Back in February, the UK government announced the
appointment of a consortium to finance and build the trains for its
Intercity Express Programme. Then came the recession and an
electrification report by Network Rail. Both have dramatically
changed the face of the IEP, and might provide new opportunities to
rail funders. Brendan
Malkin reports
“I have heard rumours that it is on, and I
have heard rumours that the whole thing might be off,” one senior
rail figure told Leasing Life last month when asked about the
Intercity Express Programme (IEP).
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Like most people who are asked
questions about the IEP, this person preferred to talk strictly off
the record. Few people want to publicly associate themselves with a
project that is beset with uncertainty, and which since its launch
in February this year has had its fair share of controversy.
However, given the scale of the
project, and also the current economic state, this uncertainty is
hardly surprising.
With a price tag of £7.5 billion
(€8.2 billion), it remains one of the biggest public private sector
projects ever, larger even than the £5.5 billion Thameslink
Programme.
IEP is also a grandiose project, not
just because it involves the introduction of up to 1,400 new trains
and carriages onto the Great Western and East Coast Main Lines, but
also as these units have been billed as state-of-the art.
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By GlobalDataLast month, however, a truer picture
of the current state of the IEP emerged during a Leasing Life
interview with Alistair Dormer, CEO of Agility Trains, the
consortium working with the government in the building and
financing of the IEP trains.
In a frank interview, Dormer
disclosed the drying-up of available cash in the capital markets
has meant that the financing of the trains will now be
“tranched”.
“We are having to put the train
delivery into different tranches,” Dormer said. “We have a funding
plan that looks at a series
of trains being packaged into funding tranches.”
He added: “There will probably be
five or six tranches while originally it was less than that.
Originally it was looking at bigger chunks of money and buying
trains in bigger batches.”
Commenting on the reasons for this,
Dormer explained: “Fundamentally, a lack of liquidity in the
capital markets has caused this. And also the view that we want to
get something that is deliverable. If you ask for too much money at
the moment it just isn’t there.”
Inside sources said that Dormer’s
current plans to raise the cash over six tranches was
“unrealistic”, and they expected it would be raised over more like
eight or nine tranches, each worth between £800 million and £1
billion.
One of these sources said: “My
understanding is that the Department for Transport [DfT] has been
supporting Agility in talking to banks in that there will be
tranches, and that the first would be a £1 billion.”
One suggestion, believed to have
been part of discussions between the government and Agility, is
that the money will be raised through a mix of debt financing and
the bond markets.
Either way, HSBC, which is arranging
the finance on behalf of Agility, has got “banks lined up” to
provide the financing, according to Dormer.
“I don’t think we will have any
problems in raising the money,” he added.
One inside source said Calyon is
among the list of banks which has been chosen.
“I believe this is being done
through [Calyon’s] project finance team in London,” said the
source.
There is said to be reluctance from
some banks to lend to the IEP – and not all of this resistance
relates to the credit crunch.
“There are risks around the need to
deliver a prototype and perhaps new technology which banks would
not like,” said one adviser.
Another difficulty is that while
before the recession “you would expect this type of finance to be
project finance with a debt facility secured over the contracts and
cash flow or occasionally bond finance”, the adviser added, today
this form of long-term finance is less available.
IEP refused to comment on the model
of financing it is looking to arrange.
Despite the new tranching
arrangements, Dormer does not predict any major change will take
place to the original plan for the delivery of the new trains.
“The first train will enter the UK
in around 2013. That will be tested and come into service in 2014.
The last ones will come in around 2018 and 2019,” Dormer said.
These dates are almost exactly in
line with what was planned back in February.
A press statement issued at the time
by the Agility consortium, which includes Hitachi (to build the
trains in Japan), John Laing and Barclays Private Equity Limited,
stated: “Initial deliveries of the first tranche of trains will
start in 2013 for the East Coast Mainline franchise. The total
fleet of up to 1,400 coaches is planned to be in service by the end
of 2018.”
This is all very well, but it does
not account for one big change – possibly not properly accounted
for when the IEP consortium was announced – which is so significant
it might even drive a coach and horse through the entire IEP
agenda.
