Where privatisation went off the rails

[Woody]

Railway research expert Professor Rod Smith on the need to address the failings on the railways.
http://profeng.com/columns/where-privatisation-went-off-the-rails

 

[Mcr Warrior]

:roll: Succinct, and to the point.

So since privatisation we’ve managed to increase government subsidies, increase fares, and increase passenger usage. A triple whammy. And you have to ask where is all this money going? What’s happened is that privatisation created a system that has a lot of interfaces between many companies, all bound by complex legal agreements. There’s a lot of friction at all those interfaces which absorbs a lot of money.

Primarily there are three groups of people who have prospered out of all this. One group is the lawyers who cement all these relationships – they have done extremely well. The second group are the fat-cats who are running the companies, many of whom are receiving astronomical salaries. And the third group is the Roscos – the vehicle owners – who largely speaking are the banks. They have a captive market and are charging huge amounts of money to hire out, for example, two-axle diesel rail cars.

I often wonder how it is that companies are allowed to take huge amounts of money out of a system that is being subsidised by the taxpayer to the tune of £5 billion a year? That is a complete scandal. It’s the laundering of public money into banks’ coffers.

 

[Masbroughlad]

:roll: Succinct, and to the point.

That's what annoys me. The railways are still subsidised-ie our money goes in one end and just goes towards company profit. That can't be right?! How can that be justified?! It doesn't make sense!

 

[Greenback]

The Professor is spot on. Why nothing has been done about it is scandalous.

 

[Masbroughlad]

The Professor is spot on. Why nothing has been done about it is scandalous.

I hope McNulty has read this. What's the point of saving money elsewhere if this nonsense carries on!

 

[Greenback]

If someone demonstrated the desire to get to grips with the systemic failures created by privatisation, they would be assured of my vote for the next thirty years.

Unfortunately, I believe any cost savings will be at the expense of the customer, and to the detriment of society. It is sad fact that the richest get richer while the poorer have to struggle on...

 

[imagination]

What do the ROSCOs actually do?

I mean I know the point of them is supposed to be that they have a longer term interest in the trains than the short-term franchised TOCs would. But why can't the government take over and create a QANGO to fill the role of the ROSCO, charging the TOCs only the cost of purchasing the rolling stock and any investments put into it over the course of its lifetime, plus a small amount for paying employees etc?

Unless I'm mistaken that would take away a layer of completely unnecessary bureaucracy and save a significant amount of money for taxpayers/fare-payers, without in any way compromising the functioning of the railway network.

 

[Greenback]

The government is against quango's!

 

[junglejames]

At long last, a report that says it as it is. Not a Mcnulty report which thinks we need to find loads of savings in other areas first.
It either needs a complete rewrite of the franchise agreements. Something that makes it plainly obvious TOCs must improve things with their own money, and cant come running to the government whenever they are told they must improve, or we need to scrap privatisation. This would save the most money in the long term, if it was all just one big BR, but it would be the most expensive to begin with.

 

[j0hn0]

Agreed with allsentiments on here

I have been shouting it for ages too yet we all just accept it.

How is it in the public interest to subsidise private profits, many times at the expense of a) passenger comfort, b) punctuality and c) cost of fares?

There will be a report but really who do we think will act on it? The government? Forget it, the main 'fat cats' that are referred to are in fact either firends of of donors to the government

 

[gordonthemoron]

the same is/will be true of the NHS

 

[tbtc]

What do the ROSCOs actually do?

I mean I know the point of them is supposed to be that they have a longer term interest in the trains than the short-term franchised TOCs would. But why can't the government take over and create a QANGO to fill the role of the ROSCO, charging the TOCs only the cost of purchasing the rolling stock and any investments put into it over the course of its lifetime, plus a small amount for paying employees etc?

Unless I'm mistaken that would take away a layer of completely unnecessary bureaucracy and save a significant amount of money for taxpayers/fare-payers, without in any way compromising the functioning of the railway network.

A lot of bus companies lease vehicles. This is more common amongst tendered operations (including London routes), where an operator doesn't want to be left with an expensive bus after the end of a five year tender.

So, there are a few companies who will lease buses. Or you could go to banks and they'll set up a financing package. Lots of options, plenty competition, reasonable prices. Not as cheap as owning the vehicle yourself over twenty years, but it avoids being stuck with an asset you have no use for when the tender ends.

