ROSCOs and nationalisation: any ideas?

[Unixman]

There has been much discussion about the renationalisation of the railways by letting the current contracts expire ( there is a thread here) but I have yet to see anything about what will happen to the rail leasing companies and what will happen to them.

Anyone got any ideas? Or have I missed something?

 

[swt_passenger]

There has been much discussion about the renationalisation of the railways by letting the current contracts expire ( there is a thread here) but I have yet to see anything about what will happen to the rail leasing companies and what will happen to them.

Anyone got any ideas? Or have I missed something?

It was touched on in the closed thread about the new transport minister, (and various others). No real indication has been found that anything significant will happen to the ROSCOs. It’s not as if their assets can just be taken, they’d have to be bought.

 

[Tazi Hupefi]

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?

Same with other commercial vehicles, most large companies like Openreach, utilities, Network Rail outsource their fleet procurement and leasing arrangements for vans etc - it's a similar concept.

ROSCOs also deal with things like planning and designing refurbishments, overhauls, sourcing parts, dealing with safety investigations/recommendations, insurance, consultancy etc.

 

[renegademaster]

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

Works for Tesla

 

[hwl]

Or have I missed something?

You haven't missed anything. The plan is nothing happens.

 

[Djgr]

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?

Same with other commercial vehicles, most large companies like Openreach, utilities, Network Rail outsource their fleet procurement and leasing arrangements for vans etc - it's a similar concept.

ROSCOs also deal with things like planning and designing refurbishments, overhauls, sourcing parts, dealing with safety investigations/recommendations, insurance, consultancy etc.

Why do they need to be in the private sector to do this?

 

[thealexweb]

Should GBR start procuring new fleets while not renewing leases for Legacy fleets? Could help strong arm the ROSCOs to selling up at a fair price if their assets become increasingly useless and frozen out.

 

[Bletchleyite]

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

Because they won't sell you one. I would prefer to purchase a car online direct from the manufacturer funded by a personal loan I took out, but none of them will do that!

 

[Tazi Hupefi]

Why do they need to be in the private sector to do this?

Because to buy THEIR assets would cost £billions, spook the specialist financing markets and transfer debt on to the public books. Confiscation of private assets by the state is not the way forward in 2024, even with compensation.

You could potentially phase ROSCOs out over decades, as fleets are scrapped and new ones procured - but if that's going to take years, why bother setting up a load of new government departments etc.

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?

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.

 

[Lurcheroo]

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?

Same with other commercial vehicles, most large companies like Openreach, utilities, Network Rail outsource their fleet procurement and leasing arrangements for vans etc - it's a similar concept.

ROSCOs also deal with things like planning and designing refurbishments, overhauls, sourcing parts, dealing with safety investigations/recommendations, insurance, consultancy etc.

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.

In my experience the ROSCO near enough wipe their hands clean of them, leaving the TOC to deal with most things.

People do go direct to a Mercedes dealer for a new Mercedes.

TOC’s go direct to the train builders and then use ROSCO’s to finance them essentially.

I think you misunderstand what the ROSCO’s actually do, and how much money they actually make.

 

[Bald Rick]

My view is that with all the main operators under Government ownership, that enables a proper rolling stock strategy, which in turn enables a proper strategy for rolling stock manufacture.

 

[185]

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

They're specialists in procur...

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.

 

[Tazi Hupefi]

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.

In my experience the ROSCO near enough wipe their hands clean of them, leaving the TOC to deal with most things.

People do go direct to a Mercedes dealer for a new Mercedes.

TOC’s go direct to the train builders and then use ROSCO’s to finance them essentially.

I think you misunderstand what the ROSCO’s actually do, and how much money they actually make.

They make a very small % profit margin, like the privatised TOCs. One wrong decision and they're in the red.

Unions etc throw out big profit actual numbers, without putting them into context of the overall revenue. Same happens with Tesco's etc, they have a net profit margin of just 2.5% - wafer thin, a lot of work and risk, but the profit is always pounced on by the media as £billions, without any observation that it could very quickly swing the other way.

 

[Facing Back]

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.

In my experience the ROSCO near enough wipe their hands clean of them, leaving the TOC to deal with most things.

People do go direct to a Mercedes dealer for a new Mercedes.

TOC’s go direct to the train builders and then use ROSCO’s to finance them essentially.

I think you misunderstand what the ROSCO’s actually do, and how much money they actually make.

Do you have figures to hand?

 

[JonathanH]

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

Because it is seen as money leaving the railway industry, eg fares and subsidy being paid out as private profit. There appear to be certain industries where the public are not prepared to see private profit made.

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.

It was the only way they could afford to buy the Piccadilly line stock in the absence of other funding.

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?

Their customers, through higher lease charges on future rolling stock, so some suggest.

Should GBR start procuring new fleets while not renewing leases for Legacy fleets?

I'm not convinced there is a ready source of finance for that given the public finances, no matter how much distrust of ROSCOs there is.

 

[Thirteen]

TfL selling and leasing back the Class 345s is not quite the same thing as simply leasing stocks from ROSCOs, TfL did lease the 378s but later bought them outright because in the long term it was cheaper.

I fully expect GBR to use a mix of buying outright and leasing.

 

[JonathanH]

I fully expect GBR to use a mix of buying outright and leasing.

How? Where is the funding going to come from for that?

 

[Snex]

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?

Same with other commercial vehicles, most large companies like Openreach, utilities, Network Rail outsource their fleet procurement and leasing arrangements for vans etc - it's a similar concept.

ROSCOs also deal with things like planning and designing refurbishments, overhauls, sourcing parts, dealing with safety investigations/recommendations, insurance, consultancy etc.

You're comparing pears and apples here mind. One is replaced every 3 years or so, the other is replaced every 30 years or so. Very very big difference. Not to mention that your order could be the whole order book for the factory whereas your Mercedes is pretty irrelevant, heck even the whole Network Rail vehicle fleet, in comparison.

Surely the bus and air industry is a more appropiate comparison? Both which do not have a middleman in terms of purchasing buses/planes, in the main. There is dedicated facilities such as Thornton Bros at Ashington where you can go and get a refurbishment, once or twice in their life time. The rest of it, isn't really difficult.

The only benefit is you don't have to pay for it all up front.

 

[Mike Machin]

There’s virtually no chance of the government getting involved in the ownership of rolling stock and non-fixed assets.
Most government run services are contracted-out, it avoids having higher public-sector borrowing to purchase the assets, and it keeps the borrowing off the public sector’s books.
As a graphic designer I have designed a lot of visitor centres for the nation’s waste industry. Although most people think it’s ‘the council’ who runs their waste services, the actual provision of services and infrastructure is provided by the private sector, smoothing the government’s cash flows, smoothing payments and avoiding large amounts of public debt.

The franchised passenger railway structure will change, but the rolling stock will remain in private ownership, just as it does in most countries today.

 

[JonathanH]

Both which do not have a middleman in terms of purchasing buses/planes, in the main.

Leasing companies exist in bus and plane markets.

For example
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Most government run services are contracted-out, it avoids having higher public-sector borrowing to purchase the assets, and it keeps the borrowing off the public sector’s books.

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.

 

[KNN]

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

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.

 

[43066]

They make a very small % profit margin, like the privatised TOCs. One wrong decision and they're in the red.

Unions etc throw out big profit actual numbers, without putting them into context of the overall revenue. Same happens with Tesco's etc, they have a net profit margin of just 2.5% - wafer thin, a lot of work and risk, but the profit is always pounced on by the media as £billions, without any observation that it could very quickly swing the other way.

My understanding is that the above is incorrect, and that ROSCOs have generally enjoyed far higher profit margins than TOCs (whom I agree generally enjoy supermarket level profit margins, and have sometimes wrongly been the target of union ire for profiteering).

Take the below article:

Profits of UK’s private train-leasing firms treble in a year

More than £400m paid in dividends in 2022-23 while rest of railway faced cuts and salary freezes

amp.theguardian.com

The ORR said the rolling stock companies, or Roscos, paid dividends of £409.7m in 2022-23, up from £122.3m a year before. Their net profit margins went up from 14.3% to 41.6%.
Since the collapse of franchising, train operating companies are now on management contracts of margins of about 2%. Train operators’ contracts are now structured for the government to make up the shortfall between revenue and costs, meaning taxpayers are now effectively paying the £3.1bn spent last year on leasing trains, almost a quarter of total industry costs.

