Treasury warned it must bail out Network Rail

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The Rail Regulator, Tom Winsor, warned a reluctant Treasury yesterday that it had a legal duty to bail out the state-backed Network Rail (NR), which disclosed its pre-tax losses had risen from £3m to £233m.

Contradicting ministerial assertions, Mr Winsor said he had the power to force the Government to fund extra access charges that the state-backed organisation levied on train operating companies.

In a speech to a conference in London, the regulator said operators were indemnified by the Government against such increases. He said: "It is not relevant what the Treasury wishes to pay. If it were, there would be state control of the finances of the railway and negation of important protection for railway industry participants."

Mr Winsor recently proposed that Network Rail should receive £22.7bn instead of less than £15bn originally envisaged. His final judgement will be disclosed next month.

Speaking at a recent Commons committee on transport, Kim Howells, the transport minister, however, insisted that the Government had the power to reduce the amount.

The regulator also questioned whether Network Rail was going to meet the September 2004 target date for the first phase of the West Coast route modernisation. He said "mistakes were being made and money wasted" on the West Coast project.

"Why are West Coast costs 40 per cent and more higher than elsewhere on the network? Has the company got the right contracting and delivery arrangements? What is stopping the company addressing these risks and inefficiencies? Is it anything to do with the pace of project delivery?"

He also questioned the organisation's commitment to enhancement work.

Network Rail's results showed that while the cost of renewal work increased to £15bn from £1.05bn, spending on capacity improvements and other enhancements was expected to fall to £334m from £404m.

On enhancing the network, Mr Winsor said: "First, Network Rail is not purely an OMR company - an operation, maintenance and renewal company. It does have an obligation to do enhancements, particularly the small-scale enhancements which no one else could or would do.

"Second, Network Rail is not the engineering arm of the state, and it is disappointing that so often the company behaves as such. Third, Network Rail is not a passive participant in these matters; it should be an active participant. It is, and should remain, a private-sector company with public-interest responsibilities."

Mr Winsor added: "Network Rail should do these enhancements. It cannot shut up shop."

The rift between the Regulator and the Government emerged as Network Rail revealed its parlous financial state in an announcement of its results in the six months to 30 September.

Network Rail also revealed that performance had improved little. Some 82.4 per cent of trains were running on time compared with 81.8 per cent in the first half of 2002.