INFORMED SOURCES e-Preview December 2012
Well, there’s a bit more variety in the December column, although the publication of Sam Laidlaw’s initial report of his investigation into the Intercity West Coast franchise cancellation has given me plenty to write about.
IEP – DfT’s taxpayer rip-off
Cap & Collar hitting DfT’s budget
Laidlaw Inquiry hints at revelations to come
SLF the central issue in ICWC cancellation
Thameslink slippage leave Northern triangle diesel powered
From the start the Intercity Express Programme has been DfT’s baby. DfT officials specified the train, procured a 27.5 year Private Finance Initiative total train service provision deal and signed the contract. When the deal was concluded earlier this year the cost was quoted as a Net Present Value of £4.5 billion - subsequently increased to £4.9 billion.I regard NPV and its more expensive twin ‘Nominal’ as snares and delusions for the unwary and prefer to deal in cash. So does Lord Berkeley who put in a written question and was told ‘the estimated annual payment, at 2012 prices, when both Great Western and East Coast fleets are in service in 2019/20 is approximately £449 million’.
You can do the maths yourselves. Agility Trains, the Hitachi-led consortium which won the IEP contract, intends to build 596 vehicles to cover its commitments for the Great Western and East Coast fleets. But, IEP is a total train service provision deal, based on the number of diagrams to be covered each day. The 596 vehicles, formed in 92 sets, will cover 78 diagrams formed from 502 vehicles.
So what counts is the cost per diagrammed vehicle and in the leasing industry this is usually expressed as cost per vehicle per month. At £449 million a year this gives £74,000 per diagrammed vehicle per month covering the capital costs of the trains and the new depots, plus whole life maintenance and overhauls.
How do we put this into context? Well the Virgin Pendolino fleet is leased by Angel and maintained by Alstom under a total train service provision contract which includes a performance regime covering availability, reliability and ‘hotel’ standards. The cost per diagrammed vehicle per month is £37,000.
So, in round numbers, the Department for Transport has not only specified a train which no one in the industry wanted, but has procured it in the most expensive way possible.
Is it not rich that ministers and civil servants who, following McNulty, have berated our industry for being too expensive are gratuitously imposing around £225 million a year in extra costs? But note that the East Coast IEP fleet has not been signed off yet. Where is the National Audit Office when you need them?
Cap & Collar costs
I had an e-mail the other day from a young researcher who is helping with a study of franchising. He wondered where I obtained the data for the tables and premium profile graphs in the column?
Quite simply, it is all official data from Government web sites, plus a bit of interpolation. For example in this month’s column there is a table which would have taken an inordinate amount of time to compile, but was provided in response to a Parliamentary written answer.
Covering the 2011-2012 financial year it lists the premium or subsidy for each TOC plus any revenue share or revenue support due under Cap & Collar. It confirms that the recession has wrecked DfT’s budget.
Despite the Association of Train Operating Companies trumpeting of continuing growth, it is not reflected in revenue. The need to prop up TOCs through Cap & Collar knocked nearly £500 million off the premium payments which the Department was expecting to receive in 2011-12 from franchised train operators.
Of course, this type of data invites secondary analysis. One table in the column shows each TOC’s support expressed as a percentage of its revenue. For all but one this is 10% or less. Readers may care to see if they can predict which operator is getting 24% of farebox revenue before all is revealed in the magazine.
Subsidy
You can also put two sets of official data together in the pursuit of enlightenment. Outside commentators often refer to ‘lucrative’ or ‘profitable’ franchises on the basis of the premium profiles. But, of course, the track access charges TOCs pay Network Rail don’t cover the full cost of access.
Network Rail also gets a direct grant from DfT and an earlier written answer listed each TOC’s share of this grant. Adding this to the table means that we can offset the premiums paid against the hidden subsidy through the direct grant.
Only one Franchise doesn’t need a subsidy. That could explain the anytime fares on my local operator First Capital Connect!
Laidlaw - more to come
While only 19 pages long, the initial report from the Laidlaw Inquiry contains, as we say in this month’s Railtalk, more smoking guns than the Magnificent Seven and more questions than Countdown. And that’s before you start reading between the lines.
