Mr. Chakrabortty has identified a 147% return to capital

I have to say that I don’t actually believe it myself:

The figures are astonishing. In the financial year ending in March 2012, the train companies gained an average return of 147% on every pound they put into their business. Forget about high: that is stratospheric. It suggests that – despite all the promises made by the freshly rehabilitated John Major – the train operators are investing barely anything, but making bumper returns.

If you’re a pensioner, imagine a savings account that promised to give you next year a 147% return on your cash, rather than the 1% you’ll typically get now. If you’re a first-time buyer, imagine selling up next year at a 147% markup – impossible even in primest, most central London.

Other businesses would kill for the kind of low-investment, high-returns that Arriva, Stagecoach and the rest are making from their train sets. Big supermarkets get about £1.08 back for every quid they put in: all that stock ties up a lot of cash. Even the supposed profiteers over at Barclays would punch the air at a 10% return. For every pound the railway barons put in, they get £2.47 back.

And that most recent figure isn’t a fluke. The Cresc team went back all the way to the start of the electronic database in 2004, and found that year after year the pre-tax return on capital employed was never less than 100%. Just as remarkable are the train operators’ dividends: pretty much all the profit after tax was paid to shareholders.

Anyone care to enlighten us as to what is going on here?

50 thoughts on “Mr. Chakrabortty has identified a 147% return to capital”

  1. “Even the supposed profiteers over at Barclays would punch the air at a 10% return. For every pound the railway barons put in, they get £2.47 back.”

    SUPPOSED profiteers!! I thought they were supposed to be real-life profiteers!

    But… if they did see returns of 147% then damn right, they would be in there like a shot when the franchise was up for renewal. And every other bank. And then the winning bid would be so high there would would never be anything like this return.

    But then, if it was this high, no operator would ever EVER hand back a franchise before the period was up would it. And no unsuccessful bidder would ever be able to seek JR on the grounds that the figures didn’t add up, because they so would add up.

    So no, I can’t enlighten you, but I can smell bullshit.

  2. They don’t *employ* any capital. They are service providers, who don’t own their trains, tracks or stations. ROCE is a completely fucking stupid measure by which to judge anyone with their business model.

    Their revenue margin, meanwhile, is just over 2% (systemwide farebox income is gbp9bn, sum of TOC annual net profit is gbp200m or so). So a person looking at revenue margins for a more conventional industry would assume based on that metric that the business is a hopeless basket case.

    Both people would be wrong: the TOCs are taking about the going rate for competitively tended management contracts with very little revenue risk or upside.

  3. [shorter version: unless you have some degree of accountancy training, don’t mechanically employ accountancy ratios, or you will look like a tit]

  4. I work as a contractor, I don’t own any plant which (under Australian depreciation schedules) can’t be depreciated within a year. The capital I put in my business to get it started was $10.

    If I were to take every year’s net income as dividends (in practice I don’t) and thus keep total capital employed at $10, my ROCE would be in the region of a million percent. Sadly, this doesn’t make me the richest man alive.

  5. What John b says.

    The Cresc team went back all the way to the start of the electronic database in 2004,”

    Also if they TOCs had their franchises awarded before this date that investment won’t show up in the database.

  6. I think they mean return on equity. ROCE is net profit / (debt + equity). It sounds like they are using RoE = net profit / equity. And I suspect they may be using operating profit / equity (because I’ve not found a net profit number by segment for first group).

    Note that ROE may be very high – back of the envelope suggests somewhere around 50%ish. But this is incredibly geared.

  7. What we really want to know is the return on assets of the train *leasing* companies, not the train *operating* companies.

  8. CRESC has half a dozen Directors, and most of them appear to be sociology types.

    Perhaps he should have asked an economist or accountant?

  9. The investment is made by the companies that own the new rolling stock which is leased by the train operating companies (“TOCs”). Anyone who actually travels by public transport cannot help noticing that the TOC no longer uses pre-war trains (I have to assume Mr Chakrabortty is too young to have commuted by British Fail pre-nationalisation or he only ever travels by taxi). Even the picture that he shows (oh, the horror of no free wifi!) is of a new carriage built by a privatised company for a privatised company.
    Secondly his researchers seem to have missed out 2009 when National Express made a loss before interest of £60.2m on it rail operations (the group doesn’t split the £63m interest cost between rail and bus) and had to have a rescue rights issue which raised £357m.
    Thirdly “capital employed” is jargon – all the cash from selling season tickets gets deducted from the amount invested when calculating “capital employed” so the denominator is artificially low.

