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Tuesday, 9 October, 2001, 16:42 GMT 17:42 UK
Railtrack and the private sector
Kings Cross station
Modernising the railways may become more expensive
The government's decision to pull the plug on Railtrack and send it into receivership could have broader ramifications for its plans to reform the public sector through greater use of private partnerships.

The move - which is likely to lead to Railtrack's 250,000 shareholders losing all their investment - could prejudice the climate against further government privatisations among investors who have previously believed that they were onto a bonanza.

Simon Fraser, chief investment officer of Fidelity Investments, said the decision "would inevitably colour investors' views of any company in which the government has an involvement".

On the other hand, it sends a strong signal to the unions, which have been campaigning against the extension of private sector involvement into the health and education sectors, that there are limits to the government's ambitions.

However, the government insists that it has not turned its back on plans for public-private partnerships (PPPs).

Indeed, it still seems determined to press ahead with the London Underground PPP, having named the preferred bidders who will take over the running of the track and stations for a 30 year period.

And the government says it will still expect to raise private money to help pay for the modernisation of the West Coast Main Line, as well as investing 30bn of state money into the rail system over the next 10 years.

The government has few genuine privatisations in the pipeline, with most of the profitable former state companies already listed on the stock market.

Its plans for privatising the air traffic control system, for example, involved a private sale, not a stock market listing.

Pragmatic approach

The change of climate was signalled by Prime Minister Tony Blair on the eve of the Labour Party conference, when he cited Railtrack on the BBC's Breakfast with Frost programme as an example of a privatisation that obviously had not worked.

It was a turnaround for the government, which had previously insisted that it was not going to renationalise Railtrack at the expense of other government spending priorities.

The government still insists it is not nationalising the company, only turning it into a non-profit trust.

However, it may now be more difficult for the new company to raise money on private capital markets.

It is still unclear whether bondholders, let alone shareholders, will get all of their money back.

"The creditors may get their money back... but may have to suffer some dilution of their rights," said Michael Wilkins of Standard & Poor's, the rating agency.

The agency has put Railtrack on credit watch, suggesting that it will downgrade its credit rating within days.

A lower credit rating would mean that it would become more expensive for the new company to raise money as investors would expect a higher interest rate in return for greater risk.

Broader questions

Shares in the train operating companies, and construction and engineering groups involved in railway maintenance, have also fallen sharply following the Railtrack announcement.

There are concerns that the train operating companies - who also receive government subsidy - could become the next targets of concern over under-performance.

And the whole nature of the relationship between Railtrack and the sub-contractors - who actually maintain the network - could be under review following the restructuring of the company.

"If the government genuinely wants the City to be involved in large-scale infrastructure projects it has to treat the City fairly," said Jeremy Batstone of NatWest Stockbrokers.

Private role remains

The government is relying on the private finance initiative to help pay for the cost of modernising schools and hospitals as well as roads and railways.

Under these plans, the private sector is paid a fixed sum over a period of years to design, build and operate everything from bridges to hospitals.

These plans are unlikely to be abandoned, because they offer the government - already facing a public spending squeeze that will be made worse by the worldwide slowdown - the chance to modernise the public sector without threatening spending targets.

And, unlike Railtrack, the private companies involved have legal guarantees about payment.

In a wider context, the government is still keen to use the management expertise of the private sector to help modernise the health service.

However, the government's other recent concessions to the unions - by limiting the ability of private companies to vary the terms and conditions of workers it takes over from the public sector - will also temper the enthusiasm for private-public partnerships.

Less than six months after Labour proclaimed that its central aim was reform and modernisation of the public services, its methods are undergoing a fundamental rethink.

See also:

03 Sep 01 | ppp
Is PFI a good deal?
01 Oct 01 | Labour
Labour avoids public services row
07 Oct 01 | Business
Gloom for Railtrack shareholders
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