Barely a week goes by in the British press
without a news story involving the UK’s beloved and beleaguered

While passengers appear to be plagued by
ticket price increases and delays caused by falling foliage, the
rolling stock leasing industry is seen as less turbulent.

This stability has been given further strength
with rail projects such as Crossrail and the political hot potato
High Speed 2 (HS2).

Yet the industry could be on track for some
subtle switches in direction which could impact on the rolling
stock leasing industry’s reliability.

“Rolling stock is generally regarded as a
stable asset,” Tom Johnson, partner at Norton Rose LLP, told
Leasing Life.

“It is an industry which requires long term
horizons and a significant level of government support and
commitment, and that support is there,” he added.

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A year ago, said Johnson, a lot of people were
speculating that rail expansion initiatives such as the
Intercity Express Programme (IEP), Thameslink and Crossrail would
be cut or cancelled outright and the volume of rolling stock
reduced, but the Government has stated that it’s committed to
all three projects.

George Lynn, chief financial officer of Angel
Trains, one of the three main rolling stock companies (ROSCOs),
says these significant infrastructure projects are what give
rolling stock leasing its reliability.

“ROSCOs benefit because rolling stock is like
infrastructure; the reason infrastructure funds invest in rolling
stock leasing is because we share very many characteristics of an
infrastructure business,” he said. UK railway rolling stock costs against wider industry costs

“Infrastructure business takes a long time to
change – a long time to invest and a long time to move so we know
what we are doing at the moment will have little impact this week
but a lot of impact in three or four years time and beyond

“I’m not sure relaxed is the right word but
our business is more circumspect.

“You can take a balanced view of what is

Long term stability may be a feature of
rolling stock leasing but the industry is not completely immune to
the changing politics and public opinion which affect the wider
rail industry.

An independent report commissioned by the
Department for Transport (DfT) published in May this year into
value for money in British railways made suggestions for changes to
the current model for rolling stock leasing.

The report, complied by Sir Roy McNulty,
suggested, among other things, that the DfT should explore the
possibility of establishing “strategic partnering arrangements with
ROSCOs which commit ROSCOs to offering rates on re-lease that
demonstrably offer value for money.”

The McNulty report followed the Competition
Commission report in 2008 into the rolling stock leasing industry
which identified a lack of competition between ROSCOs as leading to
higher re-lease rates.

The McNulty report goes as far as to say the
DfT could consider procuring and holding rolling stock itself
should there continue to be perceived problems with re-lease

Although McNulty believes it is too soon after
the Competition Commission findings to assess if the report has had
any impact on the openness of the rolling stock leasing market.

One of the suggestions in the Competition
Commission report which is supported by the McNulty document is the
idea the length of franchises open to train operating companies
(TOCs) be extended from between seven and 12 years to 15 years or

Tom Johnson said it is hard to predict
how the recommendations in the McNulty report are going
to be implemented in practice, although he said longer
franchises could drive change in the rolling stock leasing

George Lynn suggests longer franchises could
help secure more investment from the TOCs which he says the
government is hoping to encourage.

He explains: “When we buy a train we buy it
because we expect it to last 30 years and we make various
assumptions about what rental we can get throughout its life and we
work in the basis we may have to re-lease two, three or four
times.Rolling stock whole life cost breakdown (40 year life, real values undiscounted)

“Longer franchises will reduce the number of
times we have to consider RV risks, ultimately it won’t necessarily
change our view on whether we want to buy a train or not but
greater certainty will have an impact on the underlining lease

Since the Competition Commission report was
published, new lessors have entered the market including QW Rail
Leasing, a consortium of National Australia Bank and SMBC Leasing
and Finance, which owns the London Overground rolling stock, and
Lloyds TSB, which financed the purchase of 60 Bombardier Trains for
passenger trains in East Anglia and freight rolling stock in

However, the three big ROSCOs, Angel Trains,
Porterbrook and Eversholt, continue to own the majority of the
11,000-plus vehicles which make up the UK rolling stock fleet;
sharing the market with roughly a third each.

One other company which has recently moved
into rolling stock market is Agility Trains. The consortium of
Hitachi and infrastructure firm John Laing retained the preferred
bidder tender for IEP after the DfT-commissioned Sir Andrew Foster
report into the value for money of the project gave it the green

The IEP is a DfT programme to procure new
trains to replace the InterCity 125 fleet on the East Coast Main
Line and Great Western Main Line, and the Class 365 fleet serving
Cambridge and King’s Lynn.

One of the findings of the report highlighted
as positive was the alternative funding model Agility Trains have
in place for the IEP which Foster suggest could prove

Alistair Dormer, chief executive of Agility
Trains, explains TOCs using the Hitachi Super Express trains under
the IEP will only pay for what they use.

He said: “Currently, a ROSCO lease is known as
a ‘hell and high water lease’ basically because the lessee company
still has to pay regardless of the performance of the asset.
Although, obviously there is residual value risk associated with
the asset.

“With our structure there is no guarantee of
payment – it is purely a performance payment.”

Dormer explains Agility will act as train
service provider (TSP) and will be paid on a daily basis for each
train being made available, clean and fully functional each day to
the TOC.

The deal includes penalties for Agility for
failures in service and Agility will take on the “downtime risk”
between handover in the morning and hand back at night.

Part of the original invitation to tender
required bidders to take full performance risk for the trains on a
“no train no pay basis”.

Dormer said Agility had considered a leasing
structure to finance the scheme but a project finance funding model
provider more opportunity.

He said: “To cover the size of this project,
project finance worked for us better because there are more players
in project finance than in the leasing structure – it was driven by
liquidity in the market.”

Dormer added: “Primarily we are investing in
this is as a manufacturing company and it was clear from the
invitation to tender that the DfT were looking for manufacturers to
take a stake.”

Foster described the TSP finance model as a
sign of the confidence Agility Trains have in their project and
added: “From the DfT perspective, financial incentives are
unusually well aligned with desired outcomes.”

The TSP model is, however, untested and Norton
Rose’s Johnson said it remains to be seen whether the
“transformational” IEP funding model impacts on the current rolling
stock leasing market.

As for whether the special-purpose company
Agility Trains will look to expand on their rolling stock
involvement in the UK, Dormer is guarded.

“Who knows what the future holds? It very much
depends on each on opportunity as it comes along,” he said.

“If there is a requirement for Agility to
invest then yes we will, equally, if it is done via a ROSCO then we

For the foreseeable future of rolling stock
leasing George Lynn is optimistic; in addition to the projects
currently underway, High Speed 2 (HS2) is still on the horizon
despite well publicised protest from those who may be affected by
the track construction.

Lynn sees HS2 as necessary and inevitable: “If
you want to have any real improvement in the speed of transport –
get people off the roads and not using planes – you need to have
high speed trains.”

He adds: “Infrastructures are political
decisions and I imagine there is enough emphasis behind HS2 for it
to go ahead at some stage but whether that is in 10 or 20 years I
wouldn’t want to comment. It will at some stage go ahead.”

A further positive for the big three ROSCOs
and those who have entered the rolling stock leasing market is the
continued increase in passenger demand.

Lynn sees this as leading inevitably to
further investment in rolling stock.

He said: “A lot of the rolling stock market in
the next 10 to 15 years will be about increasing capacity on the
lines as part of better and more integrated transport system.”

Johnson agrees: “The government is committed
to rail and there is a need for rolling stock driven, as much as
anything, by the continuing increase in passenger numbers. If you
look at it from that perspective, it’s a great industry to be