CIPFA: Taken for a ride: Rolling stock privatisation slammed in new study

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Wednesday, 19, Mar 2008 12:00

The privatisation of the UK’s rolling stock in the 1990s, as part of the sell-off of the railway industry, was botched from the very beginning, a new study published today claims. However, while commentators have comprehensively assessed the trials and tribulations of the train operators and infrastructure companies, very little attention has been given to the privatisation of the Rolling Stock Companies, two senior academics argue in the latest edition of the policy journal Public Money & Management (PMM).

Following the break-up of British Rail, three Rolling Stock Companies (ROSCOs) were created to lease trains to the operating companies. Now, Sean McCartney, of Queen Mary University of London and John Stittle of University of Essex describe this privatisation as a ‘significant triumph of political expediency over sound governmental financial policy’. The authors claim that the sell-off was ‘seriously flawed in both design and implementation, which resulted in serious under-pricing’.

As they explain in PMM, when the original tenders were due, there was little interest from external bidders, with only four companies in the race—three management buy-out teams and one outsider. Even so, within months of the initial sale, all three ROSCOs had been sold on to new owners, for a total of more than £2.6 billion, generating some spectacular individual fortunes including those of several former British Rail managers. All three later became subsidiaries of large banking groups. John Stittle, of the Accounting Department at the University of Essex, said:

“The relatively low sale proceeds obtained by the state is largely a reflection of the government’s political expediency to be seen as achieving a ‘successful’ ROSCO privatization as the first major stage of its railway privatization programme. Without this rapid sale, the government would have faced delays in privatising other sectors of the railway industry.”

The authors conclude that that the key factor seemingly overlooked by the government of the day was that the sell-off of the ROSCOs had very little attached risk. Over 80% of the ROSCO lease rentals were underwritten by the state. The short-term nature of train franchises meant that train operators would not take the risk themselves of purchasing their own stock. Virtually all train operators were, in effect, compelled to lease their rolling stock through one of the ROSCOs. And since each ROSCO was exclusively allocated a specific type of rolling stock, train operators had virtually no choice in selecting which ROSCO would supply it. The net effect was that the ROSCOs were very secure businesses and faced very little threat to their revenue streams.

The April issue of Public Money & Management also features an assessment of ‘Best Value’ audit practices in Scotland by, amongst others, Clive Grace of Cardiff University, while, David Dorrell of the National Audit Office summarises his recent report in to the use of targets to address differentials in public service performance.

ENDS

Contact: Richard Taylor CIPFA Press Office,

tel: 020 7543 5687 email: pressoffice@cipfa.org

Notes to Editors:

1. For a full copy of the article Taken for a Ride: The Privatisation of the UK Railway Rolling Stock Industry in the April issue of Public Money & Management please contact Richard Taylor tel. 020 74543 5687 or e. Richard.taylor@cipfa.org

2. Public Money & Management is owned and managed by the Chartered Institute of Public Finance and Accountancy (CIPFA), www.cipfa.org.uk. The journal is published on behalf of CIPFA by Blackwell Publishing. It has a multidisciplinary and international audience. It publishes articles which contribute new knowledge as a basis for policy or management improvements, or which reflect on evidence from public service management and finance in order to suggest topics for research. Readers include: officials in all types of public service organizations; academics; consultants and advisers working with the public services; politicians

3. The Chartered Institute of Public Finance and Accountancy (CIPFA) is one of the leading professional accountancy bodies in the UK and the only one which specialises in the public services. It is responsible for the education and training of professional accountants and for their regulation through the setting and monitoring of professional standards. Uniquely among the professional accountancy bodies in the UK, CIPFA has responsibility for setting accounting standards for a significant part of the economy, namely local government. CIPFA’s members work (often at the most senior level) in the public service bodies, in the national audit agencies and major accountancy firms. They are respected throughout for their high technical and ethical standards and professional integrity. CIPFA also provides a range of high quality advisory, information and training and consultancy services to public service organisations. As such, CIPFA is the leading independent commentator on managing and accounting for public money.