scotland (4K)
The Friends of the Far North Line
Cairdean Na Loine Tuath
the campaign group for rail north of Inverness - lobbying for improved services for the local user, tourist and freight operator

The Law of Unintended Consequences

(Rail Privatisation and Leasing)

1955 was the last year that the nationalised British Railways reported an accounting profit. Since then railway finances have been a matter of deep concern to politicians and civil servants alike. The pruning of the 1960s was followed by investment famine of the 70s and 80s. The time bomb of looming railway investment was a major driver of privatisation of the 90s together with a doctrinaire view that a state industry must be by its very nature inefficient. Spending over £200 million on consultants' fees seemed a reasonable price to pay to get rid of the railway problem.

Part of the solution to rake some value into the Chancellor's pockets was the establishment of leasing companies for railway locomotives and rolling stock (excluding freight assets). The clever idea was to revalue fixed assets at their current replacement costs. This is contrary to generally accepted accounting principles that assets should be reported at their historic cost less an annual depreciation charge or net realisable value. An example might be helpful:

Cost of a Mark 3 coach built in 1979 say £200,000
15 years depreciation over a 30 years life £100,000
Net book value in 1994 £100,000
Current replacement cost in 1994 on privatisation £1,200,000
Annual Leasing charges on same coach £300,000
(£300,000 was reported by Modern Railways as the annual cost of leasing each mark 3 coach as temporary replacements for the North Berwick service.)

So the annual leasing costs were higher than the historical cost. This is good business and in current jargon would sweat the assets.

The stated reason for this accounting sleight of hand was to encourage investment in new rolling stock and develop a competitive market in rail leasing which would drive down prices. However there were a number of unintended consequences. Under BR a system of cascade was in operation where front line assets were later reassigned to secondary services, e.g. mark 2 coaches were reallocated in the mid 80s to Inverness - Edinburgh/Glasgow services providing more comfort to passengers.

Sadly, banks are driven by their bottom line profit. Accordingly once their Mark 3 coaches were earmarked to be replaced by Virgin Pendolinos, heavy maintenance expenditure was suspended. These coaches of excellent quality should be fit for a further period of secondary service and are available for purchase at a nominal cost each but they will now require a fortune to be spent on deferred maintenance and the banks don't want to pay!

Mark 3s would make a step change improvement in the Central Belt - Inverness service and provide capacity for bikes and parcels that has been lost for the last 15 years. Surely, the Government ought to require the banks to sell them on in good condition to First ScotRail.

For once I must reluctantly agree with the RMTs general secretary, Bob Crow, who is quoted in the current issue of "Rail" as follows "The rolling stock leasing companies have made more than £2 billion profit since privatisation but while they are raking it in at massive 30% margins there is no commitment to a refurbishment programme."

Hence a desire for a short-term fix and a hope that the problems of the railways would just wither away has by its labyrinthine nature created a shambles that as the man said "if I was going there I wouldn't be starting from here!" It would have been much simpler to put the many billions routed through leasing companies straight into assets but all governments seem currently obsessed in pretending that if you buy things on the never never that you don't owe the money.

What a way to nurture railway assets!

The views expressed are personal and not based on any deep research but an intuition of the situation gathered over the last ten years as a geriatric accountant!
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