Why did BR buy rather than lease units?

[route:oxford]

These days, few units are owned by the operator. It's pretty much the same whether airlines, coaches or the cars on our drives.

With cash so short in the 80s at Sprinterisation, why did BR use capital on new units when it could have simply leased them from a bank?

The result would probably have been no Pacers, more 150s, 3 car 156s and more 3 car 158s.

 

[Roast Veg]

BR didn't just purchase the units, it also built units (under BREL), maintained units, controlled operations, and allocated units to routes and services. That means instead of leasing units and rewriting contracts all the time, BR had a lot more wiggle room to vary their strategies. That resulted in units that were much more one-size-fits-all, like most of the PEP and Mk3 derived stock.

Now, units are specified for the services they're actually intended to operate (or they're supposed to be, one might argue the 195s and 331s suffer from not being specific enough).

 

[fireftrm]

I'm not sure but BR was a government owned company and all its debts counted toward pubclic sector debt? Maybe that affected how a lease was viewed?

 

[LNW-GW Joint]

These days, few units are owned by the operator. It's pretty much the same whether airlines, coaches or the cars on our drives.
With cash so short in the 80s at Sprinterisation, why did BR use capital on new units when it could have simply leased them from a bank?
The result would probably have been no Pacers, more 150s, 3 car 156s and more 3 car 158s.

Because the government preferred to spend its money as capital from an annual budget allocation, generally because it was seen as "cheaper".
All BR purchases above a certain level had to be approved by the government under Treasury Rules.
Only from about 1990 did leasing come into the railway, with the Class 365 fleet (BR's last rolling stock procurement).
Privatisation saw BR's rolling stock as an easy sale and leaseback transaction, and the Treasury pocketed the proceeds.

The Class 50s were originally leased from English Electric in the late 60s under a special deal, but they were eventually purchased outright.

Ships and planes and many other capital items are often leased, sometimes direct from the manufacturer like the IEP contract.
The finance industry will set up a deal however you want it.
Trains are no different.

 

[thelem]

If you can afford it, then it is cheaper in the long term to own your own assets rather than renting them.

For commercial businesses, leasing assets can allow the business to grow faster. For example, if you have x pounds you can buy one plane outright and make y pounds by operating it. That same x pounds might allow you to lease two planes and make 2 y pounds profit, minus z leasing cost. As long as the profit from operating the second plane is more than the leasing cost, you as a business owner make more money.

 

[HSTEd]

With cash so short in the 80s at Sprinterisation, why did BR use capital on new units when it could have simply leased them from a bank?

Because using Private Finance when you have state finance available is an incredibly bad plan?
BR could borrow money from the Treasury at a far lower rate than banks would charge for lending to it.

The modern obsession with PFI exists so that the Chancellor of the Exchequer can lie to the British public about the state of the public finances.

BR was a "traditional" vertically integrated railway to the point where it owned the plant where concrete cable trough was made.
Operating it on a lease model would be an anathema to it's entire way of working.

 

[JonathanH]

Around 1991, there was quite a push from John Prescott as Shadow Transport Secretary for the leasing of new trains.

British Railways Board (Finance) Bill - Hansard - UK Parliament

Hansard record of the item : 'British Railways Board (Finance) Bill' on Thursday 11 July 1991.

bit.ly

Mr. Prescott

I withdraw that, but the hon. Gentleman is aware of the document. It is not essential for companies to go through the ideological process of privatisation to get private money.

I could never understand why publicly owned British Airways could lease aeroplanes, but British Rail could not lease its trains. It was said that, if the company went bust, aeroplanes could be sold, but that did not apply to trains. Neither would have been allowed to go bust. The truth was that the Treasury could not fund the huge amounts of money needed to buy aircraft, so not only did it allow British Airways to lease them, but it guaranteed the exchange rate. It would not help the rail system— and that was under a Labour Government.

It is the Treasury's philosophy that has dictated to us how to manage our railway system, and we then have to answer for the consequences of having a poor quality system. We get into the rhetoric of party ideology and wonder whether we are dealing with monopoly or privatisation. That remains an issue between the parties, but it is not an issue that determines the quality and safety of our railway system.

 

[corfield]

Makes you wonder if an alternative approach would have been to keep it as a monopoly and just sell all that off.

Purchase of something for £100 and getting 20 years out of it is cheaper in long run than £10 per year. However it makes for massive spikes and troughs in spending. You also end up tied to the item because you want/have to get your money’s worth and unless you can sell it, can’t free any income to adjust if change is needed.

This is the opposite of what a Government wants where income does not match that.

Throw in politics and that money constantly being diverted for political reasons and the outcome is a bit of a mess.

I personally buy stuff outright (bar house!) for precisely this reason, but even then it is not easy to manage the peaks/troughs across a life of expenditure.

