Christian Wolmar: Railtrack - a flawed idea from the start

'Railtrack owned a railway which had been so under-invested for so long that it was virtually worthless '
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The Independent Online

The Government's move to put Railtrack out of its misery has ramifications which go well beyond the future of the rail industry. Not only does it represent a tacit recognition of the limitations of the private sector but it raises questions about the Government's approach of private involvement in public services.

Stephen Byers, the Secretary of State for Transport, has shown some courage in invoking the 1993 Railways Act to put Railtrack into administration. When he took charge of the department after the June election, his civil servants urged caution and suggested that the crisis in the railways would blow itself out if a bit of extra money were thrown at them. Quite rightly, he ignored this advice, recognising that the problems of the industry were structural and not managerial.

This was borne out when, in July, the new chairman of Railtrack, John Robinson, warned Mr Byers that his company was, in effect, bust. It had only just received a £1.5bn bail-out from government, but Mr Robinson argued that this was not enough and that the whole carefully sculpted, access-charge regime devised by the Regulator, Tom Winsor, to calculate Railtrack's income over the next five years would have to be scrapped. Mr Winsor had promised the company a staggering £3bn per year, most of it from government coffers, and yet even that appeared to be only enough to keep the railways in their current state of repair, without any major improvements. In comparison, the rail industry used to get around £1bn per year under British Rail which is why ministers thought that the company was not salvageable.

Mr Robinson suggested that Railtrack should be paid for the work it performed plus extra for profit. In effect, given Railtrack's staggering inefficiency, he was asking for a blank cheque and the Government had little option but to refuse, not least because the public would not have stomached watching more money go into the black hole.

The last straw for ministers was in the spring when Railtrack announced that, despite losing £534m because of the Hatfield accident and the consequent speed restrictions, the board still intended to pay £120m to shareholders to retain their confidence. It was a crass act, showing how little the company's executives understood the political realities of running a company dependent on government subsidy.

Railtrack insiders argue that the company was unlucky in having three serious accidents – Southall, Paddington and Hatfield – within three years and that the consequent adverse publicity did for its finances. That is mistaken. Right from the beginning, the privatisation of Railtrack was flawed. It not only created the wrong financial structure for the industry but was bound to lead to a fundamental crisis sooner or later, because of unforeseen safety implications. Shoji Sumita says in his history of Japanese rail privatisation, Success Story, that he could not understand how Railtrack, whose sole task is to provide infrastructure for the railways, could operate in the private sector. To make a profit, he said, the company would either charge excessive amounts for the use of the track, or it would be tempted to make cutbacks in maintenance. Railtrack seems to have done both with disastrous consequences.

When privatisation of Railtrack was first mooted in 1995, I wrote on these pages that you wouldn't catch me buying the shares because they were worthless. When they soared to £17.68 in late 1998, over four times the May 1996 flotation price of £3.90, it seemed that the opposite was true – that the general public had been ripped off because the company had been sold too cheaply. In fact, it was the new shareholders who had been sold a pig in a poke. Railtrack owned a railway which had been so underinvested for so long that it was virtually worthless. It was hardly surprising that the Treasury blocked any attempt to conduct an asset register of the network, since it would have revealed billions of liabilities, which would have made the company unsellable. The company's contingent liability far exceeded the value of its assets; but this was disguised by the Byzantine financial structure which no one, certainly not anyone in the City, could fathom.

Carried out in the last full year of Tory rule, the privatisation was a cynical act by a dying government desperate to add a couple of billion to the Treasury's coffers. No thought was given to the implications for the industry. The City purchasers of the shares, who may now lose all their money, were equally culpable. They failed to understand the structure of the company and thought they could get rich without risk because, as they put it, "the Government would never allow the company to go bankrupt".

Well, Mr Byers has surprised them, clearly with the sanction of Tony Blair who made a brief digression from foreign policy in last week's momentous speech by referring to Railtrack as an example of a poorly performing private company. But the question is whether the remedy will cure the disease.

Labour's initial mistake was to wait for Railtrack to collapse before rescuing it. Although elected in 1997 on a promise of restoring, as Tony Blair put it, a "publicly accountable, publicly owned railway," New Labour decided early in its government that it could not carry out that pledge. Initially it said that it would be too expensive and then, when the share price collapsed after Hatfield, ministers came up with a pick'n'mix pack of excuses: it was too complex, in breach of European rules or still too expensive because shareholders would need to be compensated at the average price of the past three years, or it would take too long

Therefore, after lengthy negotiations with the industry and a debate that involved No 10 and No 11 as well as the department, a complex hybrid solution has emerged. Railtrack will become a private company with no shareholders and profits will be reinvested. But in order to keep the railways out of Gordon Brown's precious public sector borrowing requirement, the Government will not be able to appoint its directors or exercise day to day control. Instead, the company's plan will have to be approved each year and in that way the Government hopes that it will become a more efficient investor than under the current arrangements (which led to the fiasco of the refurbishment of the West Coast Main Line where projected costs soared nearly threefold from £2.3bn to £6.3bn).

Rationally, the Government should have just renationalised Railtrack in order to gain the control that ministers want to exercise. However, that would have been politically unpalatable, given the Government's penchant for the private sector and, more practically, it would have meant paying out the existing shareholders – "we are not in the business of rewarding private shareholders who happen to have backed the wrong company," as a government source put it to me.

The solution of allowing the company to go bust, however, also has its downside, given that the Government's whole public sector investment programme is predicated on the notion of partnerships with the private sector. Allowing Railtrack to go under, with no bail-out for the shareholders, would make private investors more wary of entering into such schemes and more determined to demand a higher rate of return.

As a result, straightforward public sector investment should appear cheaper by comparison. Railtrack's demise may not spell the end of the private finance initiative, but it will certainly halt its momentum.


The writer's book on the failure of rail privatisation, 'Broken Rails', is published by Aurum Press on 17 October