Millions of rail passengers may face an increase in overcrowded services after the Office of Rail Regulation (ORR) yesterday said it planned to ask for an investigation into the market for leasing engines and carriages to train operators.

The train leasing companies warned that the proposed investigation by the Competition Commission could force them to stop investment in new vehicles, leaving a shortage of carriages to accommodate a 30% increase in passengers over the next decade.

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The Department for Transport, which reported the leasing companies to the ORR, accused the businesses of piling costs on to passengers by making profits of £175m last year.

The ORR said the £1bn-a-year cost of renting trains was contributing to fare rises. Passenger groups warned this week that fares were becoming increasing poor value for money after above-inflation price rises were announced for the fourth successive year. The cost of season tickets will rise by 4.3% next year, while unregulated fares such as long-distance tickets will increase by an average of 4.7%.

"Passenger train operators spend around £1bn every year on leasing," said Chris Bolt, chairman of the ORR. "We suspect there are features of these markets which are preventing them from operating competitively."

One of the most high-profile victims of an investigation could be the west coast main line, which is nearing the end of an £8bn upgrade but is expected to run out of capacity by 2015. Angel Trains, the supplier of Virgin's distinctive Pendolino carriages, is close to signing a deal with Virgin to build 106 carriages but that could be put on hold, threatening plans to increase services on the line by 40% in 2008.

The Royal Bank of Scotland, owner of Angel Trains, said an investigation could make overcrowding worse. "A sustained period of uncertainty is likely to curtail essential investment," it said.

The ORR will hold talks with the train leasing companies before deciding on a referral. Mr Bolt also criticised specifications written into franchise agreements by the government. A new franchise often had to re-lease the trains that were previously used within the franchise, giving the leasing companies the leverage to raise prices.

The Department for Transport said it would consider changing franchise contracts but demanded that leasing companies slash their prices: "The government believes this money would be better invested in the network to deliver further improvements for the travelling public.

"The ORR has questioned whether changes to the franchise process would help. We will be happy to explore this further during the consultation but find it difficult to see how it will have a significant impact on the current market."

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Michael Harrison's Outlook: Transport ministers must take the blame for Britain's great rolling stock rip-off

The Independent: 30 November 2006

Physician, heal thyself. Or, to use a more modern idiom: Department for Transport, analyse this. In June, the department packed the country's three train leasing companies off to the Rail Regulator Chris Bolt and instructed him to establish whether they were making excessive profits. Five months later, his Office of Rail Regulation has come back with its findings, all 138 pages of them. Its report concludes that the three rolling stock companies, or Roscos, are indeed making too much money and is minded to refer them to the Competition Commission. But here's the rub. The culprit in all this is the Department for Transport itself. The main reason for the lack of competition in the rolling stock market and hence the excess profits is the way the department has drawn up the passenger rail franchises. These are very prescriptive and often stipulate which rolling stock a train operator must use. In other cases, they have no option but to use particular trains because of the type of track. In other instances, even when alternative rolling stock is available, it is owned by the same Rosco.

In its response to the ORR, the department has pretty much ignored all this and gone for the jugular, arguing that at the top end of the scale the excess profits being made by the three companies is £175m a year or £2bn over the lifetime of the leases. Put another way, that is an extra 8 per cent on a typical season ticket.

The three Roscos all happen to be owned by very large banks - HSBC, Royal Bank of Scotland and Banco Santander - which makes them convenient whipping boys for politicians. But to argue that they are making £175m more a year than they deserve to when their total reported profits are only £165m seems absurd.

The department says that this is like comparing apples and pears because the £165m profit recorded by the Roscos is only after they have made interest payments of a similar amount back to their parent banks on the debt provided to finance their operations. Like dividends on equity, some of this represents extra profit.

The ORR now intends to consult for three months before deciding whether to make a reference to the Competition Commission. If it does, then the industry is in for a further investigation lasting up to two years.

