pounds 100m aid to offset Railtrack failures

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The Independent Online
The Government is set to give the railways an additional subsidy of pounds 100m to cover the costs of Railtrack's inability to keep services running on time.

The move follows a row over new performance targets, which will penalise Railtrack for missed service targets caused by failures ranging from leaves on the line to signal breakdowns.

Railtrack has been complaining privately to the Government that the performance regime will cut into its profits, damaging the prospects for its pounds 2bn flotation next spring.

It has been involved in complex negotiations with the rail regulator, Department of Transport and the Treasury over a demand to reduce the financial risk of failing to meet performance targets. Track and infrastructure problems cause 70 per cent of delays.

Railtrack's solution, which the Government appears ready to accept, is that it should be paid a supplementary track access charge by the train operating companies - above already agreed levels. But this means reopening the question of track access charges even though the regulator has set a framework that was supposed to last for six years.

Track access charges, the main source of Railtrack's income, were pounds 1.95bn this year. It is thought Railtrack was seeking an extra 5 per cent (about pounds 100m) to offset the risks.

The City will value Railtrack's shares on capital values, debt, income and the likely volatility of earnings. Even in the unlikely event that Railtrack does meet its performance targets and pays no penalties, the extra risk of having the penalties in the background depresses the share price.

This is the logic Bob Horton, the Railtrack chairman, has used in his argument with the Government. The concession will be seen by political opponents of the privatisation as a fattening-up for a company whose expected sale value has been dropping from the City prediction of about pounds 4bn. Latest estimates suggest the Government will be lucky to get half.

The Treasury is known to have set a figure below which it will call a halt to the privatisation, but based on total proceeds, not individual cash values.