Railtrack Plc Established and Sold

The Railways Act 1993, which empowered government to undertake this privatisation, was passed into law in November of that year. The first step was to set up Railtrack Plc as a publicly owned company separate from British Rail. Railtrack came into being in April 1994, vested with the fixed infrastructure assets of the network.

Initial progress with the creation of the passenger-service franchises was slow and, with an election looming, the political agenda changed. In November 1994, barely six months after Railtrack was set up, the government announced its sale into the private sector “within the lifetime of this parliament.” The company found itself the subject of a stock market flotation that was to be conducted with all possible speed and ahead of the letting of the passenger franchises.

Flotation took place in May 1996. Preparations had been accompanied by threats of renationalisation, should the Labour party come to power, and a low sale price reflected government’s concern to make the sale successful. In any event, the stock was heavily over subscribed and traded at a considerable premium from day one.

Optimism Rises then Falls

The years immediately following flotation were optimistic ones for the company. A largely guaranteed income from train company access charges, a healthy profit forecast and a triple-A credit rating all encouraged the company to set its hand to a large programme of network renewal, upgrading and development that included the West Coast Route Modernisation (WCRM) as the centrepiece. Thameslink 2000 was quickly added to the WCRM together with a ten-point plan for freight network development. An ambitious station regeneration project was launched, as were plans for major resignalling in the South East, Manchester and Leeds. By 1998, Railtrack’s Network Management Statement was listing no less than £16 billion of expenditure in the following ten years, and investors felt confident to drive the share price to £17, a five-fold increase on the sale price.

But all was not well. The haste of the British Rail privatisation and the extent of its fragmentation had denied Railtrack an adequate inherited record of the extent and condition of its operational assets, and plans to rectify this problem had been badly interrupted by the frantic preparations for flotation. The company was unable to flesh out the capital programme in the detail or with the certainty that the contract letting process required. Estimates had to be revised and dates adjusted. Regulatory concerns were expressed, and these extended to the slow pace of investment spending. Operational performance, too, was the subject of regulator’s criticism as the scale of hoped-for improvement did not materialise. Such concerns were largely muted until 1997, when the general election brought a change of government.

New Government Sets up Strategic Rail Authority

The new government was intent on putting “railways at the heart of transport” and took early steps to announce the setting up of a Strategic Rail Authority (SRA) to oversee the achievement of its ambitions. A new rail regulator was appointed who was quick to castigate publicly industry shortcomings in the delivery of investment and service commitments.

In late 1997 the Southall accident, which killed seven passengers, served also to unsettle public opinion over the success of privatisation. Media attention during 1998 focussed heavily on passenger criticisms that the rapid growth of traffic was creating capacity pinch points and a deterioration in service quality and safety. Railtrack’s 1998 annual report admitted “operating shortfalls,” and acknowledged that “passenger satisfaction levels do need to improve.”

John Prescott, the new Secretary for Transport, had quickly seized on rail problems. Appointing Sir Alastair Morton as head of the new SRA, he held a series of “rail summit” meetings, from which was established a national task force to implement recovery plans.

Railtrack and SRA Plans for Improvements

For its part, Railtrack embarked on a major programme of management activity designed to overhaul and improve control of operations and to improve the project management capabilities of the company. At the same time, Railtrack publicly expressed concerns that the emerging scale of necessary work on the network made the structure of access charging (charging the franchised train service companies) no longer appropriate. As this structure failed to secure for Railtrack an adequate share of the much enlarged revenues being generated by the train companies, it was, they said, “hindering further growth.”

During 1999 the SRA started to make known its own initial thinking. It was sympathetic to the argument that Railtrack needed better financial incentives but said the company must also take on “bigger risks and bigger investments.” The franchised train service companies too were to be encouraged to invest more by increasing the length of the franchises, and the SRA announced that the shorter term franchises were to be re-let and put out to competitive tender. The winners would be those companies that committed to major investment in service capacity, high performance and customer care, working in close collaboration with Railtrack.

Railtrack’s 1999 Network Management Statement outlined a 10-year programme of network investment now no less than £27 billion, including new commitments to upgrade the East Coast Main Line and provide a direct southern access to Heathrow International Airport. Train delays were to be reduced by 12.5 percent by the end of 2000, and a track-quality programme to be completed by April 2001 was to deliver the highest level of track quality ever.

