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INFORMED SOURCES March 2007

Competition referral wrecks Pendolino lengthening plan.

That's InterCity West Coast stuffed for the long term

From the start, the project to lengthen Virgin West Coast's Pendolino fleet from nine to 10 or 11 car formations was a race against time. But just before lunch-time on 3 January this year it looked as though the race could be won.

That morning, meeting at Virgin Rail Group's Euston offices, Pendolino builder and Maintainer Alstom made a ‘handshake deal' with Virgin and the owner of the fleet, Angel Trains, to go ahead with the lengthening. Alstom immediately started to mobilise its own project team and alert its sub-contractors. A rapid start was essential to protect the delivery programme which was linked to the heavy overhaul programme of the existing fleet (see box).

Alstom was funding this early work itself on the understanding that a formal Notice to Proceed would be issued by 31 January. A formal contract was required by 31 March at the latest. Meanwhile, it was down to Virgin to convince DfT Rail that the business case for the lengthening stood up and for Angel to agree the funding and leasing arrangements, also with the Department.

Separate

Despite having asked VRG to cost lengthening to 10 cars as part of the franchise reinstatement renegotiations (Informed Sources last month), and Virgin having priced an 11 car option for good measure, DfT Rail was treating the lengthening project as a separate deal. When I checked progress on the project with DfT Rail during the second week in January, the relaxed attitude suggested that the rapidly closing window of opportunity was not considered a real threat.

I suspect they thought that Alstom, one of those nasty commercial organisations, was trying to bounce them into a decision. But as the box shows, it really was the chance of a train's lifetime.

Pendolino lengthening project - milestones

Costs

On 15 January VRG submitted the full, costed, proposal for an 11 car fleet. The total price was £180m for the 106 vehicles, including £3million for additional spares.

Whether DfT Rail could have processed it in time we shall never know because when Angel Trains went to its owner Royal Bank of Scotland , seeking approval for finance to fund the 106 cars, RBS decided not to go ahead. As far as I can tell, the decision to withdraw was taken by RBS around 20.00 hours on 1 February.

Before that, a meeting between DfT Rail Officials and Angel scheduled for 29 January had been cancelled. There are contradictory reports on any ministerial intervention.

So 31 January came and went without Alstom being given a formal Notification to Proceed and the offer expired. Alstom stood down its contract team, the subcontractors relaxed, the capacity in the aluminium extrusion presses was released.

While a major failure in itself, the collapse of the 11 car Pendolino also highlights a particularly malign aspect of privatisation. Whether it is Network Rail's Control Periods or train operators' franchise terms, what should be a seamless flow of policy, process and finance is split up into disjointed temporal and financial packets.

Uncertainty

Rather than attempt a continuous narrative, I'll analyse this major blow to the credibility of the railway from the view points of the protagonists, starting with Angel.

Ever since DfT Rail started demanding that the ROSCOs should cut their excess profits I have been banging on about banks having an aversion to uncertainty. And the outcome of a Competition Commission market investigation is about as uncertain as you can get.

DfT Rail's original aim was to get a £100 million a year rebate on the lease rentals of the British Rail legacy fleets covered by the Master Operating Lease Agreement (MOLA). But as the stand-off dragged on, suggestions began to emerge that new train leases might also be too high.

Confirmation of this aspiration lurks in the renegotiated VWC franchise. This included a new clause requiring any future reductions in rental charges for the Class 390 to be passed on to the Department.

Nervous

Now this may be a precautionary standard clause in all new franchises, just in case the Competition Commission investigation delivers. But is was one more straw in the wind for Angel's nervous owners.

They were already concerned that if, as it is ‘minded' to, the Office of Rail Regulation refers the DfT Rail complain to the Commission, the referral will be under the Enterprise Act. This which would require a study of the whole train leasing market. Since post privatisation trains compete with the MOLA fleet, Class 458 versus class 442, for example, new train rentals could well be capped or regulated.

Compounding the uncertainty was the timescale of the Regulatory process. Consultation on ORR's draft finding closes on February 27 and it will take a month or so for ORR to confirm its decision.

Delay

But given that ORR announced on 29 November 2006 that it was minded to refer DfT Rail's complaint to the Commission, you have to ask why it took Angel two months to discover that RBS would not fund the deal because of the possible investigation.

Yet during this time Angel had been working hard to set up the funding framework for the extra cars. It had put in separate prices for the 10 th and 11 th vehicles, had worked out options, ranging from augmentation of the existing lease on the Pendolino fleet to a new longer lease for 53 11-car trains.

