Railtrack Group Plc Business Information, Profile, and History

Company Perspectives:

Our vision is the delivery of a safe, reliable, efficient, modern railway for our customers and the nation, using our railway skills to grow the company to reward our stakeholders and employees. We are making constant progress in improving operating performance, in delivering investment and in accommodating growth.

History of Railtrack Group Plc

Railtrack Group PLC (Railtrack) has become synonymous with the troubles that the United Kingdom has faced with the privatization of its rail network. When Railtrack was privatized in 1996 by the British government, the weight of controlling the country's rails rested entirely on its shoulders. While the company has had its ups and downs, in October 2001, against the protestations and counterproposals of Railtrack and its board of directors, the transport secretary of the United Kingdom placed Railtrack PLC, the main subsidiary of Railtrack Group, into railway administration, allegedly due to the company's inability to pay its accrued debt. By this action, the government removed control of Railtrack PLC from Railtrack Group. In its 2002 annual report, Railtrack Group classified Railtrack PLC as a discontinued operation.

A Private Company Is Born

After years of debating how, why, and when they would privatize British Rail, the U.K. Government decided, in 1994, to go ahead with a plan for privatizing the company. The government reorganized and fragmented out different areas of British Rail's responsibilities, creating four main component parts: track, rolling stock, maintenance, and train operators. The old railway companies Regional Railways, Network SouthEast, and InterCity were abolished and replaced with 25 train-operating units. The railway infrastructure (the track) was placed under the control of the newly formed, government-owned Railtrack. During 1995 and 1996 the government fell behind on their privatization schedule, and the U.K. Transport Secretary Sir George Young was concerned that the planned sell-off of Railtrack would be undermined by the slipping timetable. Sir George Young was further concerned when financial advisors stated that the success of the planned privatization rested largely on the success of Railtrack's successful privatization. Although the original plan had been for the government to sell Railtrack after all of the other rail franchises were sold and the operating companies had proven themselves, the government pushed Railtrack's sell date up to 1996. The estimated time schedule for selling Railtrack had originally been set at 2000.

In January 1996 the U.K. government confirmed the privatization of Railtrack. In October of the same year, Railtrack announced a plan to invest £1.5 billion in upgrading the West Coast Mainline railway. During its first year as a private company, Railtrack experienced its first of many deadly train crashes when in August 1996 a commuter train collided with an empty train, killing one person and injuring 66.

The Golden Years

Throughout 1997 and 1998, Railtrack entered into agreements with other rail companies, announced large-scale projects aimed at improving the rail network, and won important contracts. Some of these projects and contracts included: in January 1997, the company outlined a £560 million project called the Thameslink 2000; the following month, Railtrack unveiled a £15 billion plan to create the world's most efficient rail network; the company came to an agreement with Virgin Rail (Virgin) to an upgrade package that enabled Virgin to operate high-speed trains on certain intercity routes, and later, joined a partnership with Virgin wherein they promised to invest £600 million in the West Coast Mainline.

The company's expansion streak continued when, in 1988, Railtrack along with the U.K. government and London and Continental Railways (LCR), agreed to a public private partnership (PPP) deal to save the proposed Channel Tunnel project. The PPP involved the management of Eurostar (an LCR service that was intended to supply income while the railroad link was being constructed), based on the restructuring of LCR. This deal led to Railtrack's 1999 participation in the design, construction, finance, and operation of The Channel Tunnel Rail Link (CTRL). The CTRL was designed to carry high-speed services between London and the Channel Tunnel. The details of the CTRL deal enabled Railtrack to manage the construction of the CTRL, as well as assume responsibility for the operational management of the first phase of the project's infrastructure. As a result of their participation, Railtrack was granted the opportunity to purchase the entire new link upon completion of the project, although part of the plan was that the ownership of the link would eventually (in 2086) revert to the U.K. government.

Along with the partnerships and deals that Railtrack entered into during this period, they also experienced disaster in the form of one major train crash in 1997. Seven people were killed when an express passenger train crashed into a good train in a London suburb.

Government Dissatisfaction with Railtrack

Only two years after Railtrack's privatization, the company began to receive chastisement from the government for its failure to suitably upkeep the country's rail network. In December 1998, Rail Regulator Chris Bolt outlined a proposal that would cut future Railtrack profits and demand increased investment in the rail network; this proposal was scheduled to come into effect in 2001. The following year, an official report criticized Railtrack heavily for its failure to remedy train delays, run-down stations and out-of-date signaling. Soon after this report was released, the new Rail Regulator Tom Winsor informed Railtrack that if it did not improve passenger train performance by 12.7 percent by March 2000, the company would be fined from its profits. In November 1999, Tom Winsor began enforcement action against Railtrack for its failure to upgrade the West Coast Mainline as it had previously agreed to.