This change came in the form of a
draft report issued in June this year by Network Rail. Titled
Network RUS: Electrification Strategy, the report, which the DfT is
due to respond to later this year, calls for “a potential
longer-term strategic approach to further electrification of the
network”.
The reasons it gave for
electrification were to reduce costs and improve trains’
“environmental performance”.
The report is of particular
relevance to the IEP. It highlighted the Great Western Main Line –
as well as the Midland Main Line – as being particularly in need of
electrification. The Great Western line, on which currently diesel
Intercity 125 high-speed trains run, is one of the two lines which
make up the IEP development package. The other, the much smaller
East Coast Main Line, is already largely electrified with an
overhead line system.
This means diesel is no longer an
option – at least diesel-only trains.
On the face of things, this could
prove disastrous for the IEP agenda which was rooted in a diesel as
well as an electric series of trains being built.
Meanwhile, not unsurprisingly on a
project the scale of the IEP, the rumour mill is working over time.
Some claim that with electrification the IEP will now be much
smaller in scope, while others say the government will leave making
a decision on IEP until after the next election.
Final decision some way
off
Ultimately, however, any final
decision on the IEP looks set to be some way off.
To handle the changes brought about
by the electrification agenda – and to look at all these issues
raised by these sceptics – the DfT has begun intense negotiations
with Network Rail, Agility and various other interested parties on
the future of the project.
It is hoped that out of these
discussions – described by one insider as involving the “government
reviewing the whole scale of the IEP programme” – a solution will
be forged as to how to progress with the IEP.
Everything appears to be up for
grabs. In particular, there is now deep uncertainty over the scale
– and the cost – of the project.
The original IEP project stated that
the size of the new fleet could be anywhere between 900 and 1,400
trains and carriages. Right now, it is anyone’s guess what the
final number will be, and Hitachi itself was unwilling to provide
any clues.
“Agility Trains is still in
discussion with the Department of Transport regarding the order
size of trains so it is too early to comment,” said Dormer.
Talking to people leading the charge
in these talks, it does appear extremely likely that, given the
electrification agenda, Hitachi will have to scrap all plans to
build diesel-only trains.
On this point, Dormer commented: “We
are revising the roll-out plan of the fleet, and there will be a
slight change in the fleet mix.”
This is likely to mean a cost
reduction as electrics are, according to Hitachi, “slightly
cheaper” to build than diesel trains.
Furthermore, fuel and maintenance
costs are less for an electric than a diesel.
“Electric trains are cheaper to
maintain as transformers and electric traction are cheaper to
maintain than Diesel engines,” said Dormer.
However, despite the electrification
agenda, Hitachi is likely to still build bi-modes – trains capable
of switching between diesel and electric at the flick of a button –
as well as, of course, the electrics.
This reason for the need for both
bi-modes and electrics is simple enough.
Network Rail, said Dormer, has no
intention of electrifying all of the Great Western Line. Therefore,
Hitachi’s bi-modes are still needed, as are the electrics
(originally Hitachi planned to build diesel-only and bi-mode trains
on the Great Western Line).
Explaining this in more detail,
Dormer pointed out that Network Rail does not want to electrify the
whole of the Great Western Line, rather only between London and
Swansea, and also to Newbury on a branch of the main line, both
parts of which will require electric trains.
Bi-mode trains, meanwhile, will be
needed on other parts of the Great Western Line, including the line
to Plymouth and also an area of the Cotswolds, which will not be
electrified.
There appears to be more uncertainty
about what trains will be built for the East Coast Line, large
parts of which currently has electric overhead wires.
The current plan is for electric
trains to run between London and Edinburgh, and bi-modes to be used
for some branch routes off this main line, and for bi-modes to be
employed on the line north of Edinburgh.
However, its future remains
uncertain. Dormer said: “If the government decides to electrify
everything then we can make it 100 percent electric.”
But Agility is far from being in the
clear.
Several senior sources said the
current focus on electrification could spark discontent from
competitors of Hitachi which could argue that the rules on which
the Japanese manufacturer applied for the IEP have now been
fundamentally changed.
In other words, the likes of
Siemens, Bombardier and Alstom could force the government into
carrying out a new consortium tender, this time with electric
trains being top of the agenda.
