renegademaster
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The silly thing is the goverment could just borrow from the bank of england for much cheaper forever if it wanted too, but that goes on a different column on the spreadsheets
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ROSCOs and nationalisation: any ideas?
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Who provides the funding the Bank of England needs to lend money to the government?
Yeah can't disagree. The sad reality is though is we didn't get into these type of ROSCO private deals in the first place the hole probably wouldn't exist right now.
Obviously we'd never know but it'd be interesting to see how much we're wasting on private companies for assets we've bought; PFI, private toll roads, train fleets and so on. Bet it all adds up and we've been borrowing for years to fill gap so we're no further forward anyway. Right old mess.
Personally I wish we'd have long term thinking when it comes to financing in the UK. Not which one wins the next election. Obviously a different thread this though.
We have already been there. The Bank of England bought more than £800bn of UK government bonds in quantitative easing between the 2008 financial crisis and 2020. It was only possible to do that while competitor economies were doing it too, notably the USA and the EU. The UK trying it on its own would just lead to inflation and a depreciating currency.
renegademaster
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Itself when it creates money, indirectly the whole population when their money is worth slightly less. The thing you do have to consider when leaning on this kind of revenue raising is that while it is cheaper is hurts people who have more of their assets in cash.
Either way people loose purchasing power via inflation or higher tax everytime a pound is spent. The only way to avoid that is not spend anything but if you have to spend ideally it should be done with the least ammount of middleman taking their bits off the top of possible.
The way out is economic growth. I suggest that you take a long look at this.
OBR fiscal risks and sustainability report
Various recent discussions have touched upon the state of the UK public finances, in relation to matters such as pensioners' winter fuel allowance, public sector pay, and public funds available for investment in transport infrastructure. Today the Office for Budget Responsibility has published...
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renegademaster
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Which preferencing expensive borrowing over cheaper borrowing will impede
Getting back to this topic, one of the railway's great recent successes was renewing large parts of the rolling stock fleet in the aftermath of the 2008 financial crisis, when the ROSCOs could get plentiful cheap long term finance.
Buying in that rolling stock from the ROSCOs now would be exchanging leasing contracts financed and priced on low long term interest rates that applied when the rolling stock was new, for new borrowing at much higher interest rates.
I can't see that making any financial sense.
renegademaster
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I agree that buying out the contracts would probally be more expensive than its worth, but my point is more for any future purchases, their shouldnt be any resorting to funnelling off money to middleman so you can game the budget reports.
If you privately borrow £1000, keep a strict balanced budget ,thats £1100 in tax you got to take in when you account for interest. If you print £1000, and want to avoid inflation , you only have to take £1000 via tax to keep the net money increase to 0.
But if the economy grows it generates the tax that pays the interest, without needing to increase tax rates.
renegademaster
Established Member
You dont have to give 5% of that growth to HSBC the 2nd way
Borrowing on the government balance sheet isn't free, there are costs for the Debt Management Office and the Gilt Edged Market Makers.
What matters is the overall costs of different ways of financing the asset, and different risks.
Even if leasing has a higher estimated cost than borrowing, that might be regarded as a good deal if it reduces financial risk.
Look at it also from the perspective of the investors, which are likely to be the same organisations irrespective of the method of financing. They will have different risk profiles for investment in a ROSCO, where the risk is confined to the trains and their financing, and investment in gilts, where they are exposed to future trends in government financing as a whole. And they will have read the OBR's financial risks and sustainability report!
None of this is done with certainty: it all involves assumptions on future movements, over many years, in economic growth, inflation and interest rates. It can't be boiled down to fees to financial intermediaries which is just one part of the cost.
Surely it does if it can buy new trains rather than extend current leases - ie LNWR and the 350s
Ask Liz Truss
If they hadn't been funded by the private sector how many of those assets would have been bought at all?
In a previous issue of Modern Rail Walmsley said that when he was at Cardiff Canton they didn't have enough 150s to replace all the first generation units. The huge savings on maintenance etc made getting more 150s financially sensible but there was no government money available - but now the TOC would just ring a ROSCO and order them.
Clarence Yard
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I was referring to existing stock, not new build. New build is sometimes cheaper, especially when finance rates are low but the displaced stock doesn’t get offered onto others at discounted rates.
If GBR want to use the displaced stock, they will have to pay the market rate or it will tend to just sit there.
Liz Truss was borrowing for tax cuts though, very different scenario, and an absolutely stupid one aswell.
Can't really answer the second bit though as the point was doing a totally different funding system outright so you could in theory buy as much as you want. It's all hypothetical and assuming they actually wanted to invest in a train fleet.
Thats debateable but the issue was that the markets didn’t see how it would be paid back. If you massively increased borrowing the markets will want to see the tax rises to cover it…..and that wont get you re-elected.
A government can not borrow however much it wants (except for the Yanks as long as the dollar is the worlds major trading and reserve currency).
Sorry been busy so didn't see this. We wouldn't need tax rises to cover this though as the tax money is already available, instead we're just spending more of it to ROSCO's instead. It would be neutral in terms of tax, heck we'd be better off as we wouldn't be paying for trains which are already paid off. Any market would be able to see that. Borrowing for tax cuts is a total different kettle of fish though as trickle down economics in that sense is just loony territory and the markets reacted rightfully so imo.