  10. I’m a bit at sea as to Mr Ch’s definitions: what, exactly, does he mean, ‘every pound they put into their business’? Without a definition the 147% is meaningless.

  11. ken: all TOCs, by law, are separate legal entities; limited companies which file accounts at Companies House. So the relevant numbers are available, and appear to be the ones that he’s used.

    Gary/john77: yes indeed, the organisations involved for which ROCE is relevant in an industry like this are the ROSCOs. Last time this was reviewed (after DfT threw a dummy-spit that they were price-gouging), the OFT determined that they weren’t. Would be mildly interesting to see the numbers presented for that one today, but not to the extent I can be bothered to look them up.

    John77: since annual industry profits are about gbp200m, then NEXC’s collapse causes them to halve for a single year.

    Nick: he’s comparing the balance sheets of the TOCs (as legal entities) to their income statements, using ratios that are sometimes relevant but aren’t here. He hasn’t got a definition because he doesn’t know what he’s doing. Which he’d realise, if he tried to explain what it meant in this context.

  12. The new, privately-financed, carriages are also a joke, just a different kind of joke. Nonreclining seats, benches even in some trains, five-across in narrow carriages on commuter trains. Too many tables, not enough “airline” seats, too few seats altogether as space is made for palatial loos and “wheelchair space” that is never used.

    First class relegated to <10% of seats, often no different from standard, and costs 3 times as much rather than just enough extra to keep the unwashed out, while some conductors let the unwashed into first for free anyway if standard is full making it even more pointless to pay the premium.

  13. notice that he’s actually aware of the point that ROCE is the wrong thing to look at:

    “A train lobbyist reading this (hi there!) will tell you that measuring investment by the operators is barking up the wrong tree. Arriva and the rest are essentially commissioned by the government to run a line. But that ignores three things. First, the industry never stops banging on about its role as an “investor”. Second, free cash without having to pony up much actual investment is very welcome to the Branson empire, among others.”

    the structure of the argument is this:
    1. privatisation is sold to the public as a means of raising investment
    2. the railways we carved up in such a way that the train operators were asked to run a service not provide investment
    3. scandal!

    Aditya really gets me down. There might a perfectly good article to write about how rail privatization took place on too-generous terms and we are getting a bad deal. Instead we get this bilge. He’s like a CIA plant designed to discredit radicals. Who is responsible for letting this stuff go out .. Larry Elliot?

  14. John 77

    ” Anyone who actually travels by public transport cannot help noticing that the TOC no longer uses pre-war trains (I have to assume Mr Chakrabortty is too young to have commuted by British Fail pre-nationalisation or he only ever travels by taxi). ”

    You’ve said something like this before implying that immediately prior to privatisation BR had pre war rolling stock, I asked you then what this was and where and you didn’t reply. So I will ask you again. perhaps I’m being naive though and that’s just an example of one of those narratives that if repeated often enough become true.

    It might be worth observing that it’s common for rolling stock to remain in use for many years and always has been. The HSTs are a good example and are set to last for some years yet.

  15. @Thornavis, Eurostar’s getting pretty shabby though, isn’t it. Long overdue a good interior refurbishment.

  16. JamesV

    Indeed, Eurostar is a bit of a basket case though and outside the franchising and rolling stock arrangements of the rest of the rail network so it’s something of a special case.

    Refurbishment is often a better option than replacement, BR got to be pretty good at that, the engineering side was generally very good and by ‘cascading’ stock between different parts of the country where possible best use was made of available resources. That is much less common now both because of fragmentation and the problems caused by the DfT who make the decisions on financing and requirements.

  17. OK – so I had a quick scoot at Stagecoach’s annual report and think I may be able to see what is going on. Mr Chakarabotty is needless to say talking through his proverbial hat.

    I see 2 ways he might have arrived at his figure:

    First the 5 year return to shareholders quoted is 157%, which is good, but his article implies an annual return, so that doesn’t work as it would be more like 30% annualised.

    The second is, well I can’t quite bring myself to believe it, but potentially has taken the operating profit and divided it by the share capital and share premium accounts. £205m divided by c.£15m which would get you to about the ratios he is talking about. But that would just be moronic.

    The quickest way to get return to shareholders is to compare the EPS and the current share price. 23.8p and 345p respectively – a return to a shareholder of 6.8% (current not prospective) decent, but not outrageous.

