ROSCOs and nationalisation: any ideas?

[Royston Vasey]

I doubt anything will change, the imperative to move large CapEx onto someone else's books and pay lease costs in perpetuity will be as imperative as ever. It'll just be called PFI.

The most egregious aspect of ROSCOs was how much stock they got from BR for pennies in the 1990s that they are still charging the public purse to lease back. 150s, 158s, 455s, 465s etc.

ROSCOs were supposed to be entrepreneurial but other than a few speculative orders for 170s and 387s, I can't think of any times they've actually taken any risks for their rewards, and even fewer times they've taken an obvious hit (the TPE Mk 5s, Akiem on the 379s for a few years... any others? Maybe Angel buying and re-engineering the six GC power cars from Sovereign only for them to be replaced by 180s)

With all that said, without them there's no way the network would be flooded with new stock like it is right now, 197s, 745s, 802s, 701s, 730s, the list goes on. Franchisees on short leases won't buy their own trains, apart from First buying a few 43s back in the late 2000s and TfL the 378s. The public purse may have been able to make a business case for new trains but never find the money to pay up front.

So we are where we are.

 

[Gerald Fiennes]

As a reminder the 'BR stock for pennies' was, as noted, in ... er ... the 1990s. Privatised in November 1995 (now just under 30 years ago...) for an amount that was no more than 4x their cashflow before debt, tax and dividends. The resales generated spectacular headlines and gains for some managers. But we have no time machine and, indeed, much of the 'BR stock' is now gone along with the profits it earned. It's all history now.

What matters is how new and refurbished fleets are to be financed. Yes, GBR could potentially do this but all readers of this thread need to be ready for a world in which GBR, as in effect a DfT subsidiary, won't have much cash in its tills to pay for this. So this is where the future is for ROSCOs. Btw, remember that there are now two more of them than in 1995, so there is actually quite a bit of competition for new financings.... hence the comment about above about profit margins.

The main issue now will be that of what usage guarantees the public sector is able to provide ('Section 54 guarantees') -- but presumably Section 54 (of the 1993 Railways Act) will now be repealed and replaced with whatever new powers HMG, ie. HMT, don't expect DfT to have much of a look in here, intend to give GBR. If the guarantees are too extensive, new fleets, and their debt, will have to be scored as being in the public sector meaning that HMG will not permit GBR to spend very much..... Too few guarantees mean higher leasing rates a direct impact on GBR's operating budget.

 

[Magdalia]

Look at this from the perspective of the new government, and how its actions are constrained by the state of the UK public finances.

Nationalising the ROSCOs won't happen because it would cost a lot of money, which would have to be borrowed, and it would have a negligible impact on the prospect of the government achieving its objectives. There are lots of other uses for UK government borrowing that will be far higher priority. Even if the UK government financial position improves, nationalisation of the ROSCOs isn't going to get anywhere near the top of the priority list.

In the unlikely event of the government finances getting into the position where it becomes possible to the fund nationalisation of assets, then my guess would be that the water industry would be the top priority.

The arguments for against the ROSCO model are interesting but inconsequential. For what its worth, my view is that, in hindsight, the assets were sold off too cheaply in the original privatisation, but that is outweighed by what has happened since. The UK now has a huge fleet of relatively new trains because the ROSCOs were able to raise long term finance for new trains at a time when long term interest rates were low, in a way that the UK government could not.

 

[Clarence Yard]

Specifically which entities are the profits arising in, though?

Are you suggesting the profit margin figures quoted above aren’t being earned by UK entities on UK rolling stock leasing activities? That’s really the key point.

No, it isn’t the key point because profit in the business may be caused by “financial” moves, rather than pure profit on sales, or in this case, leases.

Without digging down into individual components of the business and seeing how each deal adds/subtracts from the bottom line, which you can’t really do from the annual accounts, it is hard to judge.

In general, when Government sells an asset through a privatisation process, whether it be rolling stock or council houses, it takes a nominal value and discounts it for future liabilities. Where it missed a trick here was selling the ROSCO as one, rather than auctioning off the assets. The ROSCOs immediately became “monopoly” style cards for the financial institutions, the original private owners gaining huge gains for just “being there”.

