move over freightliner, we want to get into ... - Rail Professional

LEGAL OPINION
although the new (2006) Utilities Regulations may not in fact apply to train
operators at all (Rail Professional, December 2006).
The operator will then negotiate a manufacture and supply, and possible
service, arrangement with the manufacturer and maintainer of the trains and
an operating lease with the financier (or rolling stock leasing company) which
may also be in a position to claim any remaining capital allowances on the
trains.
The DfT is not going about this procurement in the ‘normal’ way. First of
all, it is procuring the provision of the trains on behalf of the train operators
– whose identity is likely to have changed during the course of entering into
these contracts/delivery of the trains – and will presumably expect the train
operators to enter into the supply contracts at the end of the day. The DfT is
also going out to the market for joint bids from manufacturers and financiers.
As already explained, while this means that the DfT should avoid being
caught in between the manufacturer on the one hand and the financier on
the other in terms of risk allocation, it also means that the DfT does not have
the ability to ‘mix and match’ between finance and manufacture to create its
very own dream team.
RISK ALLOCATION
These three parties look to negotiate the carve up between them of key and
substantial risks such as infrastructure/train interface risk, vehicle and route
acceptance risk, risk of delay to the train delivery generally and ongoing
liability for performance, defects and service provision. The lessor will generally
take no risk other than the perceived residual value risk in the trains
themselves. In some cases, even that may be mitigated by a residual value
guarantee given by the manufacturer or a government undertaking to ensure
continued use of the trains in any new circumstances under section 54 of
the Railways Act 1993. Other risks, of course, should be allocated to the party
best placed to manage them – although this is not always easy to agree.
ostensibly to ensure compatibility between the new fleets and to reduce the
plethora of vehicle types on the network – and it appears that Network Rail
has supported this approach. It seems unlikely that the DfT will itself enter
into the train availability contract with the chosen bidder.
However, since the DfT has said that it would like the reliability and
availability contract to last for 30 years, presumably it will be providing
assurance that operators will use these new trains for at least 30 years. This
is likely to be provided by way of an undertaking by the secretary of state
under section 54 of the Railways Act 1993 – although for such a long stated
period, on/off balance sheet issues will need to be considered carefully. Since
the train procurement contracts with the train operators will be deemