The Future Of ROSCO's

[DB]

well that would be normal - you depreciate the asset and replace it when it’s knackered.

Sort of, but you are assuming that something remains on one route for all that time, then is scrapped. That's never how the railways have worked in this country - older stock has always been cascaded onto less significant routes. In the case of East Anglia, the 90s were about 15 years old when cascaded there from the WCML - that's a perfectly sensible type of cascasde. A fair proportion of the stock was not much older (all FOs and DVTs). The TSOs were older, but they are only carriages so no significant reliability issues with them. Once initial problems were sorted that was one of the most reliable fleets in the country, so not sure where you get 'ECML's unreliable rejects' from (they were actuall WCML, btw).

 

[Domh245]

I can't actually think of many examples where that applies in practice. Pendolinos, perhaps. Shorter IEP vehicle-lengths for midland mainline, possibly - but even then those lengths are only what's been normal up until the IEPs appeared. Can't immediately think of anything else.

Taking Rock rail as the example of "new entrant with sticky leases" they've got:
717s: non-standard, anything else would require end doors and wouldn't represent any capacity gain
810s: non-standard AT300, too powerful on diesel (read, expensive to run) for most other IC TOCs, and too short compared to other AT300s. Can't really be cascaded to other franchises (XC) without building a whole load more of them (which is possibly more of a win for Rock), nor replaced on EMR for any real gain by an EMU compared to just removing the engines
701s: Full fleet of 200m (or 100m) units, no capacity benefits in replacing them as they're again maximised out on infrastructure constraints effectively locking them in at SWR. No chance of returning part of the fleet and replacing with new either (WMR style) as they're a) one ROSCO b) standard
IEP(W): Mandated for use by GW franchise and successors for 30 odd years!
745: No demand elsewhere for a 240m 25kV semi-IC spec EMU (nobody else can take it), and also the 'goldilocks' situation of just the right amount of units on GA (together with the bimodes) to make their replacement highly unlikely - there'd be no capacity improvements and you'd end up with a less standard fleet
755: goldilocks'ed in with the 745s, but would realistically be quite attractive to just about any operator in the UK
West Coast AT300s: Relatively standard, especially the 805s although here at least there's always going to be a market for the ICWC diesel routes and a Hitachi bi-mode is as good as locked in on that until the next generation of intercity trains is introduced (30 odd years away), HS2 won't be operating them. 807s probably the least-sticky of all their fleets

Some are stickier than others, the 717s for example are absolutely going nowhere, whilst other fleets are a bit less sticky but are unlikely to leave that franchise because any replacement (whilst technically possible) would present no benefit over the current fleet. Not impossible, but highly unlikely

 

[edwin_m]

Perhaps a Rosco with it's business head on and crystal ball fired up would have looked at the 17039x batch and ordered a batch of 17239x similarly. There would be any number of scenarios where they would have been deployed on leases which went from short, to medium, to long, to pretty damn permanent.
Cumbrian Coast
Fife
Chiltern
Chiltern slam door replacement
Etc
Etc
Etc

I cannot recall a single series built DMU that was withdrawn from use for lack of work, the nearest probably being the 151s which were seriously non standard anyway. What about those 150/0s still soldiering on.


So yes I think the Roscos missed a trick

That was about the same time that the government was going to buy DMUs itself, possibly to set itself up as a competitor to the "marked dominant" ROSCOs.

If you go back far enough, some of the first generation DMUs were retired early - the Derby Lightweights and various non-standard types, presumably because Beeching cuts made them redundant.

 

[js1000]

They won't disappear unless the government decides to buy them out, which will effectively mean striking a deal to put a price on all the rolling stock they own. I can't see the government spending money on that right now, despite DfT's past objections to ROSCOs. When the Competition Commission looked into that they found most of the problems were due to the franchising system, so maybe will disappear with that being abolished.

The government could decided to buy rolling stock itself rather than leasing, as Scotland has sort of done, so that the ROSCOs' roles gradually diminished as older fleets were withdrawn. But they'd still be with us for several decades.

