Informed Sources e-preview by Roger Ford (view all archives)

INFORMED SOURCES October 2011

 

Derbygate – still gaining traction

<intro>Government flailing around helplessly is never a pretty sight<outro>

 

As the curtain rises on the musical ‘Evita’, the character of Che Guevara comments sardonically, chorus-like, on the preparations for the funeral of Eva Peron.  While I’ve never been much good at doing sardonic, Tim Rice’s libretto perfectly sums up the evolving  brouhaha surrounding the award of the Thameslink train fleet contract to Siemens – leaving Bombardier’s Derby works with a gaping hole in its future workload: ‘Oh what a circus, oh what a show’.

 

This being a 21^st Century circus, it is not a succession of separate acts under the firm control of a whip cracking ring-master. If only.

 

Instead we are seeing a variation of the Cirque du Soleil, where each act has a tenuous relationship to a ‘narrative’ running through the show.  Just what the storyline is in the case of Derbygate is not entirely clear.  But decades of Government disinterest in a national industrial strategy is somewhere in the mix. 

 

Government inflicted damage has been a leitmotiv of my adult life.  Industry after industry has been brought low by government action, inaction, malign spite, intellectual snobbery or, more generally, all round lack of nous and incompetence. So really, what we see going on in the railway industry generally, and rolling stock in particular, is par for the course. 

 

But what is unusual is that this time Government seems unable to brush away the effects of its sins of omission and commission. If the Transport Select Committee hearing on 7 September was meant to clear the air, the only benefit has been to give the combatants better sight of the target

 

Siemens was declared preferred bidder for the Thameslink fleet on June 16.  Bombardier announced the start of consultation on the resulting redundancies on 5 July As I write it is 9 September and the Daily Mirror has just run an editorial castigating the Prime Minister over the decision.    

 

Meanwhile even our urbane Transport Secretary Philip Hammond seems hapless, or helpless.  He is quite rightly adamant that the deal can’t be unwound.  And behind the scenes his officials are looking at ways to get more work into Derby in the short term, including the proposal to add a Pantograph car to create a dual-mode class 22x Voyager/Meridian.

 

Crossrail

It has been obvious for a long time, at least to this column, that the three big Government-directed rolling stock procurement exercises – the Intercity Express Programme (IEP), Thameslink and Crossrail - were inextricably linked, even though those in charge saw them as self contained.  For example, once Hitachi was declared preferred bidder for IEP, with the commitment to an assembly plant in the Northeast, it was clear that we risked an action replay of the Thrall Wagon works at York (Informed Sources January 2011). 

 

When a company puts industrial boots on the ground they have to be kept supplied with work. And while my old chum Alistair Dormer of Hitachi is confident of winning new business from European railways to keep his new Newton Aycliffe factory occupied, the reduced quantities involved in the IEP deal, plus the reversion to operator based procurement, flagged up by Tony Miles on page x, means that for Hitachi Crossrail is becoming a ‘must win’.

 

 

Guff

As an example of the unreality ruling within his Department, when questioned by the Select Committee on the importance of retaining a national train manufacturing capability, Mr Hammond replied that he would certainly like to see a viable train building industry in the UK and that ‘fortunately’ this will happen as a result of Hitachi’s commitment to its Newton Aycliffe train building plant.

 

But the Government also wants competition within the UK  and Mr Hammond hopes that when considering future rolling stock tenders there will be ‘strong competition between British based manufacturers’ so that while there is competition, whoever wins the order, the trains will be built in Britain.  For this reason he also hopes that Bombardier will remain as a thriving train builder in the UK. 

 

Who is feeding him this guff?  A single production line at Derby can turn out 250 vehicles a year.  Assembling IEP is not going to stretch Newton Ayclife which will be sized to serve the European Market.

 

After Thameslink, there are no major main line orders planned.  The Government’s much vaunted 2,700 new main line vehicles by 2019 is made up of current orders.  The only outstanding requirement is the 530 Piccadilly replacement stock vehicles.  So in Philip Hammond’s naïve scenario, Bombardier and Hitachi would be like two bald men bidding for a comb. 

 

 

Derbygate 2 – now Crossrail is sucked in

<intro>Ironically, deferred procurement favours Siemens<outro>

 

 

Meanwhile, Crossrail has got dragged into the maelstrom, announcing on 30 August that the procurement of its rolling stock fleet would be put back by five or six months. It had been expected that the Invitation to Tender (ITT) for the total train service provision contract would be issued towards the end of this year, with contract signature some two years later and the first units entering service in December 2016.

 

Now, the ITT will come out in 2012, with contract award put back to 2014. Infiltration into revenue earning service on the Liverpool Street-Shenfield route will now start in May 2017 rather than the previous date of December 2016.  It is this final change which confirms the five to six month delay.

