Britain's overcrowded railways could become even more congested after the country's largest train leasing company threatened a two-year shutdown yesterday amid unprecedented demand for carriages.

Angel Trains said it could not guarantee new leasing deals after the Competition Commission was asked to investigate the carriage and locomotive hire market. The warning came amid industry speculation that the Department for Transport has asked at least two train operators to alter their franchise bids because there are not enough carriages to go round.

Haydn Abbott, managing director of Angel, said the two-year investigation made it less likely train leasing companies would make multimillion-pound investments in new rolling stock. "This has increased the uncertainty that we have about any investment in rolling stock," he said.

New carriages are a vital part of government plans to reduce overcrowding and meet a projected 30% increase in train use by the middle of the next decade. The government acknowledged the need for new trains last month when it said it would buy 1,000 extra carriages between 2009 and 2014 to ease sardine-like conditions on some routes.

Train leasing companies play a pivotal role in adding carriages to the network. But the Office of Rail Regulation threw the industry into turmoil yesterday when it confirmed that it would refer the train leasing market to the commission. It said that the cost of renting carriages was contributing to fare rises.

"Rolling stock leasing is a significant part of train operating costs - around £1bn a year," said Chris Bolt, chairman of the regulator. "Our review of these markets has identified features that appear to us to prevent, restrict or distort competition - the test for a reference to the Competition Commission. This means that train operating companies may be paying higher prices ... than if competition was more effective."

Mr Bolt told the Guardian that train operators were having to procure carriages in an increasingly scarce marketplace: "We are in a position where there is not much, if any, spare rolling stock going around."

He said the inquiry could cause uncertainties for train operators, with four major franchises to be awarded this year - east Midlands, west Midlands, Cross Country and east coast mainline. However, he said that eradicating anti-competitive practices in the leasing market could bring long-term benefits.

"There is no right time to do this, but it is better now than later. Let's get some certainty and get the framework resolved. We need that to get the clear and robust framework for investment in the rolling stock that is needed to meet future growth projections."

The Department for Transport believes the three biggest train leasing firms, which control more than 90% of the market, make around £175m a year in profits.

Mr Abbott said Angel would consult its owner, the Royal Bank of Scotland, before deciding whether to fulfil requests for new trains. He said the industry had invested £5bn in carriages because it expected an "adequate return". He added: "It does make the investment climate more difficult."

The uncertainty over a competition inquiry is taking its toll on Virgin Trains, which is unable to secure an order for 106 new Pendolino carriages on the west coast route because Angel wants government reassurances that leasing rates will not be affected.

Mr Abbott said the situation was in "stalemate" because the transport department had demanded it charge lower rates.

"The government is trying to impose its own price cap before the competition commission has undertaken a study," he said.

However, the transport department is confident it can overcome any uncertainty about hiring new trains to meet capacity demands. It has cited the example of the Grand Central service from Sunderland to London, which is buying trains from China, and the decision by Transport for London to buy its own trains for an overground rail scheme.

Industry commentators say the department is contributing to the problem with tightly prescribed franchise terms which often dictate what type of carriages should be used and do not give train operators enough latitude to invest in new trains. Mr Bolt said the franchise system was "not at fault" but admitted that changes could be made, such as doubling their duration of franchises to twenty years.

More than 1bn passenger journeys were made on the rail network last year. Overcrowding has already led to a fare strike by First Great Western passengers, with a national survey finding that only four out of 10 passengers believe they get value for money for their ticket because of anger over capacity problems on commuter services in the south-east.

According to industry speculation, two bidders for the lucrative east Midlands and west Midlands franchises have been told by the transport department to redraw their rolling stock plans, because there are not enough carriages to share between bidders. The franchise map in the Midlands has been redrawn with four franchises becoming three.

See also:

Watchdog to probe rolling stock firms

Independent Online: 27 April 2007
By Michael Harrison, Business Editor

Britain's £1bn-a-year rolling stock leasing industry was referred to the Competition Commission yesterday because of concerns that the banks which own the three big players in the market are profiteering at the expense of rail passengers and taxpayers.

The Office of Rail Regulation (ORR) said it had decided to order the investigation on the grounds that lack of competition might be resulting in higher prices and poorer service. The investigation, which could last up to two years, is expected to cost £5m-£10m.

In evidence to the regulator, the Department for Transport argued that the train operating companies were being overcharged by anywhere between £34m and £177m a year by the three rolling stock leasing companies (Roscos) - HSBC Rail; Angel Trains, which is part of Royal Bank of Scotland; and Porterbrook Leasing, a subsidiary of the Spanish bank Santander. Leasing charges are met either from passenger fares or through the subsidies that train operating companies receive from the Government to run individual franchises.

The regulator said, however, that part of the reason for the rolling stock market being uncompetitive was the way in which the DfT itself had chosen to award franchises and the conditions it imposed on train operators. These often stipulate which rolling stock a franchisee must use.

There are fears that the three Roscos will hold back from ordering any new rolling stock until the investigation is complete and the findings of the Competition Commission are known. This, in turn, could have a serious knock-on effect on efforts to increase the capacity of the rail network to cope with the surge in passenger numbers.

The ORR said it would be inappropriate to give the rolling stock market a clean bill of health given that there was a "reasonable suspicion" that competition was being restricted. Chris Bolt, the ORR chairman, said: "The Roscos are earning returns which are higher potentially than the returns would be in a competitive market."

Haydn Abbott, managing director of Angel Trains, said he was confident that the investigation would conclude that the DfT's complaint was unjustified. "The ORR's criticism of the rolling stock market concentrates on the failure of the structure of the franchising process which the DfT is responsible for," he said.

The Liberal Democrat transport spokesman Alistair Carmichael, said the answer would be for Network Rail, the owner of the track, signalling and stations, to take over the rolling stock as well and lease it directly to train operators.

See also:

UK rail regulator orders probe of British train-leasing market

Thomson Financial:

LONDON - The UK rail regulator confirmed that it is to carry out a controversial threat to launch a competition probe into the British train-leasing market.

The Office of Rail Regulation (ORR) said it will refer the leasing of rolling stock for franchised passenger services to the Competition Commission for further investigation.

ORR said it believes certain features of the market are hindering competition and could cause higher prices and poorer service.

The regulator warned in November that it was likely to demand an inquiry into a perceived lack of competition in the market for new trains, which is dominated by three main train-leasing firms: Banco Santander Central Hispano's Porterbrook Leasing, HSBC (Rail) UK and Angel Trains, part of Royal Bank of Scotland Group.

The regulator said it was concerned that the situation was resulting in excessive profits for the UK's three main train-leasing firms and higher costs for passengers, rail franchisees and taxpayers.

The leasing companies warned that the inquiry, which is likely to last a couple of years, could jeopardise investment in new trains.

Porterbrook said it would burden the industry with unnecessary costs and Angel revealed in February that it had failed to sign a 180 mln stg deal with Virgin for new Pendolino tilting train carriages because the prospect of an inquiry had caused uncertainty about the potential returns on its investment.

Meanwhile, a rail operator that has set up a new leasing firm to buy trains for its proposed new service between northeast England and London said it was postponing the introduction of the service from May 20 this year to September.

Grand Central, whose new sister company Sovereign Trains has acquired a fleet of Intercity 125 High Speed Trains on its behalf for the services from Sunderland to King's Cross, blamed delays in refurbishing the trains.

Sovereign has committed to ordering three new 140 mph Polaris trains from China to provide a long term replacement for the HSTs.