Flaws in the Government’s rail franchising process are primarily to blame for excessive profits made by train leasing companies, the rail regulator said yesterday.

Chris Bolt said that he was minded to refer the companies — Porterbrook, owned by Abbey; Angel, owned by Royal Bank of Scotland; and HSBC Rail — to the Competition Commission for further investigation.

The Department for Transport, which asked Mr Bolt to investigate the companies, estimates that together they earn up to £175 million more per year than would be expected in a properly competitive market.

Mr Bolt found that the market for new trains, purchased since privatisation a decade ago, was “relatively competitive”. The main problem lay with the 9,000 carriages built by British Rail. In some cases, the construction cost has been repaid several times over, but the banks continue to charge train companies more than £1,000 a week per carriage.

The department welcomed Mr Bolt’s decision, saying that the excess profit was the “equivalent of an annual 8 per cent increase on all season tickets and amounts to around £2 billion over the lifetime of the train leases in question”.

Mr Bolt said that train companies had “extremely limited” choice over rolling stock when negotiating franchises. In many cases they were contractually bound to take on leases agreed by the previous incumbent. The Department for Transport also set tight specifications that could be met only by leasing a particular type of train.

The rapid growth in demand for rail services also meant that there was a very small pool of spare trains, with only 6 per cent of the national fleet in storage at present.

The regulator’s report said that possible remedies included a “major rethink of the franchising model, allowing train companies to take their commercial decisions for new rolling stock based purely on their own assessment of future revenue needs and the needs of the passenger”.

Mr Bolt said that franchises could also be lengthened to give train companies enough incentive to order new trains. Groups of franchises could be let at the same time to make it easier to switch trains from one company to another. He said that other options, such as imposing price controls or requiring the banks to sell some of their trains, would be difficult to implement and might not achieve value for money.

Mr Bolt will consult until the end of February and make a final decision on a Competition Commission inquiry by the end of April.

RBS said that there was no case for further investigation, adding: “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, the DfT has the remedy for this in its own hands.”

RBS also issued a thinly veiled threat that it would not purchase any more trains if there was a full competition inquiry, which could take up to two years. This would undermine Virgin’s plans to order 100 new carriages from Angel to lengthen its overcrowded tilting trains on the West Coast Main Line.

RBS said: “A sustained period of uncertainty is likely to curtail essential investment in additional capacity to solve the evident overcrowding problem in Britain’s railways.”

Mr Bolt said that if the companies refused to buy new trains, it would be a sign that the market was not competitive. “If they were to withdraw from financing new rolling stock, that’s clearly a factor the Competition Commission would be looking at.”

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