 

Justifying the move Crossrail claimed savings ‘running into the tens of millions’, as a result of introduce the new rolling stock over a shorter period. As you can read later, I’m not sure that I buy this.  Crossrail; also said that the delay would also allow the conclusions of the Government’s review of public procurement, part of the current Growth Review, ‘to be taken into account’.  That seems a more likely explanation.

 

Optimists might take this as suggesting that the tender documents could be revised to favour UK content. But, judging by Mr Hammond’s comments to the Select Committee I think the review is meant to justify the status quo.  ‘Look, we took a second opinion and our hands really are tied’.

 

Suspicions

To recapitulate, under the Crossrail train service provision contract, the successful bidder will be responsible for building the new rolling stock and associated depots and then maintaining the trains.  While ostensibly similar to the Department of Transport’s procurement of IEP, the capital cost of the Crossrail fleet goes onto Transport for London’s balance sheet.

 

And according to Crossrail, under its deal it will be required to pay for each train ‘as it becomes available for passenger service’. So, the argument goes, by reducing the time between the start of train deliveries and entry into passenger service, Crossrail will achieve ‘significant operational savings’.

 

Yet Crossrail still intends to introduce the train fleet ‘progressively’ to the existing rail network ‘well in advance’ of the start of services through the central section.  And all this vague talk of saving ‘tens of millions’ through a six month day didn’t ring true.  Especially when, according to the Crossrail statement the scale of the operational savings expected remains commercially confidential ‘while the procurement process is ongoing’.  In fact, with the ITT has yet to be issued and the tender documentation yet to be finalised, any cost estimates are speculative.  

 

Nonsense

My suspicions were heighted by the implication in the statement that if Crossrail signed a contract at the end of 2013, it would have to pay for the trains when the successful bidder chooses to deliver them, rather than at a time determined by the customer.  This has to be nonsense.  The customer specifies when trains are to be handed over.

 

Putting back procurement reduces the time for development and acceptance of what could be a new-to-the-UK design. If rational procurement makes rare appearance, even a Thameslink run-on order will not be like-for-like, not least because of the fitment of Automatic Train operation.  Given the choice between six months and a year to get a new train accepted, most Programme Directors would jump at the extra time.

 

Remember how with the Class 91 there was an initial batch of 10 locomotives, followed by a pause for development running followed by the rest of the fleet?  More recently, with the Hitachi Class 395 Electric Multiple Units, the first set arrived in August 2007 just 26 months after contract signature (hold onto that number). Seven months later the pre-series batch of four units was undergoing development and acceptance running. 

 

But not until May 2009 did hand-over of the remaining 25 series production units start, with all 29 in service for the December 2009 timetable.  And this leisurely development period was rewarded by initial reliability which put me in my place.       

 

Schedule

To get my head round Crossrail’s statement I took the time to create a notional time-line from contract signature in 2014 to the start of the full service between Shenfield/Abbey Wood in the east to Maidenhead/Heathrow Airport in the west in December 2019.   Don’t forget that since the Crossrail fleet procurement began, completion of the project had slipped back a year under the Comprehensive Spending Review settlement Crossrail has also introduced a revised service introduction schedule linked to its new signalling strategy (RBI 389 p1).

 

Services on the core Paddington (Crossrail)-Abbey Wood route will start December 1918.  Under the previous opening schedule, this would have been two years after test running was due to start between

Liverpool Street

and Shenfield. 

 

It is during this time, according to Crossrail, ‘much of the fleet would have been stored waiting for the tunnels to be completed’. So what did my schedule show? 

 

Delivery

Hitachi’s 26 months to deliver the first Class 395 chimes with the 27 months that Siemens is currently quoting for a further build of Class 350 Desiros.  So if the Crossrail contract is signed in May 2014, it is probably going to be August 2016 before the first set arrives at its new depot.

 

Stage	Service introduction	Date
1	Test rolling stock. Liverpool St- Shenfield substitution	From  May 2016
2	Paddington-Heathrow	May 2018
3	Paddington (Crossrail)-Abbey Wood	December 2018
4	Paddington (Crossrail) -Abbey Wood & Shenfield	May 2019
5	Maidenhead & Heathrow - Abbey Wood & Shenfield	December 2019

 

 

Commercial operation is due to start in May 2017, with the new trains being infiltrated into the existing passenger service on the Liverpool Street-Shenfield route.  Before that there will have to be the usual development and acceptance running.  I would reckon that four units would be adequate for this. 

 

So, with procurement deferred there will be a bare nine months to get route acceptance.  How fast you then infiltrate onto the Shenfield services obviously involves a number of uncertainties.  Siemens’ problems with route acceptance of the Scotrail Class 380 Desiros is a case in point.

 

But I reckon that a progressive built up of deliveries from one unit a month to two units a month during the testing period could have 14 units ready for service by May 2017.  Bearing in mind the concerns over the cost of trains in store I tied inserting a pause in production at this point.  But it immediate became apparent that to have the full fleet available by May 2019, you would need to keep on cranking out two 10 car units a month from May 2017.

 

Deliveries

Two units a month seems to me to be a comfortable output.  Commissioning these trains, which are going to be quite complex, will be demanding.  So one a fortnight seems about right.

 

But this does mean that by the time the new trains take over Paddington-Heathrow services in May 2018 you would have delivered 36 units with around 24 in service and a dozen sitting idle.  Of course some of these trains would be needed for on-going acceptance testing on other routes, not to mention the not inconsiderable task of developing the Automatic Train Operation signalling system.

 

So I tried stepping up series production to one unit a week.  This would allow a pause in deliveries from June to October 2017, followed by one unit a month up to the start of the Heathrow service and then one a week for the remainder of the contract.  But production lines need smooth flows.

 

Overall, I reckon that the five month delay defers paying for 10 trains a month during the new main production run.  But Crossrail doesn’t pay the capital cost but a finance and maintenance charge.  So an informed  estimate gives around £2 million a month saving for 18 months – which is indeed low ‘tens of millions’, but remember that Crossrail went back a year under the CSR, which means we are getting the benefits later.

 

And, however you juggle production, to have the full fleet available for the Paddington-Abbey Wood/Shenfield service in May 2019, you are inevitably going to have more trains than you need before then.  Although experience tells me that when you are working up a new fleet, especially for such a demanding high intensity service, you can’t have too many trains!

 

Tight

Meanwhile Crossrail has now has a demanding delivery schedule for its new trains. Initially, Crossrail Informed Sources were adamant that the Thameslink specification would not meet their requirement.  But recently, this view has been softening. 

 

To my mind, the logical solution has always been a repeat order of the new Thameslink design.  This logic is now reinforced by the shorter delivery timescale.

 

However, that was before the furore over the future of Bombardier.  And the above analysis suggests that the real reason for the delay has been to buy time for the Government to try and find some way of getting more work into Derby.

 

On the expected delivery schedule, if the Crossrail contract were to be steered towards Derby, the first hardware would appear on the production line during 2015. This would give some continuity of production since manufacture of Sub-Surface stock for London Underground finishes in 2015.

 

In another cloud-cuckoo-land statement to the Select Committee Philip Hammond said that his Department’s ‘analysis’ suggested that Bombardier would be a strong competitor for Crossrail, especially if it took on board lessons from the unsuccessful Thameslink bid.  As for Siemens being preferred bidder of the similar Thameslink trains, he did not think that this would put Bombardier at a ‘material disadvantage’, despite there being ‘some commonality between the two fleets. 

 

Oddly, given his friendship with the Japanese Ambassador, Mr Hammond did not assess Hitachi’s prospects for Crossrail.  However he did say that the Department for Business was encouraging Hitachi to set up a Design Office at Newton Aycliffe.  

 

 

 

+++++++++++++++++

Is that clear?

Will having a UK manufacturing base give an advantage to a bidder?

The procurement will be managed in accordance with the Utilities Contracts Regulations

 

Clarification note to Crossrail rolling stock bidders

September 2010

 

++++++++++++++++++++++++++++++++

 

 

 

 

++++++++++++++===

Procurement comparison

	ITT	Contract	Testing starts	Initial batch	Revenue service	Full fleet
Crossrail	May 2012	May 2014	November 2016	n/a	May 2017	December 2019
Thameslink*	December 2008	Early 2012	September 2014	10	May 2015	End 2016

 

*Based on schedule in ITT

++++++++++++++++++++++++=

 

 

Political

So, back to Che, ‘oh what a circus, oh what a show’.  And what we really need to focus is Crossrail’s statement that deferring the Invitation To Tender would allow the ‘conclusions of the Government’s review of public procurement to be taken into account’.

 

This can only mean that the contract terms are now potentially subject to political influence if not interference.  With Alstom having pulled out,   the remaining prequalified bidders will now have to decide whether it is worth risking, typically, £10 million, on preparing a tender.

 

If there is to be a political deal the shortened timescale makes an established design even more attractive.  The most likely stitch up, sorry, commercially attractive option, would seem to be a repeat of Thameslink, with some degree of Bombardier involvement in manufacture and assembly, as has happened in Germany with ICEx.       

 

++++++++++++++

And then there were four

According to Crossrail, all shortlisted bidders performed strongly at pre-qualification stage. The shortlist is now as follows

 

Bombardier Transportation (UK).

Construcciones y Auxiliar de Ferrocarriles SA (CAF);

Hitachi Rail Europe;

Siemens plc.

++++++++++++++++++++==

 

 

Alstom pulls from Crossrail train bidding

<intro>Pragmatic and hard nosed – that’s the French<outro>

 

Alston Transport confirmed on 30 August that the company had decided not to bid for the Crossrail train fleet contract.  The decision, taken some weeks previously, followed an analysis of the requirements for the new rolling stock where Crossrail is now looking for a derivative of an established design.

