City: Off the City track

IF ANYONE is capable of steering a course through the morass of rail privatisation, it is Roger Salmon, confirmed last week as rail franchising director. Even he, however, admits it will be a long, slow, complex and difficult process. Mr Salmon is a former Rothschild's man; having already worked on water and gas privatisation, he is as well qualified for the job of getting private sector involvement in the rail network as any.

Rail privatisation is possibly the most unpopular and controversial of all the Government's attempts to tackle the inefficiences of old nationalised industries through private sector involvement - worse than water, coal and the buses.

Hardly anyone believes in what the Government is trying to do (sometimes, one suspects, even ministers don't); Lord knows, something needs to be done about BR, but is this the right solution?

As you might expect, Mr Salmon has little to say on this; his job is to administer what the Government has already decided to do, not to express an opinion about its effects. The more important question for him is whether he can make the whole thing attractive enough for the private sector to want to become involved.

I have to say that hardly anything he said to me last week led me to believe he can. Most potential City backers for management buyouts and other private sector operators that might be interested in running the franchises remain deeply suspicious.

This is why. Nearly all the franchises will need some form of Government subsidy; the private sector is going to have to be paid to run them. In theory that's not a problem. There are plenty of private sector businesses that depend on Government payments and subsidy; on the whole, they find that the Government is much better at honouring contracts than others.

But that's not really the point. What's worrying the City is the scope Mr Salmon will have for renegotiation. Each year, he'll get a budget from the Government out of which to pay franchise subsidies. Presumably, he's going to be given some kind of indicative figure for some years to come (though he doesn't yet know this), otherwise it's going to be impossible to know how to divide up the cake between the various franchises on the long-term basis investors will require.

But even if he does, there's nothing to stop the Government varying the figure. Mr Salmon will then have to go back to franchise holders and say: 'Sorry guys, we haven't got so much money this year, so we'll have to insist on a variation in the deal.' According to him, this would be done in a way that leaves franchise holders no worse off; to compensate, they would be allowed either to cut uneconomic services or raise fares. Mr Salmon concedes it all sounds mind bogglingly complex but insists that in practice it will be made to work smoothly and transparently in a way that will satisfy the private sector. Somehow I doubt it. Judging by what I hear in the City, investors are going to take a hell of a lot of convincing.