Sam Laidlaw and his team have been unable to interview some of the DfT officials involved and the questions which could be put to others were restricted. This is because DfT is running an internal ‘Human Resources’ Investigation into its officials’ actions during the Intercity West Coast bidding.
At the heart of the Inquiry are the flaws in the franchising process which led to the cancellation of the Intercity West Coast ICWC) competition. These included the way in which DfT determined the size of the Subordinated Loan Facility (SLF), DfT’s hedge against an operator defaulting on the franchise agreement.
But, not only were the computer modelling and the process for setting the SLF flawed, there are also questions over how they were applied. Hence the HR investigation.
Even worse, Laidlaw reveals that DfT knew that there was a risk that the decision to award the franchise to First Group could be challenged, but decided to go ahead anyway. At the latest Parliamentary Select Committee hearing, Chair Louise Ellman tried to elicit whether this decision had been referred upwards to a minister.
You can enjoy her verbal battle with the Department’s Permanent Secretary in the column. He concludes ‘the question of who knew what and when is something that will come out when these investigations, including the HR investigation, are complete’.
SLF triggered ICWC cancellation
Whether it is the latest traction technology or the working of Cap & Collar, one of my aims in Informed Sources is to make specialist things comprehensible to the general reader. A useful tool here is the break-out box where you can explain some feature, rather than cluttering up the general narrative.
My coverage of the Laidlaw report merits multiple boxes, including a glossary and a chronology, so you can guess it’s a pretty demanding read!
As Virgin said all along, the reason why it challenged the award of the franchise to First Group was because it believed that the SLF was too small. The SLF is the loan a parent group makes to its train operating company. If the TOC subsequently defaults, the SLF is forfeited. This is what happened with National Express East Coast.
In the case of the ICWC, DfT had set First Group’s SLF at £190 million. Virgin, whose SLF was £40million for a less risky bid reckoned the First SLF should have been asked for £600 million. A key question here is why Virgin and PricewaterhouseCoopers thought the SLF was wrong when DfT and First believed it was right.
Lack of transparency is one factor. Bidders were unable to predict the likely size of their SLF. And, anyway, DfT didn’t use the process it had told bidders it would follow in determining the SLF.
Even worse, on the evidence seen to date, the Laidlaw report says it ‘is not clear or in some respects consistent’ how the final SLF requirements for First and Virgin were ‘ultimately’ determined. What is clear, says Laidlaw is that while DfT appears to have ‘considered’ the numbers being generated by its computer models it also appears that the final SLF levels ‘reflected a view taken by DfT as to appropriate numbers’.
Extraneous
What extraneous factors that DfT took into account in setting the two Groups’ SLF levels are still being investigated. However officials were concerned that setting too high an SLF might ‘knock’ a bidder out of the competition or affect its participation in other bids’. City chums suggest that most of the UK transport groups could support only one £500 million plus SLF – if that.
Laidlaw concludes that as a result of the determination of these extraneous factors the bidders were treated ‘inconsistently’.
Real
Not only wasn’t the process transparent, the key tool used for determining the SLF confused even its creators.
Bidders submitted their offers in nominal values – that is adjusted for future inflation. But in DfT’s computer model they were then deflated to real 2010 prices for all the years of the franchise term.
Thus its output was also in real 2010 prices. But, as Laidlaw comments dryly, the levels of SLF generated ‘were erroneously treated (by DfT’s officials) as if they were nominal ’.
So, in a final quote from Laidlaw, ‘The model that the DfT told bidders it would use (but did not ultimately use) to determine the level of the SLF that it required in respect of the two leading bids provided numbers in real terms which were used by the DfT as if they were in nominal terms. Had they been converted to nominal terms as they should have been, significantly increased SLF levels would have been required’.
Thameslink train contract sipsOn 25 October, Transport Minister Simon Burns said that DfT is now expecting to reach financial close on the Thameslink total train service provision deal with Siemens ‘early in the new year’. This was the third official forecast in seven weeks.
Next day the Minister was asked whether DfT officials have provided advice on what steps the Government would need to take to secure the provision of new rolling stock for Thameslink if it is not possible to reach financial close with Siemens. He replied ‘I am aware of the consequences of failing to conclude the procurement and as you would expect, my Department is closely monitoring progress, including assessing options were it not possible to secure financial close’.