 

[corfield]

PFI started from a sensible idea but has been extraordinarily abused, by Gordon “Prudent” Brown most. Subsequent attempts to row back on it faltered on the expediency and it offers and were corrupted similarly. Plus it seems to be win-win for the individuals who push it, sign the contracts and revolve through doors... so all in all it has become a juggernaut.

 

[JonathanH]

These days, few units are owned by the operator. It's pretty much the same whether airlines, coaches or the cars on our drives.

With cash so short in the 80s at Sprinterisation, why did BR use capital on new units when it could have simply leased them from a bank?

The result would probably have been no Pacers, more 150s, 3 car 156s and more 3 car 158s.

i don't think that more rolling stock would have been the result. The railway would still have had to justify purchases to itself. The regional railway was not making money. 2-car units probably were all that was needed at the time even if leasing had been available.

 

[Bald Rick]

BR did lease units, the 365s to be precise, order placed in 1993 IIRC. But this was a political thing, to help keep York works open, to demonstrate that leasing could work, and to show that the Government was approving BR to have new trains even though Government had effectively slashed the entire BR capital investment budget in the early 90s (except for Channel Tunnel related work).

Besides, leasing trains on the GB network is a curious market. Airlines can lease planes, but if they find they don’t need them they can hand them back to the lessor who will then find another customer somewhere in the world. Not so easy to do that for U.K. trains with very specific gauging, signalling and electrification specifications.

 

[randyrippley]

I'm not sure but BR was a government owned company and all its debts counted toward pubclic sector debt? Maybe that affected how a lease was viewed?

Correct - leased trains would have counted as public sector borrowing
One of the drivers for privatisation was to enable leasing without it counting against the PSBR

 

[corfield]

I must admit in a way I like the leasing (revenue cost) vs purchasing (capital) cost as it is more honest about what a service costs to run etc., and drastically reduces the politics disrupting everything (eg new party getting in and redirecting to its marginal seats/particular idiom).

I wonder if its hard to cancel something that is leased/contracted because the saving now is small vs the political hit of not doing it. In contrast to being able to blame the high capital cost of completely redoing it.

I’ve seen PFI in defence which makes no sense for military equipment due to the lack of flexibility and risk. Trains seem work ok with leasing judging by the strength of activity?

 

[Helvellyn]

Leasing is the option today because the model of franchised operators meant no company was in a position to invest capital in a new train fleet because it was never going to be around to get its return on investment. Plus as others have said, UK loading gauge means that easily releasing those trains elsewhere would not have been an easy option in the 1980s. So the risk.would be that BR would have had to commit to say a 30 year lease to allow the leasing company to recover its investment or pay relatively high leasing costs for a shorter period.

If BR had been privatised by selling off business units (e.g. InterCity) which had included its rolling stock assets then you might have seen a mix of capital investment in new fleets and leasing, but that business would have been able to work out the best model based on long term planning.

 

[LNW-GW Joint]

Rolling stock has been an issue between two arms of government (DfT/CMA) ever since the second round of franchises when the SRA was in control.
The CMA believes the DfT manipulates the market by specifying types of rolling stock and its allocation, even subsequent cascades (eg 319s to Northern).
The leasing companies then have an easy time with full utilisation of their assets and take little commercial risk.
The DfT claimed it was "protecting the interests of the secretary of state and the taxpayer".
After a major row a decade ago, the DfT has retreated a little and doesn't (or says it doesn't) dictate rolling stock policy except for strategic procurements like IEP and class 700 for Thameslink, or for HS2.
But we all know it interferes all the time as to what TOC rolling stock proposals it will or won't endorse.

And then, finding that the big orders went to Hitachi and Siemens, the DfT then fixes it behind the scenes to ensure multiple orders for Bombardier (class 387).
While most orders were at one time placed through the 3 Roscos, it's now more likely that a deal with the manufacturer will be arranged, to include long-term maintenance.
The BR model, of largely integrated in-house design, manufacture, maintenance and operation, is dead - ever since BREL was sold to ABB.

UK exceptionalism gets in the way of course.
Privatisation and EU membership at least forced the UK railway to think globally and standardise to some degree, which has reduced procurement costs.
The reversal of all that means there's a danger of slipping back to being a unique railway again, with all its cost implications.

 

[py_megapixel]

Now, units are specified for the services they're actually intended to operate (or they're supposed to be, one might argue the 195s and 331s suffer from not being specific enough).

The main problem with the 195s and 331s seems to be that they have been specced for both high-density commuter services and regional express services. These two aren't really compatible and the result is a train which does neither job particularly well. My opinion is that what was needed was two subfleets - a regional interior with more comfortable seats, more toilets and more luggage space, and a commuter interior with higher density seating and plenty of standing room.

