Britain - Railtrack to "NewTrack" - bailing out privatisation

nov 2001

Railtrack plc is no more. The private company in charge of Britain's rail infrastructure was declared insolvent by a special High Court sitting on Sunday 7 October at the request of the Secretary of State for Transport, Stephen Byers. It transpires that the government had been considering the option of receivership since July. And Byers chose this option - "soft" bankruptcy - in order to allow for a more controlled landing of the company, rather than an outright crash.

Railtrack had become a bottomless pit for state subsidies. It was £3.8bn in debt and now the Board was insisting that it needed even more cash from the public purse, in order to keep the company afloat - £700m by December and an additional £1.7m by March 2002. The government had already advanced extra grants to the company because of the emergency track repair programme it was forced to undertake after the Hatfield derailment last October. How was Byers to justify further state handouts when the passengers were seeing no tangible improvements - despite the plethora of regulatory bodies, not to mention the recent string of enquiries to investigate failures?

Ironically, Blair's insistence, out of his respect for capital, that a privately-owned railway could "work", meant that whatever went wrong with it would be blamed on the government. If Railtrack went bust and failed to pay its bills, the government stood to be accused of incompetence. If ministers intervened to engineer a "soft landing", they stood to be accused of "renationalisation by stealth" - a most damning accusation in today's political world. And this is exactly what has happened.

Of course, renationalisation is the last thing that this government has in mind. They have not spent all these years bending over backwards to privatise everything they possibly could, to suddenly change their minds and deprive capitalists of the profits they can make out of an organisation as large as the railways!

Significantly, all Railtrack's lenders have already been given guarantees by Byers. Not only did assure them that any credit they have advanced would be repaid in full, but he also implied that lenders may even see a greater yield of interest payments in the future. In fact he has gone out of his way to ensure that Railtrack's credit rating would remain solid.

Byers may well have said in his official statement that "for Railtrack there will be no bail-out, no last minute rescue deal paid for by the taxpayer. Our action will see the end of Railtrack. In my judgement, the time had come to take back the track and put the interests of the travelling public first." But he also made absolutely clear that "the interests of the travelling public" are to be put into the hands of a new private company.

"Newtrack" as this new company has been dubbed by the press, will be a not-for-profit company, run on purely commercial lines but without shareholders and backed by government finance, in "partnership" with private venture capital. It will include on its board all the "stakeholders" ie, first and foremost, train operating companies (TOCs), then large contractors, but also union officials and passenger groups for good measure. Above all, it will give the private train companies a decisive role if not a "share" in the rail infrastructure.

To all intents and purposes, therefore, the replacement of Railtrack by "Newtrack" merely amounts to a repackaging of privatisation, with the possible involvement of more private partners along the lines of current PPP/PFI deals in public services. And while Railtrack plc **[will not be bailed out], this repackaging is designed to bail out rail privatisation, by ensuring more steady profits for the private sector, all underwritten by the government, at public expense...

An exercise in gross hypocrisy

None of this prevented the City in general and Railtrack bosses in particular from making loud remonstrations. Railtrack's chief executive, Steve Marshall, resigned in protest against the government's "shoddy and unacceptable role in Railtrack's collapse". And City brokers accused the government "which has spent a long time trying to snuggle up to the City" of "mugging investors"...

The seven Railtrack directors, who got an average £300,000/yr annual salary over the past five years for cutting labour costs, even went so far as to pose as champions of Railtrack's shareholding employees!

As many as 92% of the current 11,000 Railtrack employees are said to have shares in the company. When Railtrack was initially floated on the stock market, employees and pensioners were allocated 100 free shares, worth £190, plus an extra £2 worth for every year of continuous service. Hardly a windfall! Of course, workers could buy more at the "going rate" (£3.60 a share at flotation), but for those on the stations and in the signal boxes, this was a luxury few could afford. Later on, there were more annual share allocations for workers, as "bonuses" Signal workers in particular were given shares in the company instead of the regular wage rises they should have received - a cheap and insecure con. In fact Railtrack workers, especially those who provide "security" on the stations have some of the lowest wages in the rail industry. And many subsequently became ex-Railtrack workers, being subject to an on-going contracting-out process, which placed them in the hands of one cowboy company after another - with the corresponding cuts in wages and conditions.

