Train Leasing Profits Treble, £400,000,000 dividends

[geoffk]

If and when Labour come to power, how should they approach the financing of rolling stock, bearing in mind that leasing is common on railways throughout Europe and beyond?

 

[Meerkat]

I’m glad this is finally making waves in the media, the existence of the parasitic ROSCO’s often over-charging for cheaply inherited assets is one of the great scandals of privatisation. We could all quite easily do without the ROSCO’s. They do seem to be declining somewhat though, so perhaps this money can be better utilised in the future.

Weren’t the assets bought cheaply because Labour spiked the market with their promise to renationalise?

Like with most of the other 80/90s financial and political "innovations" - the state managed to do it perfectly well before, but apparently we can never return to that.

Did the state manage perfectly before - sure I have read plenty of tales of truncated orders, undersized fleets, and old fleets staggering on because the Treasury didn’t have money to give the railway however good the business case.

Are the stated profits of the leasing companies purely from UK rail leasing?

 

[Efini92]

To quote the ORR document that the stats have come from https://dataportal.orr.gov.uk/media/algdbizg/rail-industry-finance-uk-statistical-release-202223.pdf




And for comparison the same section from the 2021-22 version of the report


So it roughly looks like ROSCO dividends were £200m before covid, 100m for the a few years in covid and jumped to 400m in 22/23, which may have been partially to compensate for the covid years. And it appears as if they have managed to hugely cut costs in the last year, or maybe costs were unusally high in 17/18. If you were keen and bored you could go and dig through the various company accounts on Companies House website.

Tbh I think the bigger story might be Network Rail spending £4.1bn on interest in the same period.

17/18 was about the time all the BR fleets were upgraded to have CET toilets. Could that be the reason why cost were so high?

 

[Irascible]

Nothing wrong with making a profit.

So I'm to believe my tax cash pouring into someone's dividends is in the national interest? I'll accept some of my cash going to shareholders when I pay a fare. Private dividends in a system propped up by public subsidy is straight up corruption, it's just been normalised.

HMT's role is to critically challenge expenditure and, self-evidently, ensure that budgets aren't exceeded.

That would surely really be the NAO - maybe if the two of them worked together they'd keep each other's delusions of grandeur in check & we'd have a slightly more functional system.

 

[Krokodil]

On ownership, the government doesn't own commercial ships, buses or aircraft, so why should it own trains?

Does the Scottish Government not own a few dozen ferries? Do Plymouth City Council and Cornwall County Council not own the Torpoint ferries?

 

[baza585]

If the Scottish Government ferry procurement is anything to go by, perhaps the Rosco's aren't such a bad thing.........

 

[Wolfie]

That would surely really be the NAO - maybe if the two of them worked together they'd keep each other's delusions of grandeur in check & we'd have a slightly more functional system.

HMT is the UK Government's finance ministry. Such a ministry obviously has a scrutiny and monitoring role. The NAO reports to Parliament on the efficiency and propriety of expenditure after the event. Very different roles.

 

[Snow1964]

Weren’t the assets bought cheaply because Labour spiked the market with their promise to renationalise?

The original ROSCOs were given the BR owned rolling stock for free.

There were equivalence values (so they would not be incentivised to not buy newer trains), but there was lack of thought on handing it back to a Government pool for reissue to new ROSCO later, or allowing them to be spot hired if there was short term shortage.

Most of the ex BR fleets were much more universal and not specified to line specific needs, so could have neen spot hired if off lease.

However main reason for high profits is they managed to issue 20-30 year bonds, and got loans with negligible interest during covid period before base rate started climbing. Some of the fleets are cheap to finance, but charged based on current interest rates.

 

[LNW-GW Joint]

The original ROSCOs were given the BR owned rolling stock for free.

I thought they paid something like £5 billion in 1996 for the ex-BR stock? Or was it £2 billion.
Cheap, maybe, especially for the stock that hasn't been off-lease since, but not "free".

Dividend payments to shareholders will be for the whole business, and they are all international players (eg funding freight locos in Europe).
So not all profits are made in the UK.
As you say, the cost of borrowing is a key item; the Roscos are left with expensive trains bought before the markets crashed in 2008.
That's the financial risk they take off the DfT/TOCs.

 

[jon0844]

I said when the DfT started talking of cuts here, there and everywhere during and post-Covid that the Government was never going to do anything to harm the ROSCOs.

 

[hwl]

I said when the DfT started talking of cuts here, there and everywhere during and post-Covid that the Government was never going to do anything to harm the ROSCOs.

Most are pension fund and / or foreign owned, doing anything without compensation would cause huge wide spread issues for the government (worse than Liz Truss era) until confidence could be regained and companies and financial market wouldn't trust the government to fulfil obligations it signed upto.
Many ROSCOs operate in multiple countries and in both passenger and freight

 

[Failed Unit]

I said when the DfT started talking of cuts here, there and everywhere during and post-Covid that the Government was never going to do anything to harm the ROSCOs.

I know it is slight variation - but you think class 379 and class 350/2 to mention 2, the dithering is certainly harming the ROSCOs. I know a few poster have said it is a licence to print money, but we have a few examples of where the ROSCOs have probably priced this into their business case. In the same way that if I could afford to buy a property to rent out, I would factor in time when it wasn't rented out so if I had it rented out 100% of the time it would look like I was making mega money.

That said I would be very interested to know if the ex-BR stock (Sprinters as most of the ex-BR EMUs are gone) are a licence to print money or if the various passenger enhancements on these fleets show the ROSCO is earning its keep.

 

[eldomtom2]

Most are pension fund and / or foreign owned, doing anything without compensation would cause huge wide spread issues for the government (worse than Liz Truss era) until confidence could be regained and companies and financial market wouldn't trust the government to fulfil obligations it signed upto.
Many ROSCOs operate in multiple countries and in both passenger and freight

It's one thing to seize existing rolling stock. It's another for the government to just buy future rolling stock outright.

 

[jon0844]

I know it is slight variation - but you think class 379 and class 350/2 to mention 2, the dithering is certainly harming the ROSCOs. I know a few poster have said it is a licence to print money, but we have a few examples of where the ROSCOs have probably priced this into their business case. In the same way that if I could afford to buy a property to rent out, I would factor in time when it wasn't rented out so if I had it rented out 100% of the time it would look like I was making mega money.

That said I would be very interested to know if the ex-BR stock (Sprinters as most of the ex-BR EMUs are gone) are a licence to print money or if the various passenger enhancements on these fleets show the ROSCO is earning its keep.

I do wonder how it works when a large shopping centre sits with loads of empty units for months, even years, and how the corporate landlords factor this in. They seem able to make big profits, so I guess they do indeed factor in a certain amount to account for situations where trains may be off-lease - or they priced things such that they made their money back quite quickly and anything beyond that is pure profit.

I also assume that there's a small element of 'win some, lose some' but you just need to be winning overall.

 

[hwl]

It's one thing to seize existing rolling stock. It's another for the government to just buy future rolling stock outright.

As DfT themselves said in the article, many other departments would always be prioritised hence this is the only way it will happen

 

[Failed Unit]

I do wonder how it works when a large shopping centre sits with loads of empty units for months, even years, and how the corporate landlords factor this in. They seem able to make big profits, so I guess they do indeed factor in a certain amount to account for situations where trains may be off-lease - or they priced things such that they made their money back quite quickly and anything beyond that is pure profit.

I also assume that there's a small element of 'win some, lose some' but you just need to be winning overall.

I think that is very true, it would be interesting what the business case is of more "sprinter replacements" - yes they are needed, but will you get the 30 years of rental back on them? So many questions at the moment as you think lets replace the engine with what ever the technology is, but the cost of that often exceeds the future benefit. I am a certain ROSCO won't forget the 319s in a hurry, but had it worked they would be very happy.

 

[Bikeman78]

Your last para carefully ignores the fact that most of the stock that you refer to is electrically powered whereas most of the shortages are in areas/lines with no sparks.

Then we should have built more DMUs and fewer EMUs. Or put some more OHL up.

 

[LNW-GW Joint]

It's one thing to seize existing rolling stock. It's another for the government to just buy future rolling stock outright.

Labour didn't much alter the Rosco position over 1997-2010, apart from challenging the leasing costs of ex-BR stock.
Gordon Brown was very keen to keep the cost off his books.
I doubt they will want to own HS2 stock (the next big contract), which will include manufacturer's maintenance.

 

[Energy]

It's one thing to seize existing rolling stock. It's another for the government to just buy future rolling stock outright.

And yet TfW, which originally intended to purchase its new stock, later found it was cheaper to lease than government borrowing.

 

[JonathanH]

I do wonder how it works when a large shopping centre sits with loads of empty units for months, even years, and how the corporate landlords factor this in.

There are examples of shopping centre owners going bust or needing to make 'fire sales', notably 'intu'. In theory the same could happen with train leasing if there were smaller companies with a poorly diversified fleet.

 

[MontyP]

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

www.theguardian.com

£400 million paid in dividends by rolling stock lease companies, whilst rail workers wage demands ignored

Net profits up from 14.3% to 41.6%

Chief execs on £1m salaries

41.6% is a mouth-wateringly high net margin, I can't think of any other industry (even professional services, law, merchant banking) where margins would be so high.

 

[coppercapped]

The original ROSCOs were given the BR owned rolling stock for free.

There were equivalence values (so they would not be incentivised to not buy newer trains), but there was lack of thought on handing it back to a Government pool for reissue to new ROSCO later, or allowing them to be spot hired if there was short term shortage.

Most of the ex BR fleets were much more universal and not specified to line specific needs, so could have neen spot hired if off lease.

However main reason for high profits is they managed to issue 20-30 year bonds, and got loans with negligible interest during covid period before base rate started climbing. Some of the fleets are cheap to finance, but charged based on current interest rates.

A little bit of factual background to the ROSCO debate…

The original BR passenger rolling stock fleet was divided among the original three nascent ROSCOs which at the time were state-owned. There were competing ideas about the distribution of the stock; for example one ROSCO could have had all the Intercity stock, another Network SouthEast and the third that of Regional Railways. The disadvantage was that they would have been of very different sizes and there would be little or no competition for the supply of stock to the TOCs as much stock was effectively bound to its operating area. An alternative of dividing each class of train three ways - the Treasury’s preferred model - would have made for some very small fleets with all the associated disadvantages so the outcome was that the largest class (the 423) was divided three ways, the remaining large classes were divided two ways and the smaller classes allocated to one of the companies so the totals were approximately the same.

In 1996 terms the direct proceeds to the Government of the sales of the ROSCOs was £1.8 billion with another £800 million being paid in cash. The bidding costs of each of the contenders were estimated to be about £1 million each so the trains were most certainly not free issue.

Rather than use the finance leasing model which had been used previously in the UK and often on the Continent, that is the ownership of the asset transfers to the lessee at the end of the term as the lessor has been fully paid off, an operating leasing model was adopted as it was expected that the stock would outlast the existence of the TOC. In this case the owner of the rolling stock carries the residual value risk at the end of the lease - the asset may not be re-leased or the price may not be what the owner had hoped for. Nevertheless an operating lease has two parts, one covers the amortisation of the capital cost incurred over the lease period and the other the ongoing engineering and maintenance support. In the early days each part made up about 50% of the whole lease cost.

The indifference pricing regime was adopted in the early days to avoid the TOCs from insisting on leasing only cheaper, older trains as would have been the case if the capital charge was based on historic cost. In fact the ROSCOs soon saw the advantages for replacing many of the ‘geriatric trains’ as they were called at the time by buying newer, more efficient and less maintenance hungry stock. Between 1996 and 1999, and starting with the Class 168 for Chiltern, the ROSCOs ordered some 2,360 vehicles for a total cost of £2,372 million, nearly £4 billion in today’s money. Two points are worth noting:

• over the last decade or so of its existence BR ordered an average of some 250 passenger vehicles a year because of limitations in the supply of capital funds from the Treasury. The ROSCOs, not having this constraint, in the first three years ordered some 750 vehicles a year, three times as many.
• The competition between the ROSCOs was never really about the supply of existing BR-built trains to the TOCs but all about getting the best deal for the TOCs for new trains.

The statement that the BR fleets were more universal and not specified to line specific needs needs some examination. The biggest fleets were the 3rd rail dc fleets on the Southern, these were bound to the third rail area and could not be transferred away. This is also true for AC electric trains, they can only operate where there are wires. The Class 91 and Mark 4 coaches were effectively bound to the East Coast Main Line and it was clear that the diesel HSTs were best employed on routes where their full speed could be used. Other examples exist but the bottom line is that the most flexible trains were the DMUs of the classes 150 to 158, for a total of some 470 sets built. The biggest constraints on re-allocation of rolling stock are the costs involved in staff training, depots and their equipment - in this sense Greater Anglia and South Western Railways are harbingers of the future by going for unified fleets.

 

[LNW-GW Joint]

Great explanation.
I would only add that leasing deals, starting with Virgin's Pendolino/Voyager fleets, increasingly included long-term maintenance by the manufacturer, at depots financed and operated by the manufacturer rather than the TOC.
Once the ex-BR fleets are gone, maintenance will be largely in hands of private firms.

 

[eldomtom2]

over the last decade or so of its existence BR ordered an average of some 250 passenger vehicles a year because of limitations in the supply of capital funds from the Treasury. The ROSCOs, not having this constraint, in the first three years ordered some 750 vehicles a year, three times as many.

Of course the ROSCOs were not ordering new trains and then finding a lessee for them, and BR was allowed to loan rolling stock from a company that provided the capital if it wanted to...

 

[Teaboy1]

An utter joke on us, the UK tax payer. Sunak and his cronies hopefully face anihalation .... !! Read it and weep.


According to its latest accounts, filed last year, Eversholt, a subsidiary of Li Ka-shing’s Hong Kong firm CK Hutchison, paid dividends of £40.7m in 2022, while its chief executive, Mary Kenny, was paid £1.075m.

Porterbrook, owned by a group of shareholders led by Luxembourg-based insurer Allianz and Canadian pension fund AIM, paid dividends of £80m in 2022, while chief executive Mary Grant was paid £1.2m.

Angel Trains, majority-owned by the Canadian pension fund PSP, paid dividends of £124.6m, and chief executive Malcolm Brown was paid £900k.



cut & paste from Guardian story by the way

 

[LNW-GW Joint]

An utter joke on us, the UK tax payer. Sunak and his cronies hopefully face annihilation .... !! Read it and weep.

cut & paste from Guardian story by the way

Some of the leasing contracts go right back to when Labour was last in power (eg the Desiro fleets).
The 350/1s had a very long DfT-guaranteed lease deal, which is why they have been retained.
The 350/2s didn't have a DfT guarantee, which is why they are being dropped by WMT.
The DfT-negotiated IEP contract, ie covering most 80x trains (not placed with one of the offending Roscos) will last into the 2040s.

 

[yorksrob]

This goes to the heart of the problem with the country. There's just too much money being siphoned off abroad.

Government needs to start addressing the balance of payments deficit.

 

[greyman42]

Are shares in these train leasing companies openly traded on the stock markets?

 

[43096]

Of course the ROSCOs were not ordering new trains and then finding a lessee for them, and BR was allowed to loan rolling stock from a company that provided the capital if it wanted to...

Actually, there were some speculative orders made. Porterbrook ordered Turbostars and Electrostars without signed up customers.

 

[Thirteen]

TfL owns most of their stock apart although I think the Class 378 were previously leased but they bought them last year.