Should trains be leased?

[Dai Corner]

And if TOCs bought their own stock instead of leasing, they could buy what they needed. With leasing, they have to rely on the lease company to buy the stock for them, and so are effectively at their mercy.

The lease company buys what the TOC wants, or, rather, what the DfT tells them to use.

 

[skyhigh]

With leasing, they have to rely on the lease company to buy the stock for them, and so are effectively at their mercy.

Nonsense. The TOC (and effectively DfT) will discuss requirements with the leasing company. They don't simply get told by the leasing company 'this is what we're buying, take it or leave it' - and in any case if you wanted to go to a different leasing company you're free to do that.

Not to mention the fact that the traditional ROSCOs have a much better idea of how to negotiate with builders, hence why 802s are less of a problem for GWR than the DfT specified 800s.

 

[Bletchleyite]

And if TOCs bought their own stock instead of leasing, they could buy what they needed. With leasing, they have to rely on the lease company to buy the stock for them, and so are effectively at their mercy.

If a TOC wants new kit, the leasecos will lease them whatever they want within reason*. In that regard it's no different from borrowing money to buy it.

Just like if you lease a car. If you do that the leaseco leases you the car you want, not one they prefer. The price may of course vary based on its value to them once your lease ends.

* Some thought will go into where it can be redeployed later, but you would have to get quite specialist to get to something that doesn't have much scope for that.

 

[Watershed]

Introducing leasing companies into the rail industry is one of the biggest scandals of rail privatisation, in my view.

They purely exist because of political ideology. The government can borrow money far cheaper than any leasing company can, so whilst it saves having the "debt" on the government's books, it has a massive cost in the long term.

There are only a handful of fleets - a tiny percentage of the overall value of the British rolling stock portfolio - which have gone off-lease sooner than expected. So in exchange for the massively higher leasing fees, the government has gained very little in terms of the 'flexibility' to off-lease trains.

Sadly, very few politicians have the guts to reverse the mistake that was made. But it's rather telling that rail operators with access to the capital funding required, both here and abroad, overwhelmingly own their rolling stock.

 

[MattRat]

If a TOC wants new kit, the leasecos will lease them whatever they want within reason*. In that regard it's no different from borrowing money to buy it.

Just like if you lease a car. If you do that the leaseco leases you the car you want, not one they prefer. The price may of course vary based on its value to them once your lease ends.

* Some thought will go into where it can be redeployed later, but you would have to get quite specialist to get to something that doesn't have much scope for that.

And yet we have roughly 40 year old DMUs clattering about with no real sign of full replacement....

 

[Bletchleyite]

And yet we have roughly 40 year old DMUs clattering about with no real sign of full replacement....

Because no TOC has asked the leasing companies to lease them a replacement, because the Government won't pay for it. Though that replacement has already happened to Pacers.

Without leasing this would actually be worse, because 150s would be long since paid off and thus basically free other than maintenance. That's how BR used to have sidings full of old stock lying around for whenever it might be useful.

 

[skyhigh]

And yet we have roughly 40 year old DMUs clattering about with no real sign of full replacement....

If you have someone willing to pay the leasing costs for new stock the leasing company will gladly buy you some.

 

[tbtc]

Twist the question the other way. What would happen if there were no ROSCOs? There'd still be accountants assessing the book value of rolling stock and allocating it to areas who paid the most for it, there'd still have to be someone in charge of these scarce resources - it wouldn't just be a Sir Topham Hat arbitrarily dishing out trains on a whim - we'd still have the same arguments (in the way that some people are slowly realising that our GBR future isn't going to solve all of the things that they moaned about during the privatisation era... some people are realising this anyhow!)

Also, if the ROSCOs charge so much then how come the financially astute people like Brian Souter never called their bluff by ordering some Turbostars directly from the manufacturer? Given that, if the ROSCOs are supposedly bleeding the industry dry, you'd expect to be able to make your money back on a direct purchase after a few years - there'd be a resale value - especially if you stuck to just ordering a fairly "go anywhere" train... (instead, despite Stagecoach running hundreds of buses around Great Britain, they choose to lease a lot of them, because they find it better to do that, even if they expect to be the only operator of that vehicle during it's fifteen/twenty year life)

Should the Government borrow the money to buy the trains, in which case you need to take into account the interest payable, perhaps long after the trains have been scrapped? Or should it raise taxes or cut expenditure on, say, the NHS, education, welfare or public transport?

