RAILTRACK PLACED IN ADMINISTRATION

8 Oct 2001 12:00 AM

Byers Proposes a Private Company Without Shareholders but with the Interests of the Travelling Public as its Top Priority

Stephen Byers, Transport Secretary, today succeeded in his petition to the High Court to put Railtrack plc into Railway Administration. The action was taken following a request from the Board for additional Government funding otherwise the company would be insolvent. Mr Byers refused this request on Friday.

He also announced that he had put in place funding arrangements for the administrator to ensure that the railway continues to run safely and normally. He also intends to put forward proposals to enable a transfer of Railtrack plc''s responsibilities to a new company.

Stephen Byers said he believed that the public interest obligations of the rail network operator would, after the administration, be better achieved through a private company without shareholders - a private sector ''company limited by guarantee''. This would have the interests of the travelling public as its priority, not the need to increase shareholder value. It would invest any operating surpluses directly into the network.

Stephen Byers said that he hoped John Robinson, in whom the Government had complete confidence, would become Chairman of the new company.

Stephen Byers said:

''The Government cannot justify any more additional public money for Railtrack. We provided a substantial package of financial assistance in April, but the company came to me in July asking for additional public subsidy. They subsequently also requested suspension of the regulatory regime.

''Railtrack''s costs and poor service penalties are expected to exceed the Regulator''s October 2000 determination - and the Government''s April rescue package - by over #2bn over the next five years. This is before taking account of the additional costs relating to Hatfield. In addition, projects, such as the West Coast Main Line, are significantly over budget - the West Coast upgrade may now exceed #7bn, compared to the original #2.3 bn.

''The Government will stand behind the rail system and is prepared to spend over #30bn over the next ten years to ensure a substantially improved rail network, but is not prepared to fund the poor performance of individual companies.

''As a result of our action today I intend to put forward a scheme for a new private company without shareholders, which will put proposals to the Railway Administrator to acquire Railtrack''s core business. This will be a private sector company, working in the interests of the whole industry.

From today, Railtrack''s rail network operations will be under the control of Railway Administrators. They, with the financial support of the Government, will keep the railway running until the transfer of Railtrack''s licensed activities out of administration as a going concern.

Current rail services will continue unaffected and Railtrack staff will continue to be paid and remain employed by the company under the control of the administrators. The Administrators are already working closely with the Health and Safety Executive to ensure that whilst in administration Railtrack continues to meet the Railway Inspectorate''s safety requirements.

The decision to petition for Railtrack to be placed into Railway Administration was taken when it became apparent that the company could not finance its activities on being told that the further significant financial support it had sought from Government would not be provided.

Stephen Byers continued:

''Since John Robinson approached me in July, I have had a number of discussions with the company, and have given full and proper consideration to our response. I reached the conclusion on Friday that it would not be right to provide additional public support to the company.

Following the administration, I believe the public interest would be better served if the interests of the rail network operator were aligned with the interests of the whole industry. This can be achieved if the future management were freed from the requirement to deliver returns on publicly traded shares.

''This is not renationalisation. The new private company without shareholders to be proposed to the administrator would have members initially appointed by the Strategic Rail Authority who will include key industry stakeholders. Unlike shareholders, these members would not receive dividends or other returns and any financial surplus would be re-invested in the network. This proposal would create a business independent of Government operating on a fully-commercial basis.

I hope that John Robinson will become Chairman of the proposed new network operator. He has the Government''s full confidence. He only recently joined Railtrack and has worked hard to tackle the huge problems the company faces. I believe John Robinson can make an important contribution to rebuilding the industry.

''I also plan to legislate, when Parliamentary time allows, to rationalise the present regulatory structure to provide stronger strategic direction while reducing the burdens of day to day interference in the industry and a self-defeating system of penalties and compensation. This will deliver clearer accountability and end perverse incentives.

Railtrack''s position as a floated company which is dependent on Government paying around two thirds of its revenue was unique. The Government remains fully committed to its programme of public private partnerships.

''I believe the announcements I am making today will start the process of rebuilding the rail industry. We need a strong, well managed new company to come out of administration and unite the rail industry under stronger strategic direction and deliver the improvements that passengers and freight-users deserve, and a better deal for taxpayers''.

