Steaming ahead with a licence to lose money

Surely the Fat Controller can explain what is going on over railway pri vatisation? Paul Wallace finds out

Share
Thomas the Tank Engine was puzzled. On the one hand, there'd been all those rumours coming down the line that half the network was going to be closed. A shiver went down Thomas's spine: that would be like the Beeching cuts all over again. But on t he other hand, the nice chief station master, John Major, had dismissed all that as a scare story. Who was he to believe?

Ah, there was the Fat Controller. He worked for Railtrack now. He'd know who was right. He'd understand how the Government's new model railway would work - and who would pay for it.

"What you've got to understand, Thomas, is that all these lines you steam up and down on are worth a small fortune. Just think of them - thousands and thousands of miles of track."

"How much are they worth?"

"£6.5bn."

Thomas gasped. He'd never been very good at figures, but that did sound like an awful lot of money. "How did they work that out?"

"The Government used a method called `modern equivalent asset valuation'. It's a fancy term for working out, more or less, what it would cost to replace the railway as it stands. They came up with the answer only this year."

"But how come there's all this talk now about closing down lines, if they're worth so much?"

"Well, £6.5bn worth of capital assets needs a lot of money spent on it to keep it up to scratch. And then the Treasury wants Railtrack to earn a respectable rate of return on all that money."

Now Thomas was even more puzzled: "There's something I don't get here. How come Railtrack is worth all this money if the railway makes such big losses?"

"Ah, that's the beauty of it. You see, what Railtrack does is to work out the charges it has to levy to make that valuation right."

"But who pays the charges?"

"The new operating companies that BR has been split up into - like Scotrail and South West Trains."

"But they make big losses at the moment, don't they?"

"Virtually every part of the network does. Even former InterCity lines need subsidy under the new charging system."

"So where will the operating companies get the subsidy from?"

"Most of it will come from nice Mr Roger Salmon. He used to work at Rothschild so he understands all about money. Now he's the franchising director and he's got pots and pots to dole out. The railway operators will bid for his money - eight of them as early as next year."

"Like the TV franchises? Will some top executives become millionaires like at LWT?"

"No such luck. The TV companies were bidding for a licence to print money. The train operating companies will be bidding for a licence to lose money."

"Lose money?"

"Yes, the least money. The company that calculates it will lose less money than all the others will be able to bid less, and it will get the licence."

"Sounds like a Dutch auction."

"More like a double-Dutch auction."

Thomas frowned. This was getting complicated. "This Roger Salmon sounds rather important. Where does he get the money from?"

"From the Treasury. You and me."

Thomas let out a big puff of smoke. "So it's taxpayers' willingness to subsidise the network that explains why Railtrack is worth so much."

"Exactly. In fact, since Railtrack was valued at £6.5bn, the flow of subsidy has doubled to £2bn a year."

"Wow. How come the railways are in such a financial crisis, then?"

"Well, that money's just a statistical fiction at the moment. Railtrack charges more and gets back more. So the Exchequer doesn't lose out for the time being. It's a financial merry-go-round. The actual railways are getting less because of the effect of the signal workers' strike and the cost of privatisation."

"So let me get this straight. What the Government will really be selling when it privatises Railtrack is this flow of subsidy."

"You are a clever tank engine, Thomas."

"Doesn't that mean that if there was less subsidy, Railtrack would be worth less?"

This time it was the Fat Controller's turn to frown. He hadn't thought about it that way. "I suppose so."

"So doesn't that mean Railtrack isn't worth £6.5bn at all - that it's only worth as much as the flow of subsidy from nice Mr Salmon? I mean, surely the valuation has to be based on what people are willing to pay for railway services, not some notional assessment of what the network might cost to rebuild. Particularly since no one would recreate the railway system in its present form if you had to start all over again."

"You've got a point there," conceded the Fat Controller grudgingly.

"So why did they value it at £6.5bn?"

The Fat Controller relaxed. He was back on home ground. "Think of it as an opening bid, Thomas. If you're going to sell something off, you don't give your hand away at the outset."

"So it's not worth £6.5bn."

"Of course not. It's worth what the City thinks it will be worth."

"Which is the amount of subsidy the Government will provide in the future. Doesn't that make the sale of Railtrack a bit like borrowing money?"

"With the interest payments taking the form of the subsidy flows in the future," agreed the Fat Controller. "Except the City can't be sure that future governments will be committed to those subsidies. Which is why many people think the Government will behard-pressed to raise more than £3.5bn. Mind you, that's still a nice little earner - enough to pay for 2p off income tax."

"But surely it can't be a cost-effective way of borrowing," persisted Thomas. "I thought the Treasury was always insisting it could get the finest terms in the market. If we have to pay for Railtrack's profits as well as the cost of running the system, the sale will be a very expensive way of borrowing. Particularly if it's then used to pay for tax cuts."

"Will be. That's the whole point, Thomas. When is Railtrack going to be sold off?"

"Before the next election."

"So who d'you think is to pick up the bill?"

Thomas let out a huge puff of smoke. Now he understood what was going on.

Hamish McRae returns next week.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Reach Volunteering: Financial Trustee and Company Secretary

Voluntary Only - Expenses Reimbursed: Reach Volunteering: A trustee (company d...

Recruitment Genius: Senior Project Manager

£45000 - £65000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Shopfitter

Negotiable: Recruitment Genius: This is an opportunity to join a successful an...

Recruitment Genius: Digital Sales Account Manager

£25000 - £30000 per annum: Recruitment Genius: A Digital Sales Account Manager...

Day In a Page

Read Next
Bill Cosby dismisses the allegations that have demolished his lovable TV persona as ‘innuendos’  

Bill Cosby's persona goes from America's dad to date-rape drugs

Rupert Cornwell
UK Border Control  

Do you think I'm feckless? I worked for two years in the Netherlands

David Ryan
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible
Look what's mushrooming now! Meat-free recipes and food scandals help one growing sector

Look what's mushrooming now!

Meat-free recipes and food scandals help one growing sector
Neil Findlay is more a pink shrimp than a red firebrand

More a pink shrimp than a red firebrand

The vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Bill Granger recipes: Tenderstem broccoli omelette; Fried eggs with Mexican-style tomato and chilli sauce; Pan-fried cavolo nero with soft-boiled egg

Oeuf quake

Bill Granger's cracking egg recipes
Terry Venables: Wayne Rooney is roaring again and the world knows that England are back

Terry Venables column

Wayne Rooney is roaring again and the world knows that England are back
Michael Calvin: Abject leadership is allowing football’s age-old sores to fester

Abject leadership is allowing football’s age-old sores to fester

Those at the top are allowing the same issues to go unchallenged, says Michael Calvin