Financing new rolling stock... how is it done?

[chris parkinson]

The DfT say that rolling stock in the UK is privately owned and financed - almost all of it through operating leases.

How does this work?

Surely ROSCO's and operators can only make profit from raising the capital for new trains if

• the capital is underwritten by the Gvrnmt i.e. through PFI-type financing, or
• if TOC's receive significant 'relief' from premium payments (or greater subsidies) throughout the course of a franchise?

and therefore, new rolling stock is not actually privately financed (it might well be privately 'owned', to keep it off-balance sheet) at all?

 

[djw1981]

Franchisee expresses desire for new stock.
Government agrees need for new stock.
Government state sin contract that the rolling stock will be used by XX franchise for XX years.
OJEU notice for invitation to tender for the rolling stock specification
ROSCO works out that XX units at XX cost each, over XX years comes out at £Y initial outlay by them and add in Z interest to cover their financing costs ABC profit.
Then they work out XX per year lease.
ROSCOs submit their bids based on these numbers.

 

[chris parkinson]

thanks -

whats the incentive for the franchisee to express a desire for new stock (other than DDA legislation requiring larger fonts on the on-train LCD displays [swt junipers]), and

for what are the ROSCO's bidding?

 

[djw1981]

TOC - more capacity, more suitable stock.

ROSCo - bidding for the financing of the units. If they buy them from Siemens (e.g.) now and lease them for the next 30 years, then they will charge X per year. X being equal to a proportion of the cost, plus the interest they pay to their bank plus a profit.

They act as a middleman between banks (who know little about rolling stock) and DfT/TOCs who know little about financing.

A bit like why go through an insurance broker rather than direct to Lloyds of London for insurance.

 

[ukrob]

thanks -

whats the incentive for the franchisee to express a desire for new stock (other than DDA legislation requiring larger fonts on the on-train LCD displays [swt junipers]), and

for what are the ROSCO's bidding?

There might not be a 'desire', but it might be in their franchise terms.

 

[DaveNewcastle]

Surely ROSCO's and operators can only make profit from raising the capital for new trains if

• the capital is underwritten by the Gvrnmt i.e. through PFI-type financing, or
• if TOC's receive significant 'relief' from premium payments (or greater subsidies) throughout the course of a franchise?

No, the skill in calculating a leasing charge is in estimating the full-life term of the asset over which the repayments accrue, and ensuring that this accrued income covers the capital repayment, interest, costs and also shows a profit.
The allocation of cost over a period into the future is "amortisation"
The calculation is not unlike the sums facing a landlord when buying a property to let.
In both cases, the period over which the asset earns income can be longer than the period required to repay the capital (creating significant end-of-life profit), and in both cases, the depreciating "value" of the asset doesn't have to be tested in the open market.

 

[route:oxford]

There is, of course, an additional option.

A ROSCO could take a risk and purchase additional units, say for example a fleet of 12 7-car Pioneers (with the option for an a overhead power carriage when Virgin place an order for theirs in the future)...

Then sit and wait...

All these lovely brand new trains just waiting for a home. Securely lined up, probably just in sight of railwaymen as well as journalists and photographers who are looking for a story...

Who'd blink first?

Grand Central?
First Hull Trains?
WSMR?
DfT?
Lord Adonis?
A new OA operator?

I'd put money on it not being the ROSCO.

 

[bluenoxid]

Franchisee expresses desire for new stock.
Government agrees need for new stock.
Government state sin contract that the rolling stock will be used by XX franchise for XX years.
OJEU notice for invitation to tender for the rolling stock specification
ROSCO works out that XX units at XX cost each, over XX years comes out at £Y initial outlay by them and add in Z interest to cover their financing costs ABC profit.
Then they work out XX per year lease.
ROSCOs submit their bids based on these numbers.

ROSCO's have quite an impact on train maintenance.

 

[jopsuk]

They act as a middleman between banks (who know little about rolling stock) and DfT/TOCs who know little about financing..

Of course, to add to confusion, some RoSCOs are owned by banks.

 

[David Sinnett]

What is a typical amortisation? I was pondering today why we change our cars after around 5 or 6 years (on average), buses are replaced after about 4 years, aircraft after perhaps 15 years. Why do we put up with much older trains? Is there no economic benefit of replacing them sooner? Would modern engines/motors use less juice? Or is it the franchise system that lets the franchisee milk the old cash cows?

