Train building

Source: Rail Technology Magazine Dec/Jan 2012

Bombardier won the Southern order for 130 new carriages, but the next big challenge is Crossrail – where the financing arrangements look like they will be similar to Thameslink, which provided an in-built advantage to Siemens. RTM discusses procurement policy with Professor Karel Williams, an expert witness to the Transport Select Committee inquiry into rolling stock procurement.

Professor Karel Williams, director of the Centre for Research on Socio- Cultural Change (CRESC) at the University of Manchester, is an expert on industrial policy and financial innovation. CRESC’s report, ‘Knowing what to do: How not to build trains’, and Professor Williams’ subsequent oral evidence to the Transport Select Committee hearing on rolling stock procurement, put a lot of weight on the idea that the main reason Bombardier lost out to Siemens was because of its “in-built disadvantage” in financing, in that its parent company had a lower credit rating, and thus borrowing would cost more.

Although the terms of the contract remain private – at the insistence of both the DfT and Siemens, despite calls from the select committee to publish the reasons that Bombardier lost out and the difference in cost of the two bids – this idea has taken widespread hold, and was highlighted in the select committee’s report, published in December.RTM spoke to Professor Williams at his Manchester office when the report was published.

He said: “The advantage of bundling together manufacturing and financing for the DfT is that it gives them a single, simple, unequivocal decision criteria. Several MPs at the select committee hearing pressed me on this, and my considered response is that having one decision principle, but two major policy objectives, is not a sensible way of proceeding. The one decision principle is the bottom line least cost, but there are two separate objectives: financing at the least possible cost, then the industrial policy criteria. You want train-building capacity in the UK, because you want the jobs, and want to limit the balance of payments deficit.

“You can’t actually have just one number that gives you the right answer to the two questions.”

Bundling blunder

He continued: “The real success we had was that the CRESC report, ‘How not to build trains’, highlighted bundling as the basic mistake, and that’s been carried through into the select committee report, and I hope we do in time learn how to unbundle things.

“Fundamentally, that’s because it’s not about least cost, but also about industrial policy. Each one of those jobs at Bombardier in Derby represents a family living in decent circumstances, buying a house, buying a car, bringing up kids decently: the job underpins desirable values. Contrast that with East Manchester, for example, which never recovered from early 80s deindustrialisation.

“It’s also about our £80bn balance of payments deficit, and the amount we import.”

There was disappointment in some circles at reports that Transport Secretary Justine Greening will not allow TfL to extend its borrowing limit in order to pay for the Crossrail rolling stock directly: instead, private financing will again play an important role. Some saw the decision as being an extra boost to Siemens, which can borrow more cheaply than Bombardier.

Professor Williams said: “From the Treasury’s point of view, this is not a procurement issue – it’s a public debt issue, it’s PFI and PPI. If TfL’s borrowing limit had been raised, it would have directly increased public borrowing by that amount.

“As for the DfT and Thameslink, I think behind it all is conservatism, an absence of expertise that would allow them to do anything else, and the fact that they would be entering a new and complicated world to do it differently. It quite suits them to have one bottom line on a bundled contract, because that provides them with their decision.”

Procurement specialisation

“The last successful case of industrial policy procurement in the UK,” Professor Williams said, “was North Sea oil, where 75- 80% of the value of the contracts, the rigs and the pipeline and the rest, was manufactured in the UK, as a result of industrial policy under Thatcher. That did require a departmental specialism – a sub-section which actually understood the industry, understood the technology, understood the capabilities of producers, and worked to match supply and demand. I don’t think the DfT has that kind of expertise.

“The DfT has a procurement department – but that is all about issuing contracts and managing them, not anything to do with arranging things so that train manufacturing in the UK would be maintained and encouraged.”

That is precisely the opposite of what many think happened with the Thameslink rolling stock decision.

“That was something that all men of goodwill wanted to do,” he said. “It was clearly in the national interest, and would be politically advantageous; it wasn’t a party political issue. Derby Council is Conservative. People like Margaret Beckett, one of the most active of local MPs, is Labour.

“In retrospect, it was quite extraordinary. You couldn’t find anybody to stand up and defend the decision and the criteria – including the Transport Secretary! What’s really hard to explain is why we still don’t know the detail of the contract. My assumption is we don’t know that partly because if people knew there was a several hundred million pound advantage to Siemens tied in with the bundling, that would cause further political problems.

“Although everybody agrees that things should be done differently, we still don’t know what the original terms of the contract are. And the next major contract, Crossrail, after apparently the turning down of TfL’s request to have its borrowing limit raised, it seems will be done on exactly the same bundled basis as the last.”

Prospects for change

Although the campaign to get the Thameslink decision reversed, or at least re-opened, is ongoing in Derby and among the unions, the prospects seem very slim indeed, meaning much attention is now shifting to the future, and whether anything will change.

Former transport secretary Philip Hammond, along with business secretary Vince Cable, implied they were unhappy with the criteria that led to the Thameslink result when they launched their procurement review, acknowledging that “there is an issue as to whether in our own procurement compliance the right balance of risk has been achieved in the past”.

The results of that review should now inform the criteria used to procure Crossrail rolling stock.

Professor Williams is doubtful that things will change, but is not completely without hope.

