The railway's black hole

The financial crisis on Britain's railways is going from bad to worse. A few days ago John Prescott, the deputy prime minister, accelerated payment of a £1.5bn lifeline to Railtrack to help pay for reconstruction costs following the Hatfield tragedy. But none of this money will go to the train operating companies, which claim that they have not been fully re- imbursed by Railtrack for the money they have lost from cancelled services. One of them, Virgin, is planning price increases of up to 10% in May, during the election campaign. Other train operators will also raise their prices, but by not as much. Virgin's long-distance routes are particularly vulnerable since disgruntled customers can travel by plane or car, whereas suburban commuters have not got a choice. The trouble is that higher fares - vital to finance Virgin's praiseworthy new investment in high-speed trains - will prompt yet more people to take a plane or drive, thrusting the industry into a downward spiral of falling revenues and higher prices.

Rail privatisation, predictably, has turned out to be an operational disaster, as Ian Jack has chronicled in G2 this week. But it is also turning into an equally serious financial disaster, since neither Railtrack nor the operating companies can reconcile the requirement to invest heavily to build a modern railway (such as continental countries have enjoyed for years) with the need to make profits and dividends for shareholders.

This is a matter of public policy for two reasons. First, it is vital that we modernise our railways as soon as possible and, second, because the taxpayers' money cannot be injected into the railways so they can pay dividends to shareholders. It is worth pointing out that the £1.5bn promised to Railtrack this week - only part of what the railways will receive overall - could have purchased over 50% of the shares in Railtrack at yesterday's (depressed) price on the stock market. There is a strong case that all new public money vested in the railways should be in the form of new equity so the taxpayer has a stake in any returns. More worrying, however, is the danger that there may not be any returns. It is unlikely that the companies will be able to make sufficient profits to finance the new investment (that was supposed to be the whole point of privatisation) and reward their shareholders. But that was obvious long before this deeply flawed privatisation took place.