If you are running a MEAV regime, then you pay a higher capital element in the lease price than you would normally do if you owned it itself because you are not depreciating. But then when it comes to renewal, you don’t have that big step up in cost, which you usually get with new stock. That is really important in a largely cash flow business where predictability (and smoothing) of cost is key.

In the case of rolling stock, heavy maintenance and overhauls are the biggest cost. Raw material prices for overhaul activities varies considerably and it can become very hard to finance because you quickly get into millions of pounds variances if you are not careful. So a ROSCO is very useful in both providing the financial strength to carry out that activity and taking on the resultant financial risk.

 

[whoosh]

Because they’re a scourge on the rail industry, the ‘big 3’ especially.
Trains, built by British rail with tax payers money, such as 150’s, 153’s, 158’s etc. given to them, to charge ludicrous amounts of money to the TOC’s to use assets that have paid for themselves many times over.

Yes, I have to say I hold them in low regard since a group of us were told in 2009 by the Managing Director at East Midlands Trains (Tim Shoveller) that a two car class 156 was costing £24,000 per month.
That's £288,000 per year.
I wondered how much they'd cost to build back in the 1980's.

The ROSCO's also did very well for themselves during COVID emergency timetables, when large numbers of trains were idle in sidings all day, and mileage accumulated by fleets was much less.

Their shareholders must be pleased!

It's also of note, that whenever it's mentioned in the press how much money privateers make out of the rail industry, it's only the poor old TOC's and their 'around 3% margin' that gets mentioned - which later gets extrapolated to the whole industry - "The private sector only makes 3% from the railways." Conveniently missing out those 156s and the entity that leases them out!

 

[4BEP]

This isn't the right comparison, it's the difference between buying a car (potentially with finance), and renting one for 15 years from someone to service their debts accrued in buying it. You end up paying more than the debt would have cost you to take on, while they keep the asset.

Not the best analogy either, in EU and UK Mercedes Benz is alone amongst mass manufactures in owning their retail outlets so you do get to buy your Merc from the manufacturer.

 

[ac6000cw]

The 'Rolling Stock Costs as a Percentage of Total Cost' chart below is from the 2015 ORR 'Understanding the Rolling Stock Costs of TOCs in the UK' report. At the time, for those TOCs running mostly ex-BR era passenger stock (e.g. Northern, Merseyrail, FGW, EMT), the 'Rolling stock charges' (pale blue/grey bars) are only around 10% of the total, which is dominated by staff costs and NR charges.

 

[gc4946]

In 2019, ownership of the class 365s passed to the Department for Transport.
Stock built before 1st April 1997 could pass back to nationalisation for £1. This change of ownership wouldn't affect maintenance and operation because the concessions can still contract work to a ROSCO.
ROSCOs will still be part of the new rail regime for procurement and maintenance, I don't think GBR will buy all its future stock outright.

 

[SynthD]

TfL initially purchased the Elizabeth line stock before realising it made more financial sense to sell them to a ROSCO and lease them back, as it meant cash flow benefits and other risks went away.

TfL have a hard limit on their debt. The Treasury is only limited by what the markets find sensible. Seemingly, it’s not worth owning them outright (which is different to just nationalising the financial schemes with their associated profit margin) and assigning them around like seconded personnel. I hope the Treasury has worked out at what cost (ROSCO interest rate) it would be worth the government taking on debt.

 

[Thirteen]

TfL have a hard limit on their debt. The Treasury is only limited by what the markets find sensible. Seemingly, it’s not worth owning them outright (which is different to just nationalising the financial schemes with their associated profit margin) and assigning them around like seconded personnel. I hope the Treasury has worked out at what cost (ROSCO interest rate) it would be worth the government taking on debt.

TfL wouldn't have had to sell and leaseback the Class 345s to pay for the 2024 stock if the previous Mayor hadn't told the Treasury to remove TfL's subsidy.

With the 10 extra trains, we're in a strange situation where TfL owns some 345s but leases the others.