However, it appears that trains can only be leased through three ROSCOS. And, with only three of them there's no competition, there's no attempt at market differentiation, there's no justification I can think of.

Why Stagecoach/ First couldn't purchase trains through a bank (etc) I don't know

 

[Domeyhead]

There's nothing wrong with profits per se - they help keep systems efficient. In the public sector you cannot incentivise efficiency which is the danger of simple reversing the privatisation. We should instead consider where profits go and what they are used for. If (eg) all profits went to institutional shareholders such as pension funds then it would be no big deal. However when a TOC has no great need to invest capital and when single shareholders who are also company non-executives (and we are probably all thinking of Brian Souter and even St Richard of Branson here) effectively award themselves bonusses of hundreds of £kpa then yes I agree the system is rotten and needs reform.
The prof should thunder his message but leave out the emotive fat cat labelling because it immediately politicises a debate that should be about economics.

 

[LE Greys]

A lot of bus companies lease vehicles. This is more common amongst tendered operations (including London routes), where an operator doesn't want to be left with an expensive bus after the end of a five year tender.

So, there are a few companies who will lease buses. Or you could go to banks and they'll set up a financing package. Lots of options, plenty competition, reasonable prices. Not as cheap as owning the vehicle yourself over twenty years, but it avoids being stuck with an asset you have no use for when the tender ends.

However, it appears that trains can only be leased through three ROSCOS. And, with only three of them there's no competition, there's no attempt at market differentiation, there's no justification I can think of.

Why Stagecoach/ First couldn't purchase trains through a bank (etc) I don't know

That is indeed a good question. I suppose the answer would be to write into the contract that Stagecoach/First/NatEx/whoever would buy the trains, but then have to sell them at the end of the franchise to the incomer or a ROSCO (preferably the latter). The problem is devaluation, so the franchisee is guaranteed to make a loss on the deal. Also, will the ROSCO buy?

Another ROSCO problem is that many classes are specific to certain areas, and each ROSCO effectively has a monopoly on that class and that area. Now that creates major competition problems with new classes. Not sure what to do about that.

 

[LexyBoy]

Consider the following immovable tenets of the post-Thatcher Governments:

1. Efficiency is everything
2. It is a fact that the private sector is always more efficient than the public sector.*

(also, 3. Some of my good friends run large companies)

Somewhere the fact that certain things are supposed to be public services gets lost - something which is even infiltrating even non-commercial areas like the NHS now.

* There's no evidence for it, but it is a scientific fact.

 

[Oswyntail]

...Another ROSCO problem is that many classes are specific to certain areas, and each ROSCO effectively has a monopoly on that class and that area. Now that creates major competition problems with new classes. Not sure what to do about that.

Generic stock should not be a problem to develop. Standardise on one type - say Turbostar - and differentiate with interior fittings. Then split the build between ROSCOs. Result - duller but more competitive railways. The main problem though, is that competition will only work if there is an immediate supply available - you can't really compete if all of you have 18 month lead times. IMHO, the ROSCOs should be ordering speculatively now then selling their services vigorously.

 

[Zoe]

At the time it was thought that the ROSCOs would compete against each other for the provision of rolling stock to the TOCs so this would have kept the price lower.

 

[tbtc]

That is indeed a good question. I suppose the answer would be to write into the contract that Stagecoach/First/NatEx/whoever would buy the trains, but then have to sell them at the end of the franchise to the incomer or a ROSCO (preferably the latter). The problem is devaluation, so the franchisee is guaranteed to make a loss on the deal. Also, will the ROSCO buy?

Another ROSCO problem is that many classes are specific to certain areas, and each ROSCO effectively has a monopoly on that class and that area. Now that creates major competition problems with new classes. Not sure what to do about that.

There has to be a way of doing this, so that the assets can pass on at a reasonable price.

And, yes, big generic classes to make rolling stock allocation much easier, rather than messing around with classes like 175/180/333s etc

 

[ivanhoe]

At the time it was thought that the ROSCOs would compete against each other for the provision of rolling stock to the TOCs so this would have kept the price lower.