 

Some readers asked if this meant that Alstom was pulling out of the UK.  But in its statement the company emphasised that it remains committed to the UK market and will be competing for power supplies, electrification equipment and signalling contracts from Crossrail.

 

 

++++++++++++++++

After analysis of the requirements for the new rolling stock for the Crossrail project, Alstom has decided to withdraw from the competition.

We consider that the necessary adaptation of our existing products in service in other countries is incompatible with both Alstom’s strategy for profitable growth and Crossrail Ltd’s requirement for minimal development costs.
Alstom Statement

August 30 2011

++++++++++++++++++++++++++

 

Once bitten

From the start Alstom Informed Sources were lukewarm about the Crossrail requirement.  Remember that Alstom’s innovative bid for the much larger Thameslink order – one of the Company’ ‘must wins’ when it decided to re-enter the UK rolling stock market – failed to make the shortlist.

 

This bid had been based on a UK version of its X’trapolis articulated electric multiple unit platform, configured for the high density/high frequency duty required for both Thameslink and Crossrail.  Alstom’s offer failed to be shortlist, in part because Network Rail’s track damage model penalises articulation.

 

With its only existing UK product the now obsolete Juniper EMU design, Alstom would have had to adapt an existing product already in service in Europe.  This would have incurred extensive development costs, running into the tens of millions of pounds, something Crossrail is now looking to minimise.  

 

Then, these costs would have had to be recovered over the relatively small build of 600 vehicles, with no prospect of repeat orders for a unique train in the short to medium term.  So, the cold number made it not worth bidding.  And the political issue reinforced this.

 

 

But as one door closes, another opportunity opens.  During the Foster Inquiry into the value for money of IEP, Alstom was promoting a second-generation Pendolino as a credible alternative.  Now that the era of DfT buying trains is over (we hope), and procurement is returning to the TOCs and Rolling Stock companies, Pendolino is suddenly back on the agenda.

 

Alstom want to build it, a ROSCO wants to fund it, and, as Tony Miles reports, East Coast sees it as a potential IC225 replacement.  And even more interesting, in independent conversations, the price per vehicle which Alstom is offering  and the price at which a ROSCO would be prepared to buy, differ by only £100,000.

 

Meanwhile, it’s hail and farewell.  Paul Robinson, who has done a lot to restore Alstom’s credibility in the UK over the past four years has stepped down as Managing Director of Alstom Transport UK & Ireland.

 

Did this mean that the French were planning another withdrawal from the UK market?  It seems not, because the new MD is my old chum Terence Watson, who I first met as Commercial Director at Preston in 1994 and subsequently rose to become Alstom’s Senior Vice President for Northern Europe. The French clearly don’t agree with Lord Sugars strictures about engineers’ business acumen.

 

That’s more executive muscle than you might expect if the UK was seen as an offshore backwater. Interesting 

 

Virgin breaks its silence

<intro>Brace yourselves for an opacity challenge as Virgin blows its own trumpet on West Coast financial performance<outro>

 

Since its inception in 1983, this column has depended for its continuation on one principle:  Informed Sources are never identified, or identifiable.

 

Put crudely, I have never dropped anyone in it.  Put deviously, it is now accepted that I don’t speak to anyone and nobody speaks to me.  I just sit in my cell like a Trappist monk writing this column.

 

But in recent months, talking to Virgin Informed Sources, they have been obsessed by not appearing to say anything which might be interpreted by the Department of Transport as supporting the company’s bit to retain the Intercity West Coast franchise.  There is a standard clause in the franchise Invitation to Tender which bans such publicity on pain of exclusion.

 

When the bidding for the replacement ICWC franchise was deferred, the pressure was even greater as Virgin began negotiations on terms to extend the existing franchise from 31 March to December 2012.  These negotiations are still on-going, with DfT waving the big stick of Directly Operated Railways taking over if Virgin won’t come up with a sensible offer.

 

32 fouettées

So, all very tense, until on 17 August I received an email from the Virgin Trains Press Office with a copy of the West Coast Trains  Report & Accounts for the  2010- 2011 financial year attached.  This was not so much a volt face as the full 32 fouettés en tournant from Act 3 of Swan Lake.

 

It was the first time since Virgin won the ICWC franchise in 1996, that that the Company had promoted the Report & Accounts to the press. Previously the accounts had been deposited, as required by law, with Companies House, from where those with the time and access could disinter them.

 

Clearly Virgin Rail Group (VRG) now sees its recent commercial performance as boosting the company’s credentials in the bidding for the replacement franchise.  Perhaps the change in policy is related to the warning Transport Secretary Phillip Hammond dished out at my chum Nigel Harris’ National Rail Conference.

 

Reportedly Mr Hammond told the transport groups present ‘If you have spent the last ten years screwing us, then don’t spend too long filling out the pre-qualification form’.  And it is no secret that  DfT civil servants still think they were screwed by the deal struck with Virgin to reinstate the West Coast Franchise.

 

Recap

At which point a brief bit of history for new readers. 

