The Government is to ask Chris Bolt, the Rail Regulator, to investigate whether rolling stock leasing companies, which are owned by the banks, are exploiting their domination of the market.

Ministers believe that they are overcharging by up to £100 million a year for more than 7,000 carriages built by British Rail before the railways were privatised a decade ago.

In many cases, the construction costs have been repaid several times over, but the banks continue to charge more than £1,000 a week per carriage.

The companies are Angel, owned by the Royal Bank of Scotland, Porterbrook, owned by Abbey, and HSBC Rail.

They charge the train operators more than £1 billion a year to lease the trains and make a combined profit of at least £165 million.

Several operators, including GNER and First, have complained to the Department for Transport. GNER described the sums demanded by the companies as ?grotesque? and said that they had no choice but to pay because there was no alternative supplier of rolling stock.

At the time of privatisation it was envisaged that there would be a surplus pool of trains that operators could lease cheaply.

But passenger numbers have grown by 42 per cent in the past ten years and operators have required almost every train available to fulfil their timetables. There are fewer than 200 spare carriages stored in sidings, including some 30-year-old former Virgin West Coast trains.

The banks refuse to reveal the costs of individual leases, claiming commercial confidentiality.

But Roger Ford, technical editor of Modern Railways, said that a two-carriage Pacer train, built in the early 1980s and found on many regional lines, typically cost £106,000 a year to lease. A Pacer cost £700,000 to build in today?s money.

South West Trains pays more than £150,000 a year to rent 12 carriages built in 1938 and used on the Island Line on the Isle of Wight.

The high leasing costs are one of the reasons why the eight-mile line is the most heavily subsidised in the country, costing the taxpayer 77p for each mile travelled by every passenger.

A Whitehall source said: ?We believe there isn?t enough transparency or competition in the market. It?s like a car hire company charging you the same for a brand new Lexus as they do for a five-year-old Ford Focus.

?We want to get value for money for taxpayers and a fair deal for train operators and passengers.? The DfT has calculated, with the help of accountants Ernst & Young, that the banks are overcharging by between £35 million and £100 million a year.

The DfT had hoped to negotiate a compromise but has reluctantly decided to ask Mr Bolt, under the provisions of the Enterprise Act, to carry out a market review.

Mr Bolt said that it would take three to six months to complete an initial review, after which he could refer the issue to the Competition Commission, which might take up to two years to reach its conclusion.

?The alternative is to do what Ofcom (the telecoms regulator) did with BT, which is to reach an agreement on what the problem is and get the company to give undertakings to do something different.?

Mr Bolt conducted a previous investigation into the train leasing companies in 1998 and concluded then that there were no serious problems.

But he said yesterday: ?That was fairly soon after privatisation. There has been a lot more experience since 1998 of how the market has worked.?

A senior leasing company figure said that the banks would welcome an inquiry by Mr Bolt as it would end two years of uncertainty over whether the Government would try to claw back some of the leasing costs.

?We would prefer the regulator looked at the business in a more detached way and are confident he will find that making £165 million profit on assets of £7 billion is actually pretty poor.?

See also:

Probe begun into train leasing sector

Reuters: Jun 28, 2006

LONDON - The government took the first step towards investigating the companies that own and lease out trains on Wednesday, saying the charges had become uncompetitive.

"On the information and analysis available, the (transport) department is not satisfied the prices charged for the rolling stock which leasing companies inherited from British Rail (the former state monopoly) are fair and competitive," said a government statement.

"It is the department's contention that there is a lack of effective competition within this market."

The Department of Transport has been holding talks since early 2005 with the rolling stock operating companies (ROSCOs), which lease about 12,500 trains and carriages to rail operators for about 1 billion pounds a year.

"Those discussions have progressed but it has become necessary to bring the matter to a firm conclusion," said the statement.

"The department argues the excessive leasing charges are the result of a deficiency in the market created by privatisation that should be remedied. A market investigation reference under the Enterprise Act is the appropriate mechanism for dealing with such an issue."