Alas, this profitable state of affairs is not set to last. Network Rail, which is responsible for managing the contracts, is looking to slash profit margins on rail maintenance by 50% in a bid to cut its debts, which are contributing to an operating deficit of £1.5bn.
Contractors will not be happy about the proposed move, which could come into force as early as Easter. Network Rail says that it is exchanging a reduction in risk for a reduction in profit, but analysts say Network Rail is merely punishing contractors who make decent margins through efficiency savings. They also argue that it will be difficult to apportion risk on older networks that are more likely to experience faults. They predict that contractors will be deterred from making further investments if margins are lowered.
This could be bad news for Network Rail and the Strategic Rail Authority, which is set to ask for more money from the private sector to finance new rail initiatives. The SRA is reeling from a £312m budget cut announced by the government in January and is looking for new ways of financing major new construction projects.
Jim Steer, the SRA’s number two and head of planning and strategy, told Building this week that more major construction projects will be financed through the private sector. The East London Underground Line is one such project and the SRA is seeking to raise the £1.1bn required through a special PFI vehicle. This will involve contractors borrowing short-term finance to fund construction. They will repay the loans after selling the completed infrastructure to Network Rail.
The SRA also wants the private sector to help redevelop some of Britain’s most run-down railway stations. The £360m redevelopment of Reading station will be part-funded by commercial developments. The SRA and Network Rail will provide £240m for signalling and a freight link but the SRA and Reading council will attempt to raise the rest from developers. This worked at Liverpool Street and Paddington but in these uncertain economic times the SRA may not find many developers eager to participate.