Lee Coppack discusses whether Railtrack's failure to manage safety risks and maintain shareholder value could have been avoided.

In the light of the current situation, it is ironic to reflect that two years after privatisation Railtrack was the subject of an inquiry by the National Audit Office (NAO) as to whether the Government had sold the rail network company too cheaply.

The Department of Transport sold 100% of Railtrack on 20 May 1996 through a stock market flotation at £3.90 a share. For the next two months, the shares traded within a range of £4.05 to £4.30, and then climbed steadily. The price eventually peaked at £17.68 in December 1998.

On 14 June 2001, however, Railtrack's shares were trading below £3.00, and the company was removed from the FTSE 100. They have since risen to around £3.35.

The risk to shareholders has not been managed, nor has the safety risk that is paramount in the public mind. The question is to what extent corporate risk management should or could have foreseen and mitigated these risks? The answer, because of Railtrack's history and political importance, is not straightforward.

Dr Lynn Drennan and Professor Matthias Beck of Glasgow Caledonian University explain the importance of corporate governance and risk management thus: 'From the Cadbury Report of the early 1990s to the more recent Turnbull Report of 1999, issues of corporate governance and risk management have been increasingly to the fore. It is now clear that boards of directors have an explicit responsibility to ensure that all potential threats to the business enterprise have been systematically identified, carefully evaluated and effectively controlled.'

The rail crash at Hatfield on 17 October 2000, which killed four people, came the year after 31 people were killed in a train collision at Ladbrook Grove in north London. It revealed a huge under-investment in the rail network and a rupture between operators and maintenance. Months of seriously dislocated services followed.

Ian Jack, the editor of Granta, wrote in a special report that Hatfield was not, in historical terms, a major disaster. 'But no other railway accident in British history - or, I would guess, any other country's history - has led to the degree of public anger, managerial panic, political confusion, blame and counter-blame that came in the wake of the Hatfield crash.'

June 2001 saw the publication of Lord Cullen's report of the public inquiry into the crash at Ladbrook Grove. Its criticism of Railtrack's management is devastating: 'The response to recommendations of inquiries into serious accidents is a test of whether there is a true determination to address the underlying causes and apply the lessons. The evidence in this inquiry demonstrated that there had been a lamentable failure on the part of Railtrack to implement the recommendations of two formal inquiries and to take steps to see that such recommendations were tracked and the persons responsible for implementation were monitored.'

Railtrack's annual report for the year to 31 March 2001 mentions corporate governance in heartsearching terms. In the past year, 'some progress' has been made toward the establishment of identification, evaluation and management of the group's significant risks, in line with the Turnbull guidance, it says. 'However, partly as a result of the management focus on the national rail recovery plan in the aftermath of the tragic accident at Hatfield in October 2000 and the extent of the challenge of fully embedding risk management throughout Railtrack, the board is unable to report that such an ongoing process has been in place throughout the year ended 31 March 2001.'

Terrifying imperfections
Many of the problems which beset Railtrack date back to what Ian Jack describes as 'the terrifying imperfections of railway privatisation.' They include serious under-investment in the infrastructure, completely misjudged expectations of levels of demand and an unwieldy commercial structure.

A further legacy of Railtrack's history, and its political importance is the governance structure that sits above it: the Strategic Rail Authority (SRA) and the Rail Regulator. In addition, rail safety comes under a dedicated inspectorate in the Health & Safety Executive.

The SRA came into being on 1 February 2001. It provides overall strategic direction for Britain's railways and has responsibility for consumer protection. The Rail Regulator, Tom Winsor, is an independent statutory officer appointed by government. He regulates the monopoly elements of Britain's railways, principally Railtrack, and balances the public and commercial interests.

The potential for this structure to produce different sets of priorities which the Railtrack directors must try to reconcile at the same time as looking after their shareholders seems obvious. Railtrack also has to manage its relationships with its principal customers, the train operating companies.

Said Sir Alistair Morton, chairman of the SRA: "From June 2000, the ageing pint pot that is Britain's railway system began to creak and leak under the steadily rising pressure of more trains, carrying more passengers or freight per train at higher speeds. Trouble was developing, resilience was declining, infrastructure and service were deteriorating." These words are from a speech to the Institute of Economic Affairs conference on the future of UK rail on 26 June 2001.

According to the SRA report, A Strategic Agenda, published on 1 March 2001, the assumption of a static or declining rail system and the progressive removal of government subsidies had a fundamental impact on the structure of the industry, as did the decision to privatise the infrastructure supplier, Railtrack.

Nor, according to Tom Winsor, was the commercial position much better: "In 1996, Railtrack was privatised on the basis of a network licence, a contractual regime and a financial framework which were not fit for purpose. The weakness was serious and, in some respects, could and should have been remedied much earlier."

From this background, arises the sense of Railtrack having to fight on too many fronts, to improve its safety management, its project management and its customer service and to look after its shareholders, not least to retain its ability to raise capital for further investment.

The company declined to comment for this article in the circumstances. But public scrutiny will continue. The final report into the Hatfield crash has yet to be published and Lord Cullen is now preparing a report into the culture, management and regulation of safety on the railways.

In December 2000, Railtrack spelled out a new approach to risk management. Acting finance director and now business development director, Sebastian Bull, gave the details of the new risk review group to the annual AIRMIC dinner. He told the AIRMIC members that, like many other industries, the rail transport sector had become increasingly aware of the need for better risk management systems and practice, incorporated within good corporate governance of the organisation. Significant progress had been made already and the drive for improvement would be continuous.

The 2001 Railtrack annual report says that the board intends to demonstrate full Turnbull compliance before 31 March 2002. Then the effectiveness of the corporate governance principles, especially in the context of privatised national industries, will also come under scrutiny.
Lee Coppack is a market analyst for StrategicRisk