Railtrack crash

Railtrack, the company to which the government sold British Rail’s tracks, signals and stations for what was considered at the time (1996) to be the bargain-basement price of £1.8 billion, has gone bust. On Sunday 7 October the government announced that it was using its powers under the Railways Act of 1993 to put the company into administration because of its insolvency. If the company were to be required to meet all its existing and contingent liabilities, including the cost of administration and liquidation, it is thought the company’s shareholders would get nothing for their shares. All in all, history would appear to have delivered its verdict on the ill-advised fiasco of railway privatisation.

There is general agreement these days among the various commentators in the bourgeois financial press, who now have the benefit of 20-20 hindsight, that railway privatisation was never a good idea. The enquiries into the Southall, Paddington and Hatfield rail disasters demonstrated that any privately-owned concern of necessity set the interests of shareholders against those of public safety. Money used up in dividend was money not spent on essential safety measures.

More than that, the form of privatisation adopted for the railways, a form that separated the ownership and control of the track from the ownership and control of the rolling stock, was one which set the interests of shareholders in Railtrack against those of shareholders in the companies that run the trains, with the outcomes of these antagonisms being settled not by any rational attempt to balance pros and cons, but by financial clout and the legalistic interpretation of fine print. Privatised companies, we are told, have the merit of being able to make important decisions far faster than nationalised behemoths – it can now be seen, however, that these decisions tend to be correspondingly ill-considered.

Worse, by separating the track from the trains, the particular form that privatisation of the railways took also broke up the teams of people who had looked after the tracks for years; who knew the railway like the back of their hands, and who had developed reasonably effective lines of communication. Their working practices had grown up over the years in direct response to the needs of Britain’s grossly under-funded railways and it is now clear that they were the fuel that kept the railways going in spite of gross under-investment. In the Thatcherite anxiety to blame the ills of under-investment on the supposedly inherent ‘inefficiency” of nationalised industries, the privateers completely lost sight of the fact that it was ordinary railway workers’ co-operation and collaboration, strong sense of public duty and years of accumulated experience which were keeping the show on the railroad. After Hatfield the realisation dawned among several bourgeois commentators of what irreparable damage privatisation has done to the railways, but by then it was all too late.

There are certain industries that even under capitalism, and even in the interests of capitalism, are generally best nationalised. Essential services which, in the interests of capitalism itself, must be maintained regardless of profitability are obvious candidates, particularly when huge investment, way beyond the means of privately-owned businesses, is required. This is why railways were nationalised in the first place. Nobody imagined it was done for the benefit of the working class!

Nationalisation, however, also has its down side as far as capitalism is concerned. On the one hand, there are always parts of the industry that would be profitable if they were in private hands and were not carrying the other parts of the service. When capitalism is in crisis and desperately looking for profitable avenues of investment, the clamour of demands to be allowed to pick the cherries off the publicly-owned tree becomes deafening and, to a bourgeois government, irresistible.

Another down side is that whereas a nationalised industry welds thousands of workers together as a mighty workforce, it also welds them together as a mighty fighting force with the capacity to defend their own interests as employees. They have the power in defence of their living standards, and also from time to time in the interests of safety at work – for themselves and others – to ‘hold the country to ransom’ (in other words, they can hold the bourgeoisie to ransom to some extent). This, naturally, is a state of affairs that the bourgeoisie cannot but deplore.

Nevertheless, for all that its workers were supposedly able to ‘hold the country to ransom’, British Rail was still able to run tracks, stations and signals on the basis of a government subsidy of a mere $1 billion a year rather better than Railtrack has been able to do in the last 5 years with subsidies averaging £3 billion a year.

Although undoubtedly some part of Railtrack’s government subsidy relates to the fact that the effects of decades of under-investment need urgently to be reversed, it remains true that a privately-owned enterprise is very expensive from the point of view of how much it has to pay for the use of the money advanced to it, as well as from the point of view of management costs. Use of money

While the government could borrow at low rates of interest – say 4% – had it wished to do so to finance British Rail, the cost of raising money on the stock market is much higher. Railtrack shareholders expected at least 8% return on their investment. Failure to pay that amount would mean an even more rapid fall in the share price than in fact occurred after the Hatfield crash, and inability of the company as a consequence to raise more money on the stock exchange to finance the provision of the various modernisation schemes that were in the pipeline. The high dividends either have to be paid from operating profit – and profits before Hatfield were maintained at the expense of essential engineering work – or from government subsidy. After Hatfield, without a substantially increased subsidy the whole Railtrack enterprise was bound to fail.

