IF you were caught by last week’s rail chaos at Rugby or Liverpool Street station, I suspect you didn’t immediately start shouting about how this was a classic failure of corporate governance.

But I think that is how we will remember this Christmas pantomime – as the event that finally prompted ministers to think the unthinkable about Network Rail and change the way in which it is run.

The rail group has always been the government’s blue-eyed boy. Ministers set it up in the wake of Railtrack’s collapse six years ago as a shining example of the “third way” – an organisation that would act with the efficiency of a public company but without all those nasty fat-cat shareholders to cream off dividends. One of the great revelations of the court case brought against the government in 2005 by aggrieved Railtrack shareholders was the long-running e-mail discussions between various officials about the attractions of this kind of organisation.

Network Rail, then, is a corporate oddity. It has no shareholders, but nor is it government-owned. Instead, it is a company limited by guarantee. The board is answerable to a group of “members” – individual members of the public and nominees from the railway industry. Although its borrowings of about £20 billion are guaranteed by the government, they do not count against the public-sector borrowing requirement because of Network Rail’s independent status. When the trains were running smoothly, or at least better than in the last days of Railtrack, nobody questioned this structure. But now that Network Rail has committed a major gaffe, questions will be asked about how this company can ever be properly held to account.

The key weakness is the Network Rail members. They are not like nonexecutive directors of a public company – they are numerous, meet infrequently, and in most cases have no direct knowledge of the company’s internal workings. The chance of them uniting to eject the board appears minuscule. Indeed, when a rather mildly worded motion from train companies querying Network Rail’s performance was tabled at the company’s last annual meeting, the members swiftly kicked it into touch.

So we should support the call by Lord Berkeley, a Network Rail member, for a change in the way the company is run. Berkeley, a former commercial director of Eurotunnel and a leader in the rail-freight industry, reckons the way forward is to have fewer members, who are elected rather than being de facto appointees of the company. It’s a good idea, one drawn in part from the experience of NHS hospital trusts.

But one seasoned observer of the railways I spoke to this week thinks something more radical is called for – the break up of Network Rail.

The problem is the organisation’s unwieldly nature. While Sir Ian McAllister and Iain Coucher, chairman and chief executive respectively, are reckoned to have done a good job, below them there is an amorphous mass of middle management that has yet to change its spots.

A break-up would create a small number of regional rail companies. This would mean duplication of overheads, but the introduction of competition between routes and individual companies would bring a much-needed incentive to perform.

Big test for BHP

SOMETHING that has always puzzled me about the BHP Billiton-Rio Tinto saga is how little has been said about the competition issues.

The combined company would control about 36% of the world’s iron-ore, a necessary raw ingredient of steel and as such one of the key inputs to any modern economy.

It seems natural to me that a deal that creates a dominant player in such a vital resource will attract the attention of competition authorities, and in particular, perhaps, the European Commission, which more and more seems to see itself as the de facto competition authority for the world economy.

Odd then that Rio Tinto has in its defence against BHP so far steered clear of the competition issues.

It has set great store by how there is much hidden value in its assets, and how it would manage them in a superior fashion to BHP, but it has not tried to say that the combination is unworkable on competition grounds.

BHP, for its part, has maintained that it has studied the subject carefully, and it is satisfied that where competition issues exist, it has remedies for them.

That might well be true – but this confidence must then mean that BHP is prepared, in order to secure a recommendation from Rio’s board, to take on the competition risk itself.

This would leave its shareholders potentially exposed to a very long and risky wait. Imagine, for example, it managed to secure an agreed deal at the end of the first quarter – and the European Commission then said it wanted to do a full analysis of the deal, which could take up to a year.

BHP shareholders would be left waiting around, while their Rio counterparts would be secure in the knowledge that BHP had signed up to pay no matter what Europe or any other watchdog said.

Marius Kloppers, BHP’s chief executive, will be turning all this over in his mind as he contemplates the rapidly approaching deadline of February 6 imposed by the Takeover Panel.

By then he must make a formal offer for Rio or relinquish the chase – something I very much doubt he will be prepared to do.

John Waples is away

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