The government would be better spending money on investing in new rolling stock directly over the next 10-20 years. I do think there is a problem with being totally reliant on ROSCOs from a taxpayer's perspective so there is an incentive to have a small surplus of stock which should bring down the cost of leasing rolling stock.

 

[ZL exile]

The concession model, with DfT specified service plans gives the ideal opportunity to get some improved degree of common body design and electrical control systems to allow multiple working and easier rescue on times of failure. But that would need common sense amongst the civil service....
It could also give a UK jobs boost if the delivery plans were to be co-ordinated with sensible phasing, rather than boom and bust amongst the TOC’s. But would we need the ROSCO’s to fund this? Possibly not with a well defined and properly funded build, lease and repair contract in place.

 

[DB]

But would we need the ROSCO’s to fund this? Possibly not with a well defined and properly funded build, lease and repair contract in place.

But all that's effectively doing is making the manufacturers into de facto ROSCOs - what's the benefit? Some manufacturers may not want or be able to do this (thereby reducing the already fairly small pool who are interested in providing UK-spec stock), and financially it's not likely to cost any less.

 

[43096]

Doesn’t the book value of the asset reflect the price paid for it as part of the business?
Assuming you are correct (I am no accountant) the ROSCO has not made huge cash profits for it’s owners if they have effectively paid a true market price for buying the right to lease that asset (which the initial ROSCO owners didn’t, but later buyouts presumably did)

The book value of the asset is just that - a book value. I'll try and construct an example...

Say there is a leasing business that only owns one train, that it bought for £5million 5 years ago. When it buys the train it will hold it as an asset and will write the cost off (depreciation) to its Profit & Loss account (to match the income from leasing it out) over a number of years that reflects the asset's useful life - let's say it is 25 years (to keep the numbers easy). So the company will take £200k as a cost on its P&L every year.

So, after 5 years, the book value will be £4 million (original £5 million, less 5 x £200k).

Say we bid to take over the company, but we know that the train is only leased out for a total of 8 years (so has 3 years to go at this point). Now, it might get re-leased, or it might not. If you're buying the company, you might think there is a risk that it doesn't get re-leased - would you still pay the full £4 million of the train?

Now, say we are successful and buy the company for £3 million. The train still has a book value of £4 million when you buy the company, the difference of £1 million reflects the risks we think there are. If we are not successful in re-leasing it, then we have a train that still has a book value of £3.4million (another three years depreciation) - we then may have to take a loss of £3.4million if we cannot get another lease or sell it as it is effectively worthless to us.

 

[Meerkat]

The book value of the asset is just that - a book value. I'll try and construct an example...

Say there is a leasing business that only owns one train, that it bought for £5million 5 years ago. When it buys the train it will hold it as an asset and will write the cost off (depreciation) to its Profit & Loss account (to match the income from leasing it out) over a number of years that reflects the asset's useful life - let's say it is 25 years (to keep the numbers easy). So the company will take £200k as a cost on its P&L every year.

So, after 5 years, the book value will be £4 million (original £5 million, less 5 x £200k).

Say we bid to take over the company, but we know that the train is only leased out for a total of 8 years (so has 3 years to go at this point). Now, it might get re-leased, or it might not. If you're buying the company, you might think there is a risk that it doesn't get re-leased - would you still pay the full £4 million of the train?

Now, say we are successful and buy the company for £3 million. The train still has a book value of £4 million when you buy the company, the difference of £1 million reflects the risks we think there are. If we are not successful in re-leasing it, then we have a train that still has a book value of £3.4million (another three years depreciation) - we then may have to take a loss of £3.4million if we cannot get another lease or sell it as it is effectively worthless to us.

Ok thanks, but that’s book profits, not cash profit as the man in the street would see it.
Only the first owners of the ROSCOs made unusually high profits on the Pacers (unless they, or later owners sold the business too cheaply as well)

 

[Clarence Yard]

How do you know they made unusually high profits on the Pacers?