 

[py_megapixel]

And then, finding that the big orders went to Hitachi and Siemens, the DfT then fixes it behind the scenes to ensure multiple orders for Bombardier (class 387).

The following post is tounge-in-cheek; I know it's not quite this simple
Also these big orders which went to Hitachi and Siemens are constantly challenged by Bombardier (and whichever of Hitachi and Siemens didn't get it in some cases) because they are sore losers.
This really infuriates me. If Siemens is selected as offering the best solution for the operator in question then Siemens should take the contract.
Someone needs to go and tell Bombardier "Life's not fair"

 

[corfield]

The following post is tounge-in-cheek; I know it's not quite this simple
Also these big orders which went to Hitachi and Siemens are constantly challenged by Bombardier (and whichever of Hitachi and Siemens didn't get it in some cases) because they are sore losers.
This really infuriates me. If Siemens is selected as offering the best solution for the operator in question then Siemens should take the contract.
Someone needs to go and tell Bombardier "Life's not fair"

To be fair this is common in large procurement cases where losing can end the company. Especially when they have a point it wasn’t a level playing field in the competition. Writing a requirement that favours one expected bid is common in many, if not all fields.

This is nothing new, even in BR days contracts went places for political reasons, as they do now. All that’s changed is the noise and detail of how it happens.

 

[WesternLancer]

A comparable question might be (and it would be interesting to know) did British Airways, when it was nationalised in say the 1970s, lease its aircraft or own them outright?

Of course that may be affected by conditions and methods in then the industry concerned stretching back to the time it was brought under state control - eg is state run airlines typically leased aircraft at the time the state started to run them, then that approach may well be continued with after nationalisation (were BOAC/Imperial Airways ever fully private sector businesses however?)

Did leasing of assets as a concept / financial model actually exist in the way we currently understand it when railways were nationalised in 1948? - when as is mentioned up thread UK railways were highly vertically integrated with the vast majority of their activity 'in house'.

 

[pdeaves]

If BR had been privatised by selling off business units (e.g. InterCity) which had included its rolling stock assets then you might have seen a mix of capital investment in new fleets and leasing, but that business would have been able to work out the best model based on long term planning.

This is exactly what happened in the freight sector. The privatised companies owned stock and since then has had a mix.

 

[LNW-GW Joint]

A comparable question might be (and it would be interesting to know) did British Airways, when it was nationalised in say the 1970s, lease its aircraft or own them outright?

Of course that may be affected by conditions and methods in then the industry concerned stretching back to the time it was brought under state control - eg is state run airlines typically leased aircraft at the time the state started to run them, then that approach may well be continued with after nationalisation (were BOAC/Imperial Airways ever fully private sector businesses however?)

Did leasing of assets as a concept / financial model actually exist in the way we currently understand it when railways were nationalised in 1948? - when as is mentioned up thread UK railways were highly vertically integrated with the vast majority of their activity 'in house'.

Whenever there was gloom about the UK's balance of payments figures in the 1970s (every month basically) it was frequently pointed out that whenever BA took delivery of a purchased 747 it greatly affected the figures.
BR bought almost exclusively home products so didn't suffer from the same problem.
After exchange controls were lifted in 1979, and the £ was floated, those problems disappeared.
That, and the deregulation of banks and financial institutions in the 1980s, was when other forms of financing large purchases (like PFI) were allowed.

Most private airlines have a mix of owned and leased planes, but it's noticeable that when they fail financially you usually discover the assets are all leased.
Selling and leasing back is also common, to aid cash flow.
Thomas Cook tried that route but it didn't work.

There are now several business models for financing trains, TOCs are not obliged to use the 3 main Roscos.
Merseyrail's 777 fleet will be PTE-owned (Merseytravel), but they are still financed commercially.
Some fleet purchases cause a unique financial framework to be set up for them - I think Scotrail's 385s are in that category, also TfL's 345s.
Even the government's "cheap" borrowing has to be financed on the markets.
That all depends on the government's credit-worthiness - which is about to take a dive.

 

[corfield]

Arguably the trend to lease vs own reflects at a national level the “failing company” tactics you refer to.

 

[eastwestdivide]

...Only from about 1990 did leasing come into the railway...

Maybe true for locos/passenger trains, but the private owner wagon lessors had been in operation much longer than that.

 

[Clarence Yard]

Because using Private Finance when you have state finance available is an incredibly bad plan?
BR could borrow money from the Treasury at a far lower rate than banks would charge for lending to it.

The modern obsession with PFI exists so that the Chancellor of the Exchequer can lie to the British public about the state of the public finances.

BR was a "traditional" vertically integrated railway to the point where it owned the plant where concrete cable trough was made.
Operating it on a lease model would be an anathema to it's entire way of working.

