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How to get back on track?

Cover story - After Railtrack

Transport secretary Stephen Byers' plans to replace Railtrack with a new track operating company have so far been short on details. This week N C E looks at some possible options.

Since Railtrack's dramatic collapse last month, little has emerged about the type of company that could take over the failed track operator. All transport secretary Stephen Byers has said is that he would prefer the track operator to be a not for profit company, possibly financed by subordinated government loans. Among the possible options are the models adopted by Glas Cymru, the company in charge of Wales' water industry, Sweden's railways and that adopted by France's railways. The English social housing sector has also emerged as a possible model.

Glas Cymru

Glas Cymru was formed in April 2000 for the sole purpose of acquiring and running Welsh Water as a not-for-profit company.

The first model of its kind in the water industry, Glas Cymru has no shareholders, and ploughs profits back into the business. It bought Welsh Water using a mixture of five year to 30 year bonds worth a total of £1.9bn.

Glas Cymru finance director Chris Jones explains that it raised enough to buy the business, fund the continuing capital investment programme - worth £1.2bn to March 2005 - and still retain reserves of £150M to deal with unexpected costs.

'Our plan is to grow the reserves to £350M by 2005, ' says Jones.

This will partly be achieved via water and sewage charges and partly from immediate £50M savings which result from the company no longer having to pay dividends.

Jones adds that the £350M reserve buffer was planned at Glas Cymru's inception to reassure potential bondholders that the company would have enough money to deal with unexpected costs resulting from droughts, accidents or new legal standards.

'The bondholders needed to know we had more than just enough to pay their interest, ' he says. As a result the bonds were in great demand, as people were keen to invest in an industry that would remain an asset whatever the economic climate. They were also attracted by Glas Cyrmu's promise to remain as a water and wastewater only company, with no plans for risky diversification.

'We absolutely committed ourselves that we would always make it a single purpose, low risk investment, ' adds Jones.

He says risk was also reduced by outsourcing day to day operation of the system to United Utilities for a fixed fee.

United Utilities carries out all this work except asset maintenance programming and prioritisation, which is still carried out by Glas Cymru. This means that all health and safety responsibilities, incident management and service still remain firmly at the company's feet.

The key to retaining this control is a good knowledge of asset condition, says Jones, something lacking at Railtrack.

'We've got a very good asset information system, so we can prioritise effectively and get value for money.'

Efficiency is also guaranteed by the continuing regulation of Welsh Water by industry regulators including Ofwat, the Environment Agency and the Drinking Water Inspectorate.

This means that although the company is 'not for profit', Glas Cymru cannot lag behind the best water companies in terms of cost efficiency and improving service levels.

Sweden's railways

In Sweden train operation is carried out by a mixture of state and private train operators, while track maintenance and operation is carried out separately by a state owned track authority.

Before 1988 Sweden's rail infrastructure and trains were operated by one public service enterprise, Swedish State Railways.

In 1988, in an attempt to encourage investment in the struggling rail system, the Swedish parliament separated track and train operation into different state owned companies.

Track is owned by the operator Banverket, which is responsible for maintenance and renewals.

Banverket does not collect track access charges directly as Railtrack does. Instead, train operators pay the government a fee split into two parts.

One is based on a variable charge related to track use based on marginal wear and tear on the infrastructure. The other is a fixed annual charge per vehicle. The state then allocates grants to Banverket.

Safety is the responsibility of an internal organisation from within Banverket which was made independent and became the equivalent of the Railway Inspectorate. It is responsible for inspections, safety regulations, and for licensing operators to run the trains and manage the lines and operations.

Earlier this year two separate companies were established to run passenger and freight trains.

Passenger trains are now operated by state owned Statens Jarnvagor, and freight is run by state owned freight train operator Green Carg.

Since 1999 train operation has been opened up to competition and new operators are now running some services.

France's railways

France split track maintenance and train operation into separate divisions after its state owned rail company SNCF was restructured in 1997. The former SNCF is split into two divisions: a train operating and track maintenance division known as SNCF, and a division known as Ferrailles de France (FdF), which effectively owns the French rail network.

FdF collects track access charges from the train operating division, and then uses a combination of this money and government subsidies to pay SNCF to maintain and renew the network. Repairs and maintenance are carried out following detailed inspections of the track by FdF personnel who then tell SNCF what work has to be done.

FdF says this structure was chosen for safety reasons although, as with Railtrack, it would seem that much depends on the quality of its track inspection regime.

As train operator and track maintainer, SNCF has a direct interest in ensuring maintenance work is carried out with minimum disruption, although it is not responsible for spotting defective track.

FdF engineers are helped by the fact that they have a detailed inventory of the condition of the network, something Railtrack is still striving to complete. This enables it to pinpoint areas of the network when urgent safety work is needed.

SNCF is state owned, but through a curious piece of accountancy, the French government has been able to keep its massive £5bn debt mountain off the government's balance sheet, so it does not affect public spending budgets.

English social housing

The social housing sector in this country is managed by the government run Housing Corporation.

This allocates subordinated government loans to housing associations which combine them with bank loans to fund the construction and maintenance of their housing stock.

The Housing Corporation acts as regulator to the sector to ensure housing projects are viable and that government loans are protected.

This regulatory framework also reassures banks, as the government's money is only repaid after the banks' if a housing association runs into financial trouble (see News).

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