The Rail Regulator blamed the Government's franchising policy yesterday for many of the defects in the market for train rolling stock, as it said it was minded to order a full competition inquiry into the sector.
The Department for Transport asked the Office of the Rail Regulator (ORR) to examine the lack of competition for rolling stock in June, claiming that the three train-leasing companies, all of which are owned by banks, are making £175m a year in excessive profits.
The answer that came back yesterday was that the industry was indeed inefficient but the ORR concluded that "it is evident that a number of these [negative] features arise from Government policies".
The ORR highlighted aspects of the market such as the department making the award of a franchise so specific, that the train operator's choice of stock was very limited. The regulator was also critical of business practices of the leasing companies, including maintenance and service agreements.
The regulator's criticism of the Government gave the train leasing companies immediate ammunition to hit back. The three companies are Porterbrook, which is part of Banco Santander, Angel Trains, which is owned by the Royal Bank of Scotland, and HSBCRail.
Angel pointed out that it had invested £3bn in new trains in recent years and said: "Angel Trains is clear that there is no case for further investigation. If, as the report indicates, it is the DfT's own franchising policy which is principally responsible for the matters about which it has complained, DfT has the remedy for this in its own hands."
The DfT welcomed the ORR's statement that it was "minded" to refer the £1bn-a-year sector to the Competition Commission, claiming that the excess profits being made would equal £2bn over the life of the leases - equivalent to an 8 per cent increase in annual season tickets. The DfT added: "The Government believes that this money would be better invested in the rail network to deliver further improvements for the travelling public."
A spokesman insisted its policies were not at fault but he added: "The ORR has questioned whether changes to the franchise process would help. We will be happy to explore this further with them during the consultation but find it difficult to see how it will have a significant impact on the current market given the technical and operational characteristics of the trains and the market of which they are part."
The ORR said there was "very limited" choice when it came to selecting passenger rolling stock for franchised passenger services, with franchisees often having few alternatives but to re-lease the rolling stock previously in use in that franchise. "This, we suspect, has led to higher prices and lower quality of service than would be the case in a more competitive market," the ORR said.
The regulator will now go into a consultation period before deciding whether to make a reference to the Competition Commission, which would then launch an inquiry that could last two years.
The leasing group Porterbrook appealed for a less draconian action than a Competition Commission probe which, it said, would involve significant costs and "would also lead to unnecessary market uncertainty".
The company suggested a review by the rail regulator instead or an amendment to the industry codes of practice.Reuse content