Taxpayers foot `pounds 5bn bill' for rail privatisation

Rail privatisation has cost the taxpayer a net pounds 5bn, according to an independent study of the break-up of the industry to be published today.

The study, by a rail economics consultancy, lays most of the blame for the huge bill on the way the industry was divided up into nearly 100 separate businesses on privatisation.

It says that although rail privatisation has raised or saved pounds 13.5bn, the total costs of the programme amount to more than pounds 18bn when sweeteners to private operators and administration costs are taken into account.

The study, the first attempt to assess the financial impact of rail privatisation, says the Government raised pounds 4.5bn in sale proceeds and has saved a further pounds 6bn by cutting subsidies to private train operators.

However, these savings are dwarfed by the extra pounds 7bn cost of running the privatised industry because of its increased complexity, debt write- offs, the undervaluation of Railtrack and one-off transitional costs and sweeteners.

Dr Nigel Harris of the Railway Consultancy, the author of the report, said: "The results indicate that whatever other benefits there may be from a privatisation process, the financial impact has been negative. Privatising BR in the manner chosen by the Government has cost nearly pounds 5bn. Whatever the exploits of the new operators, it seems very improbable that benefits will be found which exceed these costs."

The figures in the study are based mainly on written parliamentary answers, select committee reports and estimates by the City.

According to the study, total grant paid to the railway industry rose to around pounds 2bn in each of the two years before privatisation. The most recent figures from the Office of Passenger Rail Franchising show that total subsidies in the coming financial year will be pounds 1.84bn.

The study puts the cost of preparing the industry for privatisation, including City advisers' fees and redundancy charges, at pounds 1.2bn. It also estimates that the pounds 1.9bn sale of Railtrack shortchanged the taxpayer by as much as pounds 2.4bn based on the book value of the company at the time.

However, the study says the biggest costs of privatisation - put at pounds 7.1bn - are the "interface costs" that result from 96 separate train operators, leasing companies, suppliers, infrastructure companies and engineering and maintenance units having to deal with one another. The Commons Transport Select Committee estimated these costs at pounds 850m a year, says the study.

The figures used by Dr Harris also include the pounds 1.3bn of debt in the industry written off by the Government and the assumed financial benefits that were lost through delays in upgrading the network while privatisation was being pushed through.

Some of the figures and assumptions used in the study have been challenged by the Government. For instance, it argues that the real value of Railtrack was not its book value but the price investors were prepared to pay.

The figures produced by Dr Harris do not include estimates of the wider economic benefits that could flow from privatisation such as shorter journey times.

Rail privatisation - was it worth it?

Costs pounds m Receipts pounds m

One-off transactional costs 1,200 Sale proceeds 4,455

Loss on sale of Railtrack 2,400 Franchise savings 5,985

Railtrack sweeteners 1,069 Tax revenues 1,184

Sweeteners to freight businesses 575 Revenue gained from new investment 159

Debt write-offs 1,229 Asset replacement adjustment 1,712

Revenue lost from delayed investment 425

Miscellaneous costs 80

Additional costs of running network 7,104

Regulatory costs 171

Access charge adjustment 1,160

BR efficiency savings at 3% pa 1,952

Expected economic improvement 684

TOTAL 18,049 TOTAL 13,495

NET COST: pounds 4,554