You are quite right Zoe. Instead the initial MBO of the Roscos resulted in a group of former Railwaymen and Venture Capitalists becoming instant millionaires by selling them off at great profit to Banks. The banks wanted a return on their investment and thus competition was the casualty.

 

[tbtc]

There's nothing wrong with profits per se - they help keep systems efficient. In the public sector you cannot incentivise efficiency which is the danger of simple reversing the privatisation. We should instead consider where profits go and what they are used for. If (eg) all profits went to institutional shareholders such as pension funds then it would be no big deal. However when a TOC has no great need to invest capital and when single shareholders who are also company non-executives (and we are probably all thinking of Brian Souter and even St Richard of Branson here) effectively award themselves bonusses of hundreds of £kpa then yes I agree the system is rotten and needs reform.
The prof should thunder his message but leave out the emotive fat cat labelling because it immediately politicises a debate that should be about economics.

I agree that profit can help ensure efficiencies and manage resources to demand. Personally, I've no problem with the TOCs getting a reasonable rate of return on any investment. I work for a "contracting out" provider myself.

However, in much of the railways, there's not a huge *risk* being taken to justify a reward, especially not by the ROSCOs.

 

[Domeyhead]

I agree that profit can help ensure efficiencies and manage resources to demand. Personally, I've no problem with the TOCs getting a reasonable rate of return on any investment. I work for a "contracting out" provider myself.

However, in much of the railways, there's not a huge *risk* being taken to justify a reward, especially not by the ROSCOs.

This has been an interesting thread - the only downside is that I think we all agree with each other! You are dead right about the ROSCO model imho. They provide capital (that's why they tend to be owned by banks) but that is all they do. They carry virtually no risk at all - I don't think any new build in this country has ever been built as a speculative venture by a ROSCO - they are all built for immediate lease into an already signed contract. In fact I'd say HarryNeedle, Cotswold Rail and all the rest of the spot hire firms carry more risk in their niche than the ROSCOs do in theirs.

 

[Matt Taylor]

So how do airlines get it to work then?

If an airline wants to have some new planes they generally have to purchase them from one of two companies, Boeing or Airbus. Some years ago BMI took something of a risk in leasing or buying a very small fleet of Airbus A330s which were used to start extending their long haul network to places such as Washington and Las Vegas, but due to competition laws they were unable to use them on the prime Heathrow to New York/Washington routes and thus they never really made a great return on the investment. In 2008 when competition laws on the UK-USA routes were torn up and 'open skies' took place BMI immediately tried to capitalise by placing their A330s on routes where they felt there was money to be made. Unfortunately BMI had by this time been almost bought out by German airline Lufthansa and made a poor effort at filling their aircraft on the long haul routes across the Atlantic. As a result some of the A330s have now been leased out to other airlines.

So BMI took a risk and got hurt, but equally Singapore Airlines took a risk by becoming the first airline to operate the A380-and it has worked a treat for them. But unlike train manufacturers Boeing and Airbus will spend years researching new aircraft and getting potential airlines to help with specifications etc. Airbus took a huge gamble in building the A380 aircraft and did so with initial orders for only fifty aircraft, so far 234 have been ordered and it is still not yet at the point of profitability.

So risk is taken by both airlines and manufacturers, leasing companies exist to provide finance etc and some airlines lease aircraft directly from other airlines. Similar to our rail industry there are still many anti-competitive agreements between countries (UK-India and UK-Japan for example), and another similarity is that ownership is diluted, BMI is owned by Lufthansa, Virgin Atlantic is 49% owned by Singapore Airlines etc etc. So there are many similarities, but why does it work for them but for the railways?

 

[Eng274]

However, in much of the railways, there's not a huge *risk* being taken to justify a reward, especially not by the ROSCOs.

no TOC is duty bound to lease from a given ROSCO, if they don't like whats on offer on terms they want, they can look elsewhere. This is especially the case with newer stock that is still in its payback period. No ROSCO wants to have trains sat in a siding not earning money, there is some onus on them to make their stock attractive to lease.

 

[imagination]

no TOC is duty bound to lease from a given ROSCO, if they don't like whats on offer on terms they want, they can look elsewhere. This is especially the case with newer stock that is still in its payback period. No ROSCO wants to have trains sat in a siding not earning money, there is some onus on them to make their stock attractive to lease.

