Outlook: Railtrack

PICTURE THE situation. There's the Fat Controller (John Prescott) advertising for a new rail regulator, having given the last one, John Swift, his marching orders a couple of months back for being too soft on the railways. The acting Rail Regulator, Chris Bolt, wants the job, so what better way of getting his application in than producing an exceptionally tough regulatory review.

Isn't this just what the deputy prime minister ordered? In opposition, Mr Prescott never missed an opportunity to lambast "fat cat" utility bosses for excessive profiteering. So here's a chance to prove my worth by socking it to Railtrack, the diligent and ambitious Mr Bolt must have thought. Er...but then again, perhaps not.

In carrying out his review, Mr Bolt has applied much the same model as used for electricity, gas and most recently water. Railtrack's regulatory asset base has been set to reflect the value of the company after its first day of trading on the stock market, or less than three times its present value. The rate of return it is allowed to earn on these assets has been struck at just 5-6 per cent.

The effect of this is substantially to reduce the access charges that Railtrack charges train operating companies for using its rail network, which in turn means that Railtrack earns less profit and the Government is able to reduce the subsidies it pays the operating companies. If that doesn't please the deputy prime minister, what will, Mr Bolt must have thought. Better still, he now proposes that Railtrack shouldn't be allowed to earn any return on the pounds 1bn it has invested in the rail network over and above that allowed for by the existing regulatory regime. How about that for expropriation, beats nationalisation any day, Mr Bolt must have boasted to himself.

But hold on a moment. Is this really what the Fat Controller wants? What he said in opposition is one thing. What he wants now he is in Government - an integrated transport policy which gets people off the roads and onto the trains - is quite another. The truth of the matter is that from the Government's point of view, Railtrack probably offers the most eloquent and practical way of getting the investment it wants in the railways.

This might seem an odd thing to argue given the frequency with which Railtrack is accused of underinvesting, but look at like this. So Mr Bolt gets his way; the rail access charges are cut in the way envisaged, subsidies are reduced and the Government's coffers are swelled accordingly. The trouble is that even if the Government were itself to invest, via the planned Strategic Rail Authority, all those savings directly in the railways (a big if, given the Government's other priorities), it would be but a drop in the ocean compared with the geared way in which Railtrack can invest. As things stand Railtrack is able to finance investment equal to about 10 times its profits. Every pounds 1 less in profits means pounds 10 less investment. For the Government, Railtrack therefore provides a quite effective offbalance sheet and geared way of financing its plans for the railways.

Railtrack is right to believe that the game has changed, that Mr Bolt is applying outdated concepts and priorities. It may also be right in believing it can persuade Mr Prescott that the goal posts have moved sufficiently to require a rethink.