It was, of course, dubbed ‘mismanagement’ on the part of Railtrack’s board that they allowed costs to escalate. Profits in privatised concerns are supposed to be generated not at the expense of essential engineering works but on the basis of greater ‘efficiency’, i.e., by reducing the wages bill – making staff redundant, squeezing more work out of those that remain, using cheap unskilled labour rather than expensive skilled labour. These measures, however, proved insufficient to generate the kind of money Railtrack needed, especially after Hatfield. On the one hand it seems clear that British Rail was already ‘efficient’ in that its staff was underpaid and overworked, so that there was not all that much more that could be squeezed out of them. On the other hand, the sums required to put the railway system in reasonable order were so gigantic that these ‘efficiency’ savings could not even begin to generate sufficient income.

Management of the nationalised industries tended not to be paid the huge salaries that the top managers of stock-exchange quoted companies are paid. Railtrack’s top managers were getting salaries of up to half a million pounds a year. On top of that there are always perks, bonuses and share incentives. In addition, if these managers fail hopelessly at their jobs, they are given enormous golden handshakes when they leave. Gerald Corbett, the chief executive of Railtrack at the time of the Hatfield crash, had been ‘earning’ over £400,000 a year. He received another half million or so as compensation for resigning! A similar scenario arose a few weeks later when the company got rid of Jonson Cox, Railtrack’s chief operating officer. When he joined the company in the autumn of 2000, he was paid a £106,000 ‘golden hallo’ and was given some 90,000 Railtrack shares, which would have been worth about £1 million at the time. His salary was £300,000. He left the company in disgrace less than a year after he was appointed, and in return for his resignation was to be paid up to an extra 13 months’ salary!

Now that Railtrack is no more, there are expected to be over 1,000 management redundancies. Non-managerial staff are being kept on – the railways cannot run without them – but clearly the management is considered dispensable.

In addition to these expenses, Railtrack has to meet other expenses arising purely from the antagonisms created by separating track from rolling stock:

“Earlier this year Railtrack and the operators admitted to employing more than 300 staff just to argue over who caused which delays” (Juliette Jowitt, ‘How the privatisation experience was derailed by conflicting interests’, Financial Times, 8 October 2001).

It is difficult to sympathise with the Railtrack shareholders who bought shares in the company in the belief that the government had sold the railways cheap and that they were investing in a dead cert. Because it suited the government to have the costs of modernisation met from private investment, the government was only too happy to encourage such illusions, which still linger. For instance, in the Guardian of 8 October 2001 ‘From sell-off to takeover via incompetence’, Keith Harper claims Railtrack “was sold off at a rock bottom price of £1.8 billion, at least 4 times less than the value of its assets. The knock-on effect of rail privatisation created multi-millionaires within weeks”. What K Harper does not realise, however, is that the ‘value’ was as illusory as that of a house built on crumbling foundations. Christian Wolmar, writing in the Independent of 8 October (‘Railtrack: a flawed idea from the start’), was far better able to understand the reality:

“When privatisation of Railtrack was first mooted in 1995, I wrote on these pages that you would not catch me buying the shares because they were worthless. When they soared to £17.68 in late 1998, over four times the May 1996 flotation price of £3.90, it seemed the opposite was true – that the general public had been ripped off because the company had been sold too cheaply. In fact it was the shareholders who had been sold a pig in a poke. Railtrack owned a railway which had been so underinvested for so long it was virtually worthless. It was hardly surprising that the Treasury blocked any attempt to conduct an asset register of the network, since it would have revealed billions of liabilities, which would have made the company unsellable. The company’s contingent liability far exceeded the value of its assets; but this was disguised by the Byzantine financial structure which no one, certainly not anyone in the City, could fathom”.

In the days before the Hatfield crash, the price of Railtrack shares soared because of profit figures artificially inflated through neglect of essential engineering works. Many shareholders who bought and sold at the right time made huge killings. Those who have lost money nevertheless invested it in the expectation of making huge profits, and many of them expected their return to be guaranteed by the government. It appeared that the government had ‘agreed’ to ensure there was always enough money available to pay at least an 8% dividend. In fact, in making its subsidy calculations, the government had agreed to exactly that. What it had not foreseen, however, was the extent of Railtrack’s losses, and in the end it was not prepared to fund those, pay an 8% dividend as well as finance huge management costs – and then find itself with a worse rail service than British Rail used to provide.

The dire financial picture was drawn by Juliette Jowitt in the Financial Times of 26 May 2001, in an article drawing attention to the “growing hole” in Railtrack’s finances:

“On Thursday [May 24] the company revealed the latest bad news: rail maintenance and replacement costs – in its core business – are to rise by £700 million a year. That amounts to £2 million a day.

“Add in rising costs, and efficiency and performance targets set by the rail regulator that Railtrack claims it cannot meet, and the company needs another £4.3 billion over the next five years.

“That is on top of a rising debt mountain, forecast to hit £8 billion in 2003.

“And on top of that there is a list of potential project overruns and claims risks Railtrack cannot yet price; estimates range from a few hundred million pounds to as high as £2 billion. To say nothing of what could be the positively devastating impact if another fatal train crash were to happen.

“What investors do know is that these are huge numbers for a company worth £2.2 billion last night; and nobody – directors included – yet knows how they are going to pay the bills.”

