Passenger Railway Services (Public Ownership) Bill

Viscount Hanworth Excerpts

2nd reading
Monday 7th October 2024 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I have been pre-empted in much of what I wished to say by my colleague, the speaker before last—but that pleases me.

The period following the First World War saw a rapid process of consolidation, or grouping, as it was called, which created what were described as the “big four” companies. These were the Great Western Railway, GWR; the London, Midland and Scottish Railway, LMS; the London and North Eastern Railway, LNER; and the Southern Railway, SR. The companies were created by the Railways Act 1921, which came into effect on 1 January 1923. A quarter of a century later, on 1 January 1948, the companies were nationalised to form British Railways as a result of the Transport Act 1947. However, during the Second World War they had been effectively united when operating efficiently under the direction of the Railway Executive Committee, albeit that there had been no investment during that period.

Many regard the interwar years as the golden age of the railways, notwithstanding their poor economic performance; throughout that period, the LNER never made a profit. During that period, the engineering works at Crewe, Derby, Doncaster and Swindon provided the locomotives and rolling stock for their parent companies. They also profited from exporting their products in quantity to Africa, India and South America.

The romance of the railways was sustained by the magnificent main line express trains such as the “Flying Scotsman” of 1923 and the “Mallard” of 1938, which were both LNER locomotives designed by Nigel Gresley. Also memorable was the LMS “Coronation Scot” of 1937. That romance was in the mind of John Major when he oversaw the denationalisation of British Rail, which began in 1994 and was virtually complete by 1997. He relished the revival of the names of the big four. The process resulted in seven, later 25, rail franchises. The number is now down to 17, albeit that there are fewer controlling companies or consortia. These include companies partly or wholly owned by various national rail operators, including those of Italy, France, Germany, the Netherlands and Canada.

Since the beginning of privatisation, many of the train operating companies have ceased to exist, for reasons that include the withdrawal or expiry of the franchises, the bankruptcy of the firms or their mergers. In 2004, Labour, on perceiving the inefficiency of the system, decided to reduce the number of franchises to align them with the structure of Network Rail, which maintains the railway infrastructure. The costs of the fragmentation and disorganisation of our rail system that have resulted from its privatisation are evident from comparisons that can be made with the efficient, nationally owned rail systems of some European countries.

The privatisation of 1994 saw the creation of a separate organisation charged with the maintenance of the railway infrastructure. That was Railtrack, which operated from 1994 until 2002. It owned the track, signalling, tunnels, bridges, level crossings and all but a handful of the stations. Many of the operations were outsourced to other companies. The consequence was that the infrastructure fell into disrepair and the state of the rail track was blamed for two major train accidents. The company was eventually taken into public ownership under the title of Network Rail.

Another problematic feature of the privatisation has been the creation of the so-called rolling stock leasing companies, or roscos, which own the locomotives and carriages that are leased to the franchise owners. There are six rolling stock companies operating in Britain, as we have heard, three of which own 87% of the rolling stock. They are owned by consortia, structured in complicated ways, which embody a large proportion of foreign capital. These consortia derive substantial profits; according to a document of the RMT rail union, between 2012 and 2018 the roscos passed a total of £1.2 billion in the form of dividends to their parent companies or consortia.

These companies are motivated to prolong the life of the rolling stock. It is notable that the average age of the rolling stock rose from 16 years in the first year of privatisation to almost 20 years in 2017-18. The rolling stock companies have no obligation or incentive to maintain a steady and co-ordinated stream of new orders for rolling stock. Their failure to do so has been to the detriment of our native manufacturers, which have also passed into foreign ownership and been subject to a series of takeovers and closures. The roscos might continue to lease their trains and rolling stock to a nationalised rail network for as long as they are serviceable, but there is no reason why they should be relied on to purchase new equipment. Such purchases should be made exclusively by Great British Railways, the new publicly owned authority.

All the major political parties have called for the reintegration of our rail system, albeit that the Conservatives have been coy about calling it renationalisation. The process will entail a massive reorganisation, which will take time. The current Bill, which is the first small step, does little more than relieve the Minister of the obligation to invite competitive tenders from parties proposing to run sections of the system. Placing the system under a coherent central direction which can address strategic matters will relieve the Minister for Transport of the continual interventions, described as micro-management, that have been necessitated by the disjointed nature of the privatised system. This will enhance the efficiency of the operations. At the same time, it should facilitate regional planning within a wider national framework, which should be able better to meet local transport needs.

