For & Against: Putting Railtrack into receivership

John Redwood

goes head-to-head with John Spellar

Byers has almost derailed the PFI, says John Redwood
The government’s decision to force Railtrack plc into administration not only dealt a body blow to the railway industry, but will cause big problems for future public-private partnerships. Anyone contemplating a joint venture or an agreement with the government will now want stronger guarantees.

The government will discover it has a solution likely to undermine Railtrack Group shareholders, give bondholders and bank managers sleepless nights and raise costs for the taxpayer.

Not all the group assets are in administration, because only a subsidiary and not the group became the custody of accountants. Many of the assets stay with the group and do not pass to the administrator. They will not be enough to restore the full fortunes of all shareholders and bondholders, but it does mean the new company is missing some important investments of the old group.

Under pressure the government has now agreed to make the cash it was planning to spend on the railway available to the successor company. It may well need to increase the amount as delays will add costs and there will be big fees to pay for the administration and financial reorganisation. It certainly won’t be cheaper for the taxpayer.

Stephen Byers would like the successor company to be a not for profit company limited by guarantee with no new share capital. Such an animal is unlikely to attract the huge sums of private investment needed unless the government grants a full guarantee, tantamount to re-nationalising the business. The chancellor is unlikely to be happy with that, as it will count against the total for public borrowing. He might find another bid salvages more of the government’s battered reputation.

Anyone thinking of a venture with the government may well now want bigger upfront payments, or payments in escrow, to protect themselves against a change of mind by ministers. If there is no clear guarantee forthcoming, the private sector will impose a much heavier price for supplying the capital.Byers has caused big problems for himself, trying to modernise the railway and survive as a minister. He has caused even bigger problems for the government. It was banking on very large sums of private finance. These are now most unlikely to emerge. The private finance initiative, if not derailed, has at the very least a bad case of administration leaves on the line, or the wrong kind of insolvency.

  • John Redwood MP is a former minister of state at the DTI

Receivership was not ill-founded, argues John Spellar

John Redwood’s understanding of events surrounding Railtrack’s move into administration is not accurate. The government did not force Railtrack plc into administration. In April, when a substantial funding package was put in place, the secretary of state said clearly that ‘government stands behind the rail system but not behind individual rail companies and their shareholders, who need to be fully aware of the projected liabilities of the companies in which they invest and the performance risks they face’.

The sums agreed in April have been, and will be, paid – the government has withdrawn no agreed support. But the April settlement was based on a Railtrack business case that the company assured us was robust, but one which ultimately proved to be flawed.

Railtrack is a company with many excellent and dedicated staff, but also one with many problems. Not least of these is an endemic inability to control cost and manage contracts: the West Coast Main Line project has seen projected costs escalate from £2.1bn to £6.3bn; and there were over 1,000 temporary speed restrictions still in place some six months after Hatfield.

On 5 October the secretary of state decided he would not provide the considerable amount of extra funding requested, in addition to the sums already agreed in April, requested by Railtrack. He petitioned the court for the appointment of an administrator because he believed the company to be insolvent and that this step was needed to protect the nation’s railway assets.

The court made the order because it agreed with this assessment. Do not forget it was Railtrack that approached us over the summer looking for further financial assistance – not vice versa. Indeed, a recent article in Accountancy Age highlighted the fact that an examination of Railtrack’s recent accounts clearly indicated the company was facing severe financial difficulties.

Ultimately it will be for the administrator to evaluate any proposals put to him for a successor to Railtrack as network operator. We do intend to put our own proposals to him for a Company Limited Guarantee but we also welcome the interest shown by third parties and have recently published some guidelines which should assist in this process. There has been much speculation surrounding Railtrack in recent weeks and I hope this article helps to finally set the record straight.

  • John Spellar is minister of state at the department of transport, local government and the regions

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