Danger signals for plans to privatise British Rail: Potential buyers grow increasingly nervous as the strike drags on. Russell Hotten reports

AS BOTH sides in the rail dispute dig in for a long battle, defects in the Government's privatisation plans are being harshly exposed.

Warnings by Robert Adley, the late chairman of the Commons select committee on transport, that the sell-off would be a 'poll tax on wheels' for government policy are proving uncomfortably close.

Businesses once firmly committed to tendering for the 25 train- operating companies (TOCs) being franchised by British Rail are increasingly edgy. And the flotation of Railtrack, from which the Government had expected pounds 3bn in revenues to offset tax cuts before the next election, is under threat.

Although no timetable for Railtrack's public debut had been set, there was a belief that it would be done before the next election. 'They've no chance now,' a rail official said. 'What investor would put money into Railtrack until all this was well behind them?'

Roger Salmon, the franchising director, was adamant that the regional operations would make very profitable businesses. But there is now a question mark over this, and his timetable for marketing the franchises.

Derek Scott, finance director of Stagecoach, the bus and coach company deciding whether to bid for the TOCs, said: 'The whole timetable for privatisation is being put back for one reason or another. It is all slipping perilously close to the next political cycle.'

He sees the strike as a real test case of some of the hypothetical issues he would have raised during the tendering process. He is closely watching Railtrack's willingness to provide the TOCs with compensation for lost business, or the ability to push through changes in working practices. Unless such issues are resolved few companies seem willing to risk owning a franchise.

Scotrail, which runs passenger services in Scotland, is pursuing Railtrack for compensation on each day its train drivers are idle. Chris Green, director, estimates that each strike day means pounds 300,000 in lost revenue. Other regional operations are likely to follow Scotrail's lead.

What angers Mr Green is that, although he can seek compensation for each day lost, he cannot claim for the knock-on effect of passengers switching to buses or cars long-term.

Badgerline, a bus company once enthusiastic about privatisation, is cool on the idea. 'We do not like the thought that influences outside our control could disrupt passenger services so badly,' Trevor Smallwood, chairman, said.

The Office of Passenger Rail Franchising is trying to formulate a collective compensation scheme on which TOCs could draw when profits are hit by unpredictable forces, like a strike or collapsed bridge. However, potential bidders remain sceptical. 'It would have to be a big scheme to compensate us for a strike. One day of action could knock out a year's profit,' said one. The strike is estimated to have cost BR more than pounds 100m so far.

Privatisation is designed to help the Government cut, and eventually withdraw, the subsidy it gives to BR - currently about pounds 1bn a year.

Each TOC bidder will be tendering on the understanding there will be a subsidy, though this will vary for each region. But, said Roger Brooke, chairman of the venture capital group Candover, the strike will only increase the level of subsidy and delay its withdrawal. 'The Treasury will have to dig deeper, for longer. All the time Railtrack is a drain on cash, bidders will be concerned about its track and rolling stock charges. You cannot approach financial backers until you have got answers to questions like Railtrack's charging structure and compensation for lost business.

'The strike has exposed widespread concerns that need to be resolved. We need the Government to help us think through the implications and consequencs of the affair. The strike has messed up whatever preliminary plans the TOC bidders were making.'

The Government needs Railtrack to win this dispute so it can send the right signals to potential investors.

The Government's financial advisers have recently been urging a reform of working practices, such as the introduction of personal contracts, to make Railtrack more attractive. Forcing through productivity improvements will be easier with a more flexible workforce. Although the RMT has been able to block labour reforms in the past, it was hoped that privatisation would change that.

For example, Railtrack will buy engineering services from the private sector. A victorious RMT will be more likely to resist such changes.

Mr Brooke said that if the union wins 'you can kiss goodbye to sensible levels of manning' in the industry, which would scare off much-needed private capital.

Lord Sterling, whose P&O wants to buy BR's Freightliner business, said the strike had focused attention on the railways and what they could produce for Britain. Nothing would stop the industry's revitalisation, he believed.

However, most people in the industry think otherwise. BR's chairman, Sir Bob Reid, said the strike could devastate the industry. Others would add: and the Government's privatisation plans.

----------------------------------------------------------------------- TRAIN OPERATING UNITS ----------------------------------------------------------------------- Thames Trains, Reading, Berks North London Railways, Watford, Herts Great Eastern, London LTS Rail, Southend-on-Sea, Essex Network South Central, Croydon South West Trains, London InterCity East Coast, York Chiltern Lines, Aylesbury, Bucks West Anglia Great Northern Railway, London InterCity Anglia, London South Eastern, London Thameslink, London Isle of Wight, Sandown, Isle of Wight ScotRail, Glasgow Regional Railways North East, York Regional Railways North West, Manchester InterCity West Coast, Birmingham InterCity Great Western, Swindon Regional Railways Cardiff Valleys, Cardiff Regional Railways MerseyRail Electrics, Liverpool Regional Railways Central, Birmingham InterCity Midland Main Line, Derby Regional Railways South Wales & West, Swindon InterCity Cross Country, Birmingham Gatwick Express, London ----------------------------------------------------------------------- (Photograph omitted)