It has been observed that the process of renationalisation, as far as it concerns the train operating companies, will be virtually costless. The franchises will fall into the Government’s hands when they expire. Already ScotRail, Welsh railways, the east coast main line, TransPennine, Northern, Southeastern and the Caledonian Sleeper are in public ownership. The Department for Transport currently controls these train operators via rail transport’s operator of last resort, which is known unaccountably by the initials DOHL. Someone might explain that to me; I cannot find what those initials signify. Although it is proposed that the expiring franchises will fall under this umbrella, there is an allowance in the Bill for the extension of franchises in case DOHL finds itself overwhelmed in coping with its new acquisitions.

It seems that there is no intention at present to nationalise the rolling stock companies, presumably because to do so would be too costly. However, control must be exercised to ensure that there is a steady stream of orders to support the train manufacturers in the UK. The three firms that are manufacturing trains in the UK—Alstom, Hitachi and Siemens—are in foreign ownership, and each can fulfil its orders by manufacturing its trains elsewhere. The Government must guard against the ever-present danger of losing our train manufacturers.

Britain was the original railway nation—it began its railway exactly 200 years ago—but, since its privatisation, the nation has been in danger of losing ownership of its rail system. The hope is that we can repossess it, at least in part. The system has been widely subject to a predatory profit motive. By alleviating that, one can expect a better return for taxpayers’ and passengers’ money. Even greater gains are in prospect, which should come from reducing the inefficiencies of a disjointed and dislocated system.

Passenger Railway Services (Public Ownership) Bill

Viscount Hanworth Excerpts

Committee stage
Wednesday 23rd October 2024 Lords Chamber

[Lord Sikka (Lab)]

My Lords, Amendment 44 requires the Secretary of State, within 12 months of enacting the Bill, to publish an annual report on the relationship between the provisions of the Bill and the leasing of rolling stock to public sector companies. My preference would have been to end the private ownership of rolling stock, but the Bill officer suggested that such an amendment was beyond the scope of the Bill—hence this silly weak amendment that I am putting forward.

The background is that, during Second Reading, on 7 October, the noble Baroness, Lady Blake of Leeds, laid down the principles of the Bill. She said:

“This Bill will ensure that trains are run for the benefit of the British public, not for the profits of shareholders around the world”.


She added that, by ending the current franchise system for passenger railways,

“the taxpayer will save between £110 million and £150 million a year in fees”.—[Official Report, 7/10/24; cols. 1831, 1833.]

The Government have already said that they will not bring rolling stock back into public ownership. However, the new system, operated by a public company, will still need rolling stock, and the Government have not provided a great deal of clarity on that so far. By leaving the rolling stock in private hands, they will be negating their own principle, which was to deny profits to shareholders around the world.

The Bill will not facilitate public ownership of passenger railway services. Instead, it will facilitate what I call “rent a carriage”. That will guarantee massive profits for rolling stock companies—roscos—which do not build or commission trains but make huge profits. Last year, roscos charged £3.1 billion for leasing out rolling stock and had a profit margin of 41.6%. That is a profit of £1.29 billion in one year, extracted from customers and the public purse. The actual amount which the shareholders have extracted from roscos is likely to be much, much bigger—more of that in a moment.

I looked at the accounts of one of the roscos and it is full of financial engineering. The £1.29 billion profit which it declared for a year is far greater than the savings for the passenger services that the Minister said would be £110 million to £150 million a year. There is no justification for the profiteering of roscos, especially as the payments are guaranteed and in future will be guaranteed by the state—at worst, it can simply print the money—so the risk is very low. The return should be no higher than the yield on any government bond, which is technically called a risk-free rate of return.

The actual returns extracted by rosco shareholders are much bigger than the dividends. Let me illustrate that with quotes from the accounts of Porterbrook, which is one of these companies. It is owned by foreign shareholders: Canadian pension fund manager Alberta Investment Management; Luxembourg-based Allianz Capital Partners; EDF Invest, which is owned by the French Government; and Australian infrastructure investor Hastings Funds Management. Porterbrook’s 2023 accounts show a payment in dividends of £150 million. In 2022, it was £285 million. That is £435 million in dividends in just two years, which is far greater than the expected total saving of £110 million to £150 million for the publicly operated passenger service.