Or, and this seems to be happening rather more, to avoid buying new trains thus ensuring that the TOCs' only choice is between them and nothing.

 

[Dewedin]

Given the chronic shortage of rolling stock it seems the ROSCOs have it made at the moment. Just about every bit of stock they have is required. They have no motivation to acquire more.

 

[Rhydgaled]

I hope McNulty has read this. What's the point of saving money elsewhere if this nonsense carries on!

I totaly agree. Unless McNulty suggests re-nationalising I can think of only 3 things that could come out of his review:

1. A little tinkering, saving a small amont (up to £1bn maybe, but very unlikly, certainly not getting down to BR's £1bn per anum subsidy)
2. Beeching style cutbacks to the rail network (unlikely, and probablly not as far reaching even if that is what comes out of it)
3. Massive fare rises (which will price passengers off the railways and hence probablly not save much more either)

If someone demonstrated the desire to get to grips with the systemic failures created by privatisation, they would be assured of my vote for the next thirty years.

The Welsh Green Party have nationalisation in their manifesto, I'm not sure if the national party actually included it in their manifesto at the last Westminster election but it was on their policy website. Sadly none of the parties that really have any hope of getting a Westminister majority with our 2 party voting system (although obviously there were some major problems with the alternative we were offered or it may have had more success) have considered sorting out the mess the railways were thrown into. Interestingly Plaid Cymru, and in a different flow to their UK wing, Welsh Labour, are considering taking steps towards re-nationalisation in the form of a not-for-profit franchise holder to take over from ATW. Sadly this does nothing to sort the ROSCO problem.

What do the ROSCOs actually do?

I mean I know the point of them is supposed to be that they have a longer term interest in the trains than the short-term franchised TOCs would. But why can't the government take over and create a QANGO to fill the role of the ROSCO, charging the TOCs only the cost of purchasing the rolling stock and any investments put into it over the course of its lifetime, plus a small amount for paying employees etc?

Unless I'm mistaken that would take away a layer of completely unnecessary bureaucracy and save a significant amount of money for taxpayers/fare-payers, without in any way compromising the functioning of the railway network.

As I see it the ROSCOs are an expensive loan, to spread the cost of paying for the stock over several years. Expensive because even when the TOCs (and indirectly passengers and taxpayers) have paid back the cost of the stock the ROSCOs just keep on charging. What's the going rate for a 15 to 30 year loan on, say, the cost of 30 new 3-car 377 trains?

we need to scrap privatisation. This would save the most money in the long term, if it was all just one big BR, but it would be the most expensive to begin with.

I don't see it being that expensive to begin with if you let the current franchises lapse first, use leglislation to force the ROSCOs to hand over all their stock free of charge once the current lease has expired (and the investment in the stock has been repaid) and don't hurry to restore BR livery, or even apply stickers, until the stock actually needs painting anyway.

leave out the emotive fat cat labelling because it immediately politicises a debate that should be about economics.

I think you are right there. Concentrate on reducing the cost of the railway, the figures: BR's subsidy £1bn, Privatised Railway's subsidy £5bn. And don't forget the above-inflation fare rises the privatised railway has been having.

Consider the following immovable tenets of the post-Thatcher Governments:

1. Efficiency is everything
2. It is a fact that the private sector is always more efficient than the public sector.*

(also, 3. Some of my good friends run large companies)

Somewhere the fact that certain things are supposed to be public services gets lost - something which is even infiltrating even non-commercial areas like the NHS now.

* There's no evidence for it, but it is a scientific fact.

How can somthing be a scientific fact without any evidence? In fact, if there really is no evidence for it, perhaps we have a new scientific theroy: "the public sector can, in certain suituations, be more efficient than the private sector".

Perhaps if you impress certain values on the staff (eg. a sence of pride in the Britain's railway and a strong drive to make services attractive to get travelers out of their cars to help combat climate change) and THEN give them a limited budget, we'll get a very effiecent system.

 

[Greenback]

I believe Lexy Boy's comment was ironic, in that it is now a widely belief that the private sector is better at delivering just about everything than the public sector.

I personally don't accept this. Some things, such as health care and public transport should be delivered by the public sector. Yet there has bene no serious debate on this, even New Labour were keen on privatisation. The idea of a public service has largely been lost.