 

[JamesT]

TfL wouldn't have had to sell and leaseback the Class 345s to pay for the 2024 stock if the previous Mayor hadn't told the Treasury to remove TfL's subsidy.

With the 10 extra trains, we're in a strange situation where TfL owns some 345s but leases the others.

TfL gets more money from retained business rates now than it did from the central government grants.

 

[renegademaster]

The thing is that it only makes economic sense to either in house it all or not at all. Otherwise you have duplicate asset management departments, the in house one and your leasing companies one. Tfl rail being a new one didn't have to deal with that problem

 

[TPO]

The other thing not mentioned that typically shareholders in ROSCOs are the likes of pension funds who hold shares for long term.

Those with generous railway or other final salary pensions reliant on investments- be careful what you wish for....

TPO

 

[coppercapped]

This is going to be TLDR, but give it a go...!

It seems to me, judging by comments made in this thread, that many posters do not understand the difference between financial leases and operating leases, the assumption being that trains are paid for under the first type.

In operating leasing, each period of hire is significantly shorter than the life of the asset. The owner of the rolling stock takes residual-value risk — that is, the risk of both the likelihood whether that asset will be relet at the end of any lease and also the price at which it will be possible to relet the asset. This is different from previous passenger railway rolling stock practice in both Britain or continental Europe where finance leasing had been adopted. Such leases involved the lessor being fully paid out by the original lessee over the initial lease term and which effectively transfers ownership from lessor to lessee at the end of the lease.

This is the lease model which seems to me the one which many posters have in mind when they made their comments upthread. It is also clear that this model cannot work for a situation where the franchises were let for a period much shorter than the book life of each vehicle.

For the operating lease model separate pricing structures were adopted for capital and operating costs with each component accounting for around 50% of the total rent, the capital part being essentially a traditional financial lease. Most of the non-capital rents are absorbed by the costs incurred by the ROSCO in keeping the vehicle operational in a typical year. Profit before interest in tax (the usually quoted measure) is therefore largely capital rents less depreciation. In the early days of the ROSCOS the depreciation allowances transferred from BR were much less than the value of the capital rents so profit before interest and tax would be high compared with most commercial companies (52% for Porterbrook is often quoted). This is more a matter of arithmetic than the measure of underlying profitability but right from the start it has affected the public’s image of the ROSCO — and which still remains.

The lease charges covering the cost of capital are based on a model covering the cost of financing a modern equivalent vehicle over its life. This includes a depreciation allowance permitting the lessor to have amassed sufficient funds in order to purchase replacement trains — as Mr. Clarence Yard also stated in his post above, #34 .

Non-capital lease charges (the operating part of the lease payments) cover expenditure on heavy maintenance and other ongoing costs to keep the vehicle serviceable throughout its life. In the run-up to privatisation a BR team prepared estimates to the likely cost associated with the maintenance derived from historical data with allowances built-in for ageing, corrosion and other potential liabilities.

So, the apparent high rents paid for the few remaining geriatric BR trains of Classes 150 to 158 (and one or two others) are not surprising — they contribute to the costs of keeping them working and are also contributing to the costs of their replacements. Between them, the 10 or so ROSCOs have financed the replacement of all the other BR era trains.

 

[eldomtom2]

It is also clear that this model cannot work for a situation where the franchises were let for a period much shorter than the book life of each vehicle.

Which is no longer the case, so the question is whether for future rolling stock leasing it will be a good deal for GBR.

 

[stevieinselby]

I don't get why people want the ROSCOs to be nationalised.

They're specialists in procuring and managing fleets, finance and maintenance. It's one part of the industry that gets a bad name, somewhat unfairly. Their profit margins aren't huge, although the actual profit number is high.

Why don't I go direct to Mercedes when I want a nice car and cut out the dealer, bank/finances etc?

Me as a customer buying one car is a very different prospect from a nationalised rail industry buying large fleets. It's not even like individual TOCs buying small fleets, we're talking about a centralised national rail body. Why would a number of different private companies have more specialist skills and more expertise than a centralised national body that is doing the same procurement and refurbishment work as the Roscos but on an even bigger scale?