The company also shifts profits through intra-group transactions. In 2023, it paid £154 million interest on its debt, which included £153.5 million to other entities in the same group—not to an outsider, but within the same group. In 2022, it made interest payments of £162.4 million, which included £161.2 million to other group entities. In the absence of additional information, it is hard to know whether such payments are genuine. They are probably not.

Of course, profits are also shifted to avoid taxes. Interest payments give the company a tax-deductible expense, even though the transactions are not arm’s length and may lack economic substance. This company paid no corporation tax in the last two years, dividends are paid to foreign investors, and they did not pay any UK tax on those. This really is organised looting, permitted by the last Government, and I urge the Minister to ask HMRC to investigate these companies. Over the last two years, Porterbrook extracted at least £750 million in returns for its shareholders, or an average of £375 million a year. This is far greater than the £110 million to £150 million which the Government hope to save by ending passenger rail franchises.

I have referred to only one company, which is by no means the largest one, but I am sure the Minister gets the substance of my arguments. Billions of pounds can be saved by ending the role of current roscos in the railway industry. Leasing out rolling stock is effectively a licence to print money. I understand from rail company executives that the useful economic life of a carriage is around 30 years or more. The cost of a carriage is normally recovered through rental or leasing arrangements over a period of five to seven years. This being so, the rental charges of 23 to 25 years are pure profit, nothing else. There is absolutely no economic justification for this. The Government can help by stopping the use of current roscos. They can buy direct from manufacturers or set up a Great British Railways leasing company. All of these options are preferable to the current practice.

I hope that, as a first step towards ending profiteering, the Minister will agree to publish the annual report that this amendment calls for. It should provide data about the returns extracted by shareholders in dividends, intragroup transactions, related-party transactions and various profit-shifting techniques. Of course, my preference is to end this roscos circus altogether.

[Viscount Hanworth (Lab)]

My Lords, I offer my support to Amendment 44 and, beyond that, want to support and reiterate what my colleague has just asserted.

I agree that, consequent upon the Bill, the whole of the rail system needs to be kept under review during the period of transition. The privatisation of British Rail imposed costs on rail users and taxpayers. There were costs that resulted from the disorganisation of the system which might have been alleviated by rational central planning. There were also costs that arose from the profit-seeking and rent-seeking of the agents of privatisation.

Some of the main train operating companies have been paying large dividends to their ultimate owners. These include consortia of foreign banks and foreign national rail companies, as we have heard. The companies that own the rolling stock and lease it to the train operating companies have been deriving large and exorbitant rents. These companies are of course called the roscos.

The three largest companies, Porterbrook, Eversholt Rail Group and Angel Trains, own 84% of the UK’s rolling stock. They were established in 1994, at the time of the privatisation. They acquired their rolling stock at vastly undervalued prices and substantial profits were reaped when they were sold on to subsequent owners. These companies have complicated structures of foreign and domestic ownership. Between 2012 and 2018, the three largest roscos passed on a total of £1.2 billion to their parent companies in the form of dividends. We have heard that this sum has recently become even more exorbitant. The Government appear to have concluded that it would be far too expensive to bring these companies into public ownership.

It should be observed that the era of the roscos has coincided with the demise of our railway manufacturing industry, the remnants of which have now fallen into the hands of foreign owners. This demise has been due, in part, to the activities of the rolling stock companies. Instead of providing a steady flow of orders for new rolling stock, they have often opted to refurbish their existing stock. This has made it unprofitable to manufacture trains in the UK. The train manufacturers are now in foreign hands, and they may decide to retreat abroad.

To avert this, there needs to be a consistent stream of rolling stock replacements, subject to a centrally managed plan. The question is how this can be achieved. Others may have opinions to offer on this matter, but I believe that, when Great British Railways is properly established, it should undertake this task. Great British Railways would not be remitting exorbitant dividends to financial consortia, such as the owners of the existing roscos do, and it would not be paying eye-watering salaries to its executive staff. As a consequence of such savings, it would be able to offer attractive rates of return to funds borrowed from capital markets, which might assist investment in new rolling stock.