First Great Western: villain or victim of circumstance?
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2 comments:
Thanks for the analysis. I agree that the Government takes most of the blame, but there is one part of yoru reasoning that I have never really understood. You say that 7 to 10 year franchises are too short for the TOCs to invest in rolling stock, but doesn't this ignore the fact that it would not be the TOC but the ROSCO who would buy the new trains. The millions of pounds needed for a new train do not need to be recouped in the 7 year franchise period. It can be recouped over the 30 to 40 year lifespan of the train. If new trains are purchased for First to use for 4 or 5 years and the next franchise goes to National Express instead, NE will take on the lease of the trains and pay for the next 7 years and so on.
The only real risks taken by the ROSCOs are that the trains they buy are rubbish or that passenger demand will fall and fewer trains will be needed. those risks would exist for anyone buying trains and existed for British Rail. Sure the Government could reduce the money available in the future for hiring trains or a recession could cause few tickets to be sold, but BR always ran the risk of having its money supply reduced and was never the less able to invest innew trains.
Thanks. This is a good point and is something that I didn’t make particularly clear in the recent document.
It is true that ROSCOs are, largely, the owners of the trains which they then lease to the train operating companies. It is also true that they bear most of the capital cost of building new rolling stock which they can then recoup by leasing trains. However, there are several aspects of the current system which mean that buying new trains often remains an unattractive option, even with the involvement of ROSCOs.
First, train operating companies do face some costs in buying new rolling stock. There are development costs, management costs and so forth. While this investment does not approach the actual cost of building the trains, it is still expensive and obviously has to be recouped. Since the expenditure isn’t of a capital nature it often comes straight off the bottom line which can make it an unattractive option. This is especially the case for franchises which are financially tight.
Second, many of the passenger increases are long term trends. In other words, they don’t occur overnight but, rather, happen incrementally. As such, investment in rolling stock is also a longer term investment. So, it may not be attractive to buy all of the rolling stock at one point in time but actually to commit to a contract at a certain price and then have it delivered over a longer period which is more matched with gradual increases in demand. As franchises currently stand, it is commercially difficult for any TOC to enter into this type of arrangement: the desirable phase-in period may well be longer than the length of the franchise and, moreover, most TOCs are not too concerned about the final few years of the franchise as they are unwilling to invest in something they may not recoup money from.
Third, because of the way franchises work, most of the planning and financial engineering is done at the beginning; and this includes provision for rolling stock. While this is probably necessary for a short term contract, it means that TOCs are not always particularly sensitive: they focus more on delivering on their contract with the government than they do on delivering for consumers (though, it has to be said, that this isn’t the fault of the TOCs – it’s the fault of a system which makes them serve two masters). As a result, even if there are significant changes in demand there often isn’t an incentive to acquire new rolling stock if it wasn’t part of the original plan.
Fourth, the way in which the ROSCOs operate isn’t particularly competitive. Again, the ROSCOs can’t be blamed for this, they are only behaving as any commercial entity would under the system we have. TOCs are at a distinct disadvantage to ROSCOs. TOCs can’t really buy their own trains as their franchises are too short, so they have to deal with ROSCOs. There are only three major ROSCOs so they have a limited choice of suppliers; moreover, stock requirements are often peculiar to each individual franchise so that means some TOCs can only deal with one ROSCO. Because of this lack of competition, it means that leasing prices are artificially high which has stunted investment in rolling stock. This has, and will, become more of a problem as the financial arrangements for franchises become even more challenging in terms of the premiums which need to be paid.
Fifth, although ROSCOs do have something of a captive market, there are still risks in building new stock due to the fact that the contracts with TOCs are short term. It is probable that the next TOC for a given franchise will take on similar rolling stock but it is not, and cannot, be guaranteed. The example of First Great Western sending back the Class 180s (Adelantes) is a case in point. This risk is probably reflected in higher leasing costs.
In summary, ROSCOs are not ideal: they only really exist because of the way the system was ‘privatised’ and are a symptom of the short-termism that exists on the railways. The ideal would be a system with longer franchises and with less government interference. Under this system, TOCs would have more flexibility in planning and would be able to mix leasing with buying their own stock. This would result in a more competitive environment for the acquisition of new trains and, together with the lower levels of risk all round, would result in lower costs.
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