Whether the margins are big or not, it's still a huge amount of money that is leeched out of the system. Merseytravel obviously believes that it's better for them to own the trains than lease them and, unlike other devolved bodies, were in a financial position to do so (I believe TfL did buy the 345s originally but needed to sell them and lease them back to release capital in the short term – so again, all other things being equal, they would have preferred to own them outright).

== Doublepost prevention - post automatically merged: 18 Jul 2024 ==

Also think of the risks that ROSCOs take - how much was lost on Mk5 coaches, 379s. 175s withdrawn well before end of their life and earning nothing at the moment. Who's paying the storage, maintenance and locomotive movement charges etc?

They'll just load those costs onto other trains to ensure they don't lose money.
If we had a central procurement strategy we wouldn't have had the nonsense of modern trains being mothballed just because one franchise wanted shiny new trains.
The 68s+Mk5s was a fiasco from start to finish, but not helped by the complicated leasing and sub-leasing arrangements with different companies responsible for different parts of the train. Arguably, it would have been a lot less likely to fall apart if the entire train had been owned by GBR because there wouldn't have been the breakdowns in communication and abnegation of responsibility between the different parts of the whole.
And we wouldn't have had the 175s or 379s replaced without a new home identified for them to go to. Far more efficient to have one strategic organisation managing it all rather than lots of competing factions all pulling in different directions.

 

[Meerkat]

Specialists in lining their own pockets and renting out a clapped out 142 that paid for itself 50 times over in rental fees. At least Radio Rentals in 1987 let you keep the telly after a year or two.

They bought those old trains, with the taxpayer getting the cash. AIUI the prices paid were low mainly because Labour promised to renationalise the railway…..and then didn’t.
Presumably it was also not anticipated that the old trains would hang on so long - who let the No growth franchises??
Also AIUI the fear was that if the old trains were dead cheap to lease then there would be little incentive to replace them.

The government would invetiablely bail out or nationalise ROSCOs if they went tits up, and subside ROC to pay leasing fees, so in practice it's government debt even if New Labour accounting pretends its not

Why would they? The ROSCO investors would lose out but the assets (trains and their leases) would get sold on to other finance companies and still be available for TOCs.

if there is a business case for new trains you will find private finance for them.
If you rely on the Treasury then it doesn’t really matter how good the business case is - they only have so much cash and if the politicians prefer hospitals and schools then no new trains.

 

[43096]

This is going to be TLDR, but give it a go...!

It seems to me, judging by comments made in this thread, that many posters do not understand the difference between financial leases and operating leases, the assumption being that trains are paid for under the first type.

In operating leasing, each period of hire is significantly shorter than the life of the asset. The owner of the rolling stock takes residual-value risk — that is, the risk of both the likelihood whether that asset will be relet at the end of any lease and also the price at which it will be possible to relet the asset. This is different from previous passenger railway rolling stock practice in both Britain or continental Europe where finance leasing had been adopted. Such leases involved the lessor being fully paid out by the original lessee over the initial lease term and which effectively transfers ownership from lessor to lessee at the end of the lease.

This is the lease model which seems to me the one which many posters have in mind when they made their comments upthread. It is also clear that this model cannot work for a situation where the franchises were let for a period much shorter than the book life of each vehicle.

For the operating lease model separate pricing structures were adopted for capital and operating costs with each component accounting for around 50% of the total rent, the capital part being essentially a traditional financial lease. Most of the non-capital rents are absorbed by the costs incurred by the ROSCO in keeping the vehicle operational in a typical year. Profit before interest in tax (the usually quoted measure) is therefore largely capital rents less depreciation. In the early days of the ROSCOS the depreciation allowances transferred from BR were much less than the value of the capital rents so profit before interest and tax would be high compared with most commercial companies (52% for Porterbrook is often quoted). This is more a matter of arithmetic than the measure of underlying profitability but right from the start it has affected the public’s image of the ROSCO — and which still remains.

