“In the current market conditions, are we willing to take the risk and invest a lot of money, and take the position that the trains will still be in use in 2025 to reduce the leasing costs? Probably not, so all we do is price it over a much shorter period of time, so the costs will be quite high for the TOC. Or the alternative is that the Department gives us a guarantee that our trains will be used for longer.”
These guarantees are generally known as ‘section 54s’, after the part of the Railway Act 1993 that provides for the Secretary of State to direct train operators to use particular stock (see panel opposite). They reduce the re-leasing risk, and so can provide for lower lease prices at the risk of constraining the market.
If a complex fleet project (such as SWT’s Class 455, 456 and 458 one) comes round again, or compulsory modifications are mandated by Government, then it’s more likely that funders will ask the DfT for section 54 protection.
RailReview’s financing man comments: “Someone will now say ‘well, if you want me to do this, I want a section 54 because I’m just going to get burnt’. So the DfT, to me, are just brewing up a problem. Aggressive franchising bids and aggressive assumptions for funding for long-term assets equals you’re going to have a difficult time.”
Other ROSCOs implemented PRM modifications earlier. Eversholt Rail speculatively modified its Class 315s, even though it knew they would be displaced in London by new Crossrail Class 345s before the PRM deadline.
Eversholt’s Relationship Development Manager Tim Burleigh explains that it did this with an eye on the electrification of the Valley Lines in South Wales. Despite dating from the early 1980s, the ‘315s’ could have provided a cost-effective fleet, helping the overall business case even in the face of cheap trains straight from the factory.
Except that there are no wires being erected in the Valleys anytime soon. Furthermore, DfT’s plans to wire the Midland Main Line and trans-Pennine route have foundered in the mire of Network Rail’s struggling Great Western wiring project.
Will Britain see more electrification? “No,” according to Brown. “Not in my opinion, although no one’s broken cover to say so.”
Eversholt initiated its Renatus rebuild of Class 321s to market them to Greater Anglia bidders. Thirty of the fleet of 110 will be upgraded with air-conditioning, modern traction systems, AC motors and other improvements. The company’s fall-back position for the fleet would have been the lines DfT and Network Rail planned to electrify. Now it’s faced with the prospect of displacement from Greater Anglia and no future home, despite the improvement project.
Instead of cascades of EMUs bringing cost-effective trains to newly electrified lines, East Midlands bidders face the prospect of having to order new diesel trains or bi-mode trains. A new operator should be in place in Wales from autumn 2018, and will be looking for diesels to replace Pacers from 2020. But the market is very tight.
According to Andre: “You don’t really have a choice at the moment. CAF offers a product, Stadler can offer one, but it’s done it in bi-modes at the moment and it’s quite expensive. I think in time, people will have to buy some more - probably bi-modes rather than pure DMUs, because from a financing house point of view it doesn’t make sense to buy something that’s purely diesel. The orders are always quite small, so it’s difficult to get good pricing.”
Reading between the lines, expect such diesels to be expensive, because orders will be small and there’s not much competition. Some DMUs are being displaced, which should ease the market. TPE is casting aside part of its Class 185 fleet, and there should be Class 170s looking for new homes.
How might a DMU shortage affect the market? Or the reverberations from EMU changes?
According to RailReview’s financier: “What will most probably happen is that they will say ‘hold on, I’m losing something over here, I’m going to get you back next time somewhere else’. ‘So you say you want ten diesels, I’ve got ten diesels - the price may have been five, it’s now ten’. ‘Why is it ten? That’s really expensive!’ ‘Well, it’s because that’s now the market price, because our assumption under this lease is that they’re not going to last more than five years because of replacement risk going on’.”
The biggest longer-term factor will be the balance between diesel and electric stock. This depends on what DfT decides to do with electrification. For the past few years, the messages from DfT have pushed electrification as the future. So will there be more wires?
No, says Brown. Yes, says the TOC owner. He admits the DfT wouldn’t want to do more and that NR doesn’t want to do more, but argues that environmental concerns will insist on it. “People’s attitudes to air pollution have changed over the last few years,” he says.
In the motoring world, the Government has turned sharply away from diesels. Secretary of State for Transport Chris Grayling recently warned motorists to think long and hard before buying a diesel car. If that resonates with the public, they will wonder why he’s pushing rail down the diesel road by ditching electrification.
Noting that the Voyager fleet of diesel-electric multiple units is looking for a new owner, Brown said he’d looked at it but didn’t want to buy diesels. But he doesn’t want to buy electric either, because of the uncertainty over wiring. Yet with trains cheaper than ever, and with finance also cheap, now is surely the time to invest.
