Railtrack seeks new sweeteners

Privatisation: Government urged to scrap golden share and change rules on property profits

PETER RODGERS

AND CHRISTIAN WOLMAR

Railtrack is fighting to make its flotation next year more attractive to the City by arguing it should be allowed to keep some of the profits it makes on property development, and pressing the Government not to retain a golden share that would allow ministers to block takeovers.

The moves follow the disclosure in Saturday's Independent that the Government is set to give the railways an additional subsidy of pounds 100m to cover the costs of Railtrack's inability to keep services running on time.

All three measures are seen as important to boosting the value of Railtrack when it is floated next April or May - after a long period in which City estimates of the company's value have more than halved from an initial guess of as much as pounds 4bn.

Under rail privatisation legislation, the company is due to hand any profits on property development back to the Government so they can be used to reduce the train operating companies' track access charges.

But Railtrack has told John Swift, the rail regulator, that there will be no incentive to develop trackside property if its shareholders do not receive a part of the action.

Although British Rail kept a large number of properties in public ownership, Railtrack was handed a considerable amount of land needed for operational use of the railways, including the stations. Much of this is certain to be developed when the property market recovers.

Railtrack's opposition to a golden share is thought to be based on the fact that this would depress the value of the company because it would remove any takeover premium.

At the likely flotation price of up to pounds 2bn, Railtrack would be an easy mouthful for a large company to swallow and there would be enormous embarrassment for the Government if, for example, the bidder were a foreign railway operator.

Railtrack's hostility to golden shares follows a statement from Professor Stephen Littlechild, the electricity regulator, last month that it had been a mistake for the Government to retain a golden share in the regional electricity companies. This contributed to the undervaluing of the companies when they were sold.

Railtrack is also believed to be arguing strongly for a flotation of 100 per cent of its shares, although the Government has so far committed itself only to selling 51 per cent or more. Department of Transport sources have said 51 per cent is the minimum.

The main argument put forward within Railtrack for a sale of the entire company is that it would reduce the political risk and potential disruption from an incoming Labour government, which could retake control by buying 2 per cent if only 51 per cent were in private hands.

It has also emerged that the Government and its advisers are considering a tender offer to institutions as one option for the Railtrack sale, because it might produce higher revenues than a public offer for sale. A proportion, perhaps 20 per cent, might still be kept back for the public at a discount to the tender price.

The additional pounds 100m subsidy would be funnelled to Railtrack through supplementary track access charges paid to the company by the train operators. It is to compensate for the financial risk to Railtrack of meeting tough new performance targets set by Mr Swift, which will increase the volatility of its profits and reduce the value of its shares.

Half the agreements on performance monitoring between Railtrack and the 25 train companies have been signed, with the remainder due to be completed by Christmas. It is a vital pre-requisite of the privatisation that these deals are sewn up since the performance regimes represent one of the uncertainties surrounding Railtrack's financial strength.

While Railtrack could lose a substantial proportion of its income - believed to be up to 10 per cent - the extent of the losses will be capped, and if Railtrack performs better than expected, it will receive extra money.

This capping was insisted upon by Railtrack as otherwise the risk would have been unacceptable to the private sector.