The lease charges covering the cost of capital are based on a model covering the cost of financing a modern equivalent vehicle over its life. This includes a depreciation allowance permitting the lessor to have amassed sufficient funds in order to purchase replacement trains — as Mr. Clarence Yard also stated in his post above, #34 .

Non-capital lease charges (the operating part of the lease payments) cover expenditure on heavy maintenance and other ongoing costs to keep the vehicle serviceable throughout its life. In the run-up to privatisation a BR team prepared estimates to the likely cost associated with the maintenance derived from historical data with allowances built-in for ageing, corrosion and other potential liabilities.

So, the apparent high rents paid for the few remaining geriatric BR trains of Classes 150 to 158 (and one or two others) are not surprising — they contribute to the costs of keeping them working and are also contributing to the costs of their replacements. Between them, the 10 or so ROSCOs have financed the replacement of all the other BR era trains.

Good to see there are some who understand it on here - though I suspect you are banging your head against the wall with those who can't/won't understand.

There are also different types of operating lease, depending on who is responsible for maintenance:
- Dry lease - operator is responsible for all maintenance. Leasing costs will be lower for the TOC, but maintenance costs are higher.
- Soggy lease - responsibility split, generally heavy maintenance a ROSCO responsibility, lower level maintenance down to the TOC. This was the initial model as set up at privatisation.
- Wet lease - all maintenance is the responsibility of the ROSCO. The Thameslink 319s transferred to this arrangement with Porterbrook then contracting out the maintenance.

And also to add, the ROSCOs often fund upgrades/refurbishments for a fleet, which is then recovered via the lease payment, which is why lease payments may be higher than you might think for older stock.

 

[Snex]

Leasing companies exist in bus and plane markets.

For example
https://dawsongroup.co.uk/is-your-vehicle-a-drain-on-your-revenue/



Yes, and people don't like it, as it usually means staff being employed on worse terms and conditions and means that public money is paid out as private profit.

Yeah no arguments about them existing (what I meant by the main) but it's usually just the smaller independents who use them who could never afford to buy buses outright for a contract they might lose in a year or whatever. Similar with airlines where it's quite often summer only services etc which is a different discussion really.

 

[JamesT]

Yeah no arguments about them existing (what I meant by the main) but it's usually just the smaller independents who use them who could never afford to buy buses outright for a contract they might lose in a year or whatever. Similar with airlines where it's quite often summer only services etc which is a different discussion really.

According to https://corporate.easyjet.com/inves...news-details/2023/newsid-1688477/default.aspx easyJet lease 45% of their fleet. That’s not a few summer only services.

 

[childwallblues]

Merseytrave have bought the 53 Class 777 trains.

 

[Mcr Warrior]

Merseytrave have bought the 53 Class 777 trains.

= Merseytravel? Thought it was Liverpool City Region Combined Authority, but either way, they are apparently the first publicly-owned trains in more than a generation.

 

[JamesT]

= Merseytravel? Thought it was Liverpool City Region Combined Authority, but either way, they are apparently the first publicly-owned trains in more than a generation.

TfL initially bought the Class 345s. But then decided on a sale and leaseback arrangement to free up funds. We shall see whether the 777s follow a similar path.

 

[coppercapped]

To try to pick up on some of the points made in the posts above. I stated, in my post no #44 that if the asset life is longer than any lessee's contract then an operating lease is essential to which Eldomtom2 replied:

Which is no longer the case, so the question is whether for future rolling stock leasing it will be a good deal for GBR.

This is a valid point as if GBR is set up to operate the train service in perpetuity then the question of the lessee disappearing after a few years doesn't arise so putting the train operating part of GBR in the same situation as Merseyrail and TfL. Whether it now makes sense for GBR to lease or buy trains will now depend on several other factors:

• will GBR be funded by the Government on an annual basis — meaning the amount of money it has available may vary wildly from year to year depending on the Government's financial situation at that point in time — or will it have some stability in planning if it has a ring-fenced multi-year deal?
• will GBR's funding include a sufficient global allowance for the purchase or updates of the trains or will it have to approach the government on a case by case basis?
• if individual applications have to be made will the government commit to deal with the application within a fixed time limit?
• will the government set spend rate limits on the procurement or updates to the rolling stock?
• will the DfT still have an influence on the designs of new stock, passengers/square metre or similar?
• will the DfT/Treasury retain an influence on where the trains are assembled?
• etc.

