£3bn bill to raise cash for railways

THE cost of raising money from capital markets to fund Government plans for modernising the rail network has doubled to £3bn, Financial Mail has established. The huge increase will gobble up most of the extra £4.5bn Whitehall has pledged to put into the railways over the next 10 years.

Leading fund managers had already warned that private investment in Railtrack would come at a higher price following Transport Secretary Stephen Byers' controversial decision to place the company in administration.

Now, large investors who already have loan exposure to Railtrack amounting to hundreds of millions of pounds are to demand a far higher risk premium than expected. Last week Simon Haslam, the Fidelity Investments director who chairs the Railtrack Shareholders Action Group, warned: 'There is no doubt that the risk premium for dealing with the Government has increased.

'If private sector lenders need just half of one% to cover the higher risk of Government intervention at some future date, this will cost £1.5bn over ten years.'

But other institutional investors, including Invesco, Morley Fund Management and Deutsche Asset Management, are believed to be demanding an even higher premium. One leading fund manager said: 'I have been talking to the other major institutions. It is clear that the risk premium will be about 1% - double the 0.5% we were first anticipating.

'The last time the City had to raise this amount of money was for the European Investment Bank. But it is a different story lending to the rail network, bearing in mind this Government's history of dealings with Railtrack. The risk premium is much higher.'

A spokesman for the Strategic Rail Authority, which is charged with directingthe extra investment, claimed that 'there was a strong willingness' in the private sector to lend money to Railtrack. But he declined to name any company.

It has also emerged that the authority's latest spending plans for the rail network do not take into account the extra billions of pounds that would be needed to invest in an advanced traffic management system recommended by the Cullen inquiry into rail safety.

Most safety experts calculate that the new European advanced braking system will cost between £2bn and £3bn. This is not the only major project left out of the 10-year investment blueprint. The Great Western mainline upgrade is also omitted.

Critics of Byers' handling of Railtrack have already predicted that the cost of administration is running at £1m a day, while Railtrack has been forced to pay extra for 'golden handcuffs' to motivate demoralised engineers.