INFORMED SOURCES e-Preview July 2014
This month’s Informed Sources is a bit lop-sided as a long interview with Terence Watson of Alstom takes up a sizeable chunk of the available space. However, next month’s column will be less lumpy.
Belief wins TSGN new-style super-franchise
Quality factor encourages rolling stock replacement
Alstom grows its infrastructure business
DfT coy on rolling stock costs
Thameslink, Southern & Great Northern (TSGN) is the first of the replacement franchises to reflect the Department of Transport’s new pragmatic approach. It is also a very complex franchise.
New franchisee Govia has to: create an organisation to run the greatly enlarged Thameslink network which will absorb Southern next July; partner Network Rail in managing the crucial next five years of the Thameslink programme; all the while improving the service to passengers.
At the same time, DfT has made quality a factor in bid evaluation. ‘Tick-the-box best premium profile wins’ bidding is now a thing of the past.
With bidders encouraged to put forward proposals to improve quality – such as new trains - DfT doesn’t know what’s going to be in the bids until they arrive. Bid evaluation then involves more work.
Which is why the parallel Essex Thameside replacement franchise is now runing two months late. With two complex evaluations running in parallel, TSGN was deemed the more important and made the focus of the Rail Executive’s finite franchising resources.
Not that all the bidders bought into DfT’s commitment to reward quality. According to Informed Sources the TSGN bids reflected a spectrum from classic NPV driven offers to those who embraced the quality agenda and made it work commercially and for the passenger. And winner Govia appears to have read this new market best.
TSGN is, in fact, a management contract where DfT will take all the farebox revenue and make a franchise payment to Govia to cover operating costs plus a margin. In other words DfT is taking revenue risk while Govia will take cost risk.
With the Southern merger TSGN will become the largest franchise on several parameters and is set to grow. DfT modelling, tabled in the column, indicates that the £1.1 billion revenue generated by First Capital Connect and Southern in 2012-13, will have doubled by 2021. On the other hand, the new train fleets and more intensive services will see operating costs increase over the same period by 75%.
Money
With a management contract and DfT taking revenue risk, TSGN doesn’t have the classic premium or subsidy profile that has been a rich source of material for past columns. Operating costs will increase as the Thameslink programme comes on line, particularly the new rolling stock. So instead of being paid a premium DfT will keep the difference between farebox revenues and franchise payments. This is likely to vary year by year.
According to Govia, franchise payments for the base Thameslink and Great Northern (FCC) franchise for the period September 2014 to June 2015 will be around £350 million. For the first full year after the absorption of Southern this will increase to some £1.1 billion.
Remember, these payments are there to cover operating costs. But there are also performance regimes with incentive and penalty payments covering a range of service quality targets. The punctuality target is a 20% reduction in delays. TSGN will also be able to earn up to £25 million for delivery of key performance milestones in the Thameslink Programme
For fellow franchise finance enthusiasts, there is much more detail in the column. Go on – I can’t be the only one?
‘n-factor’ funds rolling stock replacement
Govia’s shrewd reading of the new franchise evaluation rules has made possible the procurement of two new train fleets for the TSGN franchise. This is in addition to the Siemens’ Class 700 fleet.
From January 2016 27 four car electric multiple units will replace the current fleet of 24 five-car Class 442 EMUs on the Victoria-Gatwick Airport Gatwick Express service. The January 2016 service date suggests that the Gatwick stock will be drawn down from the option on a further 140 Bombardier Class 387 vehicles, held by Southern on behalf of DfT.
More significant is the commitment to replace the Class 313 EMUs on the Great Northern Moorgate service in December 2018, when the fleet will be 42 years old. FCC operates 44 three-car units and they will be replaced by 25 new six-car units
Historically, the low lease charges of ex-BR rolling stock have made replacement by new trains unaffordable because it would punish the premium/subsidy NPV on which bids were judged. In the column I explain how quantifying quality improvements in the new-style bid evaluation gets round the cost issue. I even publish the equation with a worked example – including the magical ‘n’ factor.
Alstom eyes UK rolling stock market – again.
Back in the August 2012 column I reported on an interview with an old chum Terence Watson who had just been appointed Alstom Transport’s Managing Director UK & Ireland. The obvious question was why one of the Group’s high flyers had been posted to the UK?
‘I’m back for a reason’, he told me. And the reason for the return was that the UK rail market was in an interesting shape, ‘a changing shape but with value in it’.
At that interview Terence outlined his plans for the company to win business in the rail infrastructure market with was then taking off. When we met again earlier this year it was clear that his optimism has been justified.
In the column I describe how, with its partners in a number of joint ventures, Alstom has been winning the major infrastructure contracts targeted back in 2012. Terence sees this success as the result of having ‘the right strategy at the right time’.
So Signalling Solutions Ltd (SSL), the signalling joint venture with Balfour Beatty, was a £30 million company and is now ‘more like a £180million business’. Network Rail’s plans for ETCS and TMS mean that new technology will be introduced alongside the increasing volume of current signalling equipment already committed under the framework contracts.