In any case, workers' shares are only tiny in the scheme of things. But above all, they are merely a part of their wages and should be paid to them as such.

The hypocrisy of Railtrack's directors is further exposed by the only piece of information they have circulated so far to their employees since 7 October. This letter told workers to carry on working "as normal" as if nothing had changed. It also stated that neither Railtrack, nor the administrators appointed by the government, Ernst & Young, employ them during the administration period or accept any liability with respect to their contracts. In other words Railtrack's workers are not legally employed by anyone at present!

Byers said that "employees' pay and conditions will not be affected" and that "there were no plans for redundancies... Any transfer of core licensed network activities would comply with the relevant TUPE regulations." But, of course, once Railtrack is wound up and the new company takes over, there is no guarantee for workers whatsoever. As for TUPE (Transfer of Undertakings Protection of Employees Regulation), railway workers know from bitter experience under current Railtrack directors, that this "protection" is valid for one year (or two at most) and that afterwards, private contractors may do what they please with workers' conditions and pay. So of course, this exercise is putting jobs at risk.

Big shareholders shed tears

The real preoccupation of the City and Railtrack bosses has more to do with the big shareholders, of course. And some are very big.

The six biggest - out of a total 255,000 shareholders - owned 25% of all Railtrack shares! Morley Fund Management had a 4.5% stake (worth £65m on Friday 5 October, before the crash), while the US company, Fidelity Investments had a 4% stake. The others are Deutsche Asset Management, Legg Mason, Marathon and Odey Asset Management. These big guys immediately launched a joint legal bid for compensation. And 3,500 other investors, represented by a firm called "Class Law" and other big City solicitors are also threatening what legal jargon terms "class action" (probably oblivious of the irony). If nothing else, of course, there will be a bonanza for the lawyers!

Of course, some of the noise from big shareholders is really covert bargaining, and perhaps it was even welcomed by the government, as it could then be seen to "soften" the blow by announcing a few days later that shareholders could count on at least some compensation. But having stated that "no taxpayers money" will be used for compensation, Byers had to find additional finance, without this looking as if it was coming out of government coffers.

But he had been very careful to ensure that only part of the company was taken into administration in the first place - that is, Railtrack plc, the part responsible for running the track and signals - while Railtrack Group - which owns and manages the company's property portfolio - was left intact. This was precisely with the intention that something would be left for shareholders! So a total £1020m out of Railtrack Group's assets will be available to pay back shareholders.

Never mind the fact that Railtrack's big shareholders, at least, have made hundreds of millions in dividends, including a chunk of the £138m dividend paid out only a few months ago. Not to mention those - who may be present shareholders or others - who made a fortune out of the ridiculously high price reached by Railtrack shares - a peak of £17 in October 1998, almost five times the flotation price. Why should these rich companies be compensated at all?

In fact it could even be argued that by forcing Railtrack into receivership, Byers has in fact protected big shareholders from inevitable future losses. And these would have been far greater than is now likely: that they will be reimbursed at worst at £1.70 per share, possibly £2.80 or even the amount that Steve Marshall is suing for - the original 1996 selling price of £3.60.

A history of dependency

Railtrack's problems were bequeathed on the company right from its conception, in the smoke-filled rooms of Tory cabinet ministers. Rail privatisation was their last and most controversial privatisation and was carried out against opposition even from their own ranks. But once decided, it was pursued relentlessly, despite the flaws which had already appeared before the actual sell-off.

It was in April 1994, that Railtrack first began its life, when it was physically separated off from British Rail and became a government-owned company, in preparation for its privatisation. At the time it was valued at between £3bn-£4bn. In fact its total assets were huge: the whole of the national rail network infrastructure (10,000 route miles of track and signals), and a large property portfolio, including 2,500 stations, 90 light maintenance depots, 40,000 bridges, viaducts and tunnels, 9,000 level crossings plus stretches of surrounding land and buildings. And it had a guaranteed income from access charges to be paid by train companies for use of the track and stations. After a 2- year "practice run" as an independent "shadow company", it was sold in a public flotation for £1.93bn. The sale was launched on April Fool's Day 1996 and the flotation was complete by the end of May.

Sweeteners, on a scale not seen in previous privatisations had been added by Major's government. It put up £69m to fund the first dividend payment (guaranteed to produce a return of between 15-20%) due in October 1996, only six months after the sale! No wonder the final share issue was nine times over-subscribed.