 

[royaloak]

What is a typical amortisation? I was pondering today why we change our cars after around 5 or 6 years (on average), buses are replaced after about 4 years, aircraft after perhaps 15 years. Why do we put up with much older trains? Is there no economic benefit of replacing them sooner? Would modern engines/motors use less juice? Or is it the franchise system that lets the franchisee milk the old cash cows?

My car is 12 years old, I regularly see 20 year old buses (first Group), cant comment on aircraft but I am sure they last a lot longer than that.

 

[DaveNewcastle]

What is a typical amortisation? . . . we change our cars after around 5 or 6 years . . . . Why do we put up with much older trains?

Hah! Thats getting to the nub of the matter!
As I explained above, the longer the term of the lease, the more of that term is in profitable territory. (ie the capital will have been repaid). So even if costs and liabilities rise with age, its still likely to be more lucrative to cling on to the asset. Right up to the moment they become a liability.
These sums are done by the accountants advising the lessors (the ROSCOS).

By contrast, when consumers buy new cars, they(we) use quite different criteria and are strongly lobbied by advertisers of the benefits of change, even if its not the most financially beneficial decision to make. Sadly, when we do so, we are simply fulfilling the wishes of the financial advisers who drive the motor industry.

 

[90019]

buses are replaced after about 4 years

Dunno what bus companies you're thinking of; the newest bus fleet I know of is Lothian with an average age of 5 1/2 years IIRC, but the oldest ones are currently 10 years old, but up until a few weeks ago the oldest were about 16 years old.

But most other operators I can think of are running buses older than that, the oldest ones I can think of in Edinburgh are some of First's which are 16 or 17 years old, but I think they have even older ones than that still running here.

 

[jopsuk]

routexford, I would reckon that it would (especially now) be rather difficult even for a bank-owned RoSCO to raise capital to build a fleet without an intended client- it's a bit different to building a couple of extra Turbostars as "spot hire" units.

Has Grand Central's "tame" mini-RoSCO (that was set up to purchase the HSTs) bought the 180s they now run?

 

[Broken Viking]

Dunno what bus companies you're thinking of; the newest bus fleet I know of is Lothian with an average age of 5 1/2 years IIRC, but the oldest ones are currently 10 years old, but up until a few weeks ago the oldest were about 16 years old.

Don't forget that different members of a fleet will often be replaced at different times as it's very rare for all members of a fleet to be around the same age.

An example specific to buses:
My local Stagecoach yard currently have a fleet of Enviros (I think) that were bought into service last March as part of a route upgrade, which more or less replaced a large fleet of 5-ish year old Darts. Those Darts have now been cascaded to other routes and will probabally remain in service for another 10+ years. The Darts in turn part replace an older fleet of Mercedes minibuses, with 3-ish year old Solos now picking up the minibus work.
In this case, the new and existing rolling stock was pretty much shifted around on a "one in, one out" basis...I believe.

Also, some members of a fleet may have a longer practical service life than others. Take SWT's fleet as another example; Although the 455's are the oldest trains in the fleet (And general thinking would suggest those being the next up for replacement) I have a feeling that we'll see the 458's going before the 455's do.
That, and I have a feeling that the 442s's have a much longer potential service life than the 444's SWT replaced them with... 8)

 

[90019]

An example specific to buses:
My local Stagecoach yard currently have a fleet of Enviros (I think) that were bought into service last March as part of a route upgrade, which more or less replaced a large fleet of 5-ish year old Darts. Those Darts have now been cascaded to other routes and will probabally remain in service for another 10+ years. The Darts in turn part replace an older fleet of Mercedes minibuses, with 3-ish year old Solos now picking up the minibus work.
In this case, the new and existing rolling stock was pretty much shifted around on a "one in, one out" basis...I believe.

I find that Lothian don't cascade buses much anymore (There are a few anomalies with unusual buses on certain routes, ie. I think there are currently at least two 08 plate Geminis running the 22, and there have been a few changes, like the 21 switching to Pointer 2s and the 22 to Geimini 2s), which does seem a little unusual, but a lot of the buses tend to stay on the same routes for years (like the 8 is still mostly President bodied Tridents) before being replaced by newer buses.