Not quite true. There were occasions when BR, in common with other nationalised industries, had to borrow money from the Treasury when it would have been cheaper to go to the market. But they were not allowed to do so, something that the BRB Finance team would get quite upset about but could do absolutely nothing to change.

All to do with managing government debt, of course and it was an occasional game with BR that went back to at least the 1960's.

 

[WesternLancer]

Whenever there was gloom about the UK's balance of payments figures in the 1970s (every month basically) it was frequently pointed out that whenever BA took delivery of a purchased 747 it greatly affected the figures.
BR bought almost exclusively home products so didn't suffer from the same problem.
After exchange controls were lifted in 1979, and the £ was floated, those problems disappeared.
That, and the deregulation of banks and financial institutions in the 1980s, was when other forms of financing large purchases (like PFI) were allowed.

Most private airlines have a mix of owned and leased planes, but it's noticeable that when they fail financially you usually discover the assets are all leased.
Selling and leasing back is also common, to aid cash flow.
Thomas Cook tried that route but it didn't work.

There are now several business models for financing trains, TOCs are not obliged to use the 3 main Roscos.
Merseyrail's 777 fleet will be PTE-owned (Merseytravel), but they are still financed commercially.
Some fleet purchases cause a unique financial framework to be set up for them - I think Scotrail's 385s are in that category, also TfL's 345s.
Even the government's "cheap" borrowing has to be financed on the markets.
That all depends on the government's credit-worthiness - which is about to take a dive.

Thanks for these points, interesting to read.

Of course it occurs to me that is the Concorde project had gone as planned that would have helped the balance of payments in the 1970s considerably!

 

[Sad Sprinter]

Thats what the Labour Party were going to do had they won the 1992 election. NSE would of leased the class 471 trains.

 

[Grumpy]

With cash so short in the 80s at Sprinterisation, why did BR use capital on new units when it could have simply leased them from a bank?

The result would probably have been no Pacers, more 150s, 3 car 156s and more 3 car 158s.

I'm not sure how BR funded its assets in the early 1980's. However it's not true to suggest that leasing only started in the 1990's. BR's Corporate Finance department was organising the leasing of new rolling stock in the 1970's, and the class 50 leases have already been mentioned. The PTE's were certainly leasing buses in the 1980's.

It's also an over-simplification to say that BR could borrow money from the Treasury at a far lower rate than banks would charge for lending to it. Apart from BR having a good covenant, with little risk of default, the issue of Corporation tax allowances at the time is relevant. In simple terms the banks had lots of taxable profits whilst BR had none and could not take advantage of the 100% allowances on new plant and equipment (which included transport rolling stock). However if a bank bought the assets it could offset the purchase costs against Corporation tax and would therefore offer an attractive leasing rate to attract the business.

 

[edwin_m]

BR didn't just purchase the units, it also built units (under BREL), maintained units, controlled operations, and allocated units to routes and services. That means instead of leasing units and rewriting contracts all the time, BR had a lot more wiggle room to vary their strategies. That resulted in units that were much more one-size-fits-all, like most of the PEP and Mk3 derived stock.

Now, units are specified for the services they're actually intended to operate (or they're supposed to be, one might argue the 195s and 331s suffer from not being specific enough).

The one-size-fits-all approach actually continued for some years after privatization, and in some ways became more so, as the leasing companies realized they would be on the hook if the successor to the initial operator decided not to use the fleet they had funded. Witness the nearly universal specification of EMUs with dual voltage provision, albeit this was made relatively easy by technology changes that roughly coincided. There were some oddballs like the 185s and anything by Alstom, but by 2010 the market had settled down to repeat runs of 23m Turbostars and 20m Desiros and Electrostars with gradual improvements to the spec in each order. Intercity or similar stock was a bit more bespoke.

This has since somewhat broken down for the suburban/regional market, probably due to the entry of new leasers into the market who are more willing to offer the client what they (think they) want rather than a standard product with minor tweaks. This does now seem to be settling down to a new standard of 23-24m for AC EMUs and DMUs (four suppliers having delivered these, with Stadler as a wildcard) with 20m dual voltage remaining in play mainly for the Southern. Conversely the intercity market has coalesced to a standard product with all orders being variations on the IEP design, whose one-off design and development costs were largely paid for by the government.

 

[SteveM70]

If you can afford it, then it is cheaper in the long term to own your own assets rather than renting them.

For commercial businesses, leasing assets can allow the business to grow faster. For example, if you have x pounds you can buy one plane outright and make y pounds by operating it. That same x pounds might allow you to lease two planes and make 2 y pounds profit, minus z leasing cost. As long as the profit from operating the second plane is more than the leasing cost, you as a business owner make more money.

This

It’s about opportunity cost, ie what else could be done with money that would otherwise be sunk into capital purchases.

And with historically low interest rates, the argument for leading has never been stronger

 

[delt1c]

Leasing also has an effect on the balance sheet.