In fact, the company was grossly "undersold". In September 1995, just prior to flotation, its total assets were valued at £4.8bn. What is more, the government had also taken over a large chunk of its debt so that its interest payments fell from £117m to just £35m for year one of privatisation.

But Railtrack's dependence on state hand-outs did not stop there. In fact, at least two-thirds of the £1m per day profits it made through 1997-1999, came straight from taxpayers' pockets!

Railtrack's income was generated mainly by the track access charges which were paid by Train Operating Companies (TOCs) and freight companies. But these companies received (and still receive) direct state subsidies which covered a large part of the access charges they had to pay to Railtrack. So in 1998, for instance, over £2.3bn of Railtrack's £2.5bn revenue came from its track access charges, 80% of which was financed by the state subsidy to train and freight companies. Out of this Railtrack managed to extract £398m profits, de facto paid by the taxpayer.

But how much money was actually left out of Railtrack's revenue for investment in projects to expand the network or modernise it? The answer is: nothing.

Of course. there was always the theoretical possibility for Railtrack to increase access charges in order to raise cash for investment. But these were subjected to tight controls built into the privatisation machinery, in order to avoid eroding the train and freight companies' profits. All the more so because, in theory, one of the purposes of rail privatisation was, in the long-term, to reduce significantly the state's subsidies to the railways.

Of course, there was always the possibility for Railtrack to cut costs by reducing maintenance and renewal work and by cutting jobs - which Railtrack did anyway, left right and centre. But the savings were only used to increase profits for shareholders. And had Railtrack been able to generate more revenue or reduce costs further, its directors would have used the cash to pay larger dividends, increase their own pay packets or invest abroad - like any other private company - but certainly not to make substantial investment to improve the network.

So, right from the word go, governments were left with the responsibility to fork out even more money for capital projects and stand surety for loans made against assets. And since they failed to do so, the result was a slow collapse of the entire network.

The real cost of private ownership

One year before its flotation, in March 1995, a study had been commissioned by Railtrack on the state of its infrastructure. It concluded that around £11bn would be needed to renew bridges, tunnels and sea defences alone. However, in its 1996 flotation prospectus, Railtrack's estimate for its total maintenance and renewal bill was only £1.39bn for the next ten years. No wonder, when Railtrack managers were polled on the question of privatisation of the company, in April 1996, that 82% of middle and 51.3% of senior management said the sale should not go ahead because there were "accidents waiting to happen" and because "safety systems were not in place" and that ill-informed consultants and inexperienced contractors were "entering the often dangerous railway environment."

The study's findings were swept under the carpet and the poll dismissed out of hand and nothing was done.

Signalling was to be one of the first casualties. After the Clapham Junction disaster, in 1988 - which happened before privatisation - the so called Hidden Report concluded that the only way to prevent such collisions would be to modernise the antiquated signalling system and the out-of-date warning systems fitted to trains, which were supposed to alert drivers if they passed a red signal. The decision to fit the only system which could stop trains travelling over 70mph if they inadvertently passed a red signal - Automatic Train Protection - however, was never implemented, purely on grounds of cost. And once privatisation had taken place this was actually ruled out and a cheaper system was decided upon (Train Protection Warning System - TPWS), which would not be effective for high-speed trains. But even the programme to fit TPWS was not even begun.

Two major train crashes then occurred which yet again exposed the vital need for an effective warning system, as well as the fact that the signalling network was in disarray. The first was at Southall in 1997, when a freight train unpredictably crossed the path of a high speed passenger train from Bristol. The driver, who was not expecting a red signal at this point, was unable to stop and 7 people died. The second crash was at Paddington, in 1999, when 31 people died and many victims were maimed for life because of the fire that broke out almost immediately after the collision. Like the Southall crash, the Paddington crash would also have been prevented by ATP, though the immediate cause was the malpositioning of a signal, so that it was not fully visible. In fact there have been many other accidents directly attributable to cost-savings on adequate signalling, such as Watford, but not as disastrous as these two.

Nevertheless, after years of enquiries and public campaigns, the latest report, by Lord Cullen on the Paddington crash, has failed to find anyone to blame, despite its criticisms of all the agencies involved, including Railtrack management and the private operators. There are to be no prosecutions.

