Taxpayer faces pain as Railtrack solution sought

THERE is a tacit admission within Government circles that putting Railtrack into administration was an unwise decision. The move is costing millions of pounds and has probably had an adverse effect on the way the railways are run. The City's relationship with Ministers has been deeply wounded by the cavalier fashion in which investors were treated.

The Department of Transport is, however, keen to move on and there have been suggestions Railtrack will be out of administration by the spring. This is widely regarded as disingenuous but steps are being taken to create a structure for Railtrack's successor.

The sketchiest outlines have been shown to a select circle of influential people and the next stage involves talking to City institutions. The work is being done by the company limited by guarantee, the entity that the Government would most like to take over our railways.

Details are hard to come by but some sort of debt-laden organisation is proposed, requiring billions of pounds from the private sector. The private sector is not playing ball. It would rather not participate in a game where it has no idea if its opponent side is going to move the goalposts.

Some investors have refused to sign the Government's standstill agreement, whereby institutions sacrifice their rights in return for continuing to be paid interest on their bonds. Even those who have not objected openly are half-hearted about the Government's publicprivate partnership schemes.

Trust has gone and financing costs are expected to rise in consequence, particularly irksome for Transport Secretary Stephen Byers as he prepares to privatise Britain's roads. Those with their noses closest to the ground suggest the simplest way for Government to restore faith with the City would be to repay Railtrack's bond investors and start from scratch. They are owed £1.5 billion, a drop in the ocean compared with overall Government expenditure. Investors could even be asked to swap their holdings for gilts.

This Government seems averse to simplicity, so it is unlikely to adopt the idea. Taxpayers will suffer in the long term.

Kingfisher catch
KINGFISHER owns 55% of French DIY chain Castorama and would love to assume full control. Such a move would cost about £2.4 billion and Kingfisher does not have that money to hand. Hence the rumours of a £1bn-plus rights issue to bulk out the company's purse.

Those close to the group, which owns B&Q and Comet, say the cash would come in handy. Kingfisher's balance sheet is in better shape following last year's demerger of Woolworths and sale of Superdrug, but there is still not enough in the kitty to fulfil its French ambitions.

There is one little problem, however- - the group's 59-year-old chief executive Sir Geoff Mulcahy. Institutional investors have been ambivalent about Mulcahy for years. Their feelings took a turn for the worse as he dithered over the future of Woolworths and appeared to fall out with a number of executives in the process.

Mulcahy has a three-year contract, awarded last year by former chairman Sir John Banham. Francis Mackay is chairman now and shareholders have been hoping he might cut short Mulcahy's tenure.

If Kingfisher asked investors for money, the chances are they would demand Mulcahy's head before agreeing to deliver it. Mulcahy almost certainly knows that this is the price shareholders would demand, but self-sacrifice is not his style. The rights issue speculation is likely to remain just that unless investor sentiment changes.