Would it be realistic to renationalise the railways? - BBC News Magazine

[whole diary]

[Tim]

AIUI^▸ (as I understand it) the 'core of people on standby' is DOR, and East Coast was their operating subsidiary, and it is the latter that was 'bought' by Intercity Railways (Stagecoach/Virgin).

So DOR as a government holding company will continue to exist, and still employ that core of people, but they are now on standby, however AFAICT^▸ (as far as I can tell) the people are in the private sector, not civil servants.

I don't think the oft repeated statement that the ECML^▸ (East Coast Main Line) franchise was 'operated by DOR' is strictly correct.  They were operated by East Coast Ltd, supervised by DOR.

Paul

Correct.  This might be out of date information, but I recall DfT^» (Department for Transport - about) tendering for a private firm to provide the DOR standby function.  I think Atkins had the contract at some point.  They may still do.

[ChrisB]

The issue is that if a UK^▸ (United Kingdom) Government owned or affiliated organisation bids for franchise or a concession and another department of the same UK Government also decides on the winner in such a competition then how does one know whether the selection process has been fair and above board? The DfT^» (Department for Transport - about) becomes judge, jury and executioner. Legal challenges would be inevitable.

The successful franchisee has to place a performance bond (as well as other bonds) to cover the costs of selecting a replacement in the case that it becomes insolvent during its tenure. These bonds are large, around the ^20 million mark, and a private bidder has to factor the costs of these bonds into his offer.

A UK-Government-backed operator cannot become insolvent (and DOR posted no such bond). Should a Government-backed operator also have to post a bond - and if so why?

Legally, it would have to....to obtain a level competitive playing field with the other bidders. Otherwise, the DfT would end up in court on unfair competition rules and lose.

So where does DOR get this bond from? Not from the Government/taxpayer, again, unfair competition - it would have to borrow it....I don't think overall there would be any cost saving. Take VTEC - to produce the franchise payments to the DfT of the size VTEC is / investment millions (and would need to be higher than VTEC to win the franchise) is going to cost DOR the same as Virgin/Stagecoach if it has to obtain this money in commercial borrowings.

Of course, the ultimate aim, certainly of the unions, is to get all franchises under DOR- then they go for overall collective bargaining again & we end up with more industrial action affecting more pax than currently.

[4064ReadingAbbey]

The argument that because DB^» (Deutsche Bahn - German State Railway - about), Abellio and the others are subsidiaries of nationalised organisations, then an East Coast Railways/DOR-type operation should also be allowed to bid is false. DB, Abellio and Co. are, without a doubt, nationalised in one form or another - but they are NOT organs of the UK^▸ (United Kingdom) Government. That is the decisive difference.

So the conclusion of the above is that state run train operators are more cost-effective than private ones.

How does that follow? The part you snipped completes the story.

We ought therefore either have DOR competing for all (including foreign) franchises or ban SNCF^▸ (Societe Nationale des Chemins de fer Francais - French National Railways), DB, NS etc from tendering for UK operations.

The words goose, sauce and gander spring to mind.

OTC

DOR was established by the DfT^» (Department for Transport - about) to fulfil the requirements under Section 30 of the Railways Act to secure the continued provision of passenger railway services in the UK should an existing franchise not be able to complete its full term. Its terms of reference do not extend to running railways in other countries - and I doubt very much whether a company directly owned by a UK government ministry would be allowed to operate in other countries. If it was wished that a 'nationalised' UK organisation were to compete for such contracts then another organisational form would be necessary.

But private UK organisations have bid for and won 'franchises' in other countries. For example it has recently been reported that National Express Rail has been awarded the rights to operate two routes in Nord-Rhein/Westfalen (Lines RE7 Krefeld-K^ln-Rheine and RB 48 Wuppertal-Solingen-Bonn) as well as the S-Bahn network in N^rnberg in Bavaria.

It's not a one way street.

[didcotdean]

Arriva Deutschland operated a number of rail services in Germany, which had to be divested when the parent was taken over by DB^» (Deutsche Bahn - German State Railway - about).

[onthecushions]

The reason why state run operators are likely to be more cost-effective franchise holders is mainly because they already understand how railways work and have the "network" access to skills etc, also because they have more sympathetic financial management with more understanding and acceptance of actual risks.

The rules of a game are those observed by all the other players, not just the UK^▸ (United Kingdom), on its own. If Europe practices state-run franchise holdings then so must we. German success has a strong base in integration of state and industry. Where we have that (such as Rolls Royce Aero), then we also succeed and vice versa.