However the scandal called by the Paddington crash did force the government to announce direct state intervention in the railways, for the first time since privatisation, with John Prescott committing government funds to instal (at last) the second rate, cheaper TPWS!

The other main casualty was track maintenance and renewal. Of course this was no longer an in-house operation for Railtrack - seven private maintenance companies and six track-renewal companies set up at the time of British Rail's privatisation were supposed to do the job. Nevertheless, Railtrack retained overall responsibility of this work, which it paid for and was meant to organise down to the smallest detail - in particular in terms of safety.

But since the 1990s, thousands of experienced and highly specialised engineers and workers who kept the so-called "permanent way" functioning under British Rail had already lost their jobs and either got out of the industry altogether or had been transferred to private engineering firms such as Jarvis and Balfour-Beatty, who were now contracted by Railtrack to do this work. Of course, these firms also wanted to minimise their costs and maximise their profits, so they often subcontracted the work to smaller "cowboy" operators - which further compromised its safety and quality. And the main means that all these contractors used to cut costs was to cut the workforce. This exercise had already been started by British Rail, in the run-up to privatisation. So between 1992 and 1997, the number of workers employed to renew and maintain infrastructure fell from 31,000 to around 15,000. In other words, it halved. And the "accidents waiting to happen" duly happened.

In 1996 Railtrack had cut by 50% the number of ultrasonic safety tests checks required on lines where speeds were less than 90mph. These tests, which monitored wear and tear of the rails, were conducted by contractors, who may have had "rules" to stick to but who were also ruled by the profit motive and had therefore every reason to use the cheapest labour and equipment, when this work actually required very specialised skills.

Indeed, Railtrack presided over the gradual reduction of rail monitoring and consciously accepted delays in rail replacement, even when cracked rails were past danger point. This was above all a matter of cost. But it was also partly due to the complicated system of fines and penalties for train service delays and the fact that, because there were so many contractors involved, ultimate responsibility was often unclear. Moreover, Railtrack management had neither the competence nor the interest to ensure that contractors carried out this work when it was necessary. By the end of 1999, the Rail Regular was threatening to withdraw Railtrack's license to operate the track because, among other things, the number of cracked rails which had been detected - even by these "reduced" methods - had increased by 21%.

But there was to be one more crash, the derailment at Hatfield on 17 October 2000, which was to expose Railtrack's responsibility without a shadow of a doubt and the fact that making profits out of the railways was a lethal exercise. Four passengers were killed as a result of "gauge corner cracking" in a curved rail, which the GNER high speed train hit at 115mph - the maximum speed allowed for this stretch of rail. And this derailment was to end up derailing Railtrack.

Papering over the cracks

Suddenly Railtrack was in the spotlight and the catalogue of neglect of the rail infrastructure was exposed. Emergency speed restrictions were placed on just about every line, and some were closed down altogether. Every inch of track was now meant to be "walked" in order to inspect its condition. All the maintenance and replacement work required by the track, accumulated through the backlog of years of pre- privatisation neglect and the "cost-saving efficiencies" of the four years since privatisation was now going to be done in "the biggest rail inspection and maintenance programme in a century". In fact it caused the worst disruption to the service in 100 years, officially lasting until June this year - and there are still speed restrictions on some stretches of track to date.

But this "emergency programme" cost over £1bn - money that Railtrack did not have. And how was it to pay its shareholders their dividends? Using the track renewal programme and the general chaos as a cover, the government immediately came up with what amounted to a £5bn additional direct subsidy for Railtrack! £2bn of it was meant to go towards the West Coast main line project (which threatened to be stalled due to cost overrun), £2bn for modernising signalling - including £1bn for the cut-price warning system (TPWS) promised by Prescott the year before and which was still not yet installed across the network!

Ironically enough, at that time, the Economist pointed out that the government was then advancing Railtrack an extra amount of subsidy equalling exactly the value of its fixed assets. It went on to say "If the government had taken an issue of new shares in return for its injection of funds, it would have owned almost half the company and, in effect, carried out its threats made while in opposition to renationalise the company. Instead it has taken a pragmatic decision to give away the money and hope for its return in the form of a safer and better railway."