    I am an accountant, I can be creative, but not quite that creative…

  18. @ Thornavis
    Liverpool Street suburban services were using pre-war slam-door trains in the 1980s and 1990s. King’s Cross suburban were using pre-war carriages in the 1970s. Waterloo were using pre-war carriages in the 1980s. In the last twenty years we’ve had three generations of new rolling stock.
    “I asked you then what this was and where and you didn’t reply.”
    I have no memory of you asking – which possibly means I didn’t hear you (or see it if you blogged).

  19. CharlieB

    Interesting I shall use that if anyone tells me that the TOCs are profiteering, if I can remember the details that is, accountancy and finances are not remotely my strong point.

    As I suggested further up thread the railways are infested with narratives of one sort or another, each of them as inaccurate as the next, this is obviously set to be another.

  20. @ JamesV
    Oh, the horror! There is no praetorian guard to keep the great unwashed at javelin’s (pilae) length. Instead of the friendly ticket collector telling the poor that they may have special permission to stand in the corridor of the first class coaches when the crush in the corridor of the the third class coaches is unbearable for him to witness, some break the rules and allow them into your exclusive seating area which is only 10% of the train for what – 1,2 or 3% of passengers?
    The Grauniad says 11m first class tickets were sold last year, which contrasts with 1.1 billion train journeys but some of the 11m were season tickets.

  21. John 77

    No out of Liverpool Street and Waterloo there was no pre war stock being used at the dates you mention. I can’t be absolutely certain about Kings Cross in the 70s but I believe that all the stock being used was 1950s and later. In any case if I’m wrong that would only make it some 35 to 40 years old which is not excessive by railway historical standards, it is comparable with the stock on the south of the Thames electrics which was around the same age when finally replaced some ten years ago.

    From memory I believe the last pre war, sort of, stock in use were the Mersey electrics dating from late 30s to early 40s which were withdrawn in 1986 I think. Again 45 years is not unusual, the HSTs will probably beat that.

    There is one place with pre war stock still in use, the Isle of Wight which uses 1938 tube stock for loading gauge reasons. BR hit on this as a way of keeping the last remaining bit of line going at a reasonable cost. If they were at fault so are SWT who have been using tube stock there for almost as long now as BR were.

  22. @ Thornavis
    “each of them as inaccurate as the next,”
    NO. Your narratives may be inaccurate. My statements are factual from my personal experience. In the 1970s the narrative was about the commuter who read his newspaper while standing on the train with the top status being the guy who could fold it it so that he read a single column of the Financial Times. I am not sure whether I ever saw anyone doing that but I *did* see some middle-aged guys fold their newspapers to one-quarter of the width of the page while reading them. They/we braced ourselves not to fall over when the train went round a bend or slowed down/accelerated when approaching/leaving stations. Now I *expect* to have a seat even when commuting.
    My narrative of the pre-privatisation week when my fastest journey home was when I ran home from an outer London Tube Station is *precisely* accurate. It is undoubtedly exceptional but the failure of British Rail to even acknowledge my complaint was utterly typical.

  23. @ Thornavis
    I travelled on those expletive-deleted trains. Some of them had the leather straps with holes in to raise and lower the windows.
    “From memory” – so your memory is perfect concerning trains on which you did not travel, but I did?
    Diesel trains were the new thing in the 50s. The carriages for diesel trains were *very* different. I think I might just have noticed.

  24. John77

    My reference to a narrative in your case referred to your inaccurate claim regarding pre war rolling stock, which I presume is due to either faulty memory, inadequate knowledge or a prejudice against BR, or a combination of all three. In this it resembles the similar narratives by anti privatisation partisans whose also use personal experience and anecdote to argue their case.

    The narrative from politicians like Chakrabortty is of a different order, deliberate obfuscation or downright lying, that and being completely clueless of course.

  25. There were *some* fairly modern trains used in the late ’80s/early ’90s. Bloody nuisance. When the train broke down, no-one could get out even if you were only a few yards from a station.

  26. John77

    I don’t know which trains you are referring to there so I can’t really answer that except to say that, in fact, I can remember pre war stock and did travel on it. At Waterloo the last pre war stock went in the late fifties or early sixties, it lasted longer on the old Central division of SR, until the early seventies. If you are referring to the Liverpool Street commuter services, again I did travel on these trains a few times for what that’s worth, there were none of pre war vintage operating as late as you claimed.

    In any case as I’ve already said BR did not operate stock for any longer on average than the pre 1948 companies and there was no pre war stock in use at privatisation on the mainland.

