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

Recruitment Genius: National Account Manager / Key Account Sales

£30000 - £35000 per annum: Recruitment Genius: An opportunity has arisen for a...

Recruitment Genius: Operations Manager

£30000 - £35000 per annum: Recruitment Genius: An exciting opportunity to join...

Recruitment Genius: Recruitment Consultant

£30000 - £35000 per annum: Recruitment Genius: We have an excellent role for a...

Recruitment Genius: IT Support Analyst - Bristol

Negotiable: Recruitment Genius: An IT Support Analyst is required to join the ...

Day In a Page

Read Next
Pakistani volunteers carry a student injured in the shootout at a school under attack by Taliban gunmen, at a local hospital in Peshawar  

The Only Way is Ethics: The paper’s readers and users of our website want different things

Will Gore
 

Labour's Simon Danczuk is flirting with Nigel Farage, but will he answer his prayers and defect?

Matthew Norman
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick