Article - Train leasing companies’ profits investigated by regulator. But should the government “buy out” the ROSCO’s?

[crablab]

Train leasing companies’ profits investigated by regulator

Office of Rail and Road will look at whether rolling stock firms are prioritising their returns over passengers ahead of renationalisation

www.thetimes.com

The rail regulator has launched a review of whether the privately owned train leasing companies are acting in the best interests of passengers and taxpayers.
The inquiry by the Office of Rail and Road (ORR) into the “roscos”, the rolling stock companies, comes as the Labour government begins to implement its renationalisation of the railways in an incremental process taking regional train operators back into public hands.
The rolling stock leasing companies have been under the gaze of regulators since privatisation 30 years ago when industry managers made fortunes after the government handed over the nation’s trains to newly formed private companies.
Yet under the government renationalisation programme there are no plans to take the companies back into public hands.
In a letter to the train leasing companies issued on Tuesday, the rail regulator said it would carry out a review of a 2009 agreement with the rolling stock industry to be transparent in its dealings with the train operating companies to prevent profiteering.
The regulator reviewed that “transparency order” five years ago and advised the Competition and Markets Authority (CMA) that there should be no relaxation in the rules.
The regulator has decided to take a further look given the imminent renationalisation of the train operators.
In its letter, the ORR tells the companies: “With the market changes anticipated from rail reform it is important that we keep under review the effectiveness and proportionality of remedies that have now been in place for over 15 years.
“Value for money for passengers and taxpayers is a key goal of the government’s plans to reform the railway.”
It added: “One of ORR’s duties is to promote competition in the provision of railway services for the benefit of users of railway services.
“Rolling stock accounts for a significant proportion of train operator expenditure. Value for money in this market is therefore of critical importance to passengers and taxpayers.”
The original 2009 inquiry by the Competition Commission, the predecessor body to the CMA, found that the choice and competition in the rolling stock leasing market was skewed by high barriers of entry and the lack of incentives in the now discredited franchise system for train companies to get the best deal.
The ORR said its latest inquiry, which it will report back on this year, would identify whether there had been a material change in the market and if so, how the rules should be changed.
“Now is also a particularly relevant time to review this market, given developments such as in the aftermath of the pandemic, an increasing trend towards shorter contracts … the nationalisation of the operators and a move towards a much greater concentration of train operations under Great British Railways [the new state-owned national rail operator],” the regulator said.
There are more roscos than there were after privatisation or even at the time of the 2009 investigation but the market remains dominated by the original three: Porterbrook, Eversholt and Angel Trains, each of which has also changed ownership over the years.
A report by the National Audit Office in 2021 said that the cost of leasing the nation’s 15,000-plus rail vehicles had nearly doubled to more than £2.5 billion over the prior five years.
Much of that was due to the introduction of the new intercity express trains on London North Eastern and Great Western, which at the time of their procurement by the Department for Transport (DfT) were derided as the most expensive rolling stock of its kind in the world.
The National Audit Office, however, identified that DfT procurement delays, specification changes, consultant fees and legal disputes had all also contributed to rising costs.

 

[Horizon22]

Ultimately surely the response will be “they’re private companies and have limited obligations to the tax payer”?

Of course it’s one of the worst aspects of privatisation of the industry but it’s so baked-in and the government can’t buy ROSCOs out so it’s a difficult situation to resolve - especially in the way Labour would see as satisfactory. So it’s basically asking nicely and having good relationships.

Otherwise the only other thing is whether there is enough competition amongst the three, but ultimately it’s who can prove competent and get enough investment for economies of scale.

 

[185]

Twas as promised... good to see they've made a start. This is the ORRs opportunity to find proof of a cartel operating between the leasing firms - perhaps if the ORR works alongside the competition regulator they can produce a watertight case that they have been abusing their position for many years.

Gwyneth Dunwoody suggested Northern paid for those 142s a hundred times over.

 

[sad1e]

Moderator note - split from:

Article - Train leasing companies’ profits investigated by regulator. But should the government “buy out” the ROSCO’s?

https://www.thetimes.com/business-money/companies/article/train-leasing-companies-profits-investigated-by-regulator-xs9g3gtg6 The rail regulator has launched a review of whether the privately owned train leasing companies are acting in the best interests of passengers and taxpayers. The inquiry...

www.railforums.co.uk

Ultimately surely the response will be “they’re private companies and have limited obligations to the tax payer”?

Of course it’s one of the worst aspects of privatisation of the industry but it’s so baked-in and the government can’t buy ROSCOs out so it’s a difficult situation to resolve - especially in the way Labour would see as satisfactory. So it’s basically asking nicely and having good relationships.

Otherwise the only other thing is whether there is enough competition amongst the three, but ultimately it’s who can prove competent and get enough investment for economies of scale.

Why would the government not be able to buy ROSCO'S out , if they really deemed it nessesary they could spend a few hundred million ( or whatever is nessesary) buying off all the stock from them.

If the government could buy them out it would make the process of stock transfer a lot easier and save a lot of money on the costs of renting the stock. Personally I think it should be done as even though it would cost a massive amount in the short term it would save a lot and recoup coats in the next decade or so.

 

[Djgr]

...when people wonder how funds leak out of the railway industry and end up in castles and islands and the like.

 

[Hadders]

Why would the government not be able to buy ROSCO'S out , if they really deemed it nessesary they could spend a few hundred million ( or whatever is nessesary) buying off all the stock from them.

Where is the Government getting the money from? The country's broke in case you hadn't noticed.

 

[Mag_seven]

Just a gentle reminder that discussion here should be confined to the ORR Investigation into the leasing companies profits.

A suggestion that the government may wish to "buy out" the ROSCOs is a completely separate discussion and can be found here:

Should the government "buy out" the ROSCOS?

Moderator note - split from: https://www.railforums.co.uk/threads/article-train-leasing-companies%E2%80%99-profits-investigated-by-regulator.283410/ Ultimately surely the response will be “they’re private companies and have limited obligations to the tax payer”? Of course it’s one of the...

www.railforums.co.uk

thanks

 

[Class15]

Where is the Government getting the money from? The country's broke in case you hadn't noticed.

This. There are multiple ROSCOs and all of them would take a fortune to buy out. That’s money we haven’t got.

 

[Helvellyn]

The end of short term franchising and the creation of a single guiding mind within GBR should see the emergence of a more cohesive rolling stock strategy. This will hopefully allow GBR to sign longer term leases with flexibility to move them around as required. For rolling stock leasing companies this would provide more certainty that their products have a longer term future so potentially allowing for better leasing rates, rather than taking risks that stock is forced off lease because a new franchisee opts for stock replacement.

 

[Yew]

Where is the Government getting the money from? The country's broke in case you hadn't noticed.

Thats not really how state-level finances work..

 

[yorksrob]

I would let the ROSCO system wither on the vine. All new rolling stock to go to a pool owned by the national railway operator. It would then depreciate in value in the normal way.

I would also legislate to give the national rail operator first dibs on any stock being disposed of by other owners.

 

[Iskra]

I would let the ROSCO system wither on the vine. All new rolling stock to go to a pool owned by the national railway operator. It would then depreciate in value in the normal way.

I would also legislate to give the national rail operator first dibs on any stock being disposed of by other owners.

Agreed. Phasing them out is the least confrontational and damaging way of doing things. Keep leasing what is needed from them but all new orders should be financed differently.

 

[Dave W]

Thats not really how state-level finances work..

It isn't with the right political will, but the stall set out in the last 9 months by this government is that unnecessary spending will not be accommodated.

Whilst you are right to say we can't be "broke", the political position is that we are acting like it (I cast no aspersion on whether that's right, but that's how it is).

 

[yorksrob]

Agreed. Phasing them out is the least confrontational and damaging way of doing things. Keep leasing what is needed from them but all new orders should be financed differently.

Also less upfront cost, which is an important consideration these days.

 

[Class 317]

Well I don't think a cartel or anti competitive situation could be proved for a couple of reasons.

Their are low barriers to entry to the market with many trains being leased by companies other than the 3 legacy ROSCO's both previously and currently.

Significant fleets have been left off lease replaced by new fleets leaving ROSCO'S with trains with no income. For example the class 379. Also trains have been upgraded at considerable cost eg class 321/769's only to be replaced at short notice afterwards by other stock or withdrawn with no replacement.

All the above suggests the market is competitive but obviously only up to a point

 

[JonathanH]

Agreed. Phasing them out is the least confrontational and damaging way of doing things. Keep leasing what is needed from them but all new orders should be financed didifferently.

