Railtrack warns subsidies may have to rise by £1 billion to fund upgrade

Public subsidies for Britain's rail network may have to rise by as much as £1bn a year to fund the industry's ambitious investment programme, Railtrack warned yesterday.

Public subsidies for Britain's rail network may have to rise by as much as £1bn a year to fund the industry's ambitious investment programme, Railtrack warned yesterday.

This would result in taxpayers' support rising from the current level of £1.3bn to £2.3bn a year rather than falling to £700m by 2004 as is currently envisaged.

The new estimates for the amount of subsidy the Government may need to pump into the rail network to help support Railtrack's investment plans - now estimated at £40bn - came as the rail regulator, Tom Winsor, published his initial proposals for the company's access charges from 2001.

These show that Railtrack is forecasting a need for a 47 per cent increase in the charges it levies on the train operating companies from £2bn now to £3bn from 2001 to fund its 10-year investment programme, which includes £16bn of maintenance and renewal expenditure and £11bn of enhancements.

The bulk of Railtrack's access charges are funded through subsidies paid to the train operators by the franchising director.

However, officials at the rail regulator's office said Railtrack's figures "beggared belief". They calculated that access charges would only need to increase by a maximum of 18 per cent if Railtrack improved efficiency levels and achieved its investment programme for less money.

The rail regulator also claimed that Railtrack could fund most of the increased cost of the West Coast Mainline upgrade - now expected to total £5.8bn - with a rise in access charges of just 2 per cent.

But Gerald Corbett, chief executive of Railtrack, insisted that subsidies would need to increase by around £1bn and perhaps more even if additional money was raised from the train operating companies by lengthening their franchises and fare income rose sharply.

"A bigger and better railway is going to cost more and it cannot all be funded from the farebox," added Mr Corbett.

Shares in Railtrack soared another 13 per cent yesterday after Mr Winsor confirmed that his proposed formula for setting the company's charges for the five-year period from 2001 would be more lenient than expected. The shares have risen by a quarter since Monday after falling to a two-year low earlier this month.

Railtrack will be allowed to earn a rate of return of 7 per cent while the regulator has proposed valuing its asset base at £4bn. Although the proposed rate is less than the current 7.5 per cent, it is substantially more than Mr Winsor's predecessor had proposed and above those granted to either the electricity or water utilities.

Railtrack will also be required to make efficiency gains of 5 per cent a year - equivalent to a reduction of £100m a year in its cost base. Some of this will be achieved through greater efficiencies in Railtrack's maintenance and renewals programmes, which account for 65 per cent of overall costs. But Mr Corbett said there would also have to be job losses.

Although he maintained the new charging formula was "too tough" he welcomed the fact that it would align Railtrack's financial incentives with its public service obligations.

The rail regulator calculated that the new formula would reduce Railtrack's profits to £290m from £430m last year. But Norman Broadhurst, Railtrack's finance director, said this figure took no account of profits it could make from enhancement projects.