Railtrack’s 1999 Annual Report acknowledged pressures from both SRA and the Office of the Rail Regulator to better deliver its public service obligations. A Public Service Agenda was identified with commitments to the active management of train performance and the implementation of new maintenance contracts that would see a move by the contractors from “the management of the contract to the management of the asset.”

Major Accidents Add Pressure on Railtrack

Tragically, in October 1999 a collision took place at Ladbroke Grove, outside Paddington Station, that killed 31 people. The nation was shocked and the media turned on Railtrack with a campaign of vilification that fed on the notion that to be private and profitable was to be careless about safety. This position was neither objective nor justified, but it caused a considerable loss of confidence of shareholders and of government. Railtrack proposals to take over responsibility for part of the London Underground network were stood down, and ministers and the SRA took up a more interventionist stance on the content and methodology of major investment projects.

Barely had the public inquiry into Ladbroke Grove opened when another major accident took place, this one at Hatfield on the East Cost Main Line. As a result of defective track, a train running at high speed was derailed and several vehicles overturned, killing four people. Totally shocked that its systems of inspection and repair could fail so catastrophically, Railtrack applied temporary speed restrictions across the network and put in hand an urgent examination of track quality throughout the system. The results prompted a programme of relaying of unprecedented scale, the impact of which increased journey times and shattered reliability throughout the network, to last throughout the remainder of the year and up to the present time.

The impact was devastating for the industry. Passenger carryings fell significantly. Freight contracts were lost. The claims against Railtrack amount to some £500 million or more. The company’s role in the industry was seriously questioned, with suggestions that it should lose responsibility for major projects and instead confine itself to maintenance activities. Perhaps more significantly, the share price fell to a point where the company’s ability to raise capital for major investment was badly impaired, and the confidence of the financial markets so shaken as to make it necessary for government to take on the necessary risks and financial participation if the vision for the rail network is to be carried through.

Replacement of both the Railtrack chairman and its CEO brought little relief to the company. Throughout 2000, both the planned technical innovations and the project milestones of the WRMC were proving elusive, and the rising costs of this and other elements of the network plan drove Railtrack increasingly to look for government to underwrite greater financial support, whilst trying to write down the scope of some projects. With the appointment of Stephen Byers as the new Secretary of State for Transport in 2001, it seemed initially that government would keep faith with the company and make the necessary funds available. But by the third quarter of 2001, Byers’ resolve had seemingly evaporated, and in an apparent about-turn, in October he announced his decision to pull the plug on support for Railtrack. The share price collapsed immediately, and it was only days before the company was put into administration, where it remains today.

A View Toward the Future

The natural instinct of many in the socialist government—and elsewhere—is to bring railways back into state ownership. They conveniently forget the sorry history of British Rail’s investment record, and overlook the practical problems and the cost of renationalisation. Government realises that with priority of public spending in the health and education fields, there is a necessity for on-going private sector funding of rail on a large scale if it is to remain a vital transportation mode in the UK.

Government’s immediate aim is to remodel Railtrack—or its successor—into a “not-for-profit company,” a concept that many financial analysts and those in the City have difficulty with as a recipient of institutional investment funding. It will inevitably result in dearer funding.

Progress of WCRM proceeds, to a reduced scope, but other investment projects are called in by the SRA for re-examination, and the much vaunted process of reletting the passenger franchises is seemingly at a standstill.

What is clear is that the infrastructure controller of the network, Railtrack or its successor, must continue to play a pivotal role in any route modernisation and investment that impacts on the running of the system. Train services must operate to a disciplined plan, and upgrade works and renewals must, with rare exceptions, take account of
operating needs. Someone has to be in overall control and accountable, and that is Railtrack.

The first five years of privatisation have been traumatic. But lessons have been learnt, and the whole industry is wiser. Companies realise the extent of the interdependence on one another. Most of all, in this time members of the public have shown through their additional patronage their enthusiasm for rail as a way to travel provided it is easy to use, safe and can be relied on. The way forward for Railtrack and the train companies is through collaboration, releasing the inherent potential of the industry and its people, and matching these with the resources and skills of partners whose experience is derived from other business scenarios. The new chairman of the SRA, Richard Bowker, and Railtrack’s new CEO, John Armitt, both inspire a cautious confidence that things really can start to move forward again. It is with them that PB has a valuable contribution to make.