Experimental feature

Listen to this article

00:00
00:00
Experimental feature
or

The government’s decision to push Railtrack into financial administration in October 2001 2001 left the company’s shareholders in the company out of pocket, prompting them to take ministers to court in a case that is. The daily drama in the courtroom is currentlynow proving splendid political theatre. But the even biggest losers from this sorry saga are the taxpayers who are now funding the railways to the tune of £6bn annually a year in subsidies and debt guarantees.

Tom Winsor, the former rail regulator, estimated a year ago that administration had cost the public purse between £11bn and £14bn. What is more, Railtrack could have been saved as a going concern if its managers had not been arrogant enough to think they could cut a deal with Stephen Byers, the then transport secretary.

A small portion of the £14bn identified by Mr Winsor has been used to compensate shareholders – roughly £500m. The costs of the accountants and lawyers who helped transform the publicly-quoted Railtrack into the a not-for-dividend company, Network Rail, amounted to about £70m.

However, these costs clearly do not amount to anything like the huge sum mooted by Mr Winsor. During the year that the company spent in administration, it was haemorrhaging money. A cost-cutting exercise that would have seen 1,000 jobs lost in Railtrack’s headquarters was put on hold. But, crucially, the costs of operating, maintaining and renewing the railway doubled.

The problem during the period of administration was that The company had lost the discipline of the public market and shareholder scrutiny. Costs were allowed to balloon while amid because of lax internal controls. were lax. Network Rail was created in 2002 and new managers were able to start charting policy again, but it was not feasible to cut subsidies overnight.

There will always be a tension in a rail company between engineers, who want to spend a lot on the railway, and owners, who want to keep the costs down. In the 1990s, Railtrack skimped on its engineering programme in order to keep costs down and provide a return for shareholders. However, this approach was unsustainable after the serious accident at Hatfield in October 2000 2000 that was caused by a broken railin October 2000.

Hatfield was The accident proved to be a catalyst for change throughout the rail industry. The costs of a huge re-railing programme, along with compensation payments to train operating companies affected by speed restrictions, drained the companyRailtrack’s coffers.

Everyone in the industry, including the regulator, agreed that the consequence of Hatfield was that Railtrack needed more money. A regulatory review of the company’s finances to allow its charges to rise to take account of the massive rail renewal programme would have been feasible in 2001 – it was eventually granted to Network Rail, Railtrack’s successor, in 2003. The higher charges are now underwritten by the government.

But instead of throwing themselves onto at the mercy of the regulatorin 2001, Railtrack’s managers tried to cut a deal directly with the government.This was a fatal miscalculation which that gave the government the opportunity to push the company into administration. This was a fatal miscalculation: it gave the government the opportunity to do away with what it saw as a politically unpopular, failed construct. Pushing the company into administration seemed a cheap option at the time, but it has had massive repercussions. – and not only in terms of landing former transport secretary Stephen Byers in court today.

If Railtrack had sought an interim review of its finances in 2001, it might, – or it might not –possibly, be still going today. But the important point is that it would have been the shareholders, rather than the government, that would have been responsible for changing its failed management. And the shareholders would have taken the hit for any failure by the company to live within its means after a regulatory settlement had taken account of the Hatfield disaster.

Another important point is that, In addition, by allowing the management to be changed by the shareholders through the regulatory regime rather than through the course of administration that was followed, the government would have kept faith with the City. Evidence The dirty linen that is being washed in public with in from the shareholders’ court case shows the disrespect, even contempt, with which parts of the civil service hold the private sector. What must would-be participants in private finance initiative schemes in the future think of this? The summary dismissal and expropriation atà la Railtrack can give inspire private companies with little faith confidence when they consider future dealings working with the government. in the future.

Network Rail is now working hard to bring the railways’ costs under control, but the experience of the past five years has massive consequences – and not just for the railway industry. The extent to which costs have risen means it is difficult to find extra money for important new projects such as Crossrail, the proposed east-west link across London. Crossrail scheme. And will the private sector be willing to invest put in its two ha’porth after seeing it saw what happened to Railtrack?


The writer is editor of Modern Railways

Copyright The Financial Times Limited 2017. All rights reserved.
  1. new
  2. Free Lunch Martin Sandbu
  3. David Allen Green's blog David Allen Green
myFT

Follow the topics mentioned in this article

Comments have not been enabled for this article.