Network Rail mulls sale of shares

Track operator asks UBS to study options. Punctuality improvement triggers bonus payments
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The Independent Online

Network Rail, the track operator taken back into public ownership five years ago, is considering part privatisation through the sale of shares to private investors.

The infrastructure company - forced into administration in October 2001 by the then transport secretary Stephen Byers, leaving shareholders nursing huge losses - has hired the investment bank UBS to examine options for an injection of private equity. UBS began the work six months ago and several papers have been put to the Department for Transport.

News of the fresh moves to re-privatise Network Rail came as the company announced improvements in its operational and financial performance, triggering large bonuses for its top two executives and returning the network to pre-Hatfield levels of reliability for the first time in nearly six years.

For the year just ended, train punctuality increased to nearly 88 per cent while there was also a major improvement in the condition of the network with a third more tracks renewed than in the previous 12 months. In the latest three months, an average of nine in 10 trains have run on time.

Network Rail's business plan for the next three years envisages a 36 per cent increase in renewals investment, from £5.4bn to £7.2bn, and a rise in expenditure on expansion of the network to £2.7bn from £1.3bn in the previous two years, including an extra £400m not previously included in the plans. John Armitt, the chief executive, said Network Rail's losses last year were likely to be slightly higher than the £164m it reported in 2004-05 because of higher interest charges on borrowings. He predicted the company would move into profit this year but that it would probably take another year of profitability before pressing ahead with plans to raise private equity.

"We have turned our minds to the issue of raising private equity and we have shared our views with the DfT. At the moment it is an issue for discussion but I would not say it is right at the top of the agenda," he added.

Last year the Railtrack Private Shareholders Action Group lost a legal action claiming £157m in compensation over the Government's decision to pull the rug from under the company. But Mr Byers admitted in court he had misled MPs in the Commons over his actions in the run up to the collapse of Railtrack, Network Rail's privately owned predecessor.

Any attempt to raise fresh private finance is certain to be limited to large City institutions rather than the small investors who were stung by buying shares in Railtrack the first time. Many of those who lost money were employees or elderly private investors, famously described as "grannies" in one e-mail from a government adviser. Mr Armitt said Network Rail had hit its target last year of reducing delay minutes to 10.6 million, in addition to targets relating to the condition of the network and financial performance. This will trigger bonuses of at least 30 per cent for Mr Armitt and Network Rail's deputy chief executive Iain Coucher, who earn £485,000 and £433,000 respectively.

The £400m in additional investment funds is made up of a £200m discretionary grant from the Government and £200m in extra cash which Network Rail has generated through the industry's financial incentive scheme by reducing delays attributable to it.

Network Rail is targeting a further reduction in delay minutes for 2006-07, down to 9.8 million. Borrowings are forecast to increase from £18bn at present to £21bn in 2009 - some £1bn less than originally anticipated when the company was returned to state control.

The company will put detailed proposals for its funding needs for the five-year period from 2009 to the Rail Regulator in June. Mr Armitt said it was likely to ask for about the same as it is receiving in the current five-year period, which totals £22bn. Although the cost of operating, maintaining and renewing the railways is due to fall, Network Rail will argue that a big increase in funds is needed to expand the network to cater for the predicted 30 per cent increase in passenger demand over the next decade.

The rail regulator indicated £17bn to £20bn would be available for the company.