This is the problem

Whilst some people want to go down the path of "Government debt is so cheap that it's virtually free to buy new trains, compared to the entire annual UK Government expenditure", they do cost a lot of money - millions of pounds per unit - and any Transport department has to fight for that money against other departments - it's always going to be tough to prioritise a hundred million pounds on your pet transport project when that would pay for however many Nurses/ Teachers etc - I'm not saying I agree with this but it's the political reality and we have to accept that

Not to mention the fact that the traditional ROSCOs have a much better idea of how to negotiate with builders, hence why 802s are less of a problem for GWR than the DfT specified 800s.

That's a good point

A lot of the worst public sector spending is when people buy things that they aren't used to purchasing - e.g. a smaller council area undertake a "once in a generation" project where nobody has the experience of last time they procured that thing

ROSCOs know how to negotiate with train manufacturers, ROSCOs have a vested interest in ensuring some commonality with existing trains where possible (rather than seeing every order for trains designed as some "bespoke" delivery) - there are some upsides to having such middle men

Introducing leasing companies into the rail industry is one of the biggest scandals of rail privatisation, in my view.

They purely exist because of political ideology

Didn't BR lease some locomotives though?

 

[Bletchleyite]

I think the true scandal was existing, already paid-for trains being basically handed to ROSCOs for nowt. The Government should have retained ownership of them and allowed use by TOCs for the cost of the administration. New trains could of course have been obtained by whatever the most financially expedient method was.

 

[XAM2175]

Also, if the ROSCOs charge so much then how come the financially astute people like Brian Souter never called their bluff by ordering some Turbostars directly from the manufacturer? Given that, if the ROSCOs are supposedly bleeding the industry dry, you'd expect to be able to make your money back on a direct purchase after a few years - there'd be a resale value - especially if you stuck to just ordering a fairly "go anywhere" train... (instead, despite Stagecoach running hundreds of buses around Great Britain, they choose to lease a lot of them, because they find it better to do that, even if they expect to be the only operator of that vehicle during it's fifteen/twenty year life)

Mr Souter did of course briefly flirt with owning a whole ROSCO - but given that it was Porterbrook at the time of buying both the 458s and 460s from Alstom I don't think he got much enjoyment out of the experience

 

[tomuk]

I think the true scandal was existing, already paid-for trains being basically handed to ROSCOs for nowt. The Government should have retained ownership of them and allowed use by TOCs for the cost of the administration. New trains could of course have been obtained by whatever the most financially expedient method was.

ISTR that at the time the windfall the ROSCOS received allowed them to replace the Mk1 slammers at a reasonable lease rates.

 

[Magdalia]

Leasing on the railway goes back more than 50 years: the class 50s were originally leased from English Electric.

In those days leasing was relatively simple and had a clear distinction between operating leases and finance leases: in an operating lease the residual value of the asset at the end of the contract belonged to the lessor, in a finance lease the residual value of the asset at the end of the contract belonged to the lessee.

Many big manufacturers had their own finance subsidiary to do leasing: it worked well if the supplier could borrow more cheaply than the customer, or if the customer was unable to borrow at all. In an operating lease the assets either needed to be obsolete at the end of the contract, photocopiers are a good example, or have a liquid secondary market, company cars are a good example.

Computer technology, financial deregulation and the decline of domestic manufacturing made things much more complicated. Now who owns the asset at the end of the contract can be affected by various rights and options in the contract. In theory sophisticated modelling allows matching of maturity and risk profiles between the financial investors who own the assets and the businesses that use them. But the tax system also creates perverse incentives: capital allowances are only really useful to profit making entities so it can be tax efficient for a profit making financial institution to own the assets and lease them to to a company with no profits.

Leasing can work for rolling stock, but the very long life of the asset and the lack of a liquid secondary market do work against it. While government can borrow 40 year money very cheaply it is a no brainer for the government to own the rolling stock and finance the purchases through borrowing, but if interest rates are high then the calculation could be very different. The main risk in buying an asset lasting 40 years is that circumstances change before the asset reaches the end of its useful life, and that's what is happening now. Time will tell whether the government has really transferred that risk to the ROSCOs.