The above refers unambiguously to far higher net profit margins continuing be earned by ROSCOs than by TOCs, even post covid. Are you suggesting the Guardian’s figures - quoted from the ORR - are incorrect?

 

[Jack Hay]

Why have ROSCOs? Because somebody has to raise the millions of pounds required upfront to buy new trains. The government could borrow on behalf of the TOCs (most of which it controls already and will fully own eventually) but that adds to public sector borrowing which is already uncomfortably high. Keeping the ROSCOs keeps that borrowing off the public balance sheet, allowing the government to borrow more for other public spending. Plus, there is risk involved in owning trains; the owner can find there is no more use for some trains before they are life-expired and written down to nil value, so the owner is stuck with trains that are earning them nothing. The government doesn't want to carry that risk, it would prefer to get a specialist finance house to carry the risk. The ROSCOs are that specialist finance house. You can find special cases which are exceptions to this rule, for instance the 777s for MerseyRail. They are exceptional because MerseyRail is controlled by Liverpool City Region which is able to borrow cheaply on its own account, and it knows the 777s will work on MerseyRail until the end of their life as they're designed for that network alone, so the 'no use for the trains' risk is negligible and LCR can carry that risk itself; so it did - LCR raised the money to buy them. So in special cases like the 777s, a ROSCO adds no value, but in the general case it does. And in a good year, the ROSCO is rewarded for taking that risk by making good profits. In a bad year, when trains have to be written off before end of life, they take a bath financially.

 

[renegademaster]

Why have ROSCOs? Because somebody has to raise the millions of pounds required upfront to buy new trains. The government could borrow on behalf of the TOCs (most of which it controls already and will fully own eventually) but that adds to public sector borrowing which is already uncomfortably high. Keeping the ROSCOs keeps that borrowing off the public balance sheet, allowing the government to borrow more for other public spending. Plus, there is risk involved in owning trains; the owner can find there is no more use for some trains before they are life-expired and written down to nil value, so the owner is stuck with trains that are earning them nothing. The government doesn't want to carry that risk, it would prefer to get a specialist finance house to carry the risk. The ROSCOs are that specialist finance house. You can find special cases which are exceptions to this rule, for instance the 777s for MerseyRail. They are exceptional because MerseyRail is controlled by Liverpool City Region which is able to borrow cheaply on its own account, and it knows the 777s will work on MerseyRail until the end of their life as they're designed for that network alone, so the 'no use for the trains' risk is negligible and LCR can carry that risk itself; so it did - LCR raised the money to buy them. So in special cases like the 777s, a ROSCO adds no value, but in the general case it does. And in a good year, the ROSCO is rewarded for taking that risk by making good profits. In a bad year, when trains have to be written off before end of life, they take a bath financially.

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

 

[Tazi Hupefi]

Why have ROSCOs? Because somebody has to raise the millions of pounds required upfront to buy new trains. The government could borrow on behalf of the TOCs (most of which it controls already and will fully own eventually) but that adds to public sector borrowing which is already uncomfortably high. Keeping the ROSCOs keeps that borrowing off the public balance sheet, allowing the government to borrow more for other public spending. Plus, there is risk involved in owning trains; the owner can find there is no more use for some trains before they are life-expired and written down to nil value, so the owner is stuck with trains that are earning them nothing. The government doesn't want to carry that risk, it would prefer to get a specialist finance house to carry the risk. The ROSCOs are that specialist finance house. You can find special cases which are exceptions to this rule, for instance the 777s for MerseyRail. They are exceptional because MerseyRail is controlled by Liverpool City Region which is able to borrow cheaply on its own account, and it knows the 777s will work on MerseyRail until the end of their life as they're designed for that network alone, so the 'no use for the trains' risk is negligible and LCR can carry that risk itself; so it did - LCR raised the money to buy them. So in special cases like the 777s, a ROSCO adds no value, but in the general case it does. And in a good year, the ROSCO is rewarded for taking that risk by making good profits. In a bad year, when trains have to be written off before end of life, they take a bath financially.

Thanks for sharing, interesting read, and ORR have since revised their figures from where the article originates, but there's some other information not as well broadcast in that report.

Compared with five years ago (April 2017 to March 2018) total income for ROSCOs decreased by 25.1%, total costs decreased by 39.6% and total net profit margins increased by 16.0 percentage points.