That was in terms of train investment btw (not everything).
In the ongoing HoL debate on the Passenger Railway Services bill Lord Sikka is pushing hard the idea of not “buying out” the existing ROSCOs per se, but rather simply having the government create a new publicly-run train leasing company to handle future new fleet requirements.
Couple that with the fact that we’ve finally gotten inflation back down now, it should be a no brainer!!
As a former central banker Rachel Reeves would know that, but there is an ideological element of being seen as “too socialist” and “spooking the markets” to contend with (screw the markets, if you were to ask me!)
Not necessarily - the strongest contributing factor in the link between BoE increasing money supply and inflation is how quickly the new money makes its way into the hands of consumers. By that measure, long-term capital-intensive investments such as new train purchases (or any transport infrastructure project for that matter) are exactly the kind of thing we should be using QE for.
Couple that with the fact that we’ve finally gotten inflation back down now, it should be a no brainer!!
As a former central banker Rachel Reeves would know that, but there is an ideological element of being seen as “too socialist” and “spooking the markets” to contend with (screw the markets, if you were to ask me!)
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Why is having the debt on the public books, at a lower cost as we can borrow money at lower rates than private companies (and there isn't a chunk of profit being taken out of it) a bad thing exactly?
Financial analysts are clever enough to see through the simplistic ruse that is being pulled.
Bumping up the national debt tends to push up the interest rates paid on the gilts funding it. As that interest is paid on the whole pile it could get very expensive.
The usually higher costs of private borrowing are also a function of the risks being priced in. Going via a ROSCO limits liability unlike the government doing it directly.
It works the other way round because the government already has debt roughly equal to a year of GDP. The UK is in debt up to its ears and can't afford to upset those who have lent it the money. The markets can screw the UK very effectively, through demanding higher interest rates on the debt, but the UK can't screw the markets at all. Have you learned nothing from Truss and Kwarteng?
Government debt now is more expensive than private sector debt was when the leases were signed. Moving that onto the public books now would cost more not less.
That may be true, but is it more expensive than the rates that are currently being paid on the debt, I find it very unlikely that in the long-term Private sector debt averages out to be less expensive.
I struggle to believe that leading global finaiciers are so easily hoodwinked by such a transparent scheme.
The main risk I can see is trains not being used/needed. Whilst in theory it may be possible to not renew a contract for trains, we've seen very few occurrences of that over the course of privatisation for stock that was not at or near the end of its life. The only fleet at any scale I can think of are the Mk5's. Even then, with a more permissive contractual environment, off the top of my head I could easily see them doing sterling service elsewhere on the network, perhaps strengthening XC 170 routes, or working Liverpool-Norwich.
The idea of "train options" might sound good in theory, but unless there is a large amount of additional stock sitting around, I don't think it's really all that valuable for the UK market.
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UK government 10 year debt is now over 4%, with longer maturities higher still. Much of the UK rolling stock fleet was built in the 2010s, when ROSCOs would have been able to borrow more cheaply than that. The UK government will only be able to finance more cheaply than those ROSCO deals if interest rates on UK long term debt fall a long way.
At the same time the ROSCO's paid dividends of £400m last year though with a 41.6% net profit margin, Source: https://www.theguardian.com/busines...-private-train-leasing-firms-treble-in-a-year
That's a lot of 'interest' being paid out to fund the ROSCO's, ignoring salaries etc.
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Are you certain that the ROSCOS could have got a fix-rate on the finance, across multiple decades?
Clarence Yard
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You have to look at where all the profit comes from. Some of it is returning provisions from the balance sheet into the P&L, some of it comes from non passenger rolling stock activities. I still can’t reconcile the ROSCO annual accounts with some of the ORR figures (and I am a former BR Area Finance Manager!) so I wouldn’t be too sure that they have been making super profits on their passenger leasing activities.
One of the problems at the moment is that these companies are finding it hard to invest their funds. They have been buying businesses as opportunities arise but the lack of new rolling stock orders isn’t helping them. That means they can return spare funds to investors in the form of dividends.
Finally, don’t always assume that borrowing is always cheaper via the Treasury. One of the biggest complaints by my finance predecessors at BRB level was that it was often cheaper for them to finance directly through the markets but in the 1970’s and 1980’s they were banned from doing so. They had to pay the Treasury rates.
Yes. Various financial institutions, especially pension funds, want long term fixed rate financial assets to match the long term maturity profile of their liabilities. For example, Angel is part owned by a Canadian pension fund.
Okay, could you provide the interest rates that are being paid on certain rail contracts? Perhaps an order of Desiros?
Of course not, that's a matter for the lessor and the lessee and is commercially sensitive.
But we do know that, in 2016, the UK issued a 30 year gilt at 1.5%, and in 2017 a 40 year gilt at 1.75%. A rolling stock lessee could be paying a massive premium above that, and still be significantly cheaper than the government borrowing 30 or 40 year money now at more than 4%.
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