A few days later Siemens put out a statement saying that despite the delay ‘we are making good progress and we remain confident that we will achieve closure of this important deal’. It added ‘Depending on progress over the next month or so, we hope to achieve commercial close by Christmas with financial closure in the New Year’.
Delivery
Replying to yet another question (busy man) Burns said that DfT expects the first trains to be delivered for testing on the network ‘in summer 2015’ and deployment of the full fleet to be completed ‘towards the end of 2018’.
This looks like cutting it a bit fine since the 24 train/hr service through the Thameslink central core is scheduled for the December 2018 timetable change.
But the immediate problem is rolling stock for the Northern Triangle electrification. The financial case assumed that Class 319 EMUs released from Thameslink would avoid the need for expensive new trains. But I reckon that the first Class 319s won’t be available until after the whole Northern triangle electrification is finished.
Ditto Great Western, where electrification to Bristol Oxford and Newbury is scheduled for December 2016 (but could well slip). Class 319s were supposed to take over Commuter services from the Networker turbo Diesel Multiple Units. I think the phrase is ‘fat chance’.
DfT is rumoured to be considering an urgent build of 125 mile/h EMUs. But this could blow the business case.
ROSCOs
Meanwhile, what options are open to DfT’s Officials if Thameslink funding continues to be sticky. Well one approach would be to let Siemens get on with building trains and invite the ROSCOs, and anyone else with the funds and experience, to fund the fleet between them
Having seen what the similar IEP deal has cost, this ‘back to basics’ approach would almost certainly save money and there would be long term flexibility with several funders each owning 300-400 vehicles.
Roger’s Blog
Well, despite all the excitement over ICWC, which meant lots of desk time, I’ve still got out and about since the last e-Preview. I had an interesting briefing with Steve Yianni, Chairman of the Technical Strategy Leadership Group on the up-coming 2012 Rail Technical Strategy (RTS). This can’t be worse than the 2007 version and Steve assures me it will be much better.
That evening there was the Bradshaw Lecture given by Tim O’Toole. His running theme was how the development of signalling is mirrored in the wider railway. Naturally he got my attention with the claim that monoliths can’t innovate. Oh no? Contrast monolithic London Transport and Oyster with the total failure of the fragmented railway to produce a smart card. Odd coming from a man who reversed the fragmentation of the Underground, recreating his own monolith.
Next morning it was up early-ish for a blast to Bedford and back in the New Measurement Train. The aim was to showcase the new Plain Line Pattern Recognition system. A rare (these days) technical article beckons.
The following week I managed to make the morning sessions of the Rail Research UK Association annual conference. As you may have noticed I am pretty sceptical about the relevance of much of the research that is being funded, but most of the case histories presented in the morning seemed quite useful.
However, a fellow sceptic tells me there were some fine examples of crackpottedness in the afternoon and has sent me the links with the caveat ‘view only if your blood pressure can stand it’. Research, of course, is of a piece with the RTS, so expect some robust analysis in the near future.
It doesn’t help that Network Rail’s new Chairman comes from the car industry and like all incomers assumes that railway technology is primitive and is going on about bringing in fresh ideas from other sectors. Oh dear, so predictable.
This coming week I am having an up-date session with ORR Chair Anna Walker. After the Bradshaw Lecture I bashed her ear about my concerns over the proposed formalisation of the Rail Delivery Group. I am not alone in this so an official meeting will be interesting.
Then on Friday it’s Modern Railways annual traction & rolling stock extravaganza when the Golden spanner awards for reliability take over the Fourth Friday Club meeting. This year there are gold, silver and bronze spanners to be awarded, some brilliant performances to be recognised and more depots than ever honoured. It looks like being a record attendance too and I intended to make it a politics free zone!
November ends with an IMechE Railway Division Seminar on traction energy which looks promising. And then it’s December and where has the year gone? First to start the celebration is Eversholt with a reception where I must ask if they are interested in a share of the Thameslink fleet. The following week it’s the Rail Freight Group lunch which is always a hot bed of informed Sources.
Meanwhile, I’ve got the spanners, I’ve got the paint – time to spray!
Roger