factFiction4 FactCheck: Are the train operators the villains of the piece?The claim

“This money will not be invested back in services, it will be trousered by the greedy train operators as another windfall profit.”
Bob Crow, 14 August 2012

The background

After the Olympic high, it was back down to earth with a bump today with news of inflation-busting rises to rail fares.

Actually, there was nothing new in the government’s announcement that the rail companies will be allowed to raise ticket prices by 3 percentage points more than RPI inflation.

The “RPI+3″ rise in 2013 had been flagged up as early as the Comprehensive Spending Review in 2010. The nasty surprise today was that RPI rose to 3.2 per cent in July.

That means regulated fares – season tickets for most commuter journeys and off-peak fares on most intercity journeys – could go up by as much as 6.2 per cent. A few could soar by as much as 11 per cent thanks to the “flex” system, which we’ve FactChecked before.

Never one to mince his words, RMT union leader Bob Crow was quick to point the finger at the train operating companies, accusing them of seeking to cash in on commuters’ misery.

The analysis

The anger is understandable, but Mr Crow may be slightly off the mark by blaming the price hike on the greed of the train operators.

The Association of Train Operating Companies (ATOC) told us there was no way their members could profit by today’s move, thanks to terms and conditions agreed with the government in the companies’ franchise agreements.

These rules state that all additional revenue from fare hikes will go straight back to the government, which is committed to a massive rail investment programme and needs the money.

The Department for Transport is in charge of setting the fare cap, and they confirmed to us that they expected to recoup any “windfall” from the companies in full.

It’s partly for this reason that profit margins for the operators have remained stable and relatively low since the privatisation of the railways.

ATOC claims that, despite the large sums of money involved, only 3p or 4p in the pound goes back to the company as profit, thanks to very high operating costs.

Independent analysts back that up, with the TAS consultancy putting the average profit margin at about 3.9 per cent.

There are other companies making much bigger amounts of money than the operators, and enjoying much higher profit margins.

These are the Rolling Stock Operating Companies  – or ROSCOs – and their position in the rail industry food chain remains controversial, nearly 20 years after privatisation began.

Britain’s train fleet used to be owned by the taxpayer but much of it was sold off to three ROSCOs who went on to make money by leasing the vehicles to the train operators. ATOC says about 11 per cent of operators’ costs are spent on leasing agreements.

There are three major players in the rolling stock market: Angel Trains Ltd, Eversholt Rail Group and Porterbrook Leasing Company Ltd. All are owned by private equity, with varying levels of transparency over the shareholders.

Angel Trains appears to be owned by a parent company called Willow BidCo, based in Jersey [*See update]. Eversholt is ultimately owned by European Investment Group Sarl, registered in Luxembourg. Major shareholders include Morgan Stanley Funds.

Porterbrook is owned by three firms representing pension funds and other investors.

Those companies are obliged to invest heavily in new stock to replace older trains, so there are huge costs involved for investors, but this is still a very lucrative business.

In 2007 the Office for Rail Responsibility referred the ROSCOs to the Competition Commission. DfT said at the time that market weakness meant the the ROSCOs were making excessive profits, leading to a loss of up to £177m for the taxpayer.

The Competition Commission said there was no evidence that the leasing companies had overcharged the train operators and “no evidence of co-ordination in pricing or market sharing”, but the watchdog did find “competition problems” and suggested a series of reforms.

Five years on, and the independent McNulty report – whose recommendations on railway efficiency savings the government is following almost to the letter – concluded that these measures could not guarantee value for money for the taxpayer.

The main thrust of Sir Roy McNulty’s study is that the costs of rail remain sky-high in Britain – up to £3.5bn more than they ought to have been in 2008/09. Unit costs haven’t improved since the mid-1990s and would need to be cut by 40 per cent to match other European countries.

Sir Roy singled out rolling stock as an area where costs can be cut.

He doubted whether some rates being charged by the ROSCOS are “demonstrably value for money” and suggested that the government consider intervening in the market directly to regulate fair rates of return or “establish new vehicles to procure and hold rolling stock in the public interest”.

According to the ROSCOs’ latest annual reports, profit margins in this sector far oustrip those enjoyed by the train operators. Gross profits across the three major players totalled £350m in 2011, up from £247m in 2010.

Net profits across the three leasing companies have tended to come in at around 10 per cent of revenue over the last two years on average and some individual profit margins are eye-watering.

Angel Trains Ltd declared a profit of £123.5m in 2011 out of £341.7m revenue. In 2010 the ratio was even higher: £194m total revenue and more than half of that – £112.2m – profit.

That’s profit after tax, and if it looks like a lot of money that may have something to do with the fact that the company apparently only paid income tax of  4 per cent and 6.7 per cent respectively in those years.

The verdict

We think Bob Crow may be a bit off-target in blaming the operating companies for these painful price rises. Of course, as an avowed opponent of privatisation, Mr Crow no doubt sees all profits, shareholders, dividends and bonuses as an affront.

But it’s worth pointing out that the rail companies aren’t necessarily the ones creaming off the biggest profits from privatisation.

By Patrick Worrall

[*Update: A spokesman for Angel Trains told us: "Willow Bidco is a holding company, so indirectly own Angel Trains, and has since Angel Trains was acquired in 2008 by a consortium of infrastructure funds, the majority of which represent pensions.

"The holding companies are Jersey-based but all are registered for UK tax and as such, all pay UK corporation tax. Neither Angel Trains nor its shareholders receive any corporation tax benefits from the Jersey structure and, like many private equity consortia, use Jersey holding companies because the transfer of ownership is easier.

"All the required information about the company’s UK annual reports is lodged at Companies House."]

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