Get back on the rails


Whilst both the government and the market plays ever closer attention to the dismal performance of Railtrack it is worth asking why a separate track authority was needed in the first place. Given that the financial case is so compelling, how might Railtrack now be renationalised so as to achieve autonomy with real accountability?

The financial case for renationalising Railtrack is compelling. Its shares are now at around 330p. Giving back to the shareholders the 380p which they paid at flotation would end their misery. Railtrack’s current dividends total £170m per year. The annual interest cost of the indexed debt taken on to renationalise Railtrack would be less than £50m. Both institutions and small shareholders would be better off and there is a tidy saving to spend on better rail services. In the light of the government’s overall financial surplus, these numbers are small change. Future savings promise to be much larger.

The rail regulator was persuaded that Railtrack needed an 8% real return on its equity capital or about 6% more than it costs the government to borrow. That difference is needed to compensate potential investors for the uncertainties associated with Railtrack’s earnings stream. What is the source of these uncertainties? Railtrack is not a commercial business whose sales are subject to the vagaries of the market place. Most of its revenue comes from access charges from train operating companies which are fixed by the rail regulator. The principal – indeed, almost the only – uncertainty for shareholders is how much money the government will give the company. That is what analysts are arguing about. It is perverse that the government should pay the City large amounts to speculate about what it will itself decide.

Next, and significantly larger, would be the savings on future borrowings. In effect the Treasury stands behind these. The government will not allow the principal operator of its national rail system to go broke. But the price of pretending that the government might let it go broke is high. It is the difference between the cost of borrowing against the tattered credit rating of Railtrack and borrowing at the rate at which financial markets are willing to lend to the prudent Gordon Brown. The difference is large, and is money that would be better spent on new rolling stock.

Borrowing is something governments are good at. The case for privatisation was always that the higher cost of raising finance in the private sector would be offset by the greater competence of private sector management. For Railtrack, at least, that hope has proved to be unfounded.

Why did we ever need a separate track authority? At the time of rail privatisation, one strand of Conservative thought was that we could have a competitive railway system, in which different operators jostled to provide better services. The track authority would hold the ring, or rather the rails. Others had an objective of shutting the rail network down. They saw Railtrack as essentially a property development company, seeking uses for very long, very thin, pieces of land. These days, both competition and closure are more or less ruled out, and there is no continuing rationale for separating the ownership of the track from the planning of the rail network.

With Railtrack again under public control, it becomes possible to rethink how that planning should be done. The Strategic Rail Authority, the Office of the Rail Regulator, and Railtrack should be merged into a single public body charged with the development of the national rail system. This would be a far better merger than the widely proposed consolidation of franchises. The main success of privatisation is the entrepreneurial spirit of some of the smaller franchisees. We need more Chiltern Railways.

How does a new public rail authority fit into that? It sounds a bit like British Rail. The future structure must break with that dismal tradition. There has to be a different relationship between industry and government. The situation today – with a privatised industry that is wounded but not dead – reproduces many of the worst features of nationalisation. Interference without responsibility, blame without authority. Ministers pop up to comment on everything that goes wrong. Managers are scared to act without tacit government approval.

What is needed here – as in public services generally – is real autonomy with real accountability. There should be one negotiation – about how much money the government will put in. And then a new management should be allowed to plan the best railway system the money will buy. After that government involvement should be confined to hiring and firing the people who draw up these plans.

Such a renationalisation should not be the pay off that Aslef and RMT, the rail unions, long for. The new British Rail should not be allowed to hire any railwaymen. Everything done on the railways – from track maintenance to making sandwiches – should be franchised to the best available private operator. Operating franchises that are short enough that any franchisee who is less than the best available is fired. Again, real autonomy with real accountability.

Twenty year franchises achieve neither. The franchisee has permanent tenure, but no hope of being left alone for twenty years The rationale for offering these long franchises to train operating companies is that new investment requires long term security. This would be true if the franchisees were themselves putting up the money. But in reality the capital comes from banks. And they offer it because they know that whatever might happen to Virgin or to Stagecoach, the rail authority will need to make sure that trains continue to run. If British Rail gave that assurance directly, operating franchises for train companies could be short enough to ensure that any operator which failed its customers would be out.

The government’s commitment is to what works, not what is ideologically appropriate. Sometimes that means bringing the private sector in. And sometimes it means kicking it out.


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