Have you seen 4064's nameplate in Reading Museum?

OTC

[ChrisB]

The reason why state run operators are likely to be more cost-effective franchise holders is mainly because they already understand how railways work and have the "network" access to skills etc,

Eh? Where in the UK^▸ (United Kingdom) will you find one of those? There isn't one (except DOR, with the limited staffing they have) - the experienced staff are all out at current franchisees, and would be poached from those current franchisees when they lose their franchises. So it's effectively pretty much the same staff.

[Tim]

The reason why state run operators are likely to be more cost-effective franchise holders is mainly because they already understand how railways work and have the "network" access to skills etc, also because they have more sympathetic financial management with more understanding and acceptance of actual risks.

Isn't it also because they can borrow money cheaper?  Although maybe the TOCs^▸ (Train Operating Company) shouldn't need to borrow much money because they are so thinly capitalised.  The serious borrowing is done by the ROSCOs^» (Rolling Stock Owning Company - about), and it is scandalously stupid that we have the current situation where the government specifies the new rolling stock (think Intercity Express) and who should use it and then steps aside and gets a private firm to arrange finance for it.  Private firm then goes to bank and bank offers a private firm a higher rate of interest than it would offer to HMG. 

[ChrisB]

Even with a Government cast-iron guarantee?

[4064ReadingAbbey]

Government cast iron can be very brittle. Especially if it is exposed to the stresses of a General Election.

[TonyK]

Isn't it also because they can borrow money cheaper?  Although maybe the TOCs^▸ (Train Operating Company) shouldn't need to borrow much money because they are so thinly capitalised.  The serious borrowing is done by the ROSCOs^» (Rolling Stock Owning Company - about), and it is scandalously stupid that we have the current situation where the government specifies the new rolling stock (think Intercity Express) and who should use it and then steps aside and gets a private firm to arrange finance for it.  Private firm then goes to bank and bank offers a private firm a higher rate of interest than it would offer to HMG. 

Nice work if you can get it, this ROSCO business. You are told what to buy, and who to lease it to. There is never any leftover stock. You can charge what you want, aiming for a return on investment well above the normal rates, because you can rely on the fiction that you need to recover the capital cost of the stock during the lifetime of the franchise, not over the lifetime of the asset. Dividing the cost of a train by the 15 years of a franchise gives double the return that dividing it by the 30-year life does, and you still have the train to rent to the next franchisee. After refurbishment no longer works, as should happen soon with Pacers, you can flog them to some emerging country overseas, where they will seem ultra-modern.

[JayMac]

After refurbishment no longer works, as should happen soon with Pacers, you can flog them to some emerging country overseas, where they will seem ultra-modern.

The pacer owner ROSCOs^» (Rolling Stock Owning Company - about) have already produced their glossy brochures to show that their 'assets' can be refreshed yet again to make them Equality Act and RVAR compliant. Sending them overseas is too much like hard work when UK^▸ (United Kingdom) PLC is still prepared to stump up for, and put up with, them.

I'd not be putting money on all the Class 14x fleet being retired from UK service by 31st December 2019.

Not forgetting of course that even if they aren't all modified by that date the Secretary of State has derogation powers to override EA and RVAR legislation if needs must...

[4064ReadingAbbey]

Isn't it also because they can borrow money cheaper?  Although maybe the TOCs^▸ (Train Operating Company) shouldn't need to borrow much money because they are so thinly capitalised.  The serious borrowing is done by the ROSCOs^» (Rolling Stock Owning Company - about), and it is scandalously stupid that we have the current situation where the government specifies the new rolling stock (think Intercity Express) and who should use it and then steps aside and gets a private firm to arrange finance for it.  Private firm then goes to bank and bank offers a private firm a higher rate of interest than it would offer to HMG. 

Nice work if you can get it, this ROSCO business. You are told what to buy, and who to lease it to. There is never any leftover stock. You can charge what you want, aiming for a return on investment well above the normal rates, because you can rely on the fiction that you need to recover the capital cost of the stock during the lifetime of the franchise, not over the lifetime of the asset. Dividing the cost of a train by the 15 years of a franchise gives double the return that dividing it by the 30-year life does, and you still have the train to rent to the next franchisee. After refurbishment no longer works, as should happen soon with Pacers, you can flog them to some emerging country overseas, where they will seem ultra-modern.

