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EDITIONS
Tuesday, 16 October, 2001, 16:24 GMT 17:24 UK
Railtrack's risky business
Someone has to bear the risk of failure
Evan Davis

How seriously should we take Tony Blair's renewed commitments to reform of public services?

He wants to use the private sector to help him, but given events at Railtrack, will the City ever want to do business with government again? And will those providing the finance in the private finance initiative (PFI), now boycott it?

Stephen Byers: wants to "magic away" risk
These are worrying times for those wanting the government and the private sector to act in partnership.

It's not so much the scale of the private contribution (although Gordon Brown's budget allowed for 3.5bn in private cash to go to public projects this year), but the fate of the whole public sector reform agenda.


Things went wrong at Railtrack, precisely because the allocation of risks was opaque.

Evan Davis
Private finance is meant to bring a more efficient private management with it, and above all, the idea is to get the private sector to take risks - to pay up, if costs go above budget, for example.

Without partnership, and without private finance, Tony Blair's whole reform agenda looks very thin.

Trouble for Byers

So, what are the prospects for private finance now?

There is a clear answer to this question. It all comes back to risk: who loses if a project goes wrong, and how much they earn if it goes right.

In the case of rail, and Stephen Byers' fledgling plans for Newtrack, the replacement for Railtrack, there is a serious danger that no private finance will be forthcoming.

For who is it that is taking the risk of future problems?

Mr Byers has made clear it is not the government who will be taking the risk (for they will not be guaranteeing the loans).

But equally, he says that there will not be profits in Newtrack, so it is hard to see why the private sector will take risks either.

The plan is for a new company that puts any profits it makes back into the rail network; but that in effect means, the rail network itself suffer if things go wrong.

If there is a cost-overrun on the West Coast line, investment in the East Coast line will be cut, as the profits won't be there to pay for it.

But wouldn't it be better to judge any investment on the East Coast line by its own merits?

Bearing the risk

In short, if there is one lesson from the Railtrack debacle, it does not appear to be have been learned: it is that risk needs to be allowed for, to be paid for, and to be clearly allocated in advance.

Things went wrong at Railtrack, precisely because the allocation of risks was opaque.

Shareholders were relying on implicit government guarantees, which were never properly codified.

And government now hopes it can magic the risks away, by removing the awkward shareholders.

But you can't, at least without replacing them with someone else who will expect to make profits if Newtrack does well.

You simply cannot create a company of the size, importance and probable cost problems of Newtrack, without some allocation of risk.

For example, what would happen if costs overran on a big future rail scheme?

Will the private money still flow?

What about public private partnerships more generally?

Fortunately for the government, Mr Byers does not seem to have blown it for everybody else.

In most schemes, the risks are allocated in advance; and they are properly paid for. Indeed, it is the process of allocating risks that has got the PFI so embroiled in lengthy bureaucratic delays.

In hindsight, those delays may be worth bearing. With total clarity on each player's role, the private money will still flow, albeit at a price.


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16 Oct 01 | Business
15 Oct 01 | Business
15 Oct 01 | Business
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