According to informed sources, the next stage was to justify to DfT Rail how the company got from the ‘now' fleet rental costs to the ‘future' fleet rental costs. But the plug was pulled before it could happen.

Could someone else fund the 106 vehicles? HSBC and Banco Santander, the owners of the other ROSCOs, are likely to take the same view on risk. When I asked a merchant banker chum, who dabbled briefly with rolling stock some time ago, whether he would invest 3180 million with a competition commission investigation looming, he said ‘No'.

Some souls have suggested that, since Sir Richard Branson is worth £3 billion he might buy the extra cars out of petty cash. But Virgin could lose the West Coast franchise in five years' time and trains are forever, well 30 years.

So the real criticism of Angel is not that it was pulled out, but that it didn't pull out when ORR published its draft conclusions. Virgin and, especially, Alstom were pretty miffed at being jilted in the church.

Alstom

You have to remember Alstom's dual roll in Mozart's unwritten opera ‘Il imbrogilio dei Pendolini'. Not only does the company build the trains, it also maintains the VWC fleet.

This simplified the lengthening proposal since Alstom could insert the extra vehicles as part of the regular overhaul programme. Cutting extra cars into a modern computer controlled multiple is a complex process. Doing it when the trains are already scheduled to be in for several days makes a lot of sense.

Heavy overhaul periodicity for the Class 390 fleet works to a five year cycle, roughly equivalent to 1.2 million kilometres. Currently the first major exam (H1) is under way.

Alstom admits that it was nearly caught out by the planning and materials involved in H1 and, as a result, is already hard at work preparing for H2, which starts in December 2008. At the centre of the H2 work is the first bogie overhaul.

Already Swiss Federal Railways, which has similar bogies under its tilting trains, has been over to Longsight Depot. In terms of running, the Swiss trains are 1 million km ahead of the Class 390s and Alstom are tapping this experience to get advance information on what to look our for.

Current plans are to carry out a pilot H3 in mid 2008 to double check the planning. Then the programme proper starts in December at one train a month and from March steps up to one H2 exam every 8-9 days.

Also in December 2008, the availability of the Class 390 fleet has to step up from the current 46 out of 53 to 47. On some days, and at some times, such as Friday evenings, an additional set is diagrammed.

At the same time, fleet mileage increases from 235,000km to 280,000km a week. And the whole VWC operation runs at high intensity through to the end of the franchise in March 2012.

Desperate

So hopes that a solution to the funding impasse can be found, and the programme reinstated, are a touch desperate. Under Alstom's now expired offer, the vehicles were costed at £1.67m each. This included the costs of inserting the cars into the existing trains, testing and commissioning.

Longer trains would cost more to maintain and require additional spares. Here we come to the curse of privatisation.

Alstom's maintenance contract for the fleet is tied to the Virgin franchise. No one knows who will maintain the fleet when the franchise is relet in March 2012.

So funding an extra £3 million of spares for barely a couple of years would come expensive. As a result, the spares became part of the contract price..

More expensive

Alstom had quoted £180 million on the assumption that lengthening would be integrated with the H2 exam. This would attract economies of scale as well as involving vehicles already scheduled to be out of service.

According to Informed Sources, DfT Rail asked for a price if the lengthening programme was delayed by six months. The answer looks like an extra £10 million.

But restarting would not be like turning on a switch. Engineering and planning teams have to be reformed, sub-contractors have to revise their bids and delivery schedules. Add in the fact that European industry is on holiday in August and Angel's pull out has already cost the project 10 months.

On that basis, the start of lengthening would slip from December 2008 to September 2009, When H2 was completed in 2010, Virgin would have 25 11 car sets in its fleet of 53 Pendolinos.

On the other hand from August 2010, lengthening could step up to one train a week. This would produce an homogeneous 11 car fleet by March 2011, a year before the franchise ends.

Another exam

While all this is going on, the fleet is cranking out its 280,000 km per week. At that rate, the H3, the next major Exam will fall due in September 2012. H3 includes some of the work in H1 and H2, plus a bit more on the bogies and a lot more work on the bodies.

Remembering that planning for H2 is well underway with two years to go, who is going to plan H3? This poses Alstom, as maintainer, an interesting problem.

