Hard-pressed train makers encounter leases on the line: Michael Harrison describes what rail privatisation will mean for suppliers of rolling stock

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The Independent Online
EVERY time you fly there is a better than even chance that the aircraft you sit in will be owned, not by the airline whose colours adorn the fuselage, but by a bank, finance house or leasing company. By the end of this decade much the same will apply to rail travel in Britain.

On Wednesday British Rail's Network SouthEast division broke with tradition by signing a pounds 150m deal to lease 41 Networker Express trains from the Derby-based train builder ABB Transportation. It is the first time BR has not bought passenger rolling stock outright. It is also the shape of things to come.

Provided the impending privatisation of BR does not go disastrously off the rails, Britain's hard- pressed rolling stock manufacturers will no longer have one monolithic customer bankrolled by the Government to deal with but an assortment of private rail franchisees and leasing companies.

Since the average length of the franchises will be seven years and since a class 465 Networker, for instance, is built to last 35 years, there are unlikely to be many private operators interested in investing directly in new rolling stock.

Leasing also has strong political attractions in the current economic climate since it is a neat way of transferring risk to the private sector while spreading public expenditure over an extended period.

Instead of having to find pounds 150m up front to finance the Networker order, for instance, BR will pay ABB for its trains over the period of the lease, in this case a minimum of 12 years and a maximum of 25.

But not just new rolling stock will be leased. From next April BR's passenger fleet - 11,000 locomotives and carriages with a book value of pounds 2bn - will be divided up between three new rolling stock leasing companies whose job will be to lease trains to the new wave of franchisees. Initially they will operate as BR subsidiaries, but the eventual aim is to privatise them.

Since these leasing companies will also be responsible for the vast bulk of future rolling stock orders, they have the potential to become even bigger businesses. Network SouthEast alone estimates that over the next 15 years 25 per cent of its 6,000 carriages will need to be replaced - an investment programme amounting to about pounds 1bn.

The Networker order offers a lifeline for the 1,000 workers at ABB's York factory. But for the company, and Britain's other big train maker GEC, it also marks a watershed in the way they do business.

Bo Sodersten, chief executive of ABB, said: 'For the operators of the trains it will be pay as you go or pay as you get the revenue, and that entails quite a major transfer of risk to the supplier and quite a number of complications. An outright purchase is a much cleaner arrangement.'

The reason that the risk has been tipped firmly in the direction of the rolling stock manufacturers is that the type of agreements they will be obliged to enter into involve operating leases rather than finance leases.

Under an operating lease the supplier is responsible for maintenance of the rolling stock throughout the lease period and, since it will still own the asset at the end of the lease, determining a residual value and finding a new lessee.

As well as imposing a strain on suppliers, the leasing mechanism selected by the Government looks like posing a challenge for the established leasing market.

Christine Fowler, of Babcock & Brown, one of the country's principal arrangers of lease financing, said: 'Within the UK there must be pounds 800m to pounds 1bn worth of funds available each year to support the leasing of big-ticket items like aircraft ships and trains. The problem, therefore, is not lack of finance but the terms on which the Government wants it to be provided.'

Because of the sheer complexity of the leasing model adopted by the Treasury and the degree of risk transferred to the private sector, Babcock & Brown had to work with ABB for more than a year to put together a workable deal.

The concept of lease financing rolling stock is well established in the US. But there it is largely restricted to freight trains which, because of their standard design, can be used almost anywhere in the world. So there is a healthy second- hand market and it is possible to determine residual values.

'The problem in the UK is that rolling stock is specially designed for parts of the network and doesn't work elsewhere,' Ms Fowler said.

Babcock & Brown has already approached a number of the big US rolling stock leasing companies, such as GE Railcars and GATX, to test their attitude to the potential on this side of the Atlantic. Ms Fowler said: 'They are interested but, not surprisingly, they are also cautious because the market is new and quite restricted.'

In framing its rail privatisation bill the Department of Transport has gone some way to meet the more obvious worries of rolling stock manufacturers and would-be lessors. Where a passenger franchise is handed over from one operator to another, for instance, the Government-appointed franchising director will have power to require the successor franchisees to use the same rolling stock.

BR, meanwhile, is designing rolling stock that can be used on virtually any part of the network. The Networker Expresses that will begin service in 1995 on Network SouthEast's Great Northern line routes and Kent coast services can, for instance, run on all electrified lines.

But it is a brave new world for the rolling stock industry. Much remains in the realms of the unknown - the precise type of leases the new leasing companies will offer, how these companies will be capitalised and how quickly ownership can be transferred to the private sector.

As Mr Sodersten put it: 'It is not easy to forecast what is going to happen. We will have to use maximum imagination to find ways of securing the finance because Britain has a competent rolling stock industry, and I would hate to see it not being properly developed.'

(Photograph omitted)