To some extent the spiralling of costs out of control has to be blamed on poor management. As the Economist of 13 October 2001 (‘Failtrack’) says: “Dreadful management made things worse. Top jobs went to executives with no knowledge of the industry; [and] they called in consultants to advise them with no knowledge of the industry…” However, the Economist takes the view that:

“Even if the railways had been impeccably managed and in tip-top condition, privatising the tracks would have been a mistake… Railtrack, a monopoly operator of an essential service, was never going to escape from political control. It was so tightly regulated that it had little scope for increasing its income, and ministers demanded improvements in performance and expensive new safety measures without giving the company the freedom to pay for them.”

Moreover, “on the evening of October 5, the transport secretary, Stephen Byers, called in John Robinson, the boss of Railtrack, … to tell him he was going to announce that the company was bankrupt…

“The contempt with which Mr Byers treated the men the government had appointed to run Britain’s railways was born of frustration. They were supposed to sort out the mess and they had failed. But they never had much of a chance…

“The problem always centred on Railtrack, which was charged with operating a run-down network. From the day of privatisation its revenues were more or less fixed, according to a formula laid down by its regulator. But nobody, not least Railtrack’s management, knew what its costs would be. There was no proper inventory of the state of the track and signals, and therefore no idea of how much investment would be needed to fix them. Even supermanagers could not have made a go of Railtrack.”

Since it was the government that appointed Railtrack’s top managers, one cannot but ask, how come only people with no knowledge of the rail industry were appointed? Could it have been that anybody with any knowledge – who perhaps might 5 years ago have hazarded pretty accurate guesses as to the likely costs of modernisation- was passed over in favour of charlatans prepared to tell the government what it wanted to hear?

The government is proposing a Livingstone-style arrangement whereby stations, tracks and signals will be the responsibility of a non-profit making company limited by guarantee, run by a committee drawn from the train operators, passengers and the Strategic Rail Authority. As a result, however, of the government letting Railtrack sink, private investors will not be falling over themselves to supply the cash needed for rail modernisation. As Railtrack mark 2 is to be non-profit making, it will not have shareholders (who can only be rewarded by distribution of profit), but will have to borrow money. The financial press is taking the view that loans will not be forthcoming unless the government guarantees repayment. The Economist’s view of this (‘Failtrack’, op. cit.) is that “Fancy names may enable the government to keep Railtrack’s liability off the public sector borrowing requirement, but the fundamental issue cannot be fudged. Railtrack has the same problem as it had in 1996. It needs investment or its performance will deteriorate still further.

“However the government chooses to describe the status of son of Railtrack, it is not private shareholders who will finance this new company: it is the bond markets. The government will, in effect have to underwrite any future investment, which means that the rail network has been renationalised in all but name.”

It should be mentioned, however, that by hiding behind a company limited by guarantee the government is not only going to be able to massage PSBR statistics but also to avoid liability to all but the powerful business interests that it dares not cross. Where the government’s bourgeois masters demand payment should be made – e.g., as at present in the case of some modest compensation to Railtrack’s undeserving shareholders – or guarantees given, then this will be done. After all, “if they [the government] want to access £30 billion for rail programmes over the next 10 years, they will need to keep existing investors sweet” (Jonathan Marley, associate director of Standard & Poores, quoted by Martin Dickson in the Financial Times of 10 October 2001, ‘A sense of betrayal in the City’).

On the other hand, if there were to be another rail crash those injured and the families of those killed will only be able to claim against the company, and if it is unable to pay – which is probable – then they will get nothing.

In our view, however, the main criticism of the Railtrack mark 2 scheme is that it will raise money from the bourgeoisie to whom interest payments will be made in return for use of the money. These interest payments, even if lower than the dividends formerly paid, will nevertheless amount to millions of pounds which would have much more usefully been spent on the railways. The money for modernising the railways should be raised by means of a tax which falls disproportionately heavily on the rich. Furthermore, the entire transport system should be renationalised without compensation so that it can be maintained from taxes without enriching the kind of parasitic elements that benefit from privatisation.

In the absence of renationalisation there is still a silver lining on the cloud of gloom that hangs over Railtrack’s financial collapse, and that is that investors will realise from this debacle that to invest in government schemes is decidedly risky. They will therefore demand higher returns, which any government would prefer to ignore. This may well put several projected PFI initiatives in jeopardy and several projects may find themselves remaining in the public sector as a result. The cost of attracting private investment may thus become so high that the government is forced to have recourse to public finance.

Furthermore, the government’s case for privatising the London underground along similar lines to the privatisation of British Rail has crashed alongside Railtrack. Those opposing the privatisation of the London underground now have an unanswerable case. The Financial Times itself is urging the government to abandon its plans: “the government can and must go back on its plan for a similarly botched structure for the tube”.

Time will tell whether the government is capable of learning anything at all from its mistakes.

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