Railtrack told to cut its charges

John Swift, the Rail Regulator, yesterday cut millions off the value of the soon-to-be privatised Railtrack and boosted slightly the prospects for rail franchises to be transferred to the private sector.

In a statement on the charges that companies will have to pay to use the railways after privatisation, Mr Swift criticised the Government's attempt to impose an 8 per cent rate of return on Railtrack's assets, which would have made it very expensive for train operators to run services and would have led to higher subsidies or higher fares. He did not specify a new rate of return but instead imposed a reduction on the charges that Railtrack could impose.

While the reduction imposed by Mr Swift is relatively modest, its impact on the profitability of Railtrack - and therefore on its market value - could be quite severe. He wants Railtrack to charge 8 per cent less than this year in real terms, and then reduce its charges by 2 per cent in real terms in each of the following five years. This amounts to a reduction for next year of £170m on total charges to train operators of £2.2bn.

The cut will help British Rail tackle its current financial crisis which has left it £400m short for the coming financial year.

Mr Swift said he wanted to "achieve a better balance of advantage between all the parties operating in the new railway market". However, he wanted to ensure that Railtrack could still be privatised, and while the expected receipts for the company will belower, it is impossible to assess how the new regime will affect its valuation - variously put at £3bn to £4bn.

Mr Swift said he was concerned with creating a "long-term stable regime for the railways" but he did not rule out future intervention if Railtrack failed to perform adequately.

He added: "I believe expected savings from greater efficiency should be passed on to Railtrack's customers, while leaving Railtrack with real incentives to reduce costs or increase revenue further. However, I shall also wish to be satisfied that Railtrack does not increase its profits by reducing expenditure on the renewal of its assets below the levels needed to deliver its obligations to its customers, or by compromising the maintenance of safety standards."

Railtrack's chairman, Bob Horton, said yesterday: "The regime we have to follow is tough and challenging but I'm sure we can achieve it."

Labour transport spokesman Henry McLeish said the regulator had driven another nail into the coffin of privatisation. "Who is really going to want to buy shares in a company where future income is to be cut by such a huge amount?"