In the latest year, ROSCOs paid £483.4 million in dividends to shareholders. In comparison to the previous year (April 2021 to March 2022) this is up by £361.1 million from £122.3 million. When compared with five years ago (April 2017 to March 2018), total dividends payments are up by 52.9%.

I'm curious to how the ROSCO sector slashed costs, took a huge 25% hit on their income, but still managed to pay out a dividends of that magnitude.

Someone with more financial knowledge is going to have to explain that to me I'm afraid...!

I suppose this can't just be seen in the context of the UK market, these are international businesses supplying other entities/countries, which adds further complexity.

 

[43066]

Thanks for sharing, interesting read, and ORR have since revised their figures from where the article originates, but there's some other information not as well broadcast in that report.





I'm curious to how the ROSCO sector slashed costs, took a huge 25% hit on their income, but still managed to pay out a dividends of that magnitude.

Someone with more financial knowledge is going to have to explain that to me I'm afraid...!

I suppose this can't just be seen in the context of the UK market, these are international businesses supplying other entities/countries, which adds further complexity.

I’m not an accountant either (nowhere near good enough at maths!), but the article I’ve linked to above, and seemingly the report you’re referencing (although I’m not sure it’s been quoted in the thread) seem to disprove your earlier statement that ROSCOs earn similar net profit margins to TOCs.

Would you agree?

The dividend point can AIUI be explained by legally needing sufficient distributable reserves, and there are various accounting tricks to achieve that. There’s a reason why large financial institutions got involved in this market historically; namely large returns for minimal commercial risk.

 

[JLH4AC]

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.

Because as TFL has found with its class 378s it is cheaper and less risky for the TOCs to own and maintain their own rolling stock. ROSCOs have not found a mythic way of making managing and maintaining train fleets cheaper, their profit margins are solely due to the ROSCOs changing more than their costs (Which are similar to what it would cost the TOCs if they did everything in house.) thus TOCs can save money by cutting out the middlemen. ROSCOs only somewhat make sense for freight operators as demand for their services changes regularly so ROSCOS can in theory be helpful for their operations.

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

Most new car dealerships are franchises as it reduces the risk to the car manufacturers but as the European Commission has determined that the franchise agreements that prohibit dealers from carrying multiple car brands were anti-competitive, car manufacturers are starting to sell cars directly to customers

ROSCOs also deal with things like planning and designing refurbishments, overhauls, sourcing parts, dealing with safety investigations/recommendations, insurance, consultancy etc.

Nothing is stopping GBR from forming an internal division/subsidiary to carry out those tasks or merging nationalised ROSCOs into itself.

 

[43066]

I suppose this can't just be seen in the context of the UK market, these are international businesses supplying other entities/countries, which adds further complexity.

Again - respectfully this is incorrect. The ultimate owning groups might be international, but the profits being discussed are being earned on UK income by UK incorporated private limited companies (just as the original ROSCOs were upon privatisation of BR).

The dividends will be paid abroad of course.

 

[Clarence Yard]

It does get complicated because the ROSCOs are not just into rolling stock leasing so their profit is not just derived from what we see running in the UK.

Having looked closely at the ROSCOs books, I think the ORR analysis is flawed but it does show that scrapping older stock without replacement reduces rentals but frees up maintenance provisions, which can be returned to the P&L. Sometimes it goes to reserves, sometimes to acquire other businesses and sometimes to return value to shareholders. There is no prevalent trend.

I, as a former BR Area Finance Manager who had rolling stock on his books, would not like to be saddled with having to pay for the heavy maintenance of stock right now. The costs can be huge and very peaky, which leads to funding issues. Imagine if you had 80x units on your books with all their issues to pay for, even if you tried to get money back later. The cash flow implications would be enormous, whether you are in the public sector or not.

 

[43066]

It does get complicated because the ROSCOs are not just into rolling stock leasing so their profit is not just derived from what we see running in the UK.

Having looked closely at the ROSCOs books, I think the ORR analysis is flawed but it does show that scrapping older stock without replacement reduces rentals but frees up maintenance provisions, which can be returned to the P&L. Sometimes it goes to reserves, sometimes to acquire other businesses and sometimes to return value to shareholders. There is no prevalent trend.

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.