If the answer to the first point is the government imposes an annual deal and if GBR has to make individual applications and if 'yes' is the answer to any of the other bullet points, then I would suggest that procuring trains through operating leases will continue to be attractive for all the reasons that Clarence Yard gave in his post no. #34

If you are running a MEAV regime, then you pay a higher capital element in the lease price than you would normally do if you owned it itself because you are not depreciating. But then when it comes to renewal, you don’t have that big step up in cost, which you usually get with new stock. That is really important in a largely cash flow business where predictability (and smoothing) of cost is key.

In the case of rolling stock, heavy maintenance and overhauls are the biggest cost. Raw material prices for overhaul activities varies considerably and it can become very hard to finance because you quickly get into millions of pounds variances if you are not careful. So a ROSCO is very useful in both providing the financial strength to carry out that activity and taking on the resultant financial risk.

 

[LLivery]

Maybe it would make sense for the National Infra Bank (future National Wealth Fund) to invest in a ROSCO...

 

[Meerkat]

Maybe it would make sense for the National Infra Bank (future National Wealth Fund) to invest in a ROSCO...

No need, as there seems to be no shortage of private capital wanting to get involved.
Save the wealth fund for things struggling for finance

 

[coppercapped]

No need, as there seems to be no shortage of private capital wanting to get involved.
Save the wealth fund for things struggling for finance

Possibly. But the main objective of a wealth fund is to generate income for the government so it will invest in businesses offering a reliable return. For example, a ROSCO...as long as another part of government doesn't cause them to go out of business.

It is highly unlikely that a wealth fund will involve itself in offering finance to businesses struggling to raise money. A wealth fund is not a venture capitalist — these types of finance houses are worlds apart.

== Doublepost prevention - post automatically merged: 21 Jul 2024 ==

Good to see there are some who understand it on here - though I suspect you are banging your head against the wall with those who can't/won't understand.

There are also different types of operating lease, depending on who is responsible for maintenance:
- Dry lease - operator is responsible for all maintenance. Leasing costs will be lower for the TOC, but maintenance costs are higher.
- Soggy lease - responsibility split, generally heavy maintenance a ROSCO responsibility, lower level maintenance down to the TOC. This was the initial model as set up at privatisation.
- Wet lease - all maintenance is the responsibility of the ROSCO. The Thameslink 319s transferred to this arrangement with Porterbrook then contracting out the maintenance.

And also to add, the ROSCOs often fund upgrades/refurbishments for a fleet, which is then recovered via the lease payment, which is why lease payments may be higher than you might think for older stock.

Why, thank you! One has to try...!

(Although the number of posters who, as you so neatly put it,

can't/won't understand

I find troubling. It's not as if the concepts are difficult to comprehend).

 

[Meerkat]

But the main objective of a wealth fund is to generate income for the government so it will invest in businesses offering a reliable return.

I would be very surprised if that’s what Labour intend for it, rather than supporting British things that struggle for finance for political or delayed return reasons.

 

[Iskra]

I haven't read the entire thread, but the simplest, least controversial (but slow) solution would just to be to continue using the ROSCO's for all existing stock until it is retired and procure all new rolling stock a new way that suits the political agenda at the time. That way you would slowly eradicate ROSCO's and you can do it at a speed of your choosing, plus use it as a negotiating tool for better prices from the ROSCO's.

 

[Meerkat]

I haven't read the entire thread, but the simplest, least controversial (but slow) solution would just to be to continue using the ROSCO's for all existing stock until it is retired and procure all new rolling stock a new way that suits the political agenda at the time. That way you would slowly eradicate ROSCO's and you can do it at a speed of your choosing, plus use it as a negotiating tool for better prices from the ROSCO's.

I would rather it wasn’t about a political agenda but was the best for the railway.