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Why leasing back old trains to buy new isn’t such a strange idea

Reports emerged last week that Transport for London (TfL) plans to sell some of its fleet and lease them back to help raise £875 million to finance a new fleet for the Piccadilly line. A Liberal Democrat politician described the plans as “quite mad”.

TfL responded by saying that sale and leaseback agreements are nothing new – and it is right.

The practice of selling trains only to lease them to help finance new vehicles isn’t a new one. The process was used by English Welsh & Scottish (EWS) in the 1990s to finance the first Class 66s.

“In TfL’s case they’ve got an asset that’s worth x amount of pounds but it’s a sunk cost,” said Martin Fleetwood, who specialises in rail and transport for law firm Shoosmiths.

Martin likened the practice to the way a homeowner might use equity release to receive a lump sum from the value of their property while continuing to live there.

TfL may not have many other options. It could try and finance the new fleet without the extra cash from a sale and leaseback deal but if it was unable to raise the money through fare income, it would need to find another source to raise the cash.

It could also lease the new fleet – although Martin, who has worked within the rail sector for more than 20 years advising on rail franchises, concessions and rolling stock supply agreements across both light and heavy rail, thinks TfL wouldn’t have been so keen on this option.

“Primarily they want to own the new fleet… because London Underground and TfL have historically owned and managed their own stock,” said Martin. “They’re probably looking at the longer game.”

Selling some of the older stock and leasing it back could also make life simpler for TfL when it comes to retiring its ageing fleets. When the lease is up, the trains will be returned to the new owner, saving TfL the hassle of storing and disposing of the units itself.

TfL said it plans to award the contract for new Piccadilly line trains in the first half of this year, but it hasn’t specified which trains it plans to sell and lease back.

Sale and leaseback may seem like an odd way of doing things to some people but, when money is tight, it can offer a realistic way to finance key upgrades.

Photo: Shutterstock.com

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