The actual damage will probably not turn out to be nearly as bad as that. But because of the way its rail contracts are accounted for, Jarvis had the unenviable choice of booking its profit based on Railtrack's estimate of what money is due or excluding the entire amount, based on its own calculations of what is owed.
Never the less, it just goes to show how vulnerable a business can be when half its turnover and 40 per cent of its order book are reliant upon one customer.
Jarvis is that classic example of a company which has shot from total obscurity into the big league on the back of rail privatisation. Three years ago it was a tiny contracting business but the wholesale break up of British Rail changed all that. Jarvis spotted that all the old BR infrastructure maintenance and track renewal companies had been sold off with juicy fixed- price long-term contracts so it promptly gobbled them up and grew fat in the process. Until yesterday it was company with a market capitalisation of pounds 660m.
But the gravy train is now coming to a shuddering halt. In the next two years, half its Railtrack contracts come up for renewal and it is a foregone conclusion that Jarvis will not be offered anything like the same terms. Railtrack has its own battles to fight with the Rail Regulator who wants to squeeze its rate of return and its regulated asset base. So the easiest way for Railtrack to protect its own margins it is to pass the pain down the line to the maintenance companies, which account for the biggest single slice of Railtrack's fixed costs.
Jarvis is desperately trying to cover its tracks by diversifying into everything from PFI contracting to airport services. But the horrible reality for shareholders is that it will be a long climb back.Reuse content