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Rolling stock absurdities

25 June 2013

Rather than simply buying new rolling stock, the post-privatisation settlement has created a monster through using unnecessarily complex leasing arrangements. Our money could be put to much better use, argues Christian Wolmar.

The most obviously scandalous aspects of the whole rail privatisation fiasco have tended to be over rolling stock deals. It all started with the sale of the three rolling stock companies, which was carried out in 1995 in great haste to put a few bob into the Treasury coffers. This deal, rather like today’s hurried and equally shocking sale of the Royal Mail, cheated taxpayers out of at least £1bn. Now the scandals continue through a variety of crazy and complex deals to acquire new trains.

The creation and then sale of the rolling stock companies (or ROSCOs) became necessary as part of the privatisation process because the sensible solution, of allowing the train operating companies to own the stock, was not possible because their franchise periods were too short. The rolling stock would outlast the franchise, and therefore another arrangement had to be made. Therefore the trains had to be leased and the three rolling stock companies, now all owned by banks, were established in order to ensure competition – though this was a bit daft, too, since competition was pretty much impossible in practice given rolling stock tends to be line specific.

This all added significant costs. Old trains, long depreciated so that they were effectively worthless, still had an asset value and therefore were leased at often high costs to the operators – who had no choice – and in any case, were mostly subsidised. The most scandalous of the lot were the old Tube trains on the Isle of Wight, built in 1938, but which after privatisation had earned their owner over a million pounds in leasing fees. This only stopped when they were eventually given away by HSBC Rail, conscious of the bad publicity that had resulted.
The ROSCOs have fallen rather out of favour – somewhat unfairly as all they were doing was taking advantage of the government’s incompetence – and instead the government sets up deals to purchase rolling stock through insanely complex partnerships with the private sector. The most absurd has been the Intercity Express Programme, a procurement process that has dragged on for nearly a decade and finally resulted in a £2.4bn deal with Hitachi in 2012. This will undoubtedly result in far higher train costs than necessary. Instead of simply buying trains, the deal involves an ongoing contract for Hitachi to provide sufficient trains to fill a set number of paths and for them to carry out all maintenance on the trains throughout their lives.

Ministers opt for these Private Finance Initiative deals as otherwise such purchases would be on the government’s books, something ministers are always keen to avoid because, they reckon – wrongly in the view of many economists – that it might lead to higher interest rates. However the stated rationale is ‘passing on risk’. But ministers never seem to understand that private companies have a very conservative view of risk and therefore charge enormous amounts in order to take it on. Moreover, since governments can borrow money more cheaply than private companies, these deals are inherently more expensive. So the Hitachi deal will result in higher train fares and more taxpayers’ subsidy than is necessary.

The similar arrangement for Thameslink trains, controversially signed with Siemens rather than the Derby-based Bombardier, has been the subject of a recent National Audit Office report which was highly critical of the two year delay in finalising the deal. The NAO queried whether the first of the 1,200 coaches could now be delivered in time for the 2015 deadline for the first trains, because two years after the granting of the contract, the financial arrangements are still up in the air and the £1.4bn deal has not been concluded. The delay is due to Siemens being unable to come up with a suitable funding deal – ironic given that it beat off Bombardier precisely because it was able to offer cheaper financing arrangements.

There are signs that in at least some parts of government, there is a recognition that the private sector is not able to take on the massive risks associated with rolling stock and therefore should not be involved. It has recently been announced that the new trains for Crossrail will not be part of a Private Finance Initiative deal, as had been originally intended, but rather will be entirely publicly funded. They will nevertheless still be leased, like the London Overground stock, because that is ‘tax-efficient’ but there will be no attempt to pass on risk for construction or maintenance to the private sector in exchange to create a Private Finance Initiative arrangement.

This will create a rather strange situation. Crossrail will run trains east- west through London while Thameslink operates in a north-south direction through the capital. The two will meet at the hugely expanded Farringdon station, where one set of trains will have been purchased in a conventional deal, while the other will be subject to a complex PFI arrangement. What’s more, they may even end up being the same train, though politically Bombardier would be favoured as it has a British base. Only in Britain do we make things so damn complicated.
All this waste of money and these scandalous – there is no other word for it – complexities arise because of the insistence on keeping railway assets off the government’s books and because of the obsession with passing on risk to the private sector, without realising that it always has to be paid for. Perhaps the Crossrail decision will mark the beginning of a change in policy. The best option, of course, would be to return to system prior to privatisation, when rolling stock was simply purchased by the operator, and paid for conventionally. It would be quite possible to set up long term maintenance deals, rather like an extended warranty on one’s car or washing machine that were paid for separately so that the contracts were transparent, something that is not presently the case. That arrangement still largely prevails in Europe where procurement is faster and far cheaper.

However, I suspect that we will not return to those simpler days. The neo- liberal agenda is simply too firmly entrenched and there are too many lawyers, consultants and bankers arguing that these complex deals represent value for money when clearly they don’t. Sadly, it will be our children and grandchildren footing the bill for them.

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