As the rail industry continues to evolve through market opening, the role of private finance in driving European rail expansion has become increasingly significant. The opportunity presented by private open access operations, and their associated train procurements and supply, is reshaping the landscape of rail transport across the continent and enabling improved quality and services for rail customers. On another front, there is a growing role for private finance as an enabler for broader growth in rail transportation. Whole-life publicly financed procurements may become more prohibitive with growing constraints on public finances and the associated balance sheet restrictions. However, there is a proven and staged collaboration between public and private sector which could become more common and function as a future growth enabler – that is a sale and leaseback (SLB) arrangement. Once a public led procurement is completed using public finance, the capital can be recycled subsequently, with a private investor coming in after the greater uncertainties of the manufacture and fleet introduction stages have subsided.
There are always insights to be drawn from neighbouring sectors – the aviation sector has seen a surge in sale and leaseback transactions over recent years, which are driven partly by pressures following the COVID-19 pandemic [1]. Demand had dropped and balance sheets had plummeted, and in many ways there are parallels with the story of passenger rail ridership, which is only now beginning to recover to pre-pandemic figures. Sale and leasebacks are not only deployed to navigate a crisis; they are also viewed by the aviation sector as aiding operational flexibility and are utilised to resource growth opportunities without committing to additional assets or taking on additional debt.
There is a need and an aspiration for growth in rail transportation. The environmental and sustainability benefits of rail transport are driving a gradual but inexorable shift in travel behaviour towards rail, especially in Western and Northern Europe. Countries like Switzerland, Spain, and Germany have seen significant growth in rail transport passenger volume over recent years, reflecting a broader trend towards sustainable and efficient transportation solutions throughout the developed world. For instance, in 2023, Switzerland’s rail transport passenger volume increased by 15.6%, Spain’s by 12.6%, and Germany’s by 8.5% [2]. This growth highlights the increasing passenger preference for rail as a mode of transport, driven by its benefits to sustainability, the environment and passenger time efficiency.
Figure 1. London, UK – April 1, 2025; Elizabeth Line class 345 electric multiple unit train en route to central London – Ian Dewar Photography via Adobe Creative Cloud
Currently, rolling stock procurements are normally privately financed from the outset, part of a public-private partnership where public and private finance are combined, or wholly publicly financed, and retaining this initial format for the life of the asset. Each approach has its benefits and potential pitfalls. State-owned portfolios often provide stability and long-term investment security, while privately financed portfolios bring agility, innovation, and a customer-centric approach. Private finance may offer benefits of flexibility, fast implementation, and the facility to attract private investors, though what comes with this is cost of finance that reflects the delivery risks and inherent operational risks and which are influenced by the attractiveness and stickiness of the particular fleet.
Now, what if the initial delivery risk and associated inflationary effect on cost of capital could be removed from the bulk of the asset life, and that burden absorbed by the procuring authority, but only for the limited procurement and introduction period? Does a sale and leaseback approach serve this purpose?
Sale and leaseback arrangements using private finance offer significant benefits including moving assets off the balance sheet. For instance, the significant UK rolling stock procurements for Crossrail, comprising 630 vehicles valued at £1 billion, and London Overground, comprising 222 vehicles, were both initially financed publicly [3]. Public financing was retained through the initial high-risk manufacturing stage, ensuring that the projects could proceed without financial constraints and leaving the manufacture risk with the public procuring authority. Once the first units were accepted and prepared for introduction to service, a sale and leaseback arrangement was implemented, shifting ownership to a privately financed Special Purpose Vehicle (SPV) structure. This approach allowed the authority to transfer the ownership of the assets to private investors, thereby converting illiquid assets into liquid capital that could be redeployed elsewhere by the authority. The sale and leaseback arrangement not only improved the authority’s balance sheet by removing large liabilities but also provided long-term financing stability. The private investors benefited from predictable lease payments, while the authority retained operational control and flexibility with the ability to buy back the assets following the initial lease should they wish. Financing and leasing of rolling stock assets is now a well-developed and highly optimised model that is well understood by a large cross-section of equity and debt investors. This model demonstrates how leveraging private finance can optimise financial performance and support the sustainable growth of rail infrastructure.
