Shock as Jarvis quits rail repairs

RAIL AND construction giant Jarvis is pulling out of its line maintenance contracts, worth £180m a year, following investigations and accusations over its safety record.

A rail industry source said: 'You can hear the champagne corks popping. The company has just had enough.' Jarvis has admitted responsibility for causing the King's Cross derailment last month - a section of rail had not been replaced - and remains under police investigation over its role in the Potters Bar crash of May last year in which four people died.

Jarvis has suffered ridicule and embarrassment for its failure to maintain the national network. A Network Rail [NR] spokesman confirmed that it was taking over all three major contracts, 24% of rail maintenance, operated by Jarvis.

'They came to us with a proposal to withdraw from the market. We said we would take over the contracts.' The spokesman described the derailment at King's Cross as an 'unforgivable' incident. There have been other problems including an accusation that in August Jarvis employees failed to tell a signalbox operator to halt trains at Retford after a broken rail was discovered.

Last month the company faced Rotherham magistrates charged with breaching a health and safety regulation when an empty coal train was derailed.

Kevin Hyde, chief executive and number two to Jarvis founder Paris Moayedi, said today: 'We constantly review the risk-return equation and, in this instance, the equation favours exiting the maintenance business. Reputational issues were a factor in our decision.'

What that means is that the abuse the company received over the Potter's Bar disaster and for the King's Cross and Rotherham foul-ups was damaging its credibility and the level of profits does not justify the hassle.

Moreover, cash-strapped Network Rail - recently told by the Rail Regulator that it cannot keep spending £6bn a year - has been battening down the hatches and telling contractors to cut costs or lose the work.

'The negotiations on the maintenance programme indicated that this business was no longer going to be commercially viable. They were not going to generate the returns we have come to expect,' said Hyde.

Those returns are an operating margin of 6%, giving Jarvis £12m profit over £200m of maintenance contracts last year. That compares with the average 7% return on 'special' rail project work that Jarvis does, most notably on the West Coast Main Line and Thameslink, which it will continue to be significantly involved in and which last year brought in £28m profit from £400m of work.

If a major player such as Jarvis thinks standard maintenance contracts are no longer viable, then it is likely emergency meetings are going on today at its six main rivals, such as Balfour Beatty and Amey.

If they also begin to pull out, Network Rail will get pushed into overload - it has previously said it is not capable of effectively renationalising the maintenance process by taking on all the work itself.

Whatever the outcome of the Potter's Bar investigation, Jarvis's decision today is above all motivated by the effect on its shares that exposure to rail maintenance is having.

The pull-out means giving up some 15% of its annual £80m operating profits, a shortfall it hopes will be made up from expanding its businesses in road maintenance and building and maintaining hospitals, schools and university accommodation in private finance initiative contracts.