 

[43096]

Ok thanks, but that’s book profits, not cash profit as the man in the street would see it.
Only the first owners of the ROSCOs made unusually high profits on the Pacers (unless they, or later owners sold the business too cheaply as well)

The man in the street is wrong! It's the fundamentals of not understanding that the value of the assets a business owns is totally different to the value of that business as a whole. The owners of the ROSCOs did not buy directly the Pacers for cash - BR did. The owners of the ROSCOs bought a business.

How do you know they made unusually high profits on the Pacers?

They don't. There is a fundamental lack of understanding, which re-surfaces every time this issue is discussed.

 

[racyrich]

I have a question.

VAT

Is it payable on rolling stock leases?

Rail tickets are zero-rated. I wonder if the new concessions are VATable. If they are, DfT is going to lose some money and the ToCs are going to gain some.

 

[Meerkat]

The man in the street is wrong! It's the fundamentals of not understanding that the value of the assets a business owns is totally different to the value of that business as a whole. The owners of the ROSCOs did not buy directly the Pacers for cash - BR did. The owners of the ROSCOs bought a business.

whilst I am sure you are factually correct it doesn’t answer the point.
The initial owners got the ROSCOs cheap at privatisation. They therefore were making tidy return on leasing those Pacers (which they effectively bought cheaply). They then made large profits by selling the businesses on - those people wouldn’t have got such a tidy return on the Pacers as they paid more for them

 

[Philip Phlopp]

whilst I am sure you are factually correct it doesn’t answer the point.
The initial owners got the ROSCOs cheap at privatisation. They therefore were making tidy return on leasing those Pacers (which they effectively bought cheaply). They then made large profits by selling the businesses on - those people wouldn’t have got such a tidy return on the Pacers as they paid more for them

Did they though - borrowing money was considerably more expensive at privatisation and there was the replacement of slam-door stock around the network which took significant capital.

 

[Clarence Yard]

whilst I am sure you are factually correct it doesn’t answer the point.
The initial owners got the ROSCOs cheap at privatisation. They therefore were making tidy return on leasing those Pacers (which they effectively bought cheaply). They then made large profits by selling the businesses on - those people wouldn’t have got such a tidy return on the Pacers as they paid more for them

How do you know that? Do you know what the book value was, the life expectancy of the fleet or how much work was estimated to take place over the lifetime to maintain capital value? Do you know the depreciation or recapitalization policy of the ROSCO?

I'll give you a clue on Pacers - they had the same book life expectancy as other BR DMU's, so that is a lot of cost that had to be estimated for them over their years.

When you buy a company the book value of the assets from the sellers point of view is the easy bit. Working out what you are going to have to spend over the next few years on those assets and deducting the net cost (after recoveries) of that from the asset value of the company is the hard bit.

A good example of how this goes is the "sale" of council house stock to housing associations (in my case to a tenant led co-op). The book value is X, the cost of work to be done over a period of time (say 30 years) is Y and the gross rents will be Z. So the sale price was X+Z-Y, a relatively small sum compared to the asset value and the Government took a very large cut of those proceeds, but not quite as much as they did with the ROSCOs!

 

[Meerkat]

I guess I am basing this mainly on the sweet profits made when the ROSCOs were first sold on!

 

[Clarence Yard]

You may be looking at apples and pears. You need to know both sets of asset values and assumptions about future costs, including the funding requirements going forward.

ROSCOs and other similarly asset rich leasing companies are attractive to the financial sector because of the financial "gaming" that can be carried out through ownership whilst still being able to maintain a reliable and steady income. They really aren't financial structures that the public sector could (or should) dabble in.