How "pragmatic" this was, was shown when this additional subsidy immediately caused Railtrack shares to go up 13%! And this, in a context where the blame for the Hatfield crash had been laid squarely at Railtrack's door. Any other company's shares would have crashed. But the government's subsidy quite deliberately shored up Railtrack's share price. Whether Blair really believed in "its return in the form of a safer and better railway" is another question.

Despite this additional funding, Railtrack still over-ran its operating costs by £2bn, and demanded even more public money! Worse, when it already knew about the appalling financial mess it was in, its board insisted that shareholders receive their dividends - to keep up share values! It actually expected taxpayers to subsidise its payments to shareholders as well as everything else it did! It was £3.8bn in debt by June this year and if it continued with the West Coast main line project it would have over-run costs by £4bn. And this is precisely how Railtrack has managed, finally, to find itself called to order by the government.

In view of this saga, what is outrageous is not that Railtrack directors are now going to lose their comfortable salaries (if they do, which is not even certain), but that the government did not intervene earlier, to stop the profiteering of the rail companies at the expense of the public purse. The real scandal is that ministers went along with the rail sharks for so long, despite their criminal negligence and what it cost passengers in terms of casualties and day-to-day misery when commuting to work. But the worst scandal of all is that now that the government has finally decided to make a move, it has no intention of removing the threat represented by profit-making on the railways. On the contrary, private profit is, once again, the government's only concern.

The hidden agenda

Indeed, despite the disastrous image the working population now has of Blair's rail policy, the government is mainly concerned with tackling a problem which has nothing to do with passengers' interests.

While privatisation has provided a small number of train operating and other companies involved in the railways with profits, the infrastructure network has not been providing the cheap service it was meant to provide for the rail industry as a whole. In fact the way it has been structured and its own "regulation" has limited the potential profitability of the train operators.

The 1996 privatisation of the railways was supposed to provide that elusive beast, a "profitable private train and freight service" which was in fact based on the parasitism of these companies on the rail infrastructure which they did not provide but to which they had "cheap" access. But for this to have any chance of working, it was also necessary that the infrastructure should provide enough capacity.

However, the biggest cost to the private train companies has been track access charges. Given that the state subsidy, which pays a large part of these charges, is due to fall (at least in theory), train companies have to find other sources of revenue or else face shrinking profits. And already their profits are not all that great - a total £124m for the 25 train operating companies in 1998, although the loss-making companies included in the figure "reduce" the profits of the most successful ones.

In order to increase revenue, the train operators have been cramming passengers into trains and raising fares. But the capacity has reached its limits and in order to stay profitable - since fare increases (should) have a limit - the operating companies will need to be able to run more services.

So it became necessary to "deal with" Railtrack, both to reduce access charges and to speed up track modernisation so that train companies could have more, faster services, and therefore more passengers. And to ensure that the interests of the train companies are dutifully promoted by "Newtrack", Railtrack's successor, they will have a large representation on its board. Not only that, but to underline this commitment to the train companies, Byers has already appointed the present co-Chairman of Virgin Rail, Richard Bowker, to head the new company, with a £500,000 /yr salary and the power to hire and fire "Newtrack's" directors.

Talk about vested interests! And Byers has the cheek to claim this new structure will bring increased accountability! All in all, the government has found a way to help the TOCs maintain their profits, by establishing a company which will incorporate them and reduce their costs. It is just another way of subsidising the TOCs' profits. And not just the TOCs, since the government has already announced a public subsidy of £500m to "Newtrack" over the next five years in exchange for a 50% reduction in freight charges. So the freight companies will benefit straight away and, with them, the private industries which use rail to move their goods.

Although "Newtrack" is supposed to be a "not- for-profit company" which could be run by the state, it is also open to outside bids. Already a German state-owned company, WestLB and US finance house, Babcock and Brown, as well as Capital, part of Barclays, have expressed an interest in bidding to operate it. And this certainly means that a lot of profit can be made from this "not-for-profit company", which should come as no surprise. After all, it will have the responsibility to manage the £27bn already set aside by the government for Railtrack over the next 10 years. It will also have the power to issue bonds to raise more funds as well as to organise subcontracting deals for capital projects. Whoever is in control of "Newtrack" will be able to award profitable contracts to "friendly" companies.

