the ID that under sleeper pads extend the lifetime of a sleeper and are fitted on some but not all, at NR’s request. Ms Fowler and Mr Smith agreed that 25% of sleepers produced in the NSW would be fitted with USPs, and that the claimant would charge £2.55 extra for sleepers fitted with USPs. The issue is about cost to the claimant; Ms Fowler’s opinion was that the claimant incurred no extra cost when it fitted USPs, so that the additional £ charged per sleeper them was all profit. NR supplied the USPs themselves, so there was no physical item to supply. Neither of the accountants could discern any cost of fitting USPs in the accounts; there is no evidence for example that additional staff were required. For the compensating authority Mr Glover KC argued that it was implausible to suppose that NR would pay extra for sleepers to be fitted with USPs when it cost the claimant nothing to fit them; there must have been a cost. That makes sense; nevertheless there is no evidence of that cost and we accept Ms Fowler’s view that there was none.

116. In conclusion, we accept Ms Fowler’s calculation of costs in the no scheme world. (5) other issues in the no scheme world

117. The issues that remain have very little effect on the overall financial outcome and we deal with them briefly. For the most part they relate to sleeper mix, and also to volumes of sales to customers other than NR, all arising from points on which we were not offered evidence in February and about which we therefore made no decisions, but which have an effect on revenue.

118. There are five issues to be dealt with under this head; the balance of types of standard sleepers sold to NR under the P3 contract; TfL standard sleeper volumes in the post-acquisition period; prices for TfL sleepers; sales to other customers; and specialist sleepers. In each case we start with Ms Fowler’s evidence, and consider Mr Smith’s opposing view. (i) the weighting of standard sleepers sold to NR under the P3 contract

119. The accountants were unable to agree the proportion of G44 to EG47 sleepers to be sold to NR under the P3 contract in the no scheme world, EG47s being more expensive. Ms Fowler based her assessment on the mix seen in the actual results in FY16. Mr Heubeck, giving evidence about the future at Rochester, said that he expected NR’s future orders to be “dominated by the EG47 sleeper type”, and that that made “logistical sense since this type is the standard sleeper for routes electrified with the third rail system”, most of which is supplied from Rochester. Mr Smith, by contrast, based his forecast on the sales mix in the Bescot bid which showed a higher proportion of the less expensive G44s, yet predicted a higher proportion of EG47s in the scheme world in accordance with Mr Heubeck’s evidence.

120. We take the view that the demand for EG47s to which Mr Heubeck referred would still have been there in the no scheme world, and was at least as likely to have been supplied from WWH as from Doncaster. In any case we prefer to take figures from data in the real world rather than from a bid and so we adopt Ms Fowler’s approach. (ii) TfL standard sleeper volumes

121. We made no decisions in the ID about the volume of sleepers to be sold to TfL in the no scheme world. Under this heading and the next we are considering only standard sleepers, and we look at specialist sleepers later. The accountants had two sources of information: sales in the real world, and the terms of the Rochester contract with TfL.

122. Looking at volumes first, as to the pre-acquisition period Ms Fowler adopted the figures from the actual sales in the real world. Mr Smith preferred to use the volumes from FY16 for the whole of the pre-acquisition period. We prefer to use the real world data where it is available and therefore prefer Ms Fowler’s approach.

123. As to the post- acquisition period, Ms Fowler used the actual volumes sold in FY19 in order to predict that 12,440 standard sleepers would have been sold in FY20. Sales in FY19, by the way, were much lower than in some of the previous years (30,500 in FY15, 13,100 in FY 17, for example). For FY21 to FY25 she predicted 8,000 per annum, consistent with the MGV in the claimant’s Rochester contract with TfL, and thereafter she predicted 12,440 each year to 2036. The important point there is that Ms Fowler assumed that there would have been no disruption to supply to TfL in FY20. Otherwise, her predictions are driven by the view she took about the real world, where no standard sleepers were sold to TfL from FY21 to FY 23 in the real world; she predicted 8,000 for FY24 and FY25 at Rochester, following the contractual MGV and thereafter 12,440 in line with FY19.

124. Ms Smith by contrast assumed that there would have been no sales to TfL during the closure period in the no scheme world – even though there was no closure – and thereafter 8,000 per annum in line with the MGV. Mr Smith was unable to defend his approach to the closure period in cross-examination, saying only “it’s an assumption I made”. Mr Glover KC argued that that obviously surprising prediction for the no scheme world during the equivalent of the closure period had to be accepted, because it was for the claimant to prove what they would have sold and there was no evidence that they would have sold any sleepers to TfL during those years.

125. That argument has no force; the claimant’s evidence is the sales in the real world up to FY19 and the commonsense point that there would have been no reason in the no scheme world for that supply to have ceased.

126. As to the later years, Mr Smith defended his figures by saying that he had made “a conscious decision to align the figures in the scheme world and the no scheme world so that there’s essentially no loss as a consequence.” That seems to us to be an admission that Mr Smith’s evidence on this point was driven by the result he wanted to achieve. We accept Ms Fowler’s figures, observing that her 8,000 from FY21 to FY25 seems rather cautious; we see no reason why the sales to TfL should not have been up at least to FY19 levels thereafter. (iii) prices for TfL sleepers

127. Ms Fowler took the real world prices charged to TfL and applied those prices to the years FY17 to FY20, and for FY22 and FY23. In FY21 (where there were no sales to TfL in the real world) she took the prices for FY20, adjusted for inflation. From FY24 onwards Ms Fowler used the previous year’s prices in each case, adjusted for inflation.