ETCS will shift responsibility for maintaining the most technical components of the signalling system from the control centre and trackside to the rolling stock maintenance depot. Here, Alstom can draw on its experience of installing and maintaining both the Class 390 Pendolino’s Tilt Authorisation & Speed Supervision System (TASS), a version of ETCS, plus the Thales Transmission Based Train Control System on London Underground’s Northern Line fleet.
Meanwhile, Terence is not sure that Network Rail has realised the need to keep the signalling contractors engaged. Signalling is relatively small in terms of NR’s expenditure in Control Period 5, but it represents the highest technical risk for the company. ‘If we don’t get signalling right, it doesn’t matter what you do, you can’t get anything right’.
ATCBack in 2012 the consortium of Alstom, TSO and Costain (ATC) had been bidding to Crossrail. This has resulted in three key contracts, collectively worth just under £400 million.
Contract C610 is ‘the big one’, the electro-mechanical fit out of the twin tunnels. Supporting this is C644, the high voltage traction power supply. The third is C650 which covers non-traction electric power supplies.
As the tunnels are handed over, ATC with Contract C610 and Siemens with the C620 signalling contract will be taking centre stage. Terence Watson sees C610 as the contract which pulls everything together. So ATC and Siemens are now working out how to manage the interfaces between their operations to get the best result.
Meanwhile, ATC is ‘pretty much on track’ with the primary designs and will have access to the tunnels in January 2015. Construction of the railhead at Plumstead starts this September.
Electrification
In 2012 Alstom Babcock Costain (ABC), the electrification consortium, was working on 11 bids. Initially, success was elusive. After securing the £90 million WCML Power Supply Upgrade, ABC then lost three contracts in a row. ‘It was a pretty hairy time’.
A ‘real think’ followed, one outcome of which was to raise the stakes, including acquiring ABC’s own wiring train.
After that, the tide turned with ABC winning two of the three electrification Framework contracts it had targeted. These are the Great Western Valley lines and the confusingly named Central (London North Western) South (LNWS. LNWS is effectively the West Midlands section of the ‘Electric Spine, from Oxford to Nuneaton and across to Bedford.
Frameworks only give the right to bid, but when the Edinburgh-Glasgow electrification scheme, won by Costain but novated to ABC, is included, the consortium’s potential order book is now over £1 billion.
NottinghamAlso in Alstom’s alphabet soup of TLAs is NET – Nottingham Express Transit. In addition to building the Phase 2 extension under a turnkey contract, including supplying new Citadis trams, the consortium is also the concessionaire responsible for long term operation and maintenance of the extended network.
Terence Watson hopes that NET will be the poster child for further light rail schemes, not only offsetting the negative experience of Edinburgh but, as a model, becoming replicable. He points out that NET Phase 2 was launched successfully during the financial crisis.
In late March, 1000 m of a track a week was being installed. Since then the new trams have made their first public appearance.
EMU aspirations
Terence had kept a surprise for the end of the interview. When I tried to move on to London Underground’s immediate requirement for more Northern and Jubilee Line stock he wanted to talk about new main line EMUs.
Remember that Alstom, lost the UK train market in the noughties. It then attempted a comeback targeting three contracts: Class 390 fleet expansion, the new Thameslink trains and Piccadilly line fleet renewal. Class 390 was achieved, the articulated train for Thameslink was too radical and Piccadilly line was deferred. Without a suitable design, Alstom then withdrew from the Crossrail train bidding.
But, despite having missed out on the two mega-projects, Alstom sees scope for future EMU orders. The company is targeting the high-end 110-125 mile/h EMU market sector already identified by both Bombardier and Siemens.
Success could see Alstom ‘building stuff in Britain’. What sport of stuff? ‘it could mean assembly, it could mean technical parts or cooperation’. But it is ‘absolutely on the table’.
LU
London Underground’s Jubilee and Northern line orders are Alstom’s to lose. But win the deal, which would include retractioning the Jubilee line fleet, and the company has the launch pad for a manufacturing programme to which the high performance EMUs would add more momentum. By then we are into the high speed trains for HST2 where, at least initially, the money will be in the ‘classic-compatible’ fleet for operation beyond HS2 itself.
So, argues Terence Watson, why wouldn’t you, if you were Alstom, look at UK rolling stock market with fresh eyes ‘to work up an industrial plan?’
But haven’t Hitachi and Bombardier already secured their places in the UK market? ‘Absolutely not’, declares Terence Watson, ‘That’s not how Britain has ever worked, it’s not how Britain is going to work. As a market Britain is a bit scary, so I think we have equal opportunity’. What we’re saying is that the game is on, we like competition.’
Next month’s column will update the Informed Sources rolling stock procurement forecast table for Control Period 5. Terence Watson was looking to Control Period 6 (2019-2014) , but I would expect Alstom to enter the fray earlier now that we have the ‘n’ factor. Think Class 185 replacement following the Trans-Pennine electrification?IEP back in the spotlight.
This piece has been overtaken by slow-moving events. Let me explain.
