Rosco battle reveals rail muddle

The Department for Transport has got in rather a tizzy about the £1bn per year rolling stock leasing business. For the past couple of years, ministers have been making a lot of noise about how the three rolling stock companies – Angel, Porterbrook and HSBC – which bought British Rail’s entire stock on privatisation a decade ago, are making excess profits.

In particular ministers reckon that of the £1bn per year spent on leasing the trains, the train operators are being overcharged by at least £100m, money which effectively comes out of taxpayer’s pockets since the rail industry is subsidised to the tune of £5bn annually. DfT Rail thinks that rentals for the ex-BR fleet include an allowance for risk which has turned out not to exist and it is that money, reckoned to be around 10 per cent of turnover, which it is hoping to claw this back.

Behind the scenes negotiations during that time failed and now the matter was referred to the Office for Rail Regulation which, on November 29, announced that the roscos did, indeed, have a case to answer. While a reference to the Competition Commission appears likely, the ORR will only make a final decision after a three month consultation period.

Certainly, the roscos are undoubtedly overcharging for certain types of train. Researching my book, On the Wrong Line, I discovered that HSBC is charging £121,117 plus VAT for leasing out each of the six two car ex Tube trains used on the Isle of Wight line. Since these were built in 1938 and have no possible alternative use, their capital value is nil and yet that price does not even include maintenance. These high charges explain why every passenger on the 8.5 mile line is subsidised to the tune of over £3, far more than on any other route in the country. The roscos, however, argue that this must be viewed in terms of their whole portfolio in which leasing charges for newer trains tend to offer little margin while those for older trains are higher.

All three roscos are owned by major banks and therefore the government must be rather certain of its case to risk alienating such major players for a relatively small sum. Indeed, while examples like the Isle of Wight trains suggest that the government’s case is strong, there are doubts on both the validity of its case and on exactly the provenance of the £100m figure.

First, the now abolished Strategic Rail Authority, or its successor, the Department itself, approved these contracts, many of which were renewed in 2003/4. Secondly, many of the failings of the market are not the fault of the roscos, but intrinsic to the structure of the rail industry. There are inevitably many rigidities given it is a small market, with some 13,000 vehicles in around 50 types. Rolling stock is built to last around 30 – 35 years – and there are only three leasing companies, one of whom has an entirely electric fleet. There is no pool of surplus stock, which would be incredibly expensive to maintain, and many fleets are not interchangeable with each other given there are two main types of electrification, different sizes (loading gauges) of stock and various internal lay-outs depending on how heavily the trains are used. Moving fleets around the country is an expensive business and trying to coordinate between different franchisees, owned by rival companies with varying contract terms is a logistical nightmare. Therefore most franchisees, who generally have 7 – 10 year deals simply take on existing trains.

The roscos point out that not much of that is within their control and that most of the rigidities are created by the franchising authority, which, since the abolition of the Strategic Rail Authority two years ago, is the Department of Transport itself. Nevertheless, there were areas where clearly the Office of Rail Regulation felt that the market was not operating properly. In its preliminary findings it found, that ‘the train operating companies have expressed concern about the non-capital element of leasing arrangements, relating to such matters as ongoing maintenance and service level agreements’. The roscos were accused, too, of a lack transparency in transactions and an unwillingness to share the risk of poor maintenance by compensating operators for failures caused by trains breaking down.

The logical solution might be for the government to take back the risk of political uncertainty by dictating what rolling stock should be used where. There could be considerable savings in leasing charges if the Department for Transport was able to allocate stock where it was most needed and assume the risk of the loss of any residual value should circumstances change and fleets scrapped before the end of their expected lives. However, that might put the rolling stock back on Gordon Brown’s books, something he is keen to avoid.

The roscos are convinced that they are the victims of political posturing by the Labour government, although they are reticent to make such complaints in public. Angel came closest to that when it said that the investigation will result in ‘a sustained period of uncertainty [that] is likely to curtail essential investment in additional capacity to solve the evident overcrowding problem.’ This was something of a veiled threat given that the government is under increasing pressure to invest in extra carriages given that the level of overcrowding on some lines is making many commuters’ rail journeys as fun as rush hour Tube travel.

In effect, the roscos could go on strike refusing to negotiate new deals while the trains get fuller. A case in point is the extra car needed for the 53 sets of Pendolino trains on the West Coast. Realistically, it would be cheaper and more practical to introduce two new coaches simultaneously for each set given the rise in passenger demand and the savings this would make in the process, but the roscos may be reluctant to fund such a deal while they are under threat from the Competition Commission.

Interestingly, that may play into government hands. It was noticeable that for the new East London line, Transport for London will acquire new trains direct in a purchase and maintain deal from Bombardier, without going through the leasing process. Given these uncertainties, it is easy to see why the leasing companies are increasingly looking to expand their business abroad. The question that ministers must ask themselves is whether the tough stance they are taking on the roscos will ultimately benefit passengers or whether they are indulging in a game of poker that can only have one winner.

Christian Wolmar is an author and commentator specialising in transport matters and his most recent book is On the Wrong Line, how ideology and incompetence wrecked Britain’s railways, published by Aurum, £10 95.

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