It shouldn't be forgotten that when there was last direct government financing of trains, there were calls for the government to allow leasing to speed up fleet renewal.

 

[stevieinselby]

I would let the ROSCO system wither on the vine. All new rolling stock to go to a pool owned by the national railway operator. It would then depreciate in value in the normal way.

I would also legislate to give the national rail operator first dibs on any stock being disposed of by other owners.

Exactly this. Capital spend to buy partially depreciated assets that have no obvious benchmark for "market value" is a sure-fire recipe for waste. Either we offer the Roscos far more than the trains are worth up front, or we end up in long and expensive legal battles – neither is a good outcome for the public purse. Better to just do what Merseytravel have done and buy new stock up front, but continue leasing existing stock until either it is due to be replaced or the Rosco offers to sell it to GBR at a sensible price.

 

[yorksrob]

It shouldn't be forgotten that when there was last direct government financing of trains, there were calls for the government to allow leasing to speed up fleet renewal.

True, but I'm not convinced that that was such an issue at the time - certainly going by the amount of networkers, sprinters, super sprinters, general slidey-door things coming on line during the late 1980's/early 90's.

Committing to keep some of the rolling stock factories in orders would probably be a better tool for keeping rolling stock replacement going (politically speaking).

Exactly this. Capital spend to buy partially depreciated assets that have no obvious benchmark for "market value" is a sure-fire recipe for waste. Either we offer the Roscos far more than the trains are worth up front, or we end up in long and expensive legal battles – neither is a good outcome for the public purse. Better to just do what Merseytravel have done and buy new stock up front, but continue leasing existing stock until either it is due to be replaced or the Rosco offers to sell it to GBR at a sensible price.

Indeed.

 

[Iskra]

True, but I'm not convinced that that was such an issue at the time - certainly going by the amount of networkers, sprinters, super sprinters, general slidey-door things coming on line during the late 1980's/early 90's.

Committing to keep some of the rolling stock factories in orders would probably be a better tool for keeping rolling stock replacement going (politically speaking).



Indeed.

If we're spending taxpayers money to keep factories going, isn't there an argument for GBR buying such a factory to produce its own rolling stock, which would also do away with ROSCO's (or at least force them to be more competitive)?

 

[Clarence Yard]

Twas as promised... good to see they've made a start. This is the ORRs opportunity to find proof of a cartel operating between the leasing firms - perhaps if the ORR works alongside the competition regulator they can produce a watertight case that they have been abusing their position for many years.

Gwyneth Dunwoody suggested Northern paid for those 142s a hundred times over.

Gwyneth Dunwoody didn’t have a clue about rolling stock costs. In a normal ROSCO lease of that period you were not just paying for the capital, you were paying for the overhauls and major component changes as well and they cost serious money. The Pacers weren’t that cheap and had the full BR book life of 25 years.

The ORR is the competition regulator for rail. It carries out that function concurrently with the CMA, who retain sole powers over the most serious offences.

A cartel is where different organisations collude to skew a market, usually through sharing information and acting accordingly. I don’t believe that is happening here but is the MEAV regime being operated correctly and priced accordingly? Is there any evidence of super profits being gained through artificially inflated (above normal MEAV or overhaul) prices?

The elephant in the room is the DfT and short term leases. You tend to get a better price for a longer deal but any DfT reduction in older stock benefits the ROSCO because they lose the future maintenance liabilities and accrued monies can be released back into the P&L. Sometimes a ROSCO will buy a business or two (usually engineering or technical) but real opportunities there are limited and so the shareholder will usually gain from the DfT’s actions.

I get the impression this enquiry is more to do with proving to Government that the ORR is worth keeping than actually finding out anything that we didn’t know already.

 

[yorksrob]

If we're spending taxpayers money to keep factories going, isn't there an argument for GBR buying such a factory to produce its own rolling stock, which would also do away with ROSCO's (or at least force them to be more competitive)?

Certainly. And re-establish design and research as well.

 

[Yew]

If we're spending taxpayers money to keep factories going, isn't there an argument for GBR buying such a factory to produce its own rolling stock, which would also do away with ROSCO's (or at least force them to be more competitive)?

Perhaps some sort of Limited company to do Engineering for British Rail?

 

[Class15]

Perhaps some sort of Limited company to do Engineering for British Rail?

