Return to Archive -by date - by topic.
As the SWT franchises shows, Bowker's Law applies to new trains too
A long, long time ago, well, in December 1993, this column explained how the lease rentals the new ROSCOs would charge for the British Rail fleets they were inheriting would be calculated. Hambros Bank were responsible for setting up and selling the ROSCOs and they brought in US leasing specialist GATX to advise on the key issue of pricing the existing assets.
John West of GATX, who was to become a good chum and mentor as I grappled with the ins and outs of the leasing industry, came up with the concept of ‘indifference pricing'. The idea was to make TOC managers indifferent as to whether they kept their existing kit or replaced it with new trains. Either way, the overall cost to the TOC would be the same
Privatising the BR passenger fleet was, he explained, a case of ‘pay now or pay later'. If the Government valued the ROSCOs on the historic cost of the assets, lease rentals would be low – minimising TOC costs until replacement trains were acquired, when rentals would soar – hence ‘pay later'.
Using current costs for the valuation would mean higher leasing rates equating to more subsidy for the TOCs (pay now) but the Treasury would also earn more from the sale. So, the decision was taken to base lease rentals on the cost of the modern equivalent.
But ‘cost' referred to the whole life cost of the equipment, including maintenance and operating costs. As a rule of thumb, BR always reckoned that the whole life cost of traction and rolling stock was made up of three roughly equal parts - maintenance, operation and repayment of capital. Remember that BR borrowed from the National Loan Fund for its investment. One reason why John Prescott's pleas in opposition for BR to be allowed to lease went largely unheeded was because no private funder could borrow as cheaply as the Government.
So, to work out the ‘indifference pricing' rentals, each type of traction and rolling stock was given its modern replacement equivalent. Since GATX was already leasing new trains ‘n' boats ‘n' planes around the world, it was a simple matter to determine the whole life cost budget for a Networker electric multiple unit, say, and calculate appropriate lease rates. That is the right hand column in my chart.
Next, you applied the same process to the existing equipment to give the centre column. Now, obviously, you weren't going to get exact equality, hence to get true indifference you might need an ‘adjustment' or what was known as a ‘fiddle factor' when I was an engineering student.
These two columns came from Hambros and GATX. Since the costs of maintenance and operation of the existing kit were based on BR figures, I used them and the rule of thirds to produce the left hand column. This is what traction and rolling stock cost BR.
You will note that there is no insurance, because BR was largely self-insured. Nor is there a residual value cost because BR cascaded – something the Strategic Rail Authority is now considering. Nor is there provision for ‘off lease' – the time when the train is out of service for heavy maintenance or between leases. This was lost in the BR budget – or, rather, was absorbed in the overall fleet cost since the number of trains acquired had to allow for such down-time.
So, you can see that in terms of money spent on passenger traction and rolling stock, the creation of the ROSCOs increased BR's admittedly opaque costs by around 35%. But then we come to the SWT replacement franchise described above, where it's proving a bit difficult for me as a taxpayer to remain aloof.
Since £55million a year of the additional subsidy is to cover lease rentals for 625 Class 450 and Class 444 vehicles – the Class 450/2 growth fleet now being surplus to requirement, we can calculate the additional cost per vehicle. While the Class 444s are longer, with a higher specification and thus more expensive, the average represents an additional £88,000 per vehicle a year on top of a slam door Class 423, say.
Now, as 31 December - <I>der tag<I> for withdrawal – approaches Mk 1 stock rentals are all over the place. But, using my skill and judgment, as they say in ‘Spot the ball' competitions, I reckon it costs, typically, £160,000 to lease a four door Class 423. So we are looking at £500,000 a year to lease a four car Desiro. This is a tad more than a Class 458, which is to a lower spec.
Hence my remarks about indifference. This, I suggest, shows that when Safety Regulations require that slam door stock must be withdrawn by a deadline, indifference pricing goes out of the window. Ditto when the SRA casts doubt on residual values by junking 20 year replacement franchises in favour of much shorter terms.
So, while I still believe that the ROSCOs have been the one clear success of privatisation, like fame, success costs. And, of course, Bowker's Law means that, open access apart, the ROSCOs can buy only the traction and rolling stock on which the taxpayer and farepayer will pay the necessary return. It will be interesting to see what the 56 three car Siemens (probably) diesel multiple units for the new Trans Pennine Express franchise cost.
Meanwhile here is multiple choice question for readers.
Given that in the years 1994/05 to 2003/04 the ROSCOs have ordered 4474 passenger vehicles what were the quantities ordered by BR between 1984/85-1993/94 – remembering that the order for 41 four car Class 365s in October 1993 marked the start of the 1064 day hiatus?
A) 4017 passenger vehicles and 231 locomotives
B) 1017 passenger vehicles and 132 locomotives
C) 2017 passenger vehicles and 321 locomotives
The answer is, of course, A). Source, a 1992 Steer Davies Gleave study ‘Rail Privatisation: Attractive investment or wishful thinking' which I came across while looking for something else. The same study said that Trans Pennine electrification was ‘financially viable on current criteria (8% return). (That's enough winding up Jim Steer – Ed)