The Department for Transport (DfT) referred the matter to the Office of Rail Regulation yesterday after talks aimed at lowering the cost of rolling stock ended last month. The ministry said privatisation had failed in its aim of introducing a competitive train-leasing market.

The complaint focuses on the fees charged by rail-leasing firms for the trains and carriages they inherited from the old British Rail.

Train operators lease almost all of their rolling stock from just three companies, each owned by one of the big banks: Angel Trains, a division of the Royal Bank of Scotland; HSBC Rail, owned by HSBC; and Porterbrook, a part of the Abbey Group.

They were separated from British Rail when the railways were privatised in 1996 and sold off as independent entities. They made combined profits of £165m last year. The Guardian disclosed last month that the government had set a deadline for the rolling stock companies to cut their prices or face an inquiry.

In a statement yesterday, the DfT said: "On the information and analysis available, the department is not satisfied the prices charged for the rolling stock are fair and competitive.

"It is the department's contention that there is a lack of effective competition. This decision has been taken to secure good value for both tax- and farepayers."

The rail regulator - a nine-member board chaired by Chris Bolt - will now consider referring the issue to the Competition Commission. It aims to prepare a report on the market by October.

Many train operators have complained of excessive leasing fees, among them Sea Containers, which owns GNER. It recently described the prices charged by rolling stock firms as "grotesque". There are about 12,500 trains and carriages on lease, with roughly 60% predating the privatisation of British Rail. The banks charge the rail operators about £1bn a year. They estimate that the leasing companies are overcharging by £50mto £100m a year.

The government has made its dissatisfaction with the rail-leasing companies clear since the publication of the Future of Rail white paper in July 2004.

But the rail-leasing companies complained that the current, typically seven-year leases negotiated in 2003-04 were supervised and signed-off by the now dismantled Strategic Rail Authority, which was part of the DfT.

The trio of rolling stock companies also argue that they have invested £6bn in new trains over the past decade. Haydn Abbott, Angel Trains' managing director, said: "The UK can now comfortably boast the youngest fleet of trains in Europe."

Angel Trains said it charged rail operators roughly £1,800 a month to lease a 20-year-old two-carriage Pacer train, which is found on many regional lines. It charges roughly a further £3,600 a month for engineering and maintenance.

The former rail regulator Tom Winsor, who has been a consultant to Angel Trains, described the referral as a politically motivated "unjustified assault" on the rail-leasing companies.

"This is part of the tightening of the ratchet by government on the privatised railway as part of a policy of incremental renationalisation," he said. "The rolling stock-leasing companies collectively make £150m annual profit on an investment of £6bn. That's a pretty modest return. There is a danger that investment in new rolling stock will be jeopardised."

Bob Crow, general secretary of the RMT transport union, said the train-leasing companies had "been making a mint out of leasing public assets back to the public at exorbitant prices".

See also:

Rail regulator to investigate train leasing firms

The Independent: 29 June 2006
By Michael Harrison, Business Editor

The Government was accused yesterday of jeopardising future investment in new railway rolling stock after it ordered a monopolies investigation into the UK's three train-leasing companies.

The Department for Transport said it had asked the Office of Rail Regulation to conduct an inquiry into the £1bn-a-year market because of concerns that "excessive" charges are being levied on train operators by the three leasing companies, all of which are now owned by banks.

Although the referral was made under the Enterprise Act, which has criminal law powers to fine and imprison individual executives for collusion, the ORR is not investigating cartel-style activities but market abuse.

If the ORR decides there is market abuse, it can refer the leasing industry to the Competition Commission which could in turn lead to the break-up of the three companies - Angel Trains, Porterbrook and HSBC Rail. Angel is owned by Royal Bank of Scotland and Porterbrook is owned by Abbey, now part of Banco Santander.

DfT officials said the train operators were being overcharged by at least £50m a year because of a lack of effective competition between the three leasing companies. In particular, they claimed train operators were being made to pay excessive prices for leasing ex-British Rail rolling stock, some of which was more than 60 years old.

However, Tom Winsor, the former Rail Regulator who is acting as legal adviser to Angel Trains, accused the Government of "a politically motivated assault on the most successful part of the privatised railways".

Mr Winsor, who works for the law firm White and Case, added: "There is a danger that investment will be delayed or deterred by the uncertainty caused by this competition inquiry. The Department for Transport may have shot a bullet into its own foot."

He said at no time during his tenure as Rail Regulator had he received any complaint about the level of rolling stock leasing charges. Mr Winsor also said the leasing contracts had all been renegotiated as recently as April 2004 under the supervision of the DfT's Strategic Rail Authority and with its approval, and yet within three months the Government had begun making noises about investigating the industry. "What does that say about the sanctity of a contract with the Government?" he asked.

The leasing companies said they had invested £4bn in new trains in the decade since rail privatisation and had leased assets worth a total of £7bn. Annual profits from this amoun-ted to £165m, which could hardly be described as "excessive".

But the department argued it had a duty to ensure best value for taxpayers and passengers, who ultimately paid for the leased trains. It said the returns the leasing companies were achieving on ex-BR stock - which accounts for 60 per cent of the 12,500 units in service - were "contrary to what would be expected if the market was competitive".

The DfT opened negotiations with the three leasing companies in the spring of last year to try to negotiate a reduction in the charges, but said it was now necessary to consider a Competition Commission referral to bring the matter to a conclusion.

The ORR has three months to conduct its market study. After that it can conduct a further investigation lasting six to 12 months, refer the industry to the Competition Commission, or give it a clean bill of health.

The original sale of the three leasing companies was mired in controversy after the BR managers who bought the businesses made fortunes by selling them on. Sandy Anderson of Porterbrook made £33m while Andrew Jukes of Eversholt pocketed £20m and John Prideaux of Angel Trains netted £15m.