Faced with such uncertainty, it seems inconceivable that the Roscos would make any investment in new trains during this time. That is not what passengers want to hear. Only a fortnight ago, the National Audit Office warned of a capacity crisis on the West Coast Mainline if more Pendolinos were not ordered soon.

But a two-year hiatus in rolling stock orders may be precisely what a cash-strapped Department for Transport wants to hear because new trains carry a political price in the shape of higher fares or bigger government subsidies. Or is that being too cynical? Surely not.

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Government largely to blame for excess train leasing profits

The Times: November 30, 2006
Ben Webster, Transport Correspondent

# Problems lie with charge for carriages
# Banks say inquiry would stall progress

Flaws in the Government’s rail franchising process are primarily to blame for excessive profits made by train leasing companies, the rail regulator said yesterday.

Chris Bolt said that he was minded to refer the companies — Porterbrook, owned by Abbey; Angel, owned by Royal Bank of Scotland; and HSBC Rail — to the Competition Commission for further investigation.

The Department for Transport, which asked Mr Bolt to investigate the companies, estimates that together they earn up to £175 million more per year than would be expected in a properly competitive market.

Mr Bolt found that the market for new trains, purchased since privatisation a decade ago, was “relatively competitive”. The main problem lay with the 9,000 carriages built by British Rail. In some cases, the construction cost has been repaid several times over, but the banks continue to charge train companies more than £1,000 a week per carriage.

The department welcomed Mr Bolt’s decision, saying that the excess profit was the “equivalent of an annual 8 per cent increase on all season tickets and amounts to around £2 billion over the lifetime of the train leases in question”.

Mr Bolt said that train companies had “extremely limited” choice over rolling stock when negotiating franchises. In many cases they were contractually bound to take on leases agreed by the previous incumbent. The Department for Transport also set tight specifications that could be met only by leasing a particular type of train.

The rapid growth in demand for rail services also meant that there was a very small pool of spare trains, with only 6 per cent of the national fleet in storage at present.

The regulator’s report said that possible remedies included a “major rethink of the franchising model, allowing train companies to take their commercial decisions for new rolling stock based purely on their own assessment of future revenue needs and the needs of the passenger”.

Mr Bolt said that franchises could also be lengthened to give train companies enough incentive to order new trains. Groups of franchises could be let at the same time to make it easier to switch trains from one company to another. He said that other options, such as imposing price controls or requiring the banks to sell some of their trains, would be difficult to implement and might not achieve value for money.

Mr Bolt will consult until the end of February and make a final decision on a Competition Commission inquiry by the end of April.

RBS said that there was no case for further investigation, adding: “If, as the report indicates, it is the DfT’s own franchising policy which is principally responsible for the matters about which it has complained, the DfT has the remedy for this in its own hands.”

RBS also issued a thinly veiled threat that it would not purchase any more trains if there was a full competition inquiry, which could take up to two years. This would undermine Virgin’s plans to order 100 new carriages from Angel to lengthen its overcrowded tilting trains on the West Coast Main Line.

RBS said: “A sustained period of uncertainty is likely to curtail essential investment in additional capacity to solve the evident overcrowding problem in Britain’s railways.”

Mr Bolt said that if the companies refused to buy new trains, it would be a sign that the market was not competitive. “If they were to withdraw from financing new rolling stock, that’s clearly a factor the Competition Commission would be looking at.”

Timetable
# 1994 Railtrack takes control of tracks

# 1995 franchises awarded

# 1996: Railtrack’s debut raises £1.9 billion

# 1997: Seven people die in Southall crash

# 1999: 31 die at Ladbroke Grove

# 2000: Four die at Hatfield

# 2002: Seven die at Potters Bar

# 2002: Railtrack replaced by Network Rail

# June 2006: DfT tells Office of Rail Regulation that train leasing prices are unfair. Requests referral to Competition Commission

# November 2006: Regulator announces three-month consultation over referral to Commission