  27. @ Thornavis
    You assume inaccurate memory – I assume that a 1930s date on a piece of rolling stock when I was travelling to visit my (now actual, then future, mother-in-law) meant that it was pre-war and that you are using a flawed datasource.

  28. @john77, yes, if you are mug enough to pay that much extra for the extra space, indeed part of your contract with the train operator is that they keep that space free of those who have not paid for it. That’s the entire point of “exclusive” anythings, rather implies that some people are excluded.

    First class rail used to be standard for business travel round these parts until very recently. Nothing to do with being Lord Snooty or untaxed perks, just about having enough space to work (you can forget opening your laptop in second if you work in a privacy-sensitive industry) and not spending the time you are billing on going to the bar.

    Fortunately in these parts the premium is around 50% rather than 250%, so there still are people who buy it. And the exclusion of the hoi-polloi is vigorously enforced.

  29. John77

    My “from memory” comment referred to the exact dates of construction and withdrawal of the Mersey electrics. It is a simple matter of fact that these were the last pre war trains in use on mainland BR.

  30. John77

    Well again you don’t say where that train was or the date so I can’t really comment. The dates of withdrawal of various items of rolling stock are a matter of well documented historical fact which we can refer to if you’d like to be more specific.

    Mind you this is all getting a bit pointless and nerdy really so perhaps we should drop it, otherwise it will turn in to one of those 94 comment threads and I’m not up to the fitness levels required for that.

  31. John77

    Correction for the purposes of strict accuracy. The last pre war stock using Waterloo was withdrawn in 1972, I’d forgotten the Portsmouth line, which is odd as I used to travel on it often enough and remember that stock well. Just shows you how faulty memory can be.

  32. @ Thornavis
    Supply the odd document then! relating to every single carriage, not just to engines.
    Currently I occasionally travel on the second series of “hand-me-down” carriages from the Stanstead Express which means there have been *three” new sets of carriages on that line in twenty years.
    I didn’t start using Liverpool Street until the late ’80s; my branch line then used, inter alia, hand-me-downs from the London, Tilbury and Southend lines which included the ancient slam-door carriages. On one occasion I was knocked down by an open door while waiting for a connection: the BR staff just ignored it so some other passengers helped me to my feet and into the train with a view to taking me to the hospital that is a short walk from the terminus if my arm was actually broken – fortunately it wasn’t.

  33. John77

    I can’t give you a definitive reference because it will depend on the stock although there are various sites for the different types in use, I will hunt one out for the GE routes.

    I may be wrong here but you would appear to be making an assumption that slam door stock must equate to pre war which isn’t the case. I’m a bit confused also by your reference to the LTS line, was this stock electric ? If so it certainly couldn’t be pre war as there was no electrification of that route until after the war, also it was upgraded later to 25kV so any stock from before that became obsolete. If this was diesel units then again it must be post war – mid fifties at least.

    The lack of interest in your accident from staff is another matter, BR was often poor at customer service whilst being good at engineering and generally at operating too. One might say that since privatisation the reverse is often the case.

  34. @ JamesV
    Post-privatisation my line does not sell first class tickets at all. So I am automatically categorised as one of the “hoi polloi” who were praised by Pericles.
    On the whole I should prefer the praise of Pericles to your approbation.

  35. @ Thornavis
    The stock was not new when LTS received it. So the date of LTS going electric is not necessarily relevant.
    I just remember this because of the expressions of outrage that we got given rolling stock from what was generally viewed as the worst line in the whole of BR.

  36. “Supply the odd document then! relating to every single carriage, not just to engines.”

    That’s a bit silly, I can only give you specific references not a generalised account of every item of rolling stock. Your accounts are too vague to be able to pin down with any certainty. What have engines got to do with it ? Not that there were any of those from before the war after 1968. The last pre war individual carriages would have gone by the mid 60s too, replaced by the BR Mk 1 type.

    Were the LTS units you referred to be these by any chance ?

  37. @ JamesV
    “not spending the time you are billing on going to the bar.”
    One of the many good points of the Know How Fund was that its contractors *never* billed time that we weren’t working.
    Are you a ** lawyer?

  38. @ Thorenavis
    Clearly not: “Following the privatisation of British Rail, the units passed to LTS Rail in 1996.”
    You are doing your honest best (in contrast to Chakrabortty).

  39. If you could just be more specific about which line you are referring to it would be a lot easier although I doubt if I could persuade you of your error as it is obviously a fixed fact in your memory and there’s no way of changing that.

    Anyway it’s way off topic and unlikely to be of interest to anyone else, so I will leave it there.

