Railtrack tries to get the City aboard

Would-be investors face a journey into the unknown, Patrick Hosking reports

EVERY MORNING Richard Aitken-Davies catches the train from his west London suburb of Raynes Park to Waterloo. He has been a rail commuter for 25 years and, like any other, he has suffered delays, cancellations, overcrowding and all the other agonies that plague commuters. He has good reason to want rail privatisation to succeed.

Unlike his fellow passengers, he has rather more influence to ensure it does. Mr Aitken-Davies is the privatisation director at Railtrack, the core of the broken-up British Rail. His job is to prepare Railtrack for a stock market flotation in the spring.

Amiable, methodical and quiet-spoken, he is well qualified to do so. He worked in the electricity industry for 15 years and saw PowerGen's transition to the private sector.

"We thought electricity privatisation was a big challenge at the time, but this is significantly more complicated," he admits. "But I think we'll get there."

Suddenly the float looks much nearer. Last week the Government successfully sold the three rolling stock companies for a total of pounds 1.8bn. From its modest offices off Russell Square in Lon- don, Railtrack is readying itself for intense scrutiny by the City. A first draft of its prospectus was completed in September. The first report and accounts has been published, showing an annual pre-tax profit of pounds 189m.

The first step is one of education - getting the City to understand Railtrack's position as one of more than 70 interconnecting companies created out of the old British Rail. Mr Aitken-Davies has in recent weeks run two trips for stockbroking analysts to see parts of the network.

Railtrack, chaired by the former British Petroleum boss, Bob Horton, consists of 23,000 miles of track, 980 tunnels, 90,000 bridges, 40,000 commercial property units and 2,500 stations. It has net assets of pounds 1.48bn.

However, such figures give few clues to the actual value the stock market will put on the company on flotation. Railtrack expects to be treated as a yield stock. Its income is assured for the next seven years under track access agreements already signed with the train operating units - the precursors of the franchisees who will actually run the train services. On top of these charges - which amounted to pounds 1.95bn last year - Railtrack receives revenues from its enormous property portfolio.

With costs reasonably stable, Railtrack becomes a serious, if unexciting investment proposition. Before the City gets out its collective wallet, however, there are a number of key uncertainties to be sorted out.

o Debt. Railtrack has pounds 1.5bn of debt on its balance sheet and is negotiating how much it should shoulder when it comes out of Government control.

It is a straightforward trade-off for the Government: the more debt it palms off on Railtrack, the smaller the proceeds flotation will bring in. For Railtrack, some gearing makes sense, but not so much that it curbs its capital-raising ability.

o The performance regime. Railtrack and the train operating units are putting the finishing touches to this menu of penalties and incentives. Where Railtrack is responsible for delays, cancellations and other faults, it will have to pay penalties to the operators. Where it beats set targets, it will be able to demand access charge supplements from the operators.

The system is already running in shadow form and the impact - positive or negative - will be published in the interim figures in the final prospectus.

o The Briscos. These are the 13 BR infrastructure service companies, which handle everything from track repair to bridge-building. Payments to the Briscos account for a sizeable chunk of Railtrack's operating costs. Railtrack, say analysts, has much more scope to cut costs than it has to raise revenues. But that scope depends largely on the Briscos being in (efficient) private hands.

Mr Aitken-Davies comments: "It is highly desirable that some of them should be in the private sector before we float. It would add to our credibility."

o The regulator. John Swift, the rail regulator, has considerable powers. He has already set the track access charge regime so that Railtrack has to cut its charges by 2 per cent in real terms each year. His utterances over coming months will influence investor sentiment.

o Property. Mr Swift has ruled that Railtrack should share its property profits with the train operating companies. Railtrack is negotiating the percentage it has to give away. "We want that percentage to be as small as possible", says Aitken-Davies.

o Politics. Labour has threatened to restore Railtrack to public control if it wins the next election.

o The stock market. The appetite for new issues varies enormously.