DfT Consider 5 Year Direct GW Award To First Group

[whole diary]

[4064ReadingAbbey]

The net result of this is that TOCs^▸ (Train Operating Company) are having their cake and eating it. Greatly reduced track access charges and no repayment to Government to offset this. Hence only 9% of TOC profit returned to the public purse to pay for investment. 91% to shareholders. All allowed for and overseen by Government. And the Operating Companies are further rewarded for this collusion with Government, at the expense of taxpayers and Network Rail debt, with management contracts. Nice work if you can get it.

Sorry to keep on harping about this issue, but the story of the evolution of the track access charges and the Network Grant is a bit more nuanced than you make out. And I still don't understand the point about the percentage of the TOCs' profits which go towards investment in the railways.

The TOCs, on average, make less than 5% profit on their turnover, as I wrote earlier, and profit is generally taken to the the amount of money left over when the costs of operating the business are deducted from income. In the case of the TOCs the costs include staff costs, rolling stock leasing charges (which, depending on whether it is a 'wet' or 'dry' lease, will include various levels of payment for maintenance, repair and enhancement), fuel, oil, brake pads, office cleaning, train cleaning, stationery, insurance, rail replacement buses, the fixed and variable track access charges, rent, building maintenance, any interest due on monies borrowed, web site hosting services, fees payable to ATOC^» (Association of Train Operating Companies See - here) for the ticketing system, its share of the costs of the BT Police and so on.

As I wrote in an earlier post, the rolling stock leasing charges include sums for the capital expenditure on renewals and the capital expenditure on enhancements. The track access charges also include sums to cover capital expenditure on renewals of the network and a contribution to the capital expenditure on enhancements to it. I really do not understand your position where you claim that only 9% of profit goes in re-investment in the industry. The monies for investment in rolling stock and the infrastructure renewals have already been paid before the profits are declared. Even if your figures are correct, the 91% of the profits which you claim go to the shareholders is therefore 91% of less than 5% of turnover, in other words about 4% of turnover. Any anyway, aren't the shareholders exactly the people who should receive the profits - in fact the only people who are legally entitled to receive the profits?

And the fact that management contracts are being awarded at all has nothing to do with the TOCs or the rail industry generally, but is all due to the incompetence of the DfT^» (Department for Transport - about) which is a second rate, under-staffed, innumerate ministry which can't manage its franchising programme.

[ChrisB]

Apropos of nothing above, I understand that there's a 12 month period after the contract appeared in the Euro Journal before this can be made - so no holding of ones breath I suggest in anticipation...

[Andrew1939 from West Oxon]

Expressing profits as a return on turnover is not a valid measure for most comparative purposes. An outside investor usually looks at return on capital of the company. Some business has by its nature a low profit return on turnover simply because of the high turnover relative to capital employed. Others may have for a given level of capital a much higher return on turnover but because capital employed may be higher, a similar return on turnover. The figures are often used to tell the story that the writer wants to show and are often biassed so have to be read with caution.

[4064ReadingAbbey]

Expressing profits as a return on turnover is not a valid measure for most comparative purposes. An outside investor usually looks at return on capital of the company. Some business has by its nature a low profit return on turnover simply because of the high turnover relative to capital employed. Others may have for a given level of capital a much higher return on turnover but because capital employed may be higher, a similar return on turnover. The figures are often used to tell the story that the writer wants to show and are often biassed so have to be read with caution.

No investor will make a decision on the basis of one factor. The significance of the various measures of return (investment, capital or turnover) depends on the structure of the business and its products. For example a traditional manufacturing company owning its own plant and buildings will have a higher ratio of capital to turnover than a computer software company in the games business delivering its products by the internet.

The TOCs^▸ (Train Operating Company) were deliberately structured to have low capital requirements (hence, for example, the ownership of the rolling stock was invested in the ROSCOs^» (Rolling Stock Owning Company - about)) in order to attract new entrants into the railway industry. They have to be judged on this basis.