  40. OK, back on topic.

    CRESC – the source for Chakrabortty’s article – seem to have done this research a while ago. They say things like “The financial outcome is that TOCs return on capital employed is 121.6% -an annual return of £1.21 for every £1 invested.”, – which is obviously essentially the same as Chakrabortty’s article.

    That’s from the press release here :

    which links to this report:

    Is there anyone still reading with better accountancy skills than me (ie is there anyone still reading?) who would like to have a go at this?

    The odd thing is that in his article, AC clearly implies that he was the inspiration for these guys to look into this question, but clearly he wasn’t. They seem to exist primarily to produce reports attacking rail privatisation.

  41. Actually, it’s their second report, this one:

    As far as I can see, the authors make the same points that have been made by commenters here – basically that this is just one of those businesses with very little capital (because they rent everything – track from NR and trains from the ROSCOs). The authors note that return on turnover is only about 3% and say this translates into a very high ROCE because these are “fee for service businesses” with little need for capital.

    But then they shout OUTRAGEOUS!

    As they suggest that a reasonable ROCE is 7.5%, one can only conclude that they think a reasonable return on turnover for these companies would be about 3% x 7.5/120 = 0.1875%.

    Do you suppose they think an airline that leases its aircraft ought to charge lower fares than one that owns them? As far as I can see, the comparison is just the same.

  42. I have been waiting MONTHS for the resolution of this Thornavis/John77 thing. Months, I tell you. To the point where I have actually begun to care about the dates of bloody train carriages.

    For goodness sake let’s end the suspense and have some definitive answers.

    Otherwise, to seek resolution, I am going to have to go and talk to my supremely geeky train (and carriage*) loving friends, and at great personal risk -for sanity is a fragile beast – engage them on their pet topic and actually have to bloody listen.

    * It’s only when they love the carriages too, that you know they are (a) the genuine article, (b) beyond hope.

  43. I tell you of all the things I never knew about trains I never knew that the most (or indeed cared very much). But I will agree Eurostar is a bit shabby even in business class, although the champagne is always a nice touch.

    And as a former lawyer I always travelled by taxi when I could charge it to my clients, I only ever travel on the train when it was on my own personal time.

  44. @john77, I also don’t bill time I don’t spend working, however the law here is also that I cannot consider travel time as working time (for the purposes of totting up with my employer) unless I am actually working.

    Hence first class. It gives me the choice to work, to spend time that I am spending doing something at the behest of my employer but which the law regards as my own time. I prefer to have the choice to open my laptop and work or stare out the window. In second you are (unless the train is remarkably empty) deprived of this choice and instead take the luck of the draw with your neighbours and what combination of comestibles and infant bodily excretions they are spilling on you.

    The result being that I am far less likely to willingly travel to a cheapskating customer. That’s entirely their choice. You can of course continue to believe that I am impossibly grand.

  45. I doubt it helps, but if you had bought stagecoach shares 10 years ago your annual return including reinvested income would have been 19%. But then we all know equities are dreadfully risky and we should have bought some nice safe gilts and got around 5% a year instead.

  46. MBE

    Don’t yield to temptation, take it from one of the damned that once you have breathed the air you can never return.

  47. John>

    There was definitely pre-war rolling stock in use on the Tube until the eighties. Is it possible you’re remembering that, or perhaps conflating your memory of the thirties-dated carriage with general memories of somewhat newer slam-door trains?


    I’d be rather surprised to find that there were no pre-war carriages still in occasional use as reserve stock fifty years later. As you say, that’s not all that much longer than their normal lifespan. I’d have thought it was normal to keep at least some of the previous generation of rolling stock around as backup.

  48. Dave

    I wasn’t going to come back to this but as I’m a hopeless nerd and you’ve asked nicely here goes.

    Prior to nationalisation and for some time time after it was general practice to keep reserve coaching stock, that changed from the sixties onwards. BR began standardising with its own stock in the fifties and the process was all but complete twenty years later. The days of keeping individual carriages siting around in sidings for large parts of the year ended at about the same time, with the move to multiple units rather than loco hauled trains the process was complete. On the commuter lines in the south older ( mid thirties ) electric stock lasted a while longer as it did the job and the money wasn’t available to replace it rapidly, they had all gone by the early seventies though. The slightly younger immediate post war stock lasted in some cases until the late eighties, it may be this, that has confused John77.

  49. has anyone mentioned NPV – ie look at the cash flows as a better indicator of the returns that are being made?

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