By 2002, Virgin’s West Coast and Cross Country franchises were struggling financially – in part due to problems with the West Coast Route Modernisation.

 

At that time the Strategic Rail Authority (SRA) was responsible for franchising.  Its short term solution, under what was known as the Letter Agreement, was for Virgin to run the two franchises under management contracts until the infrastructure and other issues were resolved. 

 

In the event, it proved impossible to agree terms for the re-instatement of the Cross Country, franchise, which was re-let.  But under what is known as the Amended and Restated Franchise Agreement (ARFA), West Coast was reinstated on 6 December 2006, with a new subsidy profile plus the addition of Cap & collar, which had not been around in 1996.

 

Under Cap & collar, DfT was entitled to a share in the franchise’s income above the revenue line in the franchise agreement from the start.  And, after two years, the franchise became available for support from DfT if income fell short.  At that time, the ‘collar’ was generally not available to a new franchise until after four years had passed.

 

Virgin knew it had got a good deal.  But you can strike a favourable deal only if the person on the other side of the table lets you get away with it.  And when DfT realised what it had signed up to it thought that it had been screwed.

 

Unscrewed

Which brings us to Virgin’s fanfare of trumpets.  This might have been seen as rubbing it in.  But what if it turned out that DfT had got a good deal after all? 

 

And wouldn’t it help restore DfT’s amour propre if it could show that the franchise was making shed-loads of money for the taxpayer?  Hence, I suspect the high profile announcement.   Win-win as they say.

 

And it is a good story.  The headline figure being a net payment to Government, under Cap & collar, of £110 million in the 12 months to 5 March 2011. And with a

falling subsidy profile plus revenue growing in step with ridership at 11% a year, the payment is likely to be over £130 million in the current, final, year of the franchise. 

 

Growth

Ridership and revenue growth, despite the current economic conditions, is attributed to increasingly strong weekend travel and marketing campaigns.  And yields have improved.  ‘Look’, VRG is saying, ‘when it comes to running franchises for the benefit of the taxpayer, we are the experts’.

 

All very public spirited, of course.  But the joint owners of VRG, Virgin (51%) and Stagecoach (49%), are not altruists.  The accounts show that they received dividends totalling £30.5 million in 2010-2011.  A further £10 million has been paid out in the current Financial Year.  Add in the £67 million dividend paid in 2009-10 and £107.5 million will have gone out of the industry in the last three years of the franchise.

 

While this will undoubtedly get Union Leader Bob Crowe spluttering into his mug of tea, this column reports things as they are.  And that is the way the railway is structured.  In the private sector risk is supposed to earn a reward, but not necessarily, as National Express discovered. 

 

West Coast Trains, the company which operates the franchise, will cease to trade when the current franchise is terminated.  Should Virgin Rail Group retain the franchise in 2012, a new operating company will be established.  

 

Figures

I thought it worth going into the Accounts in detail because of the light they throw, or don’t throw, on the finances of today’s passenger railway. During the 12 months to March 5 2011, West Coast Trains, recorded a profit after tax of £39.948 million on a turnover of £ 797.246m.  This compared profit in 2009-10 of £50.632 million on a turnover of £720.904 million. 

 

 

 

++++++

Table 1

	FY ended 5 March 2011	FY ended 5 March 2010
	£ 000	£000
Turnover	797 246	720 994
Other operating (expense)/income	75 802	79 964
Train operating expenditure	(486 382)	(537 758
Staff costs	(129 098	(134 904)
Depreciation	(2 665)	(1 597)
Other operating charges	(50 370)	(58 367)
Operating profit	52 569	68 282
Interest receivable and similar income	438	551
Interest payable and similar charges	(565)	(573
Other finance income	3 270	1 180
Profit on ordinary activities before taxation	55 712	69 440
Tax	(15 764)	(18 808)
Profit	39 948	50 632

++++++++++++++++

 

Opacity

But getting into the detail of the results, brings home not so much the lack of transparency as the sheer opacity in the finances of passenger franchising.  Take, for example, the issue of track access charges, also raised last month.

 

Network Rail’s total income is determined by the Office of Rail Regulation for each new Control Period (CP). But track access charges (TAC) represent only a proportion of that income.

 

From the start of the current CP4 on April 1 2009, DfT decided that it wanted to increase the proportion of Network Rail’s income provided by Direct Grant.  As a result, Virgin West Coast’s annual TAC, as published by ORR, fell from a nominal £345m in 2008-09 to £64.5m in 2009-10.  In theory, Virgin’s subsidy fell by the same amount.

