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While not heroic, NEG's bid for ICEC is definitely ‘sporty'.
Nowadays news stories must have the ‘narrative'. The initial narrative in the Intercity East Coast (ICEC) franchise bidding was that National Express Group (NEG) had submitted another financially plain vanilla offer but this time had beaten more generous offers on deliverability.
That lasted until the bidders ‘wash-up' meetings with the DfT Rail procurement team. Then it emerged that NEG's successful bid (Newsfront September page 10) offered neither the lowest nor highest premium profile. So it looked as though HEG had won with another fashionable management buzz word, the ‘Goldilocks' bid which was not too low to upset the Treasury, not too high to be scary, but just right.
We must always remember that in current franchises, what is known as ‘cap & collar' cuts in after year four. Then, if revenue is higher than forecast the taxpayer increasingly shares the profit and vice versa.
As a result, when evaluating bids, DfT Rail can apply risk adjustments if it feels a potentially attractive bid is on the optimistic side. For example, it might require the comfort of a loan facility which could be taken up to cover the risk adjusted profile.
But note that Cap & Collar applies only to the revenue line. Get the cost line wrong and you are on your own. GNER not only saw its revenue hit in year one – costs were also coming out higher.
Preparing their offers for ICEC, the four bidders had much more information than usual. In addition to GNER's failed bid, they could compare what Arriva had offered to win New Cross Country ( NCC ) and also Stagecoach's aggressive bid to take East Midlands , which is really all about the Midland Main Line element.
But both were questionable bellwethers . NCC , more than ever, provides short distance Regional journeys. In the case of MML, past performance is not necessarily a guide to future prospects because of the long term disruption associated with CTRL construction.
So while the narrative had plain vanilla NEG up against Tutti Frutti Arriva and Stagecoach, that was an oversimplification. But only partially.
For example, according to one analysis, translating the winning premium line for the East Midlands to ICEC would have given an indicative NPV of around £1.65bn, compared with Sea Containers' winning bid in 2005-06 of £1.3bn. But that ovewrlooked the unique upsides in the MML business already mentioned.
Meanwhile, challenged on NEG's win, DfT Rail has confirmed that it had rejected a higher bid than that offered by NEG. Consultingn the runes, I reckon that this top bidder was Arriva.
Remember that Arriva had beaten Virgin Stagecoach to NCC and that Virgin/Stagecoach/GNER now seem to have been in or around the Goldilocks zone on ICEC. So, in order of ascending premium my best guess is that the ICEC contest ended up like this:
First Group
Virgin/Stagecoach/GNER
NEG
Arriva
Time to revise the narrative. Given the choice between winning the richest franchise and the last true InterCity business, the NEG bidding team, led by one of the wiliest old BR total-railway managers, Chris Stokes, tweaked up the optimism control slightly and came up with an NPV of £1.4 billion, which pipped Virgin and was more credible that Arriva's consultant led offer.
As the comparison with the GNER profile (Newsfront September) shows, NEG starts with lower premia, then surges ahead assuming that the extra paths required for Service Level Commitment 2 ( SLC 2) are made available for the December 2010 timetable. SLC 2 brings in rakes of semi-fasts (Class 90 plus refurbished Mk3s).
These additional trains serve intermediate stations. Taking these stops out of the 125mile/h services reduces journey times which increases ridership and revenue on the long distance journeys. It is worth remembering that ICEC has the longest average jounrey lengths of all the Intercity operators.
Up to now I have always analysed premium profiles in terms of money. But it occurred to me that indexing profiles might be illuminating.
Chart 1 shows the NEG and GNER premia for ICEC indexed from a base of 100 in 2008-09. The slope of the graph shows the rate of premium growth and suggests that the NEG bid is really quite aggressive.
Over the seven years GNER was offering to increase the annual premium by a factor of 3.47 while NEG is offering 5.43. While this may sound scary, don't forget thst GNER is a revenue rich franchise, about £600million a year generated from a few simple traffic flows and a small roling stock fleet. A small percentage increase in revenue will generate substantial sums.
Encouraged by this first indexed chart I tried indexing NEG.s ICEC profile against the winning Stagecoach profile for East Midlands (Chart 2). Studyingn the prtemium growth lines suggests that the NEG offer was ever-so-slightly the more aggressive of the two
So, it seems that we do indeed have a new narrative. Facing relegation to the Franchise Conference NEG Chief Executive Richard Bowker told Chris Stokes he could run the engines at sprint rating for 10 minutes on ICEC. The result was good enough to dominate the Goldilocks Zone!.
Oh the ignominy! The man who glories in his grasp of orders of magnitude gets a decimal place wrong. The cost of fitting ETCS to all the Networker cabs (last months column) Would be s £38 million not £3.8 million.
Still, lose one, win some. In calculating the increased demand on generating stations if all diesel routes were electrified, I doubled the number I first thought of to give peak power demand. This approach was validated by a chum who pointed out that my figure for the average demand of the existing electrified network of 440MW over an 18 hour day equated to a real railway peak demand of 912MW. That's just over 1% of national generating capacity.
While the gauge enhanced Gospel Oak-Barking line won't be drawing on the national grid, the work should include limited passive provision for future electrification. A DfT Rail spokesman confirmed that where Network Rail can achieve electrification clearances ‘without significant cost/time implications, they will do so'.
And finallyAccording to an old Chinese proverb, if you sit beside a stream for long enough, the body of your enemy will float by. Good grief! What's that in the water? For years I have been banging on about the fact that support for today's railway is a multiple of what British Rail cost at the peak of the last economic cycle. While this is now widely quoted in the media, it has been resolutely rubbished by the railway establishment. Althgpugh the cold numbers are unambiguous, the refutation goes (variously) that I am not comparing like with like, that we are catching up with decades or under-investment, that the railway is carrying a lot more traffic, or, if all else fails, we are where we are so shut up. But, and here's the floating body, on the first page of the executive summary of the Railways White Paper it says, ‘It is right that subsidy levels should now start to return closer to the historic norm'. Trying not to gloat, I asked DfT Rail's ever helpful press office if they could get me a definition of the ‘historic norm'. I'm still waiting. Obviously it has to be a similar period of economic growth and railway investment. So how about 1982-1991 the last complete economic cycle? At current prices British Rail's average subsidy over this period was £1.78 billion a year – say half the annual supporting the Statement of Funds Available(SoFA) On the other hand, perhaps the norm should be a period of similar sustained economic growth with ridership rising at similar rates. So a ‘short' norm could be the three years 1988-91 when the annual subsidy was £1.14 billion in modern money – making today's figures three times the historic norm. Asking ministers for their definition of the historic norm could be as much fun as teasing dear old Roger Freeman about the number of days since the last train order was published.
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