In October 2012, in response to a Parliamentary Question, DfT gave the annual charge for the Intercity Express Programme (IEP). My analysis showed that the cost per diagrammed vehicle was twice that of Class 390 Pendolinos for Virgin West Coast.
So in December 2012 I wrote to Amyas Morse, the Comptroller & Auditor General at the National Audit Office with a copy of the Informed Sources article containing this revelation. Subsequently NAO invited me in for a discussion. Then it all went quiet.
Earlier this year the contract for the East Coast IEP fleet reached financial close. As in 2012 Tony Berkeley, one of the feared railway Lords, put in a written question asking for the annual charge under the 27.5 year train service provision contract. DfT’s reply gave only the Net Present Value.
Lord Berkeley also asked for the annual charge for the Thameslink fleet, a 20 year train service provision deal. And guess what? DfT gave the NPV but seemed to overlook the annual charge.
Since you need the annual charge to calculate the NPV, Lord Berkeley put in follow-up questions, specifically asking for the annual charge used to calculate the quoted NPVs. As I write two answers have been published.
In the case of the Great Western IEP fleet DfT gives the annual charge, but in nominal terms at 2019 prices. This is pure obfuscation. As for Thameslink, DfT has ignored the charge question altogether and just repeated the NPV.
Trying not to sound too grand, this refusal to answer simple questions is an abuse of democracy. When others in the industry welcomed the formation of the Rail Executive as a breath of fresh air I remained doubtful. And these non-answers show that behind the outgoing façade, the old weasel mentality rules.
Anyway, while I was working up a new meta-analysis of definitive IEP costs, the mills of the NAO stopped grinding. Since my meeting, various chums had reported on-going discussions with the NAO and when I eventually checked the NAO website, I found that my intervention had led to a formal investigation into both the IEP and Thameslink rolling stock Private Finance Initiatives (PFI).
With luck, the report will be published just in time for the August Informed Sources. And, of course, the fact that DfT has now seen the NAO’s report might explain the latest attempts to cover up the costs, a further spur to an up-to-date analysis.
Roger’s blogGosh, you are a friendly lot! ‘Come up and have a chat if you see me wandering round at Infrarail’, I said in last month’s blog and within five minutes of leaving the press office to start my tour of the show I was in deep discussion with two subscribers who took me at my word.
That set the pattern for the day. And with fewer exhibitors, I finished early and had more time to meet visitors to the Modern Railways stand over a restorative glass.
Although most of the multinationals were absent, the Small & Medium Enterprises had plenty to keep my notebook and camera busy. And, of course there were the ‘regulars’ to catch up with.
Overall, what struck me was the increasing volume of deliveries being reported on several stands, with no sign of the historic dip in orders which we used to see during the changeover from one Control Period to the next.
Two days after Infrarail I popped over to Hitchin to join a Network Rail press visit looking at the ETCS National Integration Facility. Hitchin is where the four shortlisted suppliers have their test laboratories which control the ETCS equipment on the test running section on the Hertford loop.
Each supplier has equipped a room with control desks and display screens. Testing based on Network Rail’s requirements
dad just been completed and the suppliers were preparing to show what they could do over and above the basic spec.
Then, next day, it was a quick return trip to the DfT in London where the Franchising Director had arranged a briefing for the railway press on the award of the TSGN franchise – nicely timed for this month’s column.
Highlight of the following week was a trip to an industrial estate beside Warwick Parkway station to see the mock-up of what we must start calling the Hitachi Super Express Train and not IEP. You will have already seen the photos in Modern Railways and having seen the interior ‘in the flesh’ my main conclusion was that they would be like.
Muji makes good quality basics. So, rather like the Honda Jazz in which I drove to Warwick, the SET interior looks like a nice functional vehicle.
Nothing wrong with that, but the Atlantic Design mock up of the proposed new interior for the IC225 Mk 4 coach, which I reviewed some months back, had something extra. Hard to explain the subjective difference, but, to me, the Mk 4 was more ‘intercity’.
In the first week in June I had an interview with the ORR Chief Executive Richard Price and his Director of Railway Planning & Performance Richard Price. A very informative session, to be covered next month – space permitting.
Then, the following week, I had a chance to ride in Angel Trains’ retractioned and refurbished Class 317. I had a long session with the driver about handling the regenerative braking provided by the new Bombardier three-phase drive traction package.
This coming week is uncharacteristically busy, with a briefing from the Rail Delivery Group on cost savings today (Monday), the Stagecoach Summer Reception on Wednesday evening – always a notebook-filler, and, finally, the Modern Railways Innovation Awards at the Fourth Friday Club.
Our speaker and guest of honour is Transport Minister Baroness Kramer, she who signed the non-answers on IEP and Thameslink to Lord Berkeley’s questions. Would it be discourteous to print off her reply and point out the omission over lunch? Hmmm, not sure how such gonzo journalism with a guest would go down.
In comparison July is quiet, until the 21st when I’m due to find out about Hitachi’s new AT200 EMU, designed specifically for the UK market. I wonder if there will be a high end, high speed version?
Right, now to get to grips with the cost of IEP.
Roger