 

[WatcherZero]

The best analogy is Bonds, they have a value based on their redemption value (if any) and a fixed annual interest payment. Their value will be decreasing annually as they get closer to their redemption date as there will be fewer years where interest is paid to the owner remaining, but that value can fluctuate due to the change in attractiveness of the investment (e.g. if theres low central bank interest rates and a lot of cash in the system with not many places to park it they become more financially attractive and their price increase, conversely if theres a high central bank interest rate and theres investments with a better return out there their value will fall)

 

[43096]

I guess I am basing this mainly on the sweet profits made when the ROSCOs were first sold on!

They bought and sold a business. That's totally unrelated and different to what profit they made (or didn't!) on leasing Pacers. As I have already said, a business - indeed anything - is only worth what someone is prepared to pay for it. Presumably the original sale of the ROSCOs was to the highest bidders. That they sold them on for a profit a few years later reflects changes to the risks and opportunities involved - back at the time of original sale rail wasn't seen as a growth industry and there was also a threat of re-nationalisation from John Prescott when Labour was in opposition.

 

[Meerkat]

They bought and sold a business. That's totally unrelated and different to what profit they made (or didn't!) on leasing Pacers. As I have already said, a business - indeed anything - is only worth what someone is prepared to pay for it. Presumably the original sale of the ROSCOs was to the highest bidders. That they sold them on for a profit a few years later reflects changes to the risks and opportunities involved - back at the time of original sale rail wasn't seen as a growth industry and there was also a threat of re-nationalisation from John Prescott when Labour was in opposition.

You are being very obtuse seeing as the business they bought sold was all about leasing Pacers (et al)!

 

[43096]

You are being very obtuse seeing as the business they bought sold was all about leasing Pacers (et al)!

One of the ROSCOs doesn't lease Pacers, and never has!

I'm not being obtuse - I'm telling you how it is. I can explain it as many times as you like, but I can't understand it for you.

 

[edwin_m]

They bought and sold a business. That's totally unrelated and different to what profit they made (or didn't!) on leasing Pacers. As I have already said, a business - indeed anything - is only worth what someone is prepared to pay for it. Presumably the original sale of the ROSCOs was to the highest bidders. That they sold them on for a profit a few years later reflects changes to the risks and opportunities involved - back at the time of original sale rail wasn't seen as a growth industry and there was also a threat of re-nationalisation from John Prescott when Labour was in opposition.

When setting the price to ask or offer, the people selling and buying the business would have factored in their expectation of the future profit. This would include their view of how much they could make by using the skilled workforce in future deals, but also of how much they expected to make from each owned fleet including Pacers. So although there is no direct connection between those figures, once does influence the other.

 

[43096]

When setting the price to ask or offer, the people selling and buying the business would have factored in their expectation of the future profit. This would include their view of how much they could make by using the skilled workforce in future deals, but also of how much they expected to make from each owned fleet including Pacers. So although there is no direct connection between those figures, once does influence the other.

Indeed, but you can't say how much was "on Pacers" when they sold the business. They were a small fraction of the overall fleets and indeed other parts such as maintenance services.

 

[edwin_m]

Indeed, but you can't say how much was "on Pacers" when they sold the business. They were a small fraction of the overall fleets and indeed other parts such as maintenance services.

Most likely both the sellers and the buyers would have quantified the amount and probability of the future opportunities and risks associated with each asset owned and activity undertaken. The price set or offered would depend on the total of all those items. So figures do exist, but are commercially confidential so we will never see them unless we happen to be an employee with access to them. Also the seller and each potential buyer will have their own set of figures for the same transaction, which will differ as they ultimately depend on judgment.

 

[Bevan Price]

I am sure the ROSCOs will stay but hopefully now they can work together with the government for a long term traction plan which includes sensible replacement plans, cost effective improvements, reduced micro fleets and good value for UK plc as well as sensible returns for the ROSCOs

Or is common sense and logic too much to ask?

Common Sense -- Logic --- DfT.
Are those things compatible ???

 

[tbtc]

I think they're are a number of things being (deliberately?) confused here - much like the way that people conflate "revenue" and "profit" when complaining about the amount of tax that big business pays.

ROSCOs purchased trains from BR in the 1990s at whatever the price the Government set...

...some of those trains would have been at relatively low prices because the expected life of those trains was fairly limited - e.g. if a brand new carriage has a value of £1,000,000 and is expected to last for thirty/forty years then an old carriage may only have a value of £100,000 (since it was only expected to be leased for a tenth of the time)...

...but there's no necessary guarantee that the price that the ROSCO paid and the money that the ROSCO got from TOCs over the years will be the same. Nor is there any expectation that they'll stop charging money once they've made their initial investment back.

For example, if a Landlord buys a £100,000 house and rents it out at £5,000pa, they'll keep renting it out even after twenty years when they've recouped the £100,000.

But similarly, if £5,000 is the market rate for renting that kind of house, then it wouldn't matter whether the Landlord had paid a quid for the house or a million quid for the house - the "income" from that "asset" isn't related to what you paid for it - the ROSCO can only charge what the market is willing to pay.

I'm sure that the Pacers will have been relatively cheap (although the ROSCOs did pay something for them) because they weren't expected to last long - built on the cheap in British Rail days as a temporary measure - Pacers weren't expected to last into the 2020s...

...so if the ROSCO has had twenty five years of revenue from them rather than ten years then that's the Government's fault (since you wouldn't expect TOCs to order brand new stock for such heavily subsidised lines without Government backing) - if you want to blame anyone then blame the 2001 Labour Government who had plenty chance to effectively eliminate Pacers when they held the purse strings for the 2004 Northern and Wales & Borders franchises. If the Government didn't insist on Pacer replacement then the "no growth" TOCs weren't going to speculatively order brand new trains for the loss making routes - of course the ROSCOs are going to keep leasing their trains. Naive to think otherwise.

 

[edwin_m]

I think they're are a number of things being (deliberately?) confused here - much like the way that people conflate "revenue" and "profit" when complaining about the amount of tax that big business pays.

ROSCOs purchased trains from BR in the 1990s at whatever the price the Government set...

...some of those trains would have been at relatively low prices because the expected life of those trains was fairly limited - e.g. if a brand new carriage has a value of £1,000,000 and is expected to last for thirty/forty years then an old carriage may only have a value of £100,000 (since it was only expected to be leased for a tenth of the time)...

...but there's no necessary guarantee that the price that the ROSCO paid and the money that the ROSCO got from TOCs over the years will be the same. Nor is there any expectation that they'll stop charging money once they've made their initial investment back.

For example, if a Landlord buys a £100,000 house and rents it out at £5,000pa, they'll keep renting it out even after twenty years when they've recouped the £100,000.

But similarly, if £5,000 is the market rate for renting that kind of house, then it wouldn't matter whether the Landlord had paid a quid for the house or a million quid for the house - the "income" from that "asset" isn't related to what you paid for it - the ROSCO can only charge what the market is willing to pay.

I'm sure that the Pacers will have been relatively cheap (although the ROSCOs did pay something for them) because they weren't expected to last long - built on the cheap in British Rail days as a temporary measure - Pacers weren't expected to last into the 2020s...

...so if the ROSCO has had twenty five years of revenue from them rather than ten years then that's the Government's fault (since you wouldn't expect TOCs to order brand new stock for such heavily subsidised lines without Government backing) - if you want to blame anyone then blame the 2001 Labour Government who had plenty chance to effectively eliminate Pacers when they held the purse strings for the 2004 Northern and Wales & Borders franchises. If the Government didn't insist on Pacer replacement then the "no growth" TOCs weren't going to speculatively order brand new trains for the loss making routes - of course the ROSCOs are going to keep leasing their trains. Naive to think otherwise.

The same logic applies to the initial sale as to the subsequent sales. The companies were sold, not the trains, and the Government got what someone was prepared to pay for them. This was probably much less than the total value of the trains by any valuation, partly because Labour was promising at the time to renationalize them and partly because buyers probably perceived various other risks that might make it more difficult to lease the trains in future. However they probably also saw the opportunity of being able to sell the business on for a much higher figure after a couple of years...

 

[LNW-GW Joint]

Initially the government guaranteed lease contracts for the first franchise term, except where complete replacement was contracted (Virgin WC/XC, LTS etc).
Later there were still some Section 54 guarantee agreements, and there are still a few left - WMT's 350/2s for instance.
But mostly it's down to ROSCO risk now, particularly with the big EMU fleets.
Some fleets, like 350/2, were also bought by ROSCOs pre-financial crash at what are now inflated prices compared to new builds with cheap finance.
The ROSCOs are left to pick up the bill for that.
There are also now many different train leasing models, and it's very far from the cosy 3-firm cartel it was in 1996, with healthy market competition.
It remains to be seen how it plays out with HS2 stock, the next big government-led procurement.

 

[Clarence Yard]

I'm sure that the Pacers will have been relatively cheap (although the ROSCOs did pay something for them) because they weren't expected to last long - built on the cheap in British Rail days as a temporary measure - Pacers weren't expected to last into the 2020s...

...so if the ROSCO has had twenty five years of revenue from them rather than ten years.....

That’s modern mythology. Pacers were not bought as a temporary stop gap and had the same BR book life as their other DMU’s. They were expected, by BR, to last a lot longer than 10 years!

 

[317 forever]

With some newer post-privatisation stock owned by other companies than the original ROSCOs, I wonder how many ROSCOs effectively provide stock for the TOCs now?

 

[supervc-10]

I think they're are a number of things being (deliberately?) confused here - much like the way that people conflate "revenue" and "profit" when complaining about the amount of tax that big business pays.

ROSCOs purchased trains from BR in the 1990s at whatever the price the Government set...

...some of those trains would have been at relatively low prices because the expected life of those trains was fairly limited - e.g. if a brand new carriage has a value of £1,000,000 and is expected to last for thirty/forty years then an old carriage may only have a value of £100,000 (since it was only expected to be leased for a tenth of the time)...

...but there's no necessary guarantee that the price that the ROSCO paid and the money that the ROSCO got from TOCs over the years will be the same. Nor is there any expectation that they'll stop charging money once they've made their initial investment back.

For example, if a Landlord buys a £100,000 house and rents it out at £5,000pa, they'll keep renting it out even after twenty years when they've recouped the £100,000.

But similarly, if £5,000 is the market rate for renting that kind of house, then it wouldn't matter whether the Landlord had paid a quid for the house or a million quid for the house - the "income" from that "asset" isn't related to what you paid for it - the ROSCO can only charge what the market is willing to pay.

I'm sure that the Pacers will have been relatively cheap (although the ROSCOs did pay something for them) because they weren't expected to last long - built on the cheap in British Rail days as a temporary measure - Pacers weren't expected to last into the 2020s...

...so if the ROSCO has had twenty five years of revenue from them rather than ten years then that's the Government's fault (since you wouldn't expect TOCs to order brand new stock for such heavily subsidised lines without Government backing) - if you want to blame anyone then blame the 2001 Labour Government who had plenty chance to effectively eliminate Pacers when they held the purse strings for the 2004 Northern and Wales & Borders franchises. If the Government didn't insist on Pacer replacement then the "no growth" TOCs weren't going to speculatively order brand new trains for the loss making routes - of course the ROSCOs are going to keep leasing their trains. Naive to think otherwise.

The big difference though with housing is that many houses are basically indefinite assets if looked after, and house prices keep increasing. My house was built in 2016, but my parents' was built in 1810. The landlord who buys a house for £100,000, rents it out for 5 years, can then sell it for £115,000. The ROSCO who buys a train for £5 million, leases it out, and 5 years down the line the train might be worth, say £4 million.

However- your point still stands. The ROSCOs bought the business from the government, including the Pacers. They then proceeded to do exactly what any good business should do- make the most of their assets.

Let's also remember that the ROSCOs do take on risk- think about the 350/2s, which despite being excellent units with many years left, are currently without a future.