At the time of privatisation the decision to adopt a leasing structure for passenger rolling stock reflected trends in the transport industry generally (think aircraft leasing for example) and answered a long-standing criticism that public sector spending restrictions had limited investment in rolling stock. There were three main reasons underpinning the decision:

• separating train ownership from operations would drastically reduce the barriers to entry facing a potential franchisee by limiting the amount of capital required to acquire a TOC
• it enabled franchises to be let for periods much shorter than the life of the rolling stock, allowing regular competitive tendering for the TOCs
• as the ROSCOs were outside the public-sector spending limits, they would be free to invest.

Your contention that the ROSCOs aim to recover the capital cost of new trains within the lifetime of the first franchises is disingenuous. The period over which assets can be amortised varies with the type of asset and the current legal and financial frameworks - from 3 years for a computer to 50 years or more for civil engineering structures. 15 or 20 years to write off a train seems about right in view of the increasing number of unknowns the further into the future one goes. It is quite possible that, for example, existing diesel trains may be unusable after, say, 2035 because of changes in emission or noise regulations or the price of fuel even if the basic vehicle structure is good for another 15 years. It's all a question of trying to balance risks - and the further ahead the more difficult it gets. These risks do exist and are priced into the leasing costs.

All prediction is difficult - especially about the future.

BR^▸ (British Rail(ways)), of course, didn't include such risks in its financial reporting - but the risks and the costs still existed. The classic example is the continued building of steam locomotives when they were already obsolescent - the costs of the abrupt change of course were not carried by the railway but by the taxpayer.

Apart from the original three ROSCOs, there have been other entrants into the market. For example the Voyagers are owned by a specialist company set up for the purpose (the Class 222s are however owned by Eversholt) and Beacon Rail owns the Class 68 diesels and will own the Class 88 electrics when they are delivered.

The IEP^▸ (Intercity Express Program / Project.)/ SET^▸ (Super Express Train (now IET)) and Thameslink procurements fall outside this framework completely. In the case of the SET the assets are owned by Agility Trains (a joint venture but with Hitachi owning the lion's share) and will be supplied to the TOCs by two subsidiary companies Agility Trains West and Agility Trains East. The DfT^» (Department for Transport - about) has not ordered any trains nor has it transferred any trains to the ROSCOs - it has contracted for a number of operational diagrams based around a nominal future timetable. This contract will be transferred to the selected franchisee, but the train service provision payments will be guaranteed by the DfT.

With the current model of letting franchises with very detailed requirements, the DfT does effectively control the number of trains a franchisee can operate (and in the case of the Invitation to Tender for the next Northern franchise has essentially defined the the make up of part of the fleet). However the bidder can negotiate with the train builders and ROSCOs for any new stock and will build these quotes into its bid. A partial exception to this is the procurement of the interim Thameslink trains by Southern which has essentially acted as DfT's agent because of the delay in the signing of the train service provision contract with Siemens as Siemens tried to raise the capital to cover the design, development, and manufacture of the trains and the costs of the depots.

Trains are expensive - not only in capital cost but in on-going maintenance and safety checks so it is not surprising that there are few spare trains available. On the other hand the DfT was slow to react to the growth in passenger traffic and found it difficult to re-negotiate the franchise deals to allow the franchisee to acquire more trains. One hopes that now as the financial support to the TOCs (taken as a whole) is tending to zero, because of the increase in revenue due to a combination of increasing number of passengers and higher fares, the TOCs would have more freedom in procuring trains. I would suggest that the order for the Class 707 Desiro Cities by SWT^▸ (South West Trains) is a harbinger of the future - SWT pays a premium of some ^450 million a year to the DfT and this procurement did not seem to suffer the delays which have been seen in the past - and the recently let deals for Scotrail and TSGN.

The profits made by the ROSCOs are not excessive. Eversholt, for example, manages assets worth about ^1.5 billion and has an annual turnover of around ^90 million. It made a profit before tax of about ^13.5 million, paid ^3.5 million in income tax and finished with a profit of about ^10 million. Seems about par for the course.

And finally(!) which trains, apart from some Pacers sold to Iran and some Mark 2 coaches sold to New Zealand, have been sold abroad? Why would anyone 'abroad' want to buy stock to the restrictive UK^▸ (United Kingdom) loading gauge when they can buy full size trains from any other railway in Europe? It's a straw man argument.

[ellendune]

The profits made by the ROSCOs^» (Rolling Stock Owning Company - about) are not excessive. Eversholt, for example, manages assets worth about ^1.5 billion and has an annual turnover of around ^90 million. It made a profit before tax of about ^13.5 million, paid ^3.5 million in income tax and finished with a profit of about ^10 million. Seems about par for the course.

