Railtrack warns of £600m hit from regulator's performance targets

Railtrack warned yesterday that new price curbs announced by the Rail Regulator last month could wipe more than £100m a year from its profits, and called for sweeping changes to the regulatory regime.

Railtrack warned yesterday that new price curbs announced by the Rail Regulator last month could wipe more than £100m a year from its profits, and called for sweeping changes to the regulatory regime.

The rail network operator said it was facing a potential £600m bill from tough new performance and efficiency targets set by the regulator, Tom Winsor, which would affect its ability to fund an expansion of the railways.

The new five-year controls, which take effect next April, could result in Railtrack having to make penalty payments of £60m a year to the train operating companies for failing to meet punctuality and reliability targets. Railtrack is facing a further £60m a year hit from the 3 per cent annual efficiency improvement demanded by Mr Winsor. The company believes 2 per cent is a more realistic target.

Railtrack has until January to decide whether to accept the regulator's proposals or take its objections to the Competition Commission. It is thought unlikely that Railtrack will opt for a referral to the Commission.

Instead it wants Mr Winsor to agree a "general" condition that would allow its regulatory formula to be reviewed as and when circumstances alter. For instance, Railtrack is considering taking some or all of its maintenance contracts in-house - a move which would have a huge impact on staffing levels and the efficiency targets set by the regulator.

The Shadow Strategic Rail Authority is also undertaking a review of Railtrack's performance and growth targets and the impact these have on efficiency and safety.

The regulator has planned his new price controls on the assumption of an 8 per cent improvement in Railtrack's performance. In fact passenger train performance in the first half of this year has deteriorated by 10 per cent and will worsen considerably in the second six months because of the Hatfield crash and the huge upheaval caused to services. Railtrack yesterday announced that it had set aside £250m to pay for compensation to train operators and the re-railing of 250 miles of the network.

Gerald Corbett, Railtrack's chief executive, said: "We do have to ask ourselves post-Hatfield if we have got the regulatory balance right for the next five years. There has been a ghastly accident. Four people died and 30 were seriously injured and we have to take stock."

Mr Corbett said it would be a huge undertaking to bring all Railtrack's maintenance work in-house, requiring it to take on another 18,000 staff on top of its existing 11,000 workforce. However, Railtrack is considering taking direct charge of functions like track inspection, engineering and works scheduling and giving its maintenance contractors much longer contracts so that their interests are more closely aligned with those of Railtrack.

He said that despite the "maelstrom" that the industry was in, morale within Railtrack was "sky-high", adding: "The railways love a crisis."

Profits before tax for the six months to 30 September fell 31 per cent to £175m. Of the £77m decline, £62m resulted from increased maintenance expenditure and £15m from higher penalty payments for poor performance.

The interim dividend was raised 5 per cent. Railtrack defended the increase as a "reasonable gesture" given the £250m exceptional charge shareholders are having to bear.