In March 2012 the maintenance contract ends in parallel with the current franchise. Supposing NedRail won the new Intercity West Coast franchise: they might well want to take over maintenance themselves. In fact there is no certainty that the new operator will want the Pendolinos anyway in the long term. I'll come to this later.

So all Alstom can do for the present is focus on H2 and the terms of its existing contract. And, of course, try to add Captain Deltic's InterCity Golden Spanner to the Class 390's silver spanner for most improved fleet in 2006.

Virgin

As you might expect, Virgin Rail Group (VRG) took a never say die attitude to Angel's withdrawal. ‘We will make it happen' an Informed Source told me.

VRG, like DfT Rail, believes that lengthening could still start later in the H2 overhaul if the finance can be found. To provide cover while one Pendolino at a time was out of service, other stock would be subleased. For example, two of the Class 221 tilting Super Voyagers, could substitute for a Pendolino.

But by mid 2010 over half the Pendolino fleet would still be nine car and, as VRG Chief Executive Tony Collins told me last year, the revised business plan depends on putting bums on the extra seats provided by the increased frequency and longer trains. and VRG is clear that the business case for the lengthening still stands.

Capacity

But the really interesting question is whether Virgin might seek to exploit the traction and rolling stock cliff edge in March 2012. Talking to Tony Collins last year, he made the point that, apart from the impact on VWC revenue, lengthening would give DfT Rail a much more attractive, higher capacity franchise to let. And the big thing in the High Level Output Specification (HLOS) is going to be capacity

Contrarily, there is now a risk that when DfT Rail starts to refranchise ICWC it will be offering a terminally overcrowded franchise, with no relief in sight and trains overdue for a major overhaul for which no-one is willing to pay. Experience tells us that DfT Rail is never averse to blowing its brains out, but might the pragmatic solution be extensions of the existing franchise and maintenance contracts?

Yes I know that DfT Rail never, ever, renegotiates franchises. But this is promises a storm on such a scale that if Virgin and Alstom offer a life raft Ministers might just climb on board

DfT Rail

RBS' decision to withdraw clearly caught DfT Rail on the hop. But as you will have gathered by now, long term traction and rolling stock fleet management is not compatible with a contractually based railway, with arbitrary contract terms

For example, when Virgin won the Intercity West Coast franchise back in 1997, a 15 year term sounded like a lifetime. Then, following the Railtrack collapse, Virgin had to be rescued in 2002. This left the West Coast in DfT limbo for 53 months until the franchise could be reinstated. Suddenly the franchise has only five years to run.

There is a strong whiff of August 1914 about DfT Rail's role. Once it mobilised a Competition Commission referral, the troop trains started running. With the highly polished clockwork of ORR whirring it was a slide into ‘war by timetable'.

Not us Guv

Back pedalling furiously, Marsham Street Informed Sources tried to assure me that an ORR referral was not a ‘fait accompli'. Anyway, when the complaint was submitted to ORR it was not about current lease prices. Finally, in a classic example of civil service de haut en bas, I was assured that Angel could avoid the Referral affecting its business by ensuring that its leases offered good value for money.

And note in the official statement, that non sequitur on value for money. These two are examples are conflated only because the one has aborted the other.

According to Informed Sources, but denied by DfT Rail, there were suggestion that the lease for the extra Pendolino vehicles could be ‘ring fenced' from the any Competition Commission referral. Or, even, that it was not too late for Angel to cough up its share of the £172 million ‘excess profits' identified in DfT Rail's complaint and escape the wrath of the commission altogether. It is not surprising that DfT Rail dismisses such speculation since it might suggest that Government was seeking to pre-judge the Commission's terms of reference.

Way out?

To end on an optimistic note, DfT already has a way to provide extra capacity in the long term and stuff Angel into the bargain. According to Informed Sources, the Department wrote to Angel at some point suggesting that if they didn't front-up on the two cars, the Pendolino fleet might not have much of a future.

So why not re-let the West Coast franchise in 2012 on the basis of a new fleet of 26m long 125mile/h trains for Manchester and Liverpool services. At a push deliveries of an electric InterCity Express Programme(IEP) fleet could start in 2015. A tilting IEP would wipe out the Pendolinos altogether.

Of course the new fleet would need Section 54 protection to get rentals down, and the prospect of half life Pendolinos going into store might deter funders. And someone would still have to manage that H3 exam. And the Pendolinos would be heaving by 2014.

But honour would have been satisfied. You have to admit that our Rolls Royce civil service can produce cock-ups of the highest quality.

Continues.........