^10 Million represents a return on capital invested of 0.66%. That's not much more than the Bank of England's minimum lending rate. I hope Eversholt did not pay ^1.5 bn for the assets or they are getting a very poor return on their investment.   

[4064ReadingAbbey]

The profits made by the ROSCOs^» (Rolling Stock Owning Company - about) are not excessive. Eversholt, for example, manages assets worth about ^1.5 billion and has an annual turnover of around ^90 million. It made a profit before tax of about ^13.5 million, paid ^3.5 million in income tax and finished with a profit of about ^10 million. Seems about par for the course.

^10 Million represents a return on capital invested of 0.66%. That's not much more than the Bank of England's minimum lending rate. I hope Eversholt did not pay ^1.5 bn for the assets or they are getting a very poor return on their investment.  

I thought that as well - and the profits for 2013-14 were a lot higher than those for 2012-13. I took the figures from Eversholt Rail (UK^▸ (United Kingdom))'s financial reports which deal with the operating side. There are several Eversholt companies as the source and management of their loans is quite complex and I didn't study all of them closely so there may be some footnote somewhere which explains it.

I did try out simple arithmetic as a sanity check - but even this has its complications! It sold its fleet of freight rolling stock (nearly 1,000 vehicles) a couple of weeks ago, i.e., after the end of the last financial year, and its web site claims that it now owns some 3,700 vehicles - EMUs^▸ (Electric Multiple Unit), DMUs^▸ (Diesel Multiple Unit) and locomotives. Assuming the ^1.5 billion includes the freight vehicles the average value of each vehicle works out at ^319,148 and excluding the 1000 freight wagons gives an average vehicle value of ^405,405.  (As box wagons are not that expensive I assume that the total value of the assets under management will not change much).

The broad numbers seem about right - but leasing rolling stock does not seem to be a way to get rich quick. I would think the attractions of investing in such a company is the steady and predictable future cash flow rather than large profits of the chances of significant rapid expansion in the business. A bit like aircraft leasing really and nothing like selling smartphones!

[stuving]

There are several Eversholt companies as the source and management of their loans is quite complex and I didn't study all of them closely so there may be some footnote somewhere which explains it.

Yes, it is a truly labyrinthine structure, for whatever reason.

As far as I can make out the whole set-up is owned by Eversholt Investments Ltd., and their accounts for last year (2014) are consolidated ones. (At least that is the entity HSBC sold.) That company is owned by an Irish one, which is owned by one in Luxembourg. No doubt there are tax reasons for doing that, but this is in any case the kind of business that tax laws make complicated by giving deferred allowances etc.

The rolling stock is owned by subsidiaries, and mostly financed by bonds (secured on the rolling stock) issued by another subsidiary. There is a subsidiary that runs (not just owns) some depots. So only the consolidated account make any sense, and only insofar as accounts ever do. 

They quote a cost of their railway assets of (all figures in ^million at 31/12/2015) 2336, depreciated to a "carrying value" of 1751. Last years's depreciation was 134, but, before working that out as a rate, remember that the "cost" is less than the full purchase cost - apart from inflation, some of it was acquired at privatisation at below its real value then. There is a figure of 19.6 years given for the average age of the fleet (which includes the IC225s), all of which is on lease.  There were some acquisitions, totalling 16.

Their bonds (all long-term - over 5 years) cover 1250, and the rest (340) is financed by a loan from the "shareholders" - that Luxembourg company. The money to repay the bonds goes into a kind of "negative sinking fund" - by repaying that shareholder loan. However, there are other movements of money and bank deposits and loans too, which complicate things.

The lease income is given as 283, and there is maintenance income (where they operate depots) of 79 - against maintenance costs of 68 (though I am not sure what that consists of). Interest includes several items that would need a bit of investigating to make sense of, but the big numbers are 50 to the shareholders and 70 to the bondholders.

The bottom line is a loss of 55, which they attribute to that interest to the shareholders and a nominal loss of 49 on swap contracts (some of which may be a form of hedging they are required to do, to guarantee repayment of the bonds). There is no mention of dividends in the normal sense, though there is an item of 50 identified as "shareholder dividend", but that appears to be essentially the interest payment shown already.

Part of that high level of interest going to Luxembourg is presumably profit sneaking off to avoid corporation tax, but not all of it. You'd need to be an expert (and I'm not) to extract the reality from accounts that are not trying to be easy to understand. I presume they have to provide ORR^» (Office of Rail and Road formerly Office of Rail Regulation - about) with accounts for monitoring in a standard, consolidated, form.