The chastisement did not have a noticeable effect on Railtrack. Indeed, not one month after the rail regulator started the process of enforcement, Railtrack announced that the cost of upgrading the West Coast Mainline would be almost three times the original estimate. This same year, a syndicate of 19 banks provided Railtrack with a £1 billion syndicated loan to rescue them from their monetary woes. Train crashes continued to occur, despite the government's attempt to goad Railtrack into improving rail safety, and in 1999 two trains collided outside London killing 31 people and injuring 400.

New Contracts

In February 2000, Railtrack signed a £98 billion public private partnership (PPP) with Tyne and Wear Passenger Transport Executive (Nexus) to develop the Sunderland Metro system. Railtrack undertook the design, construction, testing, and commissioning of the Northeast England network, including the parts of the network that connected to the Metro. Railtrack also agreed to build additional stations along the lines' extensions. Railtrack invested £40 million, Nexus provided £8 million, the European Regional Development Fund provided £12 million, and the central government invested £35 million.

In light of the number of accidents and difficult incidents that many of Railtrack's employees came into contact with, in March 2000 the company decided to consolidate the many different employee assistance providers and offer all of their employees assistance from one provider: Care First. Peter Turner, head of Railtrack's Compensation and Benefits department, said, "We were primarily concerned about the mental health of staff. Some staff come into contact with difficult incidents [and] some will never feel able to open up to people they are working with."

The Train Wreck That Changed the Company

On October 17, 2000, a broken rail caused a passenger train to derail near Hatfield; four people were killed and 34 were injured. The emergency recovery program that followed the crash cost Railtrack £644 million. Soon after the train wreck, in February 2001, Railtrack's Chief Executive Steve Marshall warned that Railtrack could have a net debt of approximately £8 billion come 2003. Marshall, in an article in the Parliamentary House Magazine, spoke of the "huge engineering consequences" of the Hatfield crash and the need for Railtrack to "rebuild and refocus our engineering function." Marshall also said that, "In the future the company will be seeking out partnerships which offer mutual benefits. My message to the industry is that they are very welcome to come to the party, but I want to be sure that they will bring a bottle. In the bottle should certainly be some money, some new ideas and some relevant skills would be even more welcome." He then added, "We are very clear that we have to put our house in order. We are up for partnership, but it has to be safe, it has to be operationally practical and it hinges on people's ability to share in the risks as well as the rewards."

The Downward Spiral Begins

On April 2, 2001, the government announced that it would give Railtrack an advance subsidy of £1.5 billion for sustaining the rail network. Along with this good news, the government announced some bad news; Railtrack would not get the originally agreed-upon option to build and then purchase a particularly "socially desirable" section of the CTRL line because of the company's past failings. Instead the government handed the project over to the Bechtel Group, a U.S. construction and project management company that had played a large role in rescuing the Channel Tunnel project. This announcement changed Railtrack's position in the U.K. Rail Network scheme; the company was no longer the only provider of rail infrastructure, and had lost out on the chance to earn unregulated profits on certain new ventures.

At about this time, Railtrack announced that post-Hatfield repairs would cost well over the original estimate of £500 million; the actual post-Hatfield repairs would reach approximately £3 billion. Due in part to the Hatfield crash, on May 24, 2001, Railtrack posted a wider-than-expected full-year loss, £559 million (US$791 million) pre-tax in the year to March. The loss was attributed to penalty charges for late-running trains, and the cost of track repairs.

The Begg Paper

In light of the country's dissatisfaction with the state of the rail network, David Begg, chairman of the commission for Integrated Transport, and Jon Shaw, a transport economist, wrote a paper that recommended fundamental restructuring of the railways and network. They recommended that five regional train-operating companies be responsible for both train and track operations, and called for a review of the way the industry was regulated. David Begg also argued that the incentive structure that had been originally instituted with the privatization of the railways was flawed in that it gave Railtrack little incentive to invest in efficiency or growth. The paper came at a time when the government was forced to make a decision--many of the biggest train-operating companies franchises were due to be renewed in the coming months, and the franchises (as well as the country and the government) needed to know what was going to happen to the industry.

Railtrack Enters Administration

One year after the fatal Hatfield crash, Secretary of State for Transportation Stephen Byer, taking into consideration Railtrack's lack of success and fueled by the findings in the Begg paper, requested that Railtrack be placed into administration (the equivalent of receivership in the United States). Management of Railtrack PLC was removed from the Railtrack PLC board after the government refused to provide the requested £2 billion for emergency funding. The accountancy firm Ernst & Young LLP was chosen to be the administrator and reports said that a government-owned, nonprofit organization could eventually take over Railtrack's assets. This twist of events sent Railtrack shareholders into a tailspin; their shares had declined in value previously, but this unexpected turn of events had made their worth disappear altogether. Byer said that, "Any shareholder payback will be a decision for the administrators. There will be no government money to bail out shareholders." The government would, however, guarantee the company's existing debts.

The day after the administration was announced, Railtrack CEO Steve Marshall resigned stating that the government had broken its commitments in a "shoddy and unacceptable" manner. The rating agencies, Moody's Investor Service and Standard & Poor's both responded to the administration announcement by downgrading Railtrack's credit rating. On this same day, a spokesperson for Railtrack announced that the company was considering legal action to force the administrators to hand over the £350 million that was frozen upon administration. The company argued that the money withheld belonged not to Railtrack PLC, but to its parent company Railtrack Group PLC. The government quickly agreed to return the money requested. The government also agreed to allow Railtrack the opportunity to borrow against that money. Railtrack at this point also put up a fight to regain rights to build the extension to the CTRL.

On October 11, 2001, the government announced that, although it had said it would not bail out Railtrack shareholders, it would enable the investors to get back 25 percent of their investments in the company. Railtrack employees, who were also shareholders, felt the acute pain of administration and issued this statement: "Our staff feel as though they were mugged. Lots of people have used the share plan to provide for their future, whether it be for their retirement, paying off mortgages or their sons' and daughters' weddings. They feel that their good honest toil has been stolen." The company itself feared that the staff's discontent over their loss of investment would cause some of its 12,000 staff members to leave the company. The government during this time, stood firm, stating, "The Government feels responsible to the traveling public. It respects, admires and appreciates the great work that many of the staff in the railways do, but when it comes to compensation, the Government has made its position clear." That position was that they were not willing to pay taxpayers' money into the bank accounts of shareholders in what was a private company. It turned out that Railtrack's concern about fleeing staff was well founded as the staff exited the company in droves.

After the company was placed into administration, contrary to government's expectations that the railways would continue to run normally, the state of the rail network deteriorated rapidly--there was a 46 percent increase in delays in the first two months since Railtrack went bust. Railtrack shareholders sued the government with the claim that the company was forced into administration not because of its failures, but for political reasons.

Railtrack Group PLC Moves On

With Railtrack PLC in administration, Railtrack Group PLC went about doing their best to conduct business-as-usual with its remaining contracts and responsibilities. The company's media agents, Maiden Outdoor invited publishing organizations to pitch for the exclusive London newspaper contract that was in the hands of Metro until the spring of 2002. The group published a paper that was distributed across Railtrack's network of stations in the United Kingdom, which, according to Maiden, delivered to an audience of around 8 million a week. Also in 2001, Railtrack signed a partnering agreement with United Switch & Signal Inc. to build and install a Network Mangement Centre System for Railtrack's West Coast Route Modernization Program; AEC-ACO won a $16 million order to supply 490 new Railtrack maintenance cars with it's advanced Axle Motion III suspension system; and optic-cable manufacturer Brand-Rex was approved to be Railtrack's sole supplier of thermoplastic signaling cable. To follow through on their commitment to upkeep the West Coast Main Line, Railtrack contracted GT Railway Maintenance to maintain the 418-mile southern section of the Line's infrastructure.

Railtrack in 2002

After much investigation it was revealed that Secretary of State for Transportation Stephen Byers' decision to place Railtrack into administration was indeed questionable. Byer rescinded his statement that, "There will be no taxpayers' money made available to support shareholders." Under the new plan, taxpayers ended up paying shareholders £300 million, and were liable for a further £200 million through a government-supported loan that was used to pay shareholders. The four banks that were chosen to refinance the Railtrack £4.4 billion debt were Barclays, Dresdner Kleinwort Wasserstein, Merrill Lynch, and Royal Bank of Scotland.

In March 2002, Railtrack received several bids on their troubled assets. The first bid came from Network Rail, a nonprofit company set up by the government in the wake of Railtrack's placement in administration, who offered £500 million for the assets of Railtrack PLC, plus the assumption of its liabilities. Several days later, a consortium called London and Continental Railways Ltd (LCR) offered £295 million for Railtrack Group's interest in the Section 1 link between the Channel Tunnel and London and another offer from Network Rail of £80 million to operate the Channel Tunnel rail link and manage the St. Pancras Station in North-Central London. At the time of this writing, these offers were under review by the Railtrack Group board.

Principal Subsidiaries:Railtrack PLC; Railtrack UK.

Principal Competitors:Bechtel Group Inc.

Chronology

• Key Dates:
• 1996: Railtrack, the government-owned operator of the British rail track network, is privatized.
• 1997: Railtrack unveils a £15 billion plan to create the world's most efficient rail network; and Virgin Rail group invests £600 million in Railtrack's West Coast Mainline.
• 1998: Railtrack wins the contract to manage construction of the Channel Tunnel Rail Link (CTRL).
• 1999: The rail regulator begins penalizing Railtrack for its failure to upgrade the West Coast Mainline.
• 2000: A passenger train derails (due to a broken rail) near Hatfield, killing four and injuring 34 people.
• 2001: The U.K. transport secretary petitions the High Court to place Railtrack PLC in railway administration; Railtrack Group requests the immediate suspension of trading in Railtrack Group shares.
• 2002: Railtrack Group receives offers from Network Rail and London and Continental Railways Ltd. (LCR) to acquire Railtrack PLC, Railtrack's interest in Section 1 link between the Channel Tunnel and London, the rights to operate the completed link, and the concession to manage St. Pancras Station in North-Central London.