Railtrack will fight regulator on costs

As track operator threatens to go to Competition Commission over cuts, sanguine City boosts its shares
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Railtrack is preparing to haul the rail regulator over the coals at the Competition Commission in response to proposed restraints on its spending.

Railtrack is preparing to haul the rail regulator over the coals at the Competition Commission in response to proposed restraints on its spending.

The track operator is concerned that - if it is forced to make cost cuts proposed by the regulator, Tom Winsor - it will not be able then to effectively upgrade Britain's creaking rail network.

Mr Winsor is due to publish his final recommendations into Railtrack's finances before 27 October, but Railtrack has vowed that, unless he gives it more leeway, it will take the matter to the commission.

In the draft regulatory review, Mr Winsor proposed that Railtrack should cut costs by 3 per cent in the first year, rising to 4 per cent in 2002-03 and then 5 per cent. However, it is understood that Railtrack chief executive Gerald Corbett believes that 2 per cent is a more realistic figure.

An internal Railtrack report says: "The 5 per cent efficiency targets are way too demanding, and equate to taking 40 per cent out of the company's cost base over the five year period... Based on the regulator's preliminary conclusions, we will not be able to fund the investment programme that will meet all our stakeholders' and industry partners' ambitions."

Railtrack has also estimated that Mr Winsor's targets would cost up to 2,000 jobs.

If Railtrack refers the matter to the commission, it will be an extraordinary twist in the relationship between Mr Corbett and Mr Winsor. Last year the rail regulator became the scourge of Railtrack repeatedly attacking the company for poor performance. However, this year Mr Winsor has taken a less combative approach, that observers interpreted as the start of a more constructive working relationship.

But in August Mr Winsor himself threatened Railtrack with the Competition Commission in a spat over the way in which Railtrack's services and bonus payments were assessed.

Despite the news, the City is confident that Mr Winsor's review won't shackle Railtrack. On Thursday UBS Warburg upgraded Railtrack from a "buy" to a "strong buy" citing optimism over Mr Winsor's forthcoming report. Railtrack's shares have mirrored this optimism, rising 10 per cent since the publication of Mr Winsor's draft review on July 27.

However, Railtrack's internal report concedes that the "general euphoria outside Railtrack... was more a factor than that it was not as bad as some people had feared it would be".

Once the regulatory review is out of the way, the Government will flesh out its proposals for a 10-year transport strategy. When this is published, expected to be within a month, Railtrack will focus on how to raise finance to fund the improvements to the rail network, at an estimated cost of £52bn over 12 years.

Railtrack will initially focus on a five-year time frame, and needs to raise at least £8bn.

As the Independent on Sunday revealed last month, one idea under serious consideration is securitising the income Railtrack receives from train operating companies to access the network. This would, in effect, see it borrow up to £10bn backed by this income.

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