Regulator warns on Railtrack bale-out
Railtrack investors have been warned they must not rely on the rail regulator automatically to bale out the UK rail network operator.
Paul Plummer, the Office of the Rail Regulator’s chief economist, has told shareholders that if Railtrack gets into a financial crisis because of inefficiency or through mistakes it will not receive extra public subsidy to prop it up.
The warning is a blow to the company and investors who had assumed Railtrack would not be allowed to run out of money or lose its investment grade status. Railtrack is particularly vulnerable at the moment. It is about to announce big losses for last year, costs are soaring and its share price has more than halved since November. Investment bankers are already sounding out potential buyers in case the share price falls further.
Mr Plummer said it could benefit the rail industry if it stopped assuming that Railtrack would always get help, because it would force shareholders to demand more radical changes to turn the company round.
He said it would also be wrong for Railtrack to assume that it would get permission to charge train operators more to cover the rising cost of maintaining the network after the scare over cracked rails.
Railtrack faces a bill of at least £580m ($835m) for compensation and repairs following the fatal Hatfield crash last October caused by a broken rail.
“What’s needed is something much more radical,” said Mr Plummer. “Investors have to ask, ‘Would it be the best thing to force more radical change?'”
The ORR’s intervention was prompted by recent debate about the future of Railtrack. Many analysts, shareholders and commentators have talked of the regulator’s duty to ensure Railtrack keeps a single A credit rating in order to borrow, at reasonable rates, the large sums needed for the infrastructure.
But Mr Plummer said the regulator only had to ensure that Railtrack did not find it “unduly difficult” to finance its activities.
“Essentially, as long as they are reasonably efficient, we give them enough money to make sure they finance their activities, but if they have failed then there’s no duty to bale them out,” Mr Plummer said.
“What would happen to any company – and Railtrack is no different – is when the share price goes through the floor, shareholders start to make a noise and put pressure on management to change, or somebody comes along and buys them out.”