“I could buy now and wait for the market,” Brown muses. Then he recalls the warning that comes with every TV ad for financial services - the value of your investment may go up or down.
Would you buy stock speculatively, RailReview asks Andre at Porterbrook?
“We will see, again… at the moment, you’d have to be very brave,” he replies.
Andre explains Porterbrook’s last speculative build: “We did a speculative build in 2015 when we bought some ‘387s’ from Bombardier. That gave me sleepless nights because that was really, really speculative - there was no customer. It ended up well because they ended up at Great Western and the size went from 20 to 43, so that was all good.”
Some of those ‘387s’ are now working Great Northern services, and look set to displace Class 365s owned by Eversholt. Overall, there could be very little increase in overall fleet sizes as a result of all these new trains. Yet passengers complain about overcrowding. And there’s a prospect of passengers on busy trains glimpsing others stored in sidings (assuming there’s enough siding space). At face value, this will look crazy, but there’s little track capacity to use surplus stock. And capacity sits firmly with DfT and its subsidiary, Network Rail, rather than with the competitive market for rolling stock.
With NR pleading lack of funds, you’d not want to bet on major increases in capacity on today’s network (future capacity increases will come from projects such as HS2 in the middle of the next decade, together with a new fleet). But here’s a disconnect between network and fleet spending.
“raiding the sweet jar”
RailReview’s finance man notes: “What I don’t understand in this market place is you see Network Rail, which gets £35bn over a five-year period to spend on its infrastructure. It’s overspent it, and people have been told there’s no more for rail - it’s over! But for trains and franchising, under a franchising system - hey, let’s go wild!
“You have 6,000 vehicles being delivered over the next 44 months. That’s a tremendous amount, but I think people are raiding the sweet jar and this will come home to roost. People will want to see a stable market, but I don’t think it’s stable and I don’t think the DfT thinks it’s stable.”
With 13,000 vehicles in today’s UK rail passenger fleet, that 6,000 represents almost half the fleet. Yet Brown reckons the overall increase in size will only be around 2,000 - after spending billions of pounds, the fleet will only increase to 15,000.
That implies around 4,000 vehicles going for scrap. Some should certainly go - they’re old and past their prime. But others still have life, and at any other time would be refurbished, upgraded and given a new lease of life.
Such a flood of new trains looks set to kill the refurbishment market, which worries those RailReview interviewed for this article. They are concerned at the loss of skills and jobs from the market, and the potential loss of the players themselves from Britain - not least because they are also suppliers of new equipment to train builders.
Furthermore, several emphasise that refurbishment can be cheaper in environmental terms than building new, because you generally keep the major components of a train, the body and bogies.
“The DfT is putting more emphasis on sustainability. The carbon impact of refurbishing is quite significantly lower than new-build,” says Eversholt’s Burleigh.
Andre comments: “It is a lot more CO2 intensive to build new than to maintain something that exists. In operation, the new train will use less energy and be lighter, but the big expense in CO2 is when you actually build the train and make the extrusions. That’s not been taken into account by anyone.”
On jobs and skills, Andre continues: “DfT is part of a government which has published an industrial strategy. Having lots and lots of new trains is great from the DfT view of keeping passengers happy, but it has a broader impact on the industrial strategy.
“In times of Brexit, they need to have a very clear industrial strategy that is sustainable in the long-term. Having UK train manufacturing places churning out lots and lots of trains, but then having a cliff because of where do they go next, is not great to sustain jobs, skills and everything else.”
He adds: “If you take people like Wabtec and Knorr Bremse Rail Services, having lots and lots of new trains obviously kills their business pretty drastically, because it’s not viable financially to refurbish trains. But there are jobs attached to these companies - quite a large number of jobs, thousands of jobs.
“These companies also happen to be suppliers of OEM equipment on new trains (Knorr Bremse supplies brakes and doors, for example). But they are not made in the UK at the moment, so if we think that we need to increase the local content of trains then the big bits - the brakes and the doors - need to be made in the UK.
“If the companies that would potentially make them in the UK, like Wabtec and Knorr Bremse, have been killed off because their current market of refurbishment has been killed, then they will leave the UK.
“And there is no way to build the local content if these manufacturers are not here. In a way, keeping them going with the minimum of activity is actually, in the medium and long-term, quite good, because then they will invest in the UK to do new build at the right time and with the right level of local content.”