He said: “Hammond – the safest pair of hands in Government, which is why he’s now at Defence – at the select committee and elsewhere very carefully responded in a way that implied that things should change. He was sympathetic, condemned the outcome, but never actually initiated large, practical, difficult changes.

“The natural tendency of politicians towards rhetoric and masterly inactivity, plus civil service conservatism, has left us in this situation.

“But I’m not totally convinced that the game is lost. There are several interesting developments. One is the procurement review. The second, which is likely to be more important, is that Bombardier is likely to have sat down, and thought about getting a different result next time, where their credit rating doesn’t affect the outcome.”

Better (financial) vehicles

The company should already be thinking, he said, about financing arrangements and special purpose vehicles to ensure a level playing field – and to ensure that concerns about credit ratings do not “contaminate” what should ultimately be a manufacturing decision. But Hammond, at the same select committee hearing, also clearly implied that he doesn’t think Bombardier is the last UK train manufacturer anyway, because of Hitachi and the IEP.

He rejected suggestions from MPs on the committee that an assembly plant cannot  compare to a manufacturing plant, saying that even now, Bombardier imports many of the components it uses at its Derby factory, as will Siemens at its German facility.

Hammond said at the hearing: “I certainly would like to see a viable train building industry in the UK. Fortunately, we know that that will happen. Hiatchi have committed, under the IEP, to build a plant in Newton Aycliffe in County Durham, with 600 direct employees.”

Professor Williams said: “Hitachi is a wildcard. It has come into County Durham with what amounts to an assembly plant, and the interesting question is whether it can develop a manufacturing capability.

“That clearly seemed to be what Hammond was implying. His evidence was quite interesting: he focused on one of the two key considerations, at the select committee – design – which, in the UK, Bombardier can do, and Hitachi can’t. Clearly, you could add a design operation to the Hiatchi facility. I think we’d all be in favour of that, though if it’s going to be British orders only that they’re competing for, then to have two producers, not one, seems actually to be a pretty disastrous outcome.”

The broken supply chain

But there is a bigger issue at stake, Professor Williams said, that affects manufacturing more widely.

“The problem is the low British content of whatever’s actually produced; the bogies from Germany, and so on. If the Government wanted to be really serious, they would be asking why German industry has a lower proportion of intermediate output imported, why does specific stuff have to be brought in from mainly high-wage northern Europe, what are the capacity limits in the UK, how do you rebuild broken supply chains, and so on.

“The number one problem for UK manufacturing is the broken supply chain. That is to say, the benefit we get from increasing final output is limited, because a large chunk is imported components. You can’t solve that kind of problem overnight. As I understand it, for example, there’s nobody in the UK who actually makes automatic gearboxes for cars.

“There has been a chaotic decline and loss of capacity in all the basic engineering infrastructure activities. If you want something cast, forged, milled or whatever, it’s increasingly difficult to get that done in any formerly industrialised region of the UK.”

Continental drift

But supporting what’s left of our manufacturing and engineering base – which Business Secretary Vince Cable would have us believe is not as feeble as all that, as it generates 11% of GDP, more than financial services – can be difficult if it means crashing up against European procurement law.

That has been one of the primary arguments employed by officials in defending the Thameslink procurement process and result – the need to abide by the law and not discriminate in favour of domestic industry.

There is a widespread perception – acknowledged by Hammond and Cable – that other European nations do a lot more to protect their own workers and manufacturing bases without falling foul of the law. Obviously the truth is more nuanced – Siemens, for example, is making inroads across the continent, not just in the UK – but Professor Williams thinks the UK is far too unimaginative when it comes to considering the consequences on domestic industry of handing contracts to foreign competitors.

He said: “It’s fairly clear that blatant atdownf tempts to discriminate in favour of Derby would be struck down by the EU. You can’t simply have a calculation of national advantage and hope to have it stand up.

“It’s also fairly clear that in France, Germany and Italy, people contrive it so the orders go to the local firm. People would fall about laughing in a European country if they were told the poorer credit rating of their only train manufacturer was going to undermine their capacity to bid for large contracts. Everybody plays these kinds of games in Europe.”

How to build trains

“The first thing you do is unbundle the finance from the manufacturing, so that you get a fair playing field, or at least allow the manufacturer to set up some sort of special vehicle, so it can borrow on terms that aren’t just the parent’s credit rating.

“Then you could write the technical specification so it was easier for Bombardier to do it…you could clearly put in rules about proven, tried-and-tested bogies, for example. It’s not science, it’s politics. It’s a value judgement, that one wants Bombardier at Derby to continue. There are umpteen different ways to favour your domestic supplier without being blatant about it.

“We need to put some of our fine City minds onto this business of raising finance without it being on the public balance sheet, and without it disadvantaging your domestic manufacturer.

“In the longer term, we do need more selfsufficiency in manufacturing, and we need to think about building our own trains as part of European and world co-operative arrangement.

“You’re looking at ways of nurturing the basic capacities in engineering, and I would argue, high-tech engineering too, because I don’t think high-tech means supplying turbines to wind-farms, or graphene; high-tech is somebody making a custom component for a Bombardier train using a process technology which is electronically controlled and delivers more efficiently. We need to maintain the supply chains behind that so precision fabrication has a future. If you let railways go, you lose so much.”

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