Tax sweetener boost for Railtrack's bottom line

Allowances inherited from BR will help the prospects for privatisation. Report by Peter Rodgers and Christian Wolmar

Railtrack yesterday revealed the impact of one of the most valuable sweeteners the government has given to the pounds 2bn privatisation, when its half year profits included a tax credit rather than the large payment last year.

Over the next two financial years Railtrack will pay virtually no tax, as a result of a deal last year with the government over the extent to which it could inherit British Rail's tax allowances.

In later years, the company will also use tax allowances from its planned increase in capital spending - to at least pounds 1bn a year - to curb its overall tax bill.

The tax benefits will be a big boost to bottom line profits, to Railtrack's ability to pay dividends and to the prospects for the privatisation in late May, offsetting disappointing pretax profits in the latest half year.

Pretax profits for the six months to September were pounds 98m, just over half the pounds 189m made in the previous year (of 13 months.) Operating profits were pounds 151m, against pounds 305m in the previous year.

But net profits of pounds 111m for the six months to September were higher than in the whole of the previous year - a figure which included pounds 9m of property profits and a pounds 13m tax credit. The net profit was only pounds 101m in the previous full year, because the tax charge was pounds 88m. No separate figures are available for the first half of last year, because Railtrack's embryonic information systems could not produce the data.

Comparisons are in any case hard because the previous year included pounds 148m for the one-off costs of the signal workers' strike and pounds 46m as a provision covering all future privatisation costs. Without these, Railtrack would have made closer to pounds 400m before tax in the previous year, so the underlying profitability in the year to this March appears to be sharply down - perhaps halved.

The main reason is the rail regulator's decision to toughen Railtrack's price controls so that the company could calculate charges to train operators on the basis of inflation minus eight per cent. But in future years this tough regime eases to inflation minus two per cent.

Another complication is that whenever trains run an average of more than four minutes late because of track and signalling problems, Railtrack will have to pay penalties to the train operating companies. But to help the investment programme and boost the flotation, the impact on profits has been deferred for several years.

The results showed the penalties running at pounds 89m in a full year. But the regulator has approved pounds 84m in offsetting compensation payments in the year to March, wiping out all but pounds 5m of the cost. Next year the compensation will rise to pounds 90m, before tailing off to pounds 10m in 2000-01.

To confuse still further, there is to be a write-off of a substantial part of Railtrack's pounds 1.7bn debt, which will slash the interest charge and inflate the pretax profit when the prospectus is published. Tough negotiations with the Treasury on the size of the write-off are about to start.

John Edmonds, chief executive, said there were 13,000 monitoring points collecting information on train timings. Railtrack passes on pounds 31m to its own suppliers for their own performance monitoring targets and estimates that it will pay out pounds 59m to train operating companies for its failure to keep to the timetable this year.