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
Related Topics
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

Service Delivery Manager (Software Development, Testing)

£40000 - £45000 per annum: Ashdown Group: A well-established software house ba...

Digital Content Officer - Central London - £33,000

£28000 - £33000 per annum: Ashdown Group: Marketing Executive (Digital Marketi...

SSIS/ORACLE DBA

£400 - £401 per annum + competitive: Progressive Recruitment: SSIS Administrat...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Day In a Page

Read Next
Hillary Clinton said the role of president had become even more difficult in the 21st century  

This was meant to be Hillary Clinton's moment, but everyone’s still talking about Bill

Alice Jones
People hold the iconic rainbow flags at Pride  

Let's stop LGBT people 'coming out of the closet'

Chris Godfrey
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform