Rail Transport in Great Britain - Train Leasing Services - G

Rail Transport in Great Britain - G

Train Leasing Services

At the time of privatisation, the rolling stock of British Rail was sold to the new operators, as in the case of the freight companies, or to the three ROSCOs (rolling stock companies) which lease or hire stock to passenger and freight train operators. Leasing is relatively commonplace in transport since it enables operating companies to avoid the complication associated with raising sufficient capital to purchase assets.

Instead, assets are leased and paid for from ongoing revenue. Since 1994 there has been a growth in smaller spot-hire companies that provide rolling stock on short-term contracts. Many of these have grown thanks to the selling-off of locomotives by the large freight operators, especially EWS.

Unlike other major players in the privatised railway system of Great Britain, the ROSCOs are not subject to close regulation by the economic regulatory authority. They were expected to compete with one another, and they do, although not in all respects.

Competition Codes of Practice

Since privatisation in 1995, the ROSCOs have faced criticism from several quarters - including passenger train operating companies such as GNER, Arriva and FirstGroup – on the basis they are acting as an oligopoly to keep lease prices higher than they would be in a competitive market. In 1998, Deputy Prime Minister John Prescott asked rail regulator John Swift to investigate the market's operation and make recommendations. Many believed Prescott favoured much closer regulation of the ROSCOs, perhaps bringing them into the net of contract-specific regulation, i.e., requiring every rolling stock lease to be approved by the Rail Regulator before it could be valid.

Swift's report did not find major problems with the operation of what was then an infant market, and instead recommended the ROSCOs sign up to voluntary, non-binding codes of practice in relation to their future behaviour. Prescott did not like this, but he did not have the legislative time allocation to do much about it. Swift's successor as Rail Regulator, Tom Winsor, agreed with Swift and the ROSCOs were happy to go along with codes of practice, coupled with the Rail Regulator's new powers to deal with abuse of dominance and anti-competitive behaviour under the Competition Act 1998.

In establishing these codes, the Rail Regulator made it clear he expected the ROSCOs to adhere to their letter and spirit. The codes of practice were duly put in place and for the next five years the Rail Regulator received no complaints about ROSCO behaviour.

White Paper 2004

In July 2004, the DFT's White Paper on the future of the railways expressed dissatisfaction with the operation of the rolling stock leasing market, and the belief there may have been excessive pricing on the part of the ROSCOs.

In June 2006, Gwyneth Dunwoody, chair of the Transport Select Committee of the House of Commons, called for an investigation into the companies. Transport commentator Christian Wolmar has asserted the high cost of leasing is due to the way the franchises are distributed to the train operating companies. While the TOCs are negotiating for a franchise they have some freedom to propose different rolling stock options. It is only once they have won the franchise, however, they start negotiating with the ROSCOs. The ROSCO will know the TOC's requirements and also knows the TOC has to obtain a fixed mix of rolling stock which puts the train operating company at a disadvantage in its negotiations with the ROSCO.

Competition Commission

On 29 November 2006, following a June 2006 complaint by the DfT alleging excessive pricing by the ROSCOs, the Office of Rail Regulation (as it was then called) announced it was minded to refer the operation of the market for passenger rolling stock to the Competition Commission, citing, amongst other factors, problems in the DfT's own franchising policy as responsible for what may be regarded as a dysfunctional market. ORR said it will consult the industry and the public on what to do, and will publish its decision in April 2007.

If the ORR does refer the market to the Competition Commission, there may well be a hiatus in investment in new rolling stock whilst the ROSCOs and their parent companies wait to hear what return they will be allowed to make on their train fleets. This could have the unintended consequence of intensifying the problem of overcrowding on some routes because TOCs will be unable to lengthen their trains or acquire new ones if they need the ROSCOs to co-operate in their acquisition or financing. Some commentators have suggested that such an outcome would be detrimental to the public interest.

This is especially striking since the National Audit Office, in its November 2006 report on the renewal and upgrade of the West Coast Main Line, said that the capacity of the trains and the network will be full in the next few years and advocated train lengthening as an important measure to cope with sharply higher passenger numbers.

The Competition Commission conducted an investigation and published provisional findings on 7 August 2008. The report was published on 7 April 2009. A press release summarised the recommendations as follows:

Introduce longer franchise terms (in the region of 12 to 15 years or longer), which would allow TOCs to realise the benefits and recover the costs of switching to alternative new or used rolling stock over a longer period, which should increase the incentives and ability for TOCs to exercise choice.
Assess the benefits of alternative new or used rolling stock proposals beyond the franchise term and across other franchises when evaluating franchise bids. This will encourage a wider choice of rolling stock to be considered in franchise proposals, irrespective of franchise length.
Ensure franchise invitations to tender (ITTs) are specified in such a way franchise bidders are allowed a choice of rolling stock.
Requiring the ROSCOs to remove non-discrimination requirements from the Codes of Practice, which would provide greater incentives for the TOCs to seek improved terms from the ROSCOs.
Requiring rolling stock lessors to provide TOCs with a set list of information when making a lease rental offer for used rolling stock, which would give TOCs the ability to negotiate more effectively.

Rail Transport in Great Britain Overview

Infrastructure Company: Network Rail (until 2024)

Major Operators:

National Rail franchisees

Independent operators

State-owned operators

Ridership: 1.738 billion (2019/20)

Passenger km: 66.8 km (41.5 mi) billion (2019/20)

System Length Total: 15,811 km (9,824 mi)

Electrified: 5,374 km (3,339 mi)

No. Stations: 2,576

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