It is obvious that, despite the token representation (if Byers' promises are indeed implemented) of trade unions and passengers on "Newtrack's" board, there is nothing in the design to protect passengers' interests against the greed of the various capitalists involved. And apart from the modernisation of a few long-distance lines, what do train companies care about the rest? There is no reason, therefore, for "cost efficiencies", in other words, the compromising of safety, to stop, when it comes to future day-to-day maintenance and renewal, since all they amount to in the eyes of those who put profits first, is a drain on income.

Worse, using the pretext of Railtrack's failure, many of the capital projects to improve commuter services in the South will be dropped. Since most commuters have no choice but to travel to work by train, improving travel and safety conditions on these lines will not bring more passengers and therefore will not bring more profit to the train companies. So why care about working people being ferried like cattle on suburban lines? Only those projects which are likely to bring in big profits for TOCs and freight - like the West Coast main line scheme for tilting trains and the Channel Tunnel link - will go ahead, with the government's full backing and funding.

Another recipe for disaster

It is extremely ironic that this new private initiative by the government is portrayed as an attempt to make the railways more efficient for the travelling public. Especially since the 1948 nationalisation of the railways was the result of a simple and indisputable fact: namely that private operation made it impossible to have a planned system of maintenance, improvement and smooth operation on a national scale. This was too costly for the profit makers, period.

The wastefulness of private enterprise on the railways in Britain was criticised as early as the 1840s! In 1865, William Galt, in his book "Railway Reform" compared the private British railway system to that of Belgium, where the network was planned and operated by the state. He found that planned construction was less expensive and more efficient than construction under competitive conditions. At the time his ideas were unacceptable to the House of Commons, under the sway of "laissez faire" - free market economics - and against state "interference".

During the three most critical periods in recent British history, however, the question of the merits of public versus private ownership was raised again. In 1914, the requirements of war brought the privately owned railways under the control of a Railway Executive Committee comprising the executives and managers of the leading companies, which arranged for instance for a common user scheme of wagons, reducing empty running from 60% in 1913 to 20% in 1919. The advantage of unified management was obvious. Even more so when it transpired that the fragmentation inherent in Britain's rail system contributed to the death toll of injured soldiers being transported from the front.

In 1918 a Bill was introduced which would have given the transport minister control of the whole network. But the Bill was kicked out after the 1919 general election due to the vested interests of the new Society of Motor Manufacturers and the railway bosses themselves. When increasing road transport led to a fall in profits from the railways, during the interwar period, a new Transport Act grouped the 120 existing private rail companies into just four, in an attempt to help rescue the industry, granting limited subsidies and fixing freight charges. But the merged private railway companies still remained in the red (even the largest among them, London and North Eastern Railway, paid no dividends in the run-up to WW2) and what is more starved the system of vital investment.

Again, during WW2, when the railways were required for the "war effort", the state intervened to manage the network centrally. But maintenance and improvements had already ground to a halt due to the drastic state of the companies' balance sheets. The damage to the railway infrastructure from bombing was severe. So when Labour passed the 1947 Railways Act, nationalising the system, it was in the first instance literally to "save" the network and in the second to reconstruct it, against a background of neglect, using public funds, thus providing cheap transport for goods and passengers.

The result of this centralisation was in fact dramatic. In a matter of just one year, productivity in the railways was the highest in Europe. But having established a truly national network, the government then failed to maintain investment from the late 1950s, so that by 1990, it was the lowest in the European Community. The main reason for this was that road haulage took over the transport of goods, and the majority of Britain's businesses no longer regarded the railways as essential. It resulted in the drastic closure of many lines - the notorious cuts imposed after the report of Dr Beeching.

Today, history is being repeated all over again, with the mess caused by private ownership and fragmentation. Of course, Labour politicians can read history books. And of course they can see what is in front of their noses. But their servility to capitalist interests means that they just cannot go down the only viable track - renationalisation and recentralisation of the network.

So today's "Newtrack" - a hotch-potch of public and private interests - whatever its final structure may be, is going to drain public finances, while it will fail to provide the vital improvements needed. At every step its activities will be curtailed by the capitalists' greed. Ultimately this is a recipe for disaster.

The "interests of the travelling public" can only be served if this travelling public - which consists in the main of workers, including railway workers - decides to board the "engine of history", as Marx called the class struggle, and fight for a social organisation designed to benefit all and not just a handful of profiteers.

4 November 2001