 

But, as Table 2 reveals, the Report & Accounts shows track access costs in 2010-11 at £136.7m.  And this was down from £170.5m for what was, effectively, the first year of CP4.  Yet in the TAC ‘price list’ published by ORR, the TAC in 2010-11 was shown as rising by just under £3m 

 

 

++++++++++++++

Table 2

operating expenditure
	2011	2010
	£ 000	£000
Rolling stock costs	215 345	215 608
Track access costs	136 700	170 552
Station and depot access costs	11 400	10 966
Power costs	44 277	60 147
Other operating expenditure	78 660	80 485
	486 382	537 758

++++++++++++++

 

 

Confused?  Well in a note to the Accounts Virgin explains that to reflect the up-grades in the West Coast Route Modernisation, which allowed the franchise to run trains at higher speeds and frequencies, the company paid additional track access charges under a series of supplemental Track Access Agreements. This increased track capacity first became available with the introduction of the new timetable in back in September 2004.

 

In effect, Virgin had paid additional TAC in advance of the benefits they funded.  So additional payments made before the new timetable were treated as prepayments. Since September 2004, they are been charged to the profit and loss account on a straight line basis up to the end of the franchise term.

 

++++++++++++++++++++

Table 3

Income	2011	2010
	£ 000	£000
Passenger revenue	753 723	679 034
Catering income	10 645	10 503
Other trading income	32 878	31 407
	797 246	720 944

 

++++++++++++++++++++===

 

+++++++++++++

Table 4

 

Other operating (expense)/income
	2011	2010
	£ 000	£000
Network change compensation and performance regime	32 042	57 421
Property income 2,635 2,436	2 636	2 436
Franchise (expense)/income	(110 479)	20 097

+++++++++++++++++++++++++

 

++++++++++++++++

Table 5

 

Franchise (expense)/income
	2011	2010
	£ 000	£000
Payments under ARFA	(155 270)	(48 023)
Revenue support adjustment	44 791	68 120
	(110 479)	20 097

 

++++++++++++++++++++++++++

 

 

 

Compensation

In passing, take a look at Table 4.  Readers may remember that one of the issues which helped bring down GNER was Railtrack’s better than expected operating performance.  As a result GNER received less in compensation that it had assumed in the franchise bid.  Note that despite improved performance by Network Rail, West Coast Trains received £2 million, equivalent to 4% of fares income.

 

Finally Table 5 demonstrates Cap & collar in action.

According to Virgin the ARFA allows for adjustment to franchise payments under a number of circumstances, in particular, revenue share and revenue support.

 

To recapitulate, up to a 2% variation either side of the revenue forecast in the franchise agreement, the operator takes all the gain or all the pain.  Between 2% and 6% the difference is shared equally between the operator and DfT.  Above or below 6% DfT either takes 80% of then profit or covers 80% of the loss. 

 

Note in Table 5 that DfT still pays the subsidy and the cap payment is netted off. So while subsidy payments fell from £68.1 to £44.7 over the two years, payment under the Cap & collar regime trebled. 

 

Super profit

On the basis of the gross payment to DfT, a back of the envelope calculation suggests the West Coast Trains’ fares income in 2010-11 was just over £200m above the budget agreed when ARFA was signed in 2006.  Can we criticise any party for this?

 

A prudent VRG would have kept a bit up its sleeve for contingency.  A prudent DfT would have gone for a conservative estimate, knowing that Cap & collar would claw back any massive over-performance.  And in retrospect, bringing in Cap & collar early was a master stroke rather than, as I saw it at the time, a safety net negotiated by a crafty VRG.

 

We are so inured to TOCs running into problems when over-optimistic revenue forecast are wiped out by stormy economic times, that we over-look the possibility of top class old-BR management getting it spectacularly right. And don’t forget that these results are despite variable infrastructure reliability hitting Virgin with days when the PPM can fall 20 percentage points below the Joint Performance Improvement Plan (JPIP) target.

 

So, back to Mr Hammond’s injunction, I reckon that VRG deserve their prequalification.  Which leaves the question of just which of the owning groups Mr Hammond was warning? I suspect it was just braggadocio, with no particular target in mind.

 

Meanwhile, don’t forget that these ‘profits’ are entirely spurious. If you add West Coast Trains’ share of Network Rail £3.8 billion direct grant to the track access charges, this indirect subsidy more than wipes out the additional revenue.   

 

 

IEP – the most expensive option

<Intro> It’s not just the wrong train, it’s the most expensive way to acquire it<intro>

 

It will not have escaped readers’ attention that out in the real world, the Private Finance Initiative (PFI) has been the subject of increasing criticism, particularly since the publication of a report by the National Audit Office in April this year.  A follow-up report by the House of Commons Treasury Select Committee appeared on 19 August.

 

This concluded that ‘Private Finance Initiative funding for new infrastructure, such as schools and hospitals, does not provide taxpayers with good value for money and stricter criteria should be introduced to govern its use’. 

 

+++++++++++

PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that.

 

We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer. We must first acknowledge we’ve got a problem. This will be tough in the short term but it should benefit the economy and public finances in the longer term.

 

PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits. It should also ask the OBR to include PFI liabilities in future assessments of the fiscal rules. 

 

We must also impose much more robust criteria on projects that can be eligible for PFI by ensuring that as much as possible of the risk associated with PFI projects is transferred to the private sector and is seen to have been transferred."