Given the fact that the appointment
of an Asian manufacturer – not a British one or even a foreign one
with lots of UK-based factories – sparked a national storm back in
February, such a move might even prove to be politically
advantageous.
This was vehemently rejected by
Dormer, who said: “The tender competition was for a family of
trains: electrics, diesels and bi-modes. IEP was all about having a
flexible train that can be switched between diesel, bi-mode and
electric. There were options for electrification in the original
tender. We are 100 percent within the procurement rules.”
Another issue is that, until the
government decides what it wants to do with IEP, nothing is
certain. There is, of course, the possibility that the government
will decide to electrify the entire of the Great Western and the
East Coast lines. In which case, only electrics will be needed –
which might, in turn, give weight to a business case in favour of
using locally produced electrics-only.
As one rail finance expert
commented: “You have got a number of new electric trains that are
still being produced. You have got Javelins and Pendolinos, and
these could be used. European high-speed networks are basically all
driven off high-speed electric trains.
“They could just buy more Javelins
and more Pendolinos [instead of Hitachi’s trains].”
“The tender competition was for a family of
trains: electrics, diesels and bi-modes. IEP was all about having a
flexible train that can be switched between diesel, bi-mode and
electric”
Dormer rejects this argument
outright.
“Our trains are much cheaper than
the Pendolinos as they are lighter, more efficient, more modern,
have far more seats, can travel at 125mph, and have very fast
acceleration so you can get more on a track,” he said.
He added: “In terms of cost per seat
it is massively better value. Also, as they are being provided in
large numbers, there are better economies of scale in terms of
maintenance and repair costs.”
In fact, Dormer is sufficiently
confident that Hitachi’s trains will be such a success on the UK
lines that, he hopes, one day they might be used on other parts of
the UK networks beyond the Great Western and East Coast lines.
As the Hitachi trains are best
suited to high passenger capacity areas, particularly as inter-city
trains, another area where they could operate is on the southern
end of the West Coast Main Line.
This looks unlikely, as Pendolinos
that run on this line have only 10 years of operation behind them
out of a possible maximum of around 30 years. Nonetheless, a formal
“option”, said Dormer, could be activated which would apply this
line to the IEP agenda.
“It might be activated at some
point. It is out there,” he added.
Another issue which will have to be
sorted out during the DfT’s talks with Agility is deciding when the
IEP trains will be brought into operation.
Dormer commented: “There is a whole
series of issues we are in dialogue with. One is around the age of
the trains that need to be replaced.
“Some of the diesels come into the
equation as they are on their last legs, while some need additional
capacity, particularly on the east coast.”
He admitted that electrification of
the Great Western line will delay the arrival of IEP trains on the
line by around one year.
According to Dormer, there are other
issues determining when the trains will be introduced.
“Electrification, current stock,
capacity requirements, maintenance facilities and what needs to be
put in place, and signalling,” he listed.
Meanwhile, questions are being asked
in rail circles about whether anything will have to be done to the
existing trains on the Great Western and East Coast lines before
the arrival of the IEP ones.
One banking source commented: “If
electrification goes ahead and they have to change the programme
for the IEP then they will have to make sure trains are still
available during the period up to electrification.”
One likely option is for existing
trains to have their lives extended. These will not be “put in
place of IEP, but exist until the new trains go in”, the source
added.
Some rail finance providers have
been approached by the DfT to extend the lives of some of their
trains, it is understood. This should not prove difficult to do,
particularly given the fact most trains have an operational life of
between 30 and 50 years.
Meanwhile, debate rumbles on about
the future of the East Coast line if the government takes back the
franchise from National Express, which it is predicted to do
following revelations that the line suffered losses to the tune of
£20 million during the first half of this year.
Even if the government takes over
the line, Porterbrook’s trains, which currently run on the line,
will continue to do so up until the arrival of the IEP rolling
stock.
Ultimately, one wonders why the
government did not launch IEP without accounting for the
electrification of the railways, which has been on the agenda for
some time. But now it has been forced to do so, it is likely to be
for the greater good, both for the environment, as electric trains
are many times cleaner than diesel ones, and also for the IEP
provider which will now have just two, not three, types of trains
it has to build.
