The scheme is revealed in a document published just before Christmas by the Office of Rail Regulation (ORR). It says Network Rail “is currently examining the costs and benefits of raising a tranche of capital not supported by (the indemnity), possibly with a coupon linked to the company’s financial performance.”
Such a move would be an about-face for the financing of Network Rail, which was set up by the government to take over the running of Britain’s rail network after Railtrack collapsed into administration in 2001.
Network Rail has no shareholders — it is a company limited by guarantee — but is able to borrow money as it has the explicit backing of government.
In a letter of comfort to investors, the government agreed to honour the company’s debts in almost all circumstances. This has allowed Network Rail to borrow at cheap rates. Its debts are expected to increase from about £16 billion at present to some £20 billion by 2009.
But the ORR says this guaranteed cheap finance means that it is difficult to place any incentives on Network Rail’s management. “The company’s structure means that the normal pressures from the capital markets for the company to meet and exceed investor expectations are absent,” the ORR.
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If Network Rail was allowed to generate profits, it could then raise its own finance without recourse to the government guarantee. If payments on these new loans were tied to the company’s performance, investors would then have direct scrutiny of management performance.The new loans would also allow the government to distance itself from Network Rail, the ORR notes.
“Furthermore, it could enable the government to begin to limit the future coverage (of the indemnity), if it felt that it was appropriate to redistribute risks from itself, and other funders and customers, to investors.”
Network Rail said last night that the considerations of the plan were at an early stage, and that no decisions had been taken. No adviser has been appointed to draw up new funding proposals.
But a senior rail source said Network Rail and the Department for Transport, its sponsoring department, had been working on similar ideas for sometime. “The idea is that these investors would provide the type of disciplines and scrutiny that you normally get from investors in a private company,” the source said.