 

Andrew Tyrie MP

Chairman of the Treasury Select Committee

 

19 August 2011

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Pioneers

In the railway industry London Underground was a PFI pioneer with the Northern Line rolling stock replacement deal with what was then GEC Alsthom.  This was a total train service provision deal, masterminded by a young Richard Bowker, running for 20 years with the option of a 16 year extension. It was signed in 1995 and came into effect in 1997.

 

As we all know, performance incentives were inadequate (‘ran out of headroom’ in PFI parlance) and after a promising start LU and what was now Alstom went to war over train unreliability.  This was resolved and the latest report from my chums in overalls at Golders Green depot is that the fleet his hit LU’s aspirational benchmarks for the last five periods in a row - reputedly the only line ever to have done so.

 

This benchmark was created for the Public Private Partnership and is based on Lost Customer Hours.  In early 2006 the Northern line was running at 150,000 hours per month. Meeting the aspiration, first achieved in March this year, has meant reducing this figure by more than half.  

 

PFI

Anyway, currently, both the Intercity Express Programme (IEP) and Thameslink rolling stock fleets are being procured under PFI total train service deals.  The successful bidder, will fund construction of both the trains and the depots and then maintain the fleets for the next 30-35 years.

 

Given the well documented shortcomings of the PFI, notably the inflexibility, plus the horror stories of the high cost of extras, not least the £900 to install a Christmas tree in the Treasury, why are governments ‘addicted’ to its use?   First, the PFI it is supposed to transfer risk.  In the case of IEP, if Agility trains fails to cover a diagram it doesn’t get paid (no train – no pay).  Payments will also be linked to meeting the target reliability.

 

Second, in the case of buildings such as hospitals and schools, the private sector has, largely, delivered on time.  But not always.  Remember that Jarvis went under as a result of its PFI failures and the cost was born by the banks not the public

 

But above all, under current accounting rules, the borrowing to fund a scheme does not appear on the Treasury’s books. Without PFI, the Governments would not have been able to fund the 700 schemes, worth over £50 billion, which have been implemented over the past 20 years.

 

Flawed

In opposition the current Chancellor described the Labour Government’s use of the PFI as ‘totally discredited’ and as a ‘flawed model’ which must be replaced.  Since he became Chancellor the Government has signed 34 PFI contracts with a capital value of £1.8 billion.

 

This U-turn suggests that there is no alternative to PFI, despite all the disadvantages, the extra cost of private sector borrowing, the windfall gains when established schemes are refinanced and the need to go on paying for a building when you no longer need it.

 

But in the case of IEP and Thameslink there is an alternative.  And the key downside – inflexibility - looms larger, especially in the case of the Intercity fleet.   The long term ability to move rolling stock around has always been important.  A captive fleet tied to captive depots, with likely eye watering charges to move, say, a dozen units to another part of the Network, does not seem a good idea.

 

Forster

Sir Andrew Foster’s review of the value for money of IEP and its credible alternatives, effortlessly swatted aside by DfT Rail, looked at credible alternatives.  And subsequently Transport Minister Theresa (I speak your weight) Villiers has claimed in written answers that IEP has a £200 million advantage in Net Present Value  over the conventional high speed EMU, plus loco haulage beyond the wires, alternative.

 

I couldn’t make the £200 million stand up (Informed Sources May 2011).  And some further research confirms my earlier view that it is a candidate for Informed Sources DfT Dodgy Fata Dossier – or should that be Fatuous Factoid File?

 

Alternatives

So how does the cost of credible alternatives stack up against the IEP PFI? Let’s start our looks at costs with what this column calls IC125-20 – an IC125 with further modifications for Continuous Service Operation from 2025 to 2035.  Since the cost of these modifications will be amortised in the form of increase capital rental over the expected service life, let’s go for the full house up-grade.  The monthly maintenance charge will also have to cover future heavy overhauls.

 

For this proven train, the monthly capital rental and maintenance cost would be £17,000 per vehicle.  This assumes that the deal would not include a performance regime.   

 

EMU

For the credible alternative to be credible, you need real prices.  So let’s assume that Sir Andrew Fosters favoured conventional EMU alternative is based on the Alstom Class 390 Pendolino.  We know the capital cost – around £2.5 million a vehicle.  We know the maintenance cost because Alstom Train Care recently signed a new long term contract which comes into effect next year.  We know what the capital rental charge will be because leasing companies, like the ROSCOs are routinely borrowing money all the time.  And finally, Pendolino already operates under a Train Service Agreement performance regime covering availability, reliability and operating standards.  

 

Add all these ‘knowns’ together and you get a tad over £30,000 per vehicle per month.

 

IEP

Now for the PFI approach.  Clearly this is much more complicated because the cost includes overheads, such as amortisation of the cost of building the Depots.  The Set Availability Payment (SAP) is also based on the number of diagrams to be met.  Since we are comparing the cost per vehicle, this will need to be spread over a larger number of vehicles – so knock off 10% to allow for availability.

