Taxpayers to cover rail body's £9bn debt

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Taxpayers will be forced to shoulder the financial burden if the new organisation taking over the bankrupt rail network business Railtrack fails to honour £9bn worth of debts.

The not-for-profit company created by the Government, named Network Rail yesterday, will borrow £6.5m to meet Railtrack's debts and £2.5bn to finance the takeover and run the enterprise. If Network Rail fails to honour the debt, the Strategic Rail Authority – an arm of the Government – has agreed to provide emergency loans.

The Transport Secretary, Stephen Byers, confirmed yesterday that Network Rail would be given £300m worth of taxpayers' money to help it take over Railtrack.

However, he warned that the money, which will be used to bail out shareholders, would be withdrawn if they demanded a higher price for their shares.

Mr Byers stressed that the government money would only be available if the bankrupt infrastructure company came out of administration early. Any attempt by investors to negotiate a higher figure could delay the whole process, he said.

Under the plan, Network Rail would use the £300m, plus a loan of £200m, to rescue Railtrack from administration. That cash, together with assets owned by the Railtrack Group, will come to about £1.3bn, which will be distributed to shareholders.

The package would mean that Railtrack investors would get £2.50 a share, compared with the £2.80 they were originally demanding – the price at which the shares were suspended in October. At their height the shares stood at £17.

It is hoped that the package will enable the business to resume normal trading by the end of July. The company's administrators have also warned that impending legal action by shareholders against the Government could delay its escape from bankruptcy until early next year.

Mr Byers has repeatedly insisted that taxpayers' money would not be used to compensate Railtrack shareholders. He said the £300m state grant reflected "the value and benefits of an early exit from administration" and was "self-financing from savings that will be made by Network Rail".

The Rail Passenger's Council said the Network Rail bid was "good news for passengers because it ends the long-term uncertainty about Railtrack's position".

But the shadow Transport Secretary, Theresa May, accused Mr Byers of a "humiliating U-turn" and urged him to consider a rival bid. She said the Government had been panicked into making the cash offer because they were worried about being taken to court.

Ian McAllister, the Network Rail chairman, said that trying to reach a July target for ending the administration period would be "quite challenging". Although today's bid needs to be approved by Railtrack's 250,000 shareholders, who own a total of about 520 million shares, Mr McAllister said he hoped to reach preliminary agreement with Railtrack Group within the next three weeks and conclude formal contracts and sign financing agreements within six weeks.

Gwyneth Dunwoody, the Labour chairman of the Commons transport committee, told the BBC's The World at One she was very concerned that taxpayers' money was being used to underwrite the arrangement. "If we are saying that the administration is going on too long and is costing too much, and it is cheaper to do a deal of this sort, we also have to explain why we are using the taxpayers' money to underwrite the arrangements," she said. Ms Dunwoody said 95 per cent of shareholders were institutions and only 1 per cent were Railtrack employees, most of whom had no choice but to accept shares as bonuses. Referring to Mr Byers' insistence that the £300m of taxpayers' money did not constitute compensation, she said: "It is a very nice piece of semantics."