 

[TGV]

I think we could open up a whole new forum on this. I think the original article by the professor is spot on.

Another down side of the privatisation is that in a few years much specialist engineering knowledge that is currently retained by a lot of ex BR staff (e.g the DM&EE) that still work in the industry but they will soon all be gone.

Take SNCF for example (oddly enough I know a fair bit about that) - they have large regional centres of technial expertise and many of the staff are specialists on key areas of rolling stock and infrastructure. You will have a huge site devoted to vehicle couplers for example. Another for bogies and wheelsets, several for OHLE and so on. There are vastly experienced members of staff that know about very specific areas within these - corrosion, fatigue, environmental factors, EM interference etc... I could list hundreds.

But with our privatised system everything that is close to the rollong stock operation has been watered down to small teams of generalists who only look at their own issues. The knowledge base we had a few years ago is diminishing. I know so because I can see it with my own eyes!

Someone asked why the airline model doesn't work. In a word - franchises. If a company knows that in 5 years it may not have a stake in a given operation they are naturally more conservative to investment.

 

[LE Greys]

So how do airlines get it to work then?

If an airline wants to have some new planes they generally have to purchase them from one of two companies, Boeing or Airbus. Some years ago BMI took something of a risk in leasing or buying a very small fleet of Airbus A330s which were used to start extending their long haul network to places such as Washington and Las Vegas, but due to competition laws they were unable to use them on the prime Heathrow to New York/Washington routes and thus they never really made a great return on the investment. In 2008 when competition laws on the UK-USA routes were torn up and 'open skies' took place BMI immediately tried to capitalise by placing their A330s on routes where they felt there was money to be made. Unfortunately BMI had by this time been almost bought out by German airline Lufthansa and made a poor effort at filling their aircraft on the long haul routes across the Atlantic. As a result some of the A330s have now been leased out to other airlines.

So BMI took a risk and got hurt, but equally Singapore Airlines took a risk by becoming the first airline to operate the A380-and it has worked a treat for them. But unlike train manufacturers Boeing and Airbus will spend years researching new aircraft and getting potential airlines to help with specifications etc. Airbus took a huge gamble in building the A380 aircraft and did so with initial orders for only fifty aircraft, so far 234 have been ordered and it is still not yet at the point of profitability.

So risk is taken by both airlines and manufacturers, leasing companies exist to provide finance etc and some airlines lease aircraft directly from other airlines. Similar to our rail industry there are still many anti-competitive agreements between countries (UK-India and UK-Japan for example), and another similarity is that ownership is diluted, BMI is owned by Lufthansa, Virgin Atlantic is 49% owned by Singapore Airlines etc etc. So there are many similarities, but why does it work for them but for the railways?

Yes, that system makes sense, however it does help that airlines are not going to have to abandon a route at the end of a fixed-term franchise. They also don't need to worry about someone else owning the sky. Imagine if one of the regional airlines (say Loganair) was suddenly forced to abandon all their routes and move somewhere else. They would either have to sell all their aircraft to the incomer or take them to the new area, meaning that the incomer would have to bring in new aircraft overnight. I won't go into the logistics of pilot training and route familiarisation - which I imagine are similar to the railways, because you don't want someone carrying passengers to land at an unfamiliar airport.

This is why I would prefer more stability, with railway companies owning the right to operate trains over a route (and ideally owning the route as well) rather than the franchise merry-go-round. It adds stability, encourages continuous investment and improves the case for buying new stock.

 

[WatcherZero]

I totaly agree. Unless McNulty suggests re-nationalising I can think of only 3 things that could come out of his review:

1. A little tinkering, saving a small amont (up to £1bn maybe, but very unlikly, certainly not getting down to BR's £1bn per anum subsidy)
2. Beeching style cutbacks to the rail network (unlikely, and probablly not as far reaching even if that is what comes out of it)
3. Massive fare rises (which will price passengers off the railways and hence probablly not save much more either)

Well from the Times this morning and the way Hammonds briefing its suggesting he will find come down mostly on the labour costs of the industry suggesting abolition of things like contractual cross station/down train walking times, 45 minute warm up time, fixed 8 hour shifts replaced with flexible shifts such as 5 or 6 hours which closer match actual train journey times, massive overtime multipliers, etc...