Governments and authorities have a unique opportunity to excite growth and subsequently recycle capital, by first leading publicly financed procurements and then implementing sale and leaseback arrangements. This approach burdens the procuring authority with only a short-term capital lock-up. Typically, an initial percentage of the total rolling stock manufacture contract is paid to the manufacturer upon contract signature, but a significant proportion of the contract value is often deferred until later manufacturing and acceptance stages for the units are reached. At this point, the project is mature enough and sufficiently progressed to provide confidence to prospective investors that the specification is proven deliverable, the manufacturing programme is credible and the product is viable, paving the way for a successful sale and leaseback arrangement to be deployed. This methodology enables governments to manifest major infrastructure projects without bearing the long-term capital burden. It also enables authorities and government to continue to act as enablers, utilising public capital to provide the security required to drive projects forward that would otherwise be tagged with a prohibitively high cost of risk attributed by the private sector. By transferring ownership to private investors, governments can convert illiquid assets into liquid capital, improve their balance sheets by removing large liabilities, offload the burden of asset ownership and management, and ensure long-term financing stability.
Examples of European rolling stock procurements potentially suitable for sale and leaseback:
1. SNCF’s RER NG EMUs: France’s SNCF has ordered 35 RER NG EMUs from Alstom to operate on the networks of the Île-de-France region. This order, worth €520 million, is an option on the framework contract signed in 2017 for the supply of up to 255 X’Trapolis partially double-decker EMUs [4].
2. Merseyrail Class 777 EMUs: Merseyrail is operated under a concession let by the transport authority for Liverpool city region in the UK. Merseyrail procured 52 Stadler EMUs valued at £460 million. First train entered service in 2023 [5]. The assets could be sold and leased back to release capital for other projects in the Liverpool city region, where there is not the same developed leasing market.
3. DB passenger fleets: Deutsche Bahn (DB) has several regional and high-speed passenger fleets recently introduced into service or on order. The majority of DB’s assets are wholly owned and operated by the national operator. Many of these assets would be well matched to a sale and leaseback model.
These examples highlight some of the publicly owned assets or upcoming rolling stock procurements across Europe that could be viable for sale and leaseback, enabling governments to recycle capital and support sustainable growth of the rail sector. From an investor’s perspective the ideal candidate for a sale and leaseback arrangement is one in which the asset is considered ‘core’ or ‘sticky,’ as these assets tend to be difficult to displace and hold long-term value, enabling lower financing costs to be secured. Conversely, Sale and Leaseback arrangements are generally less suited to non-core assets, which may lack the same level of attractiveness and fungibility and for which higher financing costs may render the leaseback unattractive.
Three key takeaways:
- Private Finance as a Growth Enabler: Sale and leaseback arrangements can serve as a significant growth enabler for the rail industry, allowing public authorities to recycle capital and fund growth opportunities without taking on additional debt. The availability of capital within the public authorities ceases to be the constraint on the projects being progressed.
- Collaboration Between Public and Private Sectors: Effective collaboration between public and private sectors, supported by regulation and a focus on sustainability, is crucial for driving the growth and success of the European rail sector. Each party can bring its particular value to the project.
- Successful Implementation Examples: Notable examples of sale and leaseback arrangements include the UK rolling stock procurements for Crossrail and London Overground, and the aviation sector’s increased use of sale and leaseback transactions post COVID.
As we look ahead, collaboration between public and private sectors, supported by effective regulation and a focus on sustainability, will be more important than ever in driving the growth and success of the European rail sector. The role of private finance, especially in relation to sale and leaseback, in shaping the future of rail will be paramount to ensuring we deliver the best outcomes for rail users and our environment. If you want to explore this further, please contact us at moc.gnitlusnocxepi@ofni.
Ryan Bown
May 2025
