MARKET COMMENT
Railtrack Derailed By The Government

By David Kuo (TMFDragon)
October 8, 2001

Carburton Street, London -- There will be much finger wagging this morning following the collapse of Railtrack (LSE: RTK). On the one hand, those who were opposed to the privatisation of the rail industry at the outset will be quick to point out the weakness of the business model. Then there will be those who will claim that it was excessive government interference that caused many of the problems at the UK rail operator.

Clearly, the business model had its faults. No company can serve more than one master and the pressures that were placed on Railtrack to deliver a service to its customers and to enhance shareholder value whilst its hands were tied firmly behind its back by the regulator was a recipe for disaster. But Railtrack could have muddled along had it not been faced with a brace of recent disasters that resulted in 36 fatalities; 31 killed at Paddington and 5 at Hatfield.

The Government now plans to return Railtrack to some form of national control. The proposed measures would see Railtrack's assets transferred firstly to an Administrator and then on to a new private company, this time without shareholders. This remedy falls a smidgen short of renationalising the company but the reason for this may lie beyond mere semantics. A full renationalisation would mean that existing shareholders have to be compensated in some form. But this backdoor route would not only allow the Government to wriggle out of reimbursing shareholders but also avoid the accusations of clawing back businesses that were privatised by the last Conservative Government.

The measures proposed by the Transport Secretary, Stephen Byers, will probably mean that shareholders will not see a bean. The Government said it was unwilling to pump additional funds into Railtrack but ironically is prepared to spend in excess of £30b over the next ten years to improve the rail network. For this reason Railtrack investors have a right to be aggrieved. But, in addition, this action by the Government sets a bad example for future privatisations because who will ever trust this Government again when they come to the market for more private money.

More: Railtrack discussion board.