128. Mr Smith by contrast used the FY16 pricing for the pre-acquisition period, and thereafter used the pricing from the claimant’s 2022 contract with TfL at Rochester.

129. Again we prefer to use data taken from the real world and from WWH, so prefer to use the actual volumes, as Ms Fowler does, where these are available rather than projecting forward from FY16; and we think that the pricing at Rochester is unlikely to be a reliable guide to pricing from WWH. (iv) sales to other customers

130. The claimant has very few other customers besides NR and TfL. NR accounted for 90% to 95% of the claimant’s business, and sales to other customers were tiny even compared to sales to TfL. Ms Fowler took the view that sales to other customers in the no scheme world would continue at 2,700 per annum based on the FY16 actual results, and at the FY16 prices adjusted for inflation. Mr Smith assumed that volumes would be the same in the no scheme world as in the real world so that there would be no loss; in the real world he reckoned that 2,000 sleepers would have been sold to other customers from FY24 onwards, in line with the FY23 actual result. We prefer Ms Fowler’s approach as it is based on data relating to WWH. (v) sale of specialist sleepers

131. Finally, the accountants could not agree about the claimant’s production of specialist sleepers, of which in FY16 the claimant produced 9,600 for NR, 100 for TfL and 900 for other customers. As Ms Fowler explained in her report, production of specialist sleepers was temporarily moved to Rochester before acquisition, and later moved again to Somercotes to make space for the carousel equipment to be installed at Rochester. By April 2022 in the real world all the specialist sleeper production had been transferred permanently to Somercotes.

132. In the no scheme world specialist sleepers would have continued to be produced at WWH. But the question on which the parties disagree is whether the demand for specialist sleepers would have fallen in line with the demand for standard sleepers. Ms Fowler took the view that it would not, and worked on the basis of a continuing volume of 10,600 per annum throughout the no scheme world. Mr Allen in his second witness statement agreed (this having been Ms Fowler’s prediction in her earlier reports which Mr Allen had read); he said that this was the likely volume based on what was then known of NR’s intentions as well as past sales evidence.

133. Mr Smith thought that volumes of specialist sleepers would be the same in the real and no scheme worlds. The evidence both of Mr Heubeck and of Mr Jarvis was that the demand for specialist sleepers tended to correlate with that for standard sleepers, and that therefore demand for both would fall in the no scheme world. Mr Heubeck thought that the fact that certain specialist types were no longer produced post-acquisition in the real world meant that there was no longer any demand for them.

134. We think Mr Heubeck’s view is implausible; given the difficulties the claimant faced post-acquisition, if certain types of sleeper were no longer produced it is far more likely that that was because the claimant could not produce them than because demand had disappeared. Mr Neil’s evidence was some specialist sleepers (in particular cable sleepers) could not be made either at Rochester or at Somercotes.

135. In our judgment Mr Allen’s evidence was grounded in the claimant’s business and he was more likely to have a sense of the way specialist sleeper demand behaved than either Mr Heubeck or Mr Jarvis. On that basis we accept Ms Fowler’s evidence on this point. Conclusion

136. We determined at paragraph 108 above that in the scheme world to 2036 the claimant’s profit, discounted as to sums after 2017 as agreed between the accountants, was £15,733,000. In the no scheme world over the same period all the determinations we have made under headings 4 and 5 have been in favour of Ms Fowler’s figures. Accordingly, we accept her figure for the claimant’s financial position in the no scheme world.

137. The final version of Table A from paragraph 5 above therefore looks like this: No scheme world £’000 Scheme world £’000 C’s loss £’000 The Tribunal’s determination 45,666 15,733 £29,933

138. The compensation owed to the claimant for loss of profit as a result of the compulsory acquisition is £29,933,000.

139. That, therefore, concludes what has been a long and extremely complicated reference, and we again express our thanks to leading and junior counsel on both sides for their assistance in shining a light on subject matter bordering on impenetrable. We cannot finish without re-iterating our dismay that so many issues could readily have been agreed, but were not agreed, with so little reason given as to why not.

140. A letter accompanies this decision providing a timetable for submissions on costs, if they cannot be agreed. Judge Elizabeth Cooke Mr P D McCrea OBE FRICS FCIArb 18 November 2025 Right of appeal Any party has a right of appeal to the Court of Appeal on any point of law arising from this decision; and we said when we handed down the ID that time to appeal that decision would not start to run until this final decision was published. The right of appeal may be exercised only with permission. An application for permission to appeal the ID, this final decision, or both to the Court of Appeal must be sent or delivered to the Tribunal so that it is received within 1 month after the date on which this decision is sent to the parties (unless an application for costs is made within 14 days of the decision being sent to the parties, in which case an application for permission to appeal must be made within 1 month of the date on which the Tribunal’s decision on costs is sent to the parties). An application for permission to appeal must identify the decision of the Tribunal to which it relates, identify the alleged error or errors of law in the decision, and state the result the party making the application is seeking. If the Tribunal refuses permission to appeal a further application may then be made to the Court of Appeal for permission.