You could even call it B.R.E.L.!

 

[185]

The Pacers weren’t that cheap and had the full BR book life of 25 years.

I have to say, that a large amount of the work on, for example the 142s wasn't paid for by the leasing company. We were told all of the day to day maintenance and minor part replacements at Newton Heath TMD was done by and paid for by the TOC. Only major work like engine replacement, interior refurbishments etc was the ROSCO. The article about train leasing companies tripling their profits to £400 million a couple of years ago, and a huge turnover exposes some multi million pound salaries, this says it all - money from our railway is indeed being siphoned off - money which could have made our railway more affordable.

The 142 interior refurbishment, probably came from B&M bargains. Could do that for a tenner.

 

[thomasheywood]

Why do we even need to buy these leasing companies out? Just seize their assets and if they complain, tough they shouldn’t have acted in such a rapacious manner…

 

[ExRes]

Why do we even need to buy these leasing companies out? Just seize their assets and if they complain, tough they shouldn’t have acted in such a rapacious manner…

When did Putin take over this country? unless the leasing companies have been operating illegally, and it can be proven, then there's nothing the Government can do, both Conservative and Labour governments have set the parameters that the leasing companies operate under, that's where your ire should be aimed

 

[Clarence Yard]

I have to say, that a large amount of the work on, for example the 142s wasn't paid for by the leasing company. We were told all of the day to day maintenance and minor part replacements at Newton Heath TMD was done by and paid for by the TOC. Only major work like engine replacement, interior refurbishments etc was the ROSCO. The article about train leasing companies tripling their profits to £400 million a couple of years ago, and a huge turnover exposes some multi million pound salaries, this says it all - money from our railway is indeed being siphoned off - money which could have made our railway more affordable.

The 142 interior refurbishment, probably came from B&M bargains. Could do that for a tenner.

The level 4 work done at depot isn’t the most expensive part. That is the easy bit to fund. It’s the level 5 costs where the serious money is and they are very “lumpy” items to find the money for. Which is why leasing is often favoured because it evens out your costs.

Profit isn’t a dirty word to me but what it is used for is important. The big profits in that article came from balance sheet manoeuvres where funds were released to the P&L, not purely from the leasing revenue itself. That is a big difference.

As for the post about confiscation, there is a well worn path in this country that the state always has to pay if they takeover someone else’s assets. If you want to kill investment in this country, put the price of Government bonds through the roof and make everyone poorer as a result, confiscation is a very good and quick way of doing it.

 

[thomasheywood]

The level 4 work done at depot isn’t the most expensive part. That is the easy bit to fund. It’s the level 5 costs where the serious money is and they are very “lumpy” items to find the money for. Which is why leasing is often favoured because it evens out your costs.

Profit isn’t a dirty word to me but what it is used for is important. The big profits in that article came from balance sheet manoeuvres where funds were released to the P&L, not purely from the leasing revenue itself. That is a big difference.

As for the post about confiscation, there is a well worn path in this country that the state always has to pay if they takeover someone else’s assets. If you want to kill investment in this country, put the price of Government bonds through the roof and make everyone poorer as a result, confiscation is a very good and quick way of doing it.

I’m sorry I don’t buy that argument about ‘killing investment’. It’s been known about for years that Labour want to nationalise the railways, I doubt that taking back control of our rolling stock will scare away anyone…

 

[dosxuk]

I’m sorry I don’t buy that argument about ‘killing investment’. It’s been known about for years that Labour want to nationalise the railways, I doubt that taking back control of our rolling stock will scare away anyone…

Have you not noticed the way they have chosen to "nationalise" is to wait for the franchises to expire, rather than buying them out?

Seizing the rolling stock and forcing the closure of the ROSCO's will absolutely be a sure fire way to destroy confidence in investing in the UK. Why would anyone buy-to-lease something in the UK if the government of the day can just suddenly come along and take it off you? And there's an awful lot of stuff that is done through leasing companies, not just rolling stock - and you'd affect all of that.

 

[Harpo]

I’m sorry I don’t buy that argument about ‘killing investment’. It’s been known about for years that Labour want to nationalise the railways, I doubt that taking back control of our rolling stock will scare away anyone…

The railway industry already has as much control of its rolling stock as it wants. It entered into a contract and negotiated the T&Cs and price for that.