Ends

Notes to Editors

Railtrack was privatised in 1996 and has operated within a standard regulatory framework for a utility network company. The Rail Regulator, the independent regulator of licensed railway operations in the UK, determines the level of expenditure and outputs to be delivered and the level and sources of income within each five year regulatory Control Period. The second regulatory Control Period (CP2) started on 1 April 2001.

The Regulator''s final determination of his Periodic Review for CP2, published in October 2000, provided Railtrack with #14.7bn (98/99 prices) for operating, maintaining and renewing the network over the next five years, of which nearly #8bn was for a substantial programme of renewals investment. In view of the exceptional nature of this large renewals investment the government decided that the programme should be supported by #5bn of direct capital grant to Railtrack, rather than through access charges to train operators.

As a result of the additional financial costs faced by Railtrack, primarily following the accident at Hatfield, the Government subsequently agreed in April this year to advance #1.5bn of grant support Railtrack was due to receive in future control periods into CP2. In addition, Railtrack was to receive around #500m of additional grant to cover a shortfall in income from freight operators from the level assumed in the periodic review.

In July 2001, following John Robinson''s appointment, the Board of Railtrack Group concluded that it had insufficient revenue to allow it to finance its activities throughout the remainder of CP2 and approached Government seeking yet more financial support and a suspension of the economic regulatory regime. This request included an open-ended financial commitment on government for the next three to five years, which the Board believed was necessary to allow Railtrack to address its increasing operational and financial difficulties.

The Transport Secretary has rejected this request.

Appointment of Railway Administrators

Alan Bloom, Chris Hill, Scott Martin and Mike Rollings of Ernst & Young were today appointed joint special Railway Administrators on the making of a Railways Administration Order in the High Court under the provisions of the Railways Act 1993..

Rail operations during Railway Administration

The Railway Administrators are under a legal duty to manage the company so as to keep the rail network operational throughout Railway Administration and to seek to agree the terms on which the licensed activities currently undertaken by Railtrack would be transferred out of Administration as a going concern.

The Railway Administrators have indicated that they intend to conduct the Administration in a way that minimises the disturbance experienced by passengers, the Train Operating Companies and other stakeholders.

Management and employees

The Railway Administrators have confirmed that employees'' pay and conditions will not be affected by the Railways Administration Order and that there are no plans for redundancies as a result of Administration. Any transfer of the core licensed network activities would comply with the relevant TUPE regulations.

Funding Railtrack though Railway Administration

The Government has committed to provide the Railway Administrators with the financial support necessary to ensure that the rail network can remain fully operational throughout Administration.

Impact on creditors

The Government has committed to provide the Railway Administrators with sufficient funds to allow them to continue to pay trade creditors as invoices fall due for payment. Suppliers who are creditors of the company and whose invoices are approved for payment by the company in the normal way will continue to be paid. Orders for goods and services will continue to be issued by the company''s staff. There will be a review of the larger contracts but in the meantime contractors will be requested to work on these contracts in line with existing work schedules.

Suppliers who provide goods and services during the Railway Administration will be paid from the company''s operating cash flow.

The Government has also committed to provide sufficient funds to pay non-default interest, lease rentals and scheduled principal repayments (mainly Commercial Paper) and all other non-default debt service obligations for an initial period of at least 45 days. This arrangement will continue for finance creditors who have signed up to certain standstill arrangements until a transfer scheme is proposed.

Government intends to bring forward a scheme to enable a proposal to be made to the Railway Administrators which would, if accepted, result in the transfer of both the business of the company and the debt of the finance creditors participating in the standstill to a new company designed to operate the railway post Administration.

Under this proposal, such debt would be transferred to the new company which will be financially sound and have (at the time of transfer) a long-term credit rating of at least BBB/Baa2 and a short-term credit rating of at least A-2/P-2 (Standard & Poor''s Rating Services / Moody''s Investors Service Inc.). Indebtedness would be transferred on broadly the same economic terms (e.g. coupon and maturity), applicable in the absence of any default, as applied immediately before administration.

Impact on Railtrack Group shareholders

The financial consequences of today''s actions for shareholders in Railtrack Group will depend on the terms of any scheme proposed by the Administrators as appropriate for the transfer of Railtrack plc out of administration as a going concern. But no public monies will be available to support shareholder value.

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