 

But the ‘no train - no pay’ clause is a risk which the funders of the deal will need to insure against, which will increase the cost.  And because the customer pays only for diagrams operated, the Performance Regime covers just availability and operating standards.

 

According to Informed Sources, when the accountants and lawyers have put this little lot together, the answer comes out at around £50,000 per vehicle per month.  And that commitment is for 30-35 years.

 

 

Think on’t

Of course, we must not forget the key question of whether a Rolling Stock Company, could fund a fleet the size of IC125 replacement or Thameslink. Well Angel funded the Virgin’s Pendolino fleet, which is similar size to the total number of IEP vehicles required to cover IC125 replacement on Greater Western and East Coast.

 

And, of course, you don’t necessarily need a ‘ROSCO’ to fund new trains.  The Voyagers and Super Voyagers were originally funded by a consortium of Halifax and the Bank of Scotland.

 

Given that Government, reluctantly, uses PFI because it’s the only way to keep infrastructure investment off its books. Given that East coast, albeit a DfT satrapy, is taking the lead on the future of IC225, you have to wonder why Phillip Hammond is persisting with the expensive and inflexible procurement projects the coalition inherited.  And why the Foster report was binned instead of IEP.       

 

See below what the Conservatives were saying only a few months before the election.  It always fascinates me to see how ministerial appointments apparently come with a lobotomy.

 

++++++++++++++++++++

The Government’s role in buying rolling stock should also

be radically scaled back. It makes no sense for civil

servants in Whitehall to take the detailed day-to-day

decisions on new rolling stock which they now do. This

degree of detailed involvement is now slowing up

delivery of new capacity and driving up costs for both the taxpayer and the fare-payer

Conservative Rail Review: Getting the best for passengers.

February 2009

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Now diesels consider re-powering

<intro>It was worth a trip to Railtex<outro>

 

Back in the August column I reported on my peregrinations around the Railtex trade show and highlighted the counter-intuitive representation of diesel traction.  Counter intuitive because no one expects significant further investment in new Diesel Multiple Units for the UK market – ever.

 

Two of the attractions on show, well, attractive to Captain Deltic at least, were hydro-mechanical transmissions from, in alphabetical order, Voith and ZF.  These drives combine a torque converter, to get the train under way, linked to a multi-speed, electronically controlled gearbox.

 

And in my show report I mentioned that both companies had identified retrofitting existing DMUs as a potential market for these drives.  Of course, to justify retrofitting you have to have a business case and the greater efficiency of the mechanical gearboxes provides just that by reducing consumption of increasingly expensive fuel.

 

Standard

British Rail standardised on Voith’s T211 transmission for its new generation of DMUs in the 1980s. This is a hydrodynamic unit, which means that it uses the kinetic energy in fluid to transmit power. 

 

Such hydrodynamic transmissions have two types of power transmission components, the torque converter and the fluid couplings.  They can be very efficient when working at their optimum speed with the fluid coupling engaged, but this depends on the duty cycle.

 

In the Class 158 DMU, for example, the T211 can spend considerable time in the converter stage where the ‘slip’ between the blades on the impeller, which is driven by the engine, and the turbine  which drive the wheels, heats up the fluid, thus wasting energy. Maximum fuel efficiency depends on switching to the fluid coupling as soon as possible. 

 

What a mechanical gearbox does is provide six speeds.  This means that the gear-box can take over from the converter at a lower speed. ZF claim fuel savings of up to 20% compared with hydrodynamic drives for its Ecolife Rail electronically controlled gearbox.

 

Now this is to be put to the test under a joint venture which will see a Class 158 DMU retrofitted with an Ecolife drive early next year.  Owner Porterbrook Leasing, operator SWT and supplier ZF Friedrichshafen are to jointly fund the trials. 

 

SWT is looking for a modest 5-10% improvement in fuel economy from the trial. But even on this basis, SWT Engineering Director Christian Roth expects that a as business case can be developed to retrofit his Class 158/9 fleets with the more expensive mechanical transmission. 

 

Rising fuel prices are expected to strengthen the case. After 20 years, the existing Voith transmissions are approaching the end of their overhaul life 

 

ZF is already supplying its Ecomat-Rail 6 speed
transmission plus reversing final drive gearbox for the Class 172 DMU.  But don’t expect Voith to let this market go.  It, too, has identified the Class 158 plus the Class 165/166 Networker Turbos as potential applications for its similar DIWA Rail mechanical multi speed transmission.  A recent study showed payback over 6-8 years.

 

This column has been banging on about the need to plan for re-powering of ex-BR EMUs as part of Continued Service Operation for several years now. The potential benefits include energy cost savings of 15% or more through regenerative braking. To which can be added reduced maintenance and improved reliability.  With DMUs now in the frame too, it can’t be long before this new market takes off.

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