ROSCOs and New Train Fleets

[whole diary]

[SandTEngineer]

This was linked to in another place and makes for interesting reading (not quoted here as its a long article): http://www.railmagazine.com/news/rail-features/risky-business-train-fleets-in-a-state-of-flux

[simonw]

In an ideal world where train companies where 'permanent', there would be no need for ROSCOs^» (Rolling Stock Owning Company - about) to own and lease stock stock to temporary franchisees.

Looking at the article, the profit margins of these companies is obscene (30.8% for Angel, from the above article), so I have very little sympathy for them. Statutory needed companies, and I include ROSCOs in that description, should have restricted profit margins and use their excess revenue to maintain and refurbish their stock to a higher standard.

The idea that they will have loads of expensive stock in storage, with no need for them when many parts of the country have a desperate need for more frequent trains, longer trains, etc

[ellendune]

Looking at the article, the profit margins of these companies is obscene (30.8% for Angel, from the above article), so I have very little sympathy for them. Statutory needed companies, and I include ROSCOs^» (Rolling Stock Owning Company - about) in that description, should have restricted profit margins and use their excess revenue to maintain and refurbish their stock to a higher standard.

However, if the current frenzy of new stock carries on that may not be the future

[Electric train]

Looking at the article, the profit margins of these companies is obscene (30.8% for Angel, from the above article), so I have very little sympathy for them. Statutory needed companies, and I include ROSCOs^» (Rolling Stock Owning Company - about) in that description, should have restricted profit margins and use their excess revenue to maintain and refurbish their stock to a higher standard.

However, if the current frenzy of new stock carries on that may not be the future

The ROSCOs are part of the funding for the new trains like class 700's, the IEPs^▸ (Intercity Express Program / Project.) etc they are slowing moving away from an owner to funder; the owner is effectively the manufacture they are also part of the funding.  The pay back is in the order of 25 to 30 years.  The likes of Siemens, Hitachi etc make profit by train availability especially when the TOC^▸ (Train Operating Company) runs an increased service above that agreed as the min in the franchise.  The manufactures of rolling stock almost act as a hire company

[4064ReadingAbbey]

In an ideal world where train companies where 'permanent', there would be no need for ROSCOs^» (Rolling Stock Owning Company - about) to own and lease stock stock to temporary franchisees.

Looking at the article, the profit margins of these companies is obscene (30.8% for Angel, from the above article), so I have very little sympathy for them. Statutory needed companies, and I include ROSCOs in that description, should have restricted profit margins and use their excess revenue to maintain and refurbish their stock to a higher standard.

The idea that they will have loads of expensive stock in storage, with no need for them when many parts of the country have a desperate need for more frequent trains, longer trains, etc

The figure quoted is the profit on turnover. It will be much lower if calculated on the basis of return on capital.

[JayMac]

However it's calculated it's still money going out of the railway.

[4064ReadingAbbey]

However it's calculated it's still money going out of the railway.

Profit is why (many) people get out of bed in the morning.

[JayMac]

And many millions get out of bed not for profit.

[Gordon the Blue Engine]

4064ReadingAbbey is right.  It’s return on capital that counts, that’s the way the market economy works.  If you put up the capital for an investment, you get a reasonable return on what you put in which reflects the risks of the investment (say 2% - 8%).  So higher risks get higher returns.

Operating profit (ie profit as a % of revenue) is a legitimate measure, but those who are hostile to the market economy too often compare this with what you and I would get from a Building Society, which is return on capital   The two measures are not comparable. 

Our labour (ie what we get out of bed for) is part of the market economy.  We tend to aspire to a better paid job etc, even social workers go on strike for more money.  That’s the way it is with the market economy.  Not perfect, but the alternatives are no better.

[John R]

And many millions get out of bed not for profit.

Strange, I could have sworn that all those people who get out of bed and go to work are being paid for their efforts.

And I doubt a company that said it was going to invest hundreds of millions of pounds on a not for profit basis (but with some risk of loss) would find many people willing to put up the funds to enable the investment to go a ahead.

[JayMac]

And many millions get out of bed not for profit.

Strange, I could have sworn that all those people who get out of bed and go to work are being paid for their efforts.

Well done. Twist my words. Let me be a little clearer for the hard of thinking. Many people work in sectors where profit is not a concern.

Providing far more valuable services to society too.

[John R]

And many millions get out of bed not for profit.

Strange, I could have sworn that all those people who get out of bed and go to work are being paid for their efforts.

Well done. Twist my words. Let me be a little clearer for the hard of thinking. Many people work in sectors where profit is not a concern.

Providing far more valuable services to society too.

Yes, I'd agree that the state sector does indeed provide very valuable services and is necessary for a fair society. And in doing so employs millions of people. There are also many commercial organisations that provide services to society (eg care homes) but in doing so also want to make a profit for the owners.

It mustn't be forgotten though that the state is dependent on the generation of wealth by individuals and commercial organisations to fund everything that it does. Personal and corporation tax revenues (not to forget NI contributions) pay for the NHS, emergency services, benefits for those unable to work, state pensions, and so on. Without those wicked businesses and individuals generating wealth and paying taxes, none of that would be possible. 

[ellendune]

In an ideal world where train companies where 'permanent', there would be no need for ROSCOs^» (Rolling Stock Owning Company - about) to own and lease stock stock to temporary franchisees.

Looking at the article, the profit margins of these companies is obscene (30.8% for Angel, from the above article), so I have very little sympathy for them. Statutory needed companies, and I include ROSCOs in that description, should have restricted profit margins and use their excess revenue to maintain and refurbish their stock to a higher standard.

The idea that they will have loads of expensive stock in storage, with no need for them when many parts of the country have a desperate need for more frequent trains, longer trains, etc

The figure quoted is the profit on turnover. It will be much lower if calculated on the basis of return on capital.

However it's calculated it's still money going out of the railway.

Return on the capital value of the shareholders investment is like interest on money invested, except with share capital the shareholders have less security. 

If it was public sector then the railway authority would have borrowed the money and paid interest.

The question then is how the return on capital that the shareholders get (dividends plus any capital growth - i.e. increase in share value) compares to the interest a public sector rail authority would have to pay if they were to do the same deal. 

[Rhydgaled]

Without those wicked businesses and individuals generating wealth and paying taxes, none of that would be possible.

True, without profits to tax the state wouldn't bring in much money; but it works both ways. When the state is buying something (and, where railways are concerned, it is often the state buying (indirectly in many cases)) the profit margin built into the cost of whatever is being bought raises the amount of tax revenue the government needs in order to pay for it. There would still be a profit-making, tax-paying train builder involved if the state purchased trains outright and told the TOCs^▸ (Train Operating Company) 'you will use these trains as part of your franchise agreement', or indeed ran those trains itself and did away with the TOCs. Not sure what conclusions to draw from that...

[John R]

Indeed, I'd agree, and it widens the debate as to what is best done by the state and what the private sector is more effective doing.

All other things being equal the state should be able to borrow money to invest more cheaply than the private sector so the cost would be lower. And it would also remove the profit (and risk) margin built in to private sector costs. And the inefficiency of all the contractual requirements that are needed.

However, that is offset by the argument that the private sector is more efficient, innovative etc etc. The temptation to let the private sector invest is that it reduces state borrowing now, although it does mortgage the future, as the disastrous PPI contracts in the NHS are now demonstrating so plainly ( and I expect IEP^▸ (Intercity Express Program / Project.) will too).