City delivers its verdict on who was to blame for the Paddington train disaster

THE OFFICIAL inquiry into the Paddington rail disaster was barely 24 hours old when the City delivered its verdict on who was to blame.Shares in Go-Ahead, owner of Thames Trains, plunged by almost 10 per cent yesterday. In contrast, the stock market value of FirstGroup, owner ofGreat Western Trains, barely moved, its shares falling by just 1p. Shares in Railtrack, which owns the country's rail tracks, signalling and stations, fellby almost 4 per cent.

THE OFFICIAL inquiry into the Paddington rail disaster was barely 24 hours old when the City delivered its verdict on who was to blame.Shares in Go-Ahead, owner of Thames Trains, plunged by almost 10 per cent yesterday. In contrast, the stock market value of FirstGroup, owner ofGreat Western Trains, barely moved, its shares falling by just 1p. Shares in Railtrack, which owns the country's rail tracks, signalling and stations, fellby almost 4 per cent.

Such knee-jerk reactions are the City's brutal way of translating human tragedy and, perhaps, human fallibility into cold financial statistics. There islittle to suggest that yesterday's share-price falls were driven by anything more sophisticated than trading-room sentiment.

But the Paddington disaster does raise three questions of fundamental importance for the privatised rail industry and its shareholders. First, has profitbeen put before safety? And, if so, how severely will the train operators be punished? Thirdly, what will the long-term costs be of Tuesday morning'stragedy?

Railtrack says that rail travel is now twice as safe as air travel and, moreover, that further strides have been made since privatisation. The frequency of"significant" accidents has fallen from one per million train miles in 1975 to 0.2 now, and Railtrack's objective under the latest railway group safetyplan is to further halve the level of risk over the next decade.

If investment levels are a measure of how much safer the railways are being made, then again, the statistics support Railtrack. Last year its operatingprofits rose 8 per cent to £430m. However, since privatisation in 1996, total investment in the network has reached £3bn - double thelevel under state ownership - and Railtrack plans to spend a further £27bn over the next 10 years.

At a time when the wreckage of Tuesday's crash is still being sifted for bodies and emotions are understandably running high, such statistics tend notto count for much. However, one of the advisers on the Railtrack flotation, David Freud, managing director of Warburg Dillon Read, says: "Once theneed to find someone to blame is sated we will be left needing a huge increase in rail investment above and beyond what Railtrack's balance sheet cansupport. The fact is that investors will want to make a decent return on their capital or they will not be prepared to put the money up.

"Unless the political recriminations get out of hand, then the outlook for the rail industry may not deteriorate as much as people may fear because ofthe pounds, shillings and pence argument."

Few observers doubt that the Paddington inquiry will result in an acceleration in the rail investment programme, particularly in systems directlyrelated to safety. Railtrack is already holding trials of a new Train Protection Warning System, ironically on the Great Western and Thames Trainsroutes, which would cost up to £1bn to install nationally.

The question is how much more quickly it may have to introduce the system and the extent to which this is borne by shareholders as opposed totaxpayers.

Wyn Ellis, transport analyst at Commerzbank, says: "There is little doubt that the rail regulator is going to insist on safety being given an even higherpriority and that ultimately means higher costs. If Railtrack has been skimping on its programmes then it is logical that its shareholders shouldsuffer. But if it is a question of the Government moving the goalposts then it is going to have to find taxpayers' money to pay for that."

Railtrack is in the midst of the periodic review of its access charges - the amount it can levy on train operators for use of the network - whilst the trainoperators themselves have begun talks with the new Strategic Rail Authority about the terms on which their passenger franchises might be extended.

The Bill to create the SRA gives the organisation much greater powers to intervene and direct the rail industry.

And as Sir Alastair Morton, the SRA's chairman, made plain in a speech on Tuesday, delivered less than an hour after the Paddington crash, thosepowers will be used to squeeze a better deal out of the rail industry for taxpayers and passengers.

"Looking forward, Railtrack has to raise its game well above its form to date, so do the train operating companies. The basic problems left byprivatisation must now be put behind us," said Sir Alastair.

Go-Ahead warned last month that it would not invest any further in either Thames Trains or its other franchise, Thameslink, unless the two seven-year franchises, due to expire in 2004, were extended significantly.

Its chairman, Professor Sir Frederick Holiday, also hinted that passengers might have to bear the cost of some of the service improvements, saying:"We must recover the cost of our investments by means of a longer franchise period based on realistic pricing. Cheap travel is not usually cheerful."

If initial reports are correct, however, and Britain's worst peacetime rail accident was caused by the Thames commuter train ignoring a red light andpassing in front of the Great Western express, then Go-Ahead will face calls to be stripped of its franchise altogether.

Up until now, the 25 passenger franchises have been looked upon as licences to print money because of the generous terms on which the previousgovernment let the contracts in its haste to complete the rail privatisation programme. Profits from Go-Ahead's two rail franchises increased last yearby 40 per cent to £14.5m.

However, the emotions generated by Tuesday's tragedy, together with the already poor reliability levels of the privatised rail industry, must make thisa nervous time for investors.

Much may depend on the Deputy Prime Minister, John Prescott, keeping a cool head. As one City observer said yesterday: "If he plays this wronglyand starts a vendetta against the rail industry then everyone will be a loser."