The future, we are told, must be green. To be green, the future must be sustainable and the only way civilisation can be sustainable is through public transport, the backbone of which is our railways. Are you with me so far? Good.

But thanks to some lame duck privatisation that sang descant to the swan song of the last Tory government in the mid- 1990’s and some egregious bottling of principle by the Labour interregnum of the noughties, we have one of the most commercially efficient rail services on the planet.

Efficient!*!#?? you splutter as you try not to spill lukewarm coffee standing in the vestibule of an overcrowded Glasgow shuttle as it waits outside Polmont. THIS is efficient? Well, yes—very efficient. Not for the customers, of course; they’re just fare fodder. No, for the investors, for whom the whole shambolic structure was dreamed up. There have been few more lucrative—not to say copper-bottomed—ventures in which the shrewd investor could have placed his money than into the corpse of British Rail.

Unlike the BT or National Grid or English water company sell-offs, which may have been repugnant to socialists and those who felt this was a privatisation too far, by the time we got to the railways, Major’s dying days were scenes of desperation. Other sell-offs were going concerns that were given proper shares and a viable future; British Rail was a last desperate punt to get another out the door before a 1997 general election comeuppance.

The Railways Act 1993 created a fragmented industry in which the train operators leased rolling stock from the ROSCOs and paid track access charges to use to the infrastructure from Railtrack, while all these businesses were still state-owned. This merry-go-round was overseen by the UK Department of Transport & Regions, the Rail Passenger Council, the UK Railways Inspectorate, the Strategic Rail Authority, the Office of the Rail Regulator and various Passenger Transport Executives. With me so far? Didn’t think so. It’s a pig’s breakfast, made all the more so by the haste with which it was shoved out the door. Railtrack folded, taking many people’s savings with them, to be replaced by Network Rail, a lunatic concept of a private (and therefore independent) company, wholly owned by the public purse.

The Train Operating Companies (TOCs—who actually run the trains) are just the surface of a complex web of financial arrangements at the heart of which are three little-known cash cows labelled ROlling Stock leasing COmpanies—Roscos for short. Seldom has an acronym—that here corresponds to the slang name for what a mobster uses to shoot his way out of a sticky heist—been so appropriate. For while Railtrack went bust and TOCs struggle to please passengers using rolling stock they don’t own running over track they don’t control, Roscos have been mugging the public purse, big style.

UK railways turn over around £13bn each year, roughly half of which comes from fares and half from public subsidy. If you thought (as was sold at the time) that privatisation would reduce the public subsidy element, you thought wrong: it has increased every year since privatisation in 1996. Fair dos; the number of trains services has increased in that time but the number of passengers has increased by even more so shouldn’t any subsidy be coming down? Not when you see how the Roscos operate.

These rolling stock companies are a major component of the industry: their overall turnover of over £1bn last year was equivalent to over 20% of the passenger revenue of all train operators.

“The ROSCOs have attracted relatively little attention in the literature and have been little discussed in the context of the privatised British railway system.  Yet nowhere have the flaws in the privatisation process become more apparent” 

Taken for a Ride S. McCartney and J. Stittle

Here’s a potted history of the three of them:

• Eversholt was sold for £518.3 m on 2^nd February 1996 to Eversholt Holdings Ltd, a management buyout backed by The Candover Group and Electra Fleming.  On 19^th  February 1997, Eversholt was sold to Forward Trust Group (part of HSBC Holdings plc) for £726 m—40% more than the initial sale, and changed its name to Forward Trust Rail Limited on 1 December 1997.  The name of the company for the next decade, HSBC Rail (UK) Limited, was adopted on 27^th September 1999.  Ten managers were reported as having personally made total profits of £103m as a result of the sale to HSBC. Eversholt was renamed back to its original in anticipation of being sold to a consortium for £2.1bn in 2010.
• Alpha Trains International was originally Angel Train Contracts Ltd. ATC was sold on 16^th January 1996 to GRS Holding Company Limited (a consortium of Nomura, Babcock and others) for £696.3m.  Shortly after privatisation, GRS sold their right to Angel’s capital rental income for some £690m.  In December 1997, the remainder of the business was sold for £395m to Royal Bank of Scotland (RBS), of which GRS became a wholly-owned subsidiary.  The total realised from the sale of GRS (£1,085m) was some 56% more than the government had received.  RBS then sold for £3.6bn in 2008 to a consortium led by the European arm of Babcock & Brown, now called Arcus Infrastructure and the company renamed Alpha. Alpha Trains has about 40% of the UK train leasing market, owning 280 freight locomotives and 4,100 passenger carriages, including the 52 nine-carriage tilting Pendolino trains on the West Coast Main Line. They have been expanding into €1.8bn in freight wagon leasing in 12 countries across the Continent (using Slovakian wagon builder Tatravagonka).
• Porterbrook Originally costing £528m in a management buyout in 1996, this was sold by that same management six months later to Stagecoach for £836m without investing a penny. Directors and staff, who had invested only £300,000 of their own money, made nearly £83.7m. Porterbrook’s managing director, who had invested £120,000, scooped £34m. Venture-capital firms, which had put £2.2m into Porterbrook, picked up £315m. Abbey National then bought it in 2000. When taken over by Santander in 2008, Abbey National sold on to a consortium of Deutsche Bank, Lloyds and Antin Infrastructure Partners, price unknown. In 2012, Porterbrook claim to have invested £2bn in rolling stock and be the only Rosco to grow market share from its original 30%.

From the profits made in all three cases, it is clear that they were sold underpriced. The consequences of under-pricing could have been mitigated by the inclusion of clawback provisions in the sale agreements, to ensure that the government could recover some profits made if ROSCOs were sold on within a specified period. Clawback provisions were specified elsewhere in the railway privatisation.  For example, in the case of Railtrack, 25% of any profits generated from future sales of property assets were to be reclaimed by the government for the benefit of the TOCs.

The National Audit Office concludes that the sale was premature, and had ‘an adverse impact’ on the level of proceeds because the ROSCOs had no relevant track record.  The House of Commons Public Accounts Committee agreed with this view and further argued that privatising the ROSCOs first, before awarding franchises and selling Railtrack, was a key factor why only £1.8bn was obtained for public funds in sale proceeds from RailTrack, the Roscos and the TOCs.

Finally waking up to the scale of rip-off in 1996 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 fare-payers.”

After the resulting investigation, the Competition Commission published its report in July 2009, making three recommendations:

1. “Introducing longer franchise terms of 12 to 15 years or longer”
2. “Assessing the benefits of alternative new or used rolling stock proposals beyond the franchise term and across other franchises when evaluating franchise bids”
3. “Ensuring that franchise ITTs are specified in such a way that franchise bidders are allowed a choice of rolling stock”

Wow! Hardly revolutionary stuff. Certainly not incisive enough to have the boardrooms at Porterbrook et al quaking in their handmade shoes. Nonetheless, after 3 years of delving what action did the Brown government of the time take? None. Needless to say, once the 2010 election was safely behinfd them, the Tories let no more be heard of this.

So the Roscos continue to be held to the head of the travelling public. It is estimated that the UK rail system is 40% more expensive than it needs to be. This is, in part, because of its fractured nature. But it is primarily because, sitting in the middle of this web of profit are the Roscos who, on a turnover around £1bn between them, make ongoing profits (i.e. not counting the windfalls already in sundry pockets listed above) up from around £165m in 1996 to over £250m now.

Worst of all, the whole system detracts from TOCs or anyone else investing in the long term. Angel cheerfully charges £1,800 a month for a clapped out 20-year-old 2-car diesel Pacer and have the gall to slap on £3,600 a month for ‘maintenance’. The idea of Scotland getting its own internal express trains dies on the twin horns of the ScotRail franchise locked into the Roscos and the fact it only runs seven years at a time.

Until this nonsense is overturned—and it is only the UK government that currently has the power to cut this Gordian knot—we will continue to rattle around in a second-rate public rail system while the Continent shows how a sustainable society works.