The extent of interest was shown recently when 80 City professionals were attracted to a seminar on the potential of rail privatisation organised by the lawyers Theodore Goddard. One of those who attended, David Oliver, of the 3i venture capital group, put it succinctly: 'It is a damn big business with an awful lot of revenue. It's got to be possible to make money out of it.' But there is a problem - no one has yet worked out how.
The rail privatisation Bill is just completing its Commons committee stage but is not due to get the Royal Assent until the autumn.
It divides the network into a series of operating franchises that will be offered to the private sector, while the track and infrastructure will be handed to a new organisation, Railtrack, on 1 April next year. The Government has set itself a tight timetable by saying that the first franchises will start operating some time next year.
The City is sceptical of both the speed and the chosen method of privatisation. 'I think they have underestimated the scale of the task they face. They must avoid a fiasco like the one over TV licences,' says Keith Martin, managing director of Hees International Capital.
Sceptics say the deadline cannot be met. The first seven franchises have been announced and British Rail has now appointed franchise development directors to determine what exactly will be offered to the private sector in each franchise.
However, managers interested in working up a management buyout have been told by John Welsby, BR's chief executive, not to become involved until after April 1994 because they need to concentrate on operating the railway and on preparing it for privatisation. With so little expertise outside the industry, a management buyout would be an essential component of any successful bid.
David Oliver, whose company has worked out a buyout scheme with the management of Network SouthEast's South Western Division, says that the first difficulty facing prospective bidders is assessing whether the operation is profitable.
'The accounts of BR have so many charges between its different operations that it is impossible to decipher whether parts are profitable or not. There is a rump of central costs, and how they allocate those is crucial.'
Sorting out the wheat from the chaff among the lines on offer may not be as easy as it seems. BR will this year receive about pounds 800m to subsidise its operations, excluding capital spending. Nominally, InterCity breaks even, and both Regional Railways and Network SouthEast lose substantially, though the internal accounting is so nebulous, as Mr Oliver points out, that it is impossible to discern what lines, if any, are profitable.
Heavily loss-making lines may be the most attractive to investors since there is little risk as most of the revenue will come from subsidy. On busier lines, small changes in usage, caused by fluctuations in commuter travel when the economy wavers, will make the difference beween profit and loss.
Mr Oliver sees a big inconsistency in the concept: 'They have gone for the idea of dividing up British Rail, which loses a lot of money, into a series of smaller organisations that they reckon will all be profitable. I don't see how that can be done.'
Possibly the most fundamental question for bankers is whether they will be needed at all. Railtrack, which will need the most investment, is set to remain in public hands for the foreseeable future, while running a railway is a cash-rich business - passengers pay their fares on the day they travel or up to a year in advance in the case of season ticket holders. With no need for much operating capital, the only remaining question is how the purchase or leasing of the rolling stock will be funded.
Rolling stock is generally designed to last 30 or 40 years while the franchises are unlikely to be for more than seven. This leaves a question mark hanging over the fate of any operator that loses its franchise and has stock for which it has no use.
The Government has not yet decided whether it will create a series of public rolling stock leasing companies, or encourage the creation of private ones. It put out a consultation paper in January and is expected to publish its decision in a month's time.
Either way, James Ballingall, a partner with Theodore Goddard, says the Government will have to take on the residual risk: 'Private companies will be prepared to take on the risk for the length of the franchise, but you cannot amortise the rolling stock over a short period like seven years as this would cause big rises in fares. Therefore the Government will have to underwrite the long-term risk in some form or other.'
He is confident that the Treasury can work out some device to avoid this risk adding to the Government's already overstretched borrowing requirement.
Ministers take another tack. Roger Freeman, the minister seeing through the Railways Bill, has consistently argued that he wants the private sector to take on the maximum amount of risk. It may be that there will be some surreptitious way of resolving the problem.
The Government hopes that a kind of second-hand market will develop for rolling stock but the potential lessors at the seminar were sceptical. Much rolling stock is line-specific and there is very little spare to use as the basis for a market.
As Mr Ballingall put it, 'At the moment there is no market and therefore it is very difficult for lessors to take a view on what will be the market in seven or 10 years' time. They are worried that they will get left with stock at the end of the franchise.'
Of course, at this stage there is something of a cat and mouse game going on. The City is seeking the most favourable possible terms while the Government is seeking as much as possible to reduce losses on the railways and offload the risk to the private sector.
But there is no doubt that the Government will have to come up with a more coherent and attractive scheme if it is going to get any takers at all. Otherwise, much of the legislation will simply sit unused on the table, and BR will continue to run all the services.
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