Investors cool about rail sale
Analysts believe that new track charges could change the mood
Wednesday 18 January 1995
John Swift, the rail regulator, ditched the idea of fixed target rates of return for Railtrack, the company in charge of the rails. He also cut track access charges to be paid by train operating companies by £1.5bn over six years - or 12.5 per cent of the previously expected total.
If the whole of the cut in revenue of an average of £250m a year for six years were to go straight through to the bottom line it could easily halve profits and slash the valuation put on the company by the City when it is sold next year - to as low as £2bn rather than the expected £4bn, according to some claims.
However, analysts disputed this estimate. The regulator's main motive in abolishing fixed rates of return and reducing the track access charges is understood to be to put a squeeze on Railtrack's operating costs, to force it to reduce staff and improve efficiency as rapidly as possible.
Previously, with a fixed rate of return rising as high as 8 per cent there was little incentive for Railtrack to cut costs, particularly the 60 per cent represented by track maintenance.
So the eventual valuation of Railtrack will depend vitally on how rapidly the company responds with cost-cutting in its attempt to maintain its profitability.
The Government would be compensated for a lower sale value because it could get away with lower subsidies to the train operating companies that pay Railtrack's access charges. Lower track access charges will allow potential bidders for operating franchises to include lower levels of government subsidy in their own bids.
But since this is part of a commercial bidding process involving many other factors it is impossible to say yet how much subsidy would be "saved".
Another factor is that the tougher the squeeze by Railtrack on maintenance charges, the lower the income of British Rail's track maintenance firms, whose value would also fall.
Companies likely to invest in a privatised service continue to remain cautious about the sale. Badgerline, one of the bus companies looking at rail franchises, has become increasingly sceptical about the sale as the timetable slips back. The company saidit needed far more information to make an investment judgement.
And the Labour Party's anti-privatisation has begun to cause uncertainty in the City. Paul Murray, of the investment group 3i, said: "What Labour said makes us more cautious, but what is not clear yet is whether it is sabre-rattling. We have to wait and see whether the anti-privatisation lobby gains momentum.
"If it was seen to disrupt and delay the timetable then one would need to question the investment."
There is keen interest in investing in the first eight franchises identified for sale this year as they are the most profitable services.
"But the rest are a mixed bag. It would be foolish to plough money into some of them if you thought they were not going to remain in private hands," Mr Murray said.
"Labour will influence the investment community the closer we get to an election.''
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