Network Rail debt may cost extra £2.5bn

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The Independent Online

Taxpayers and passengers may have to pay an extra £2.5bn to finance the railways over the next 20 years unless the Government guarantees the debt raised by Network Rail, the ratings agency Standard & Poor's indicated yesterday.

Taxpayers and passengers may have to pay an extra £2.5bn to finance the railways over the next 20 years unless the Government guarantees the debt raised by Network Rail, the ratings agency Standard & Poor's indicated yesterday.

S&P said that if the Government failed to give undertakings or at least letters of comfort to lenders that Network Rail would avoid the same fate as its predecessor Railtrack, then it would have to pay higher interest rates. The new not-for-profit infrastructure company is planning to raise up to £14bn of debt.

The ratings agency also highlighted the degree of political uncertainty surrounding Network Rail and the deep suspicions which remain in the City about funding the rail system following the collapse of Railtrack.

Mike Wilkins, managing director of S&P's infrastructure group, said: "Politicians are fickle, governments are fickle, transport secretaries change. We cannot ignore the possibility that bondholders are left high and dry just as they were in Railtrack until the Government was backed into a corner. Lenders will not give money to a railway company unless there is a pretty cast-iron guarantee that the Government will back it up if things go wrong. You can fool the City once but you cannot fool it twice."

The rating agencies are expected to rate Network Rail in the first quarter of next year once it is clear what support the Government will provide.

However, S&P warned that Network Rail's scope to raise new finance would be limited until the Rail Regulator Tom Winsor concluded his interim review of its finances. The review will not be completed until December 2003 and will not be implemented until April the following year.

Jonathan Manley, associate director of S&P's infrastructure finance ratings division, said the interest charges on Network Rail's debts could typically be 100 to 120 basis points higher if it failed to achieve at least a single A rating. This means it would be paying an extra £140m a year on debt of £14bn. This puts the Government in a potential bind. If it gives a cast-iron guarantee of Network Rail's debt then there would be pressure to include it as part of the public finances, putting the Chancellor in breach of his golden rules.

Separately, S&P said retail electricity prices in the UK could start to fall, putting further pressure on the profit margins of energy companies. "We see this as the next big risk area," credit analyst Anthony Flintoff said. Retail margins have held up longer than we thought. The energy companies would like them to remain high but this is a competitive market."

Mr Flintoff said electricity suppliers had been enjoying profit margins of up to a third – making a £100 profit on the average domestic electricity bill of £300. But these margins were likely to come under pressure. S&P also forecast that it would take years – and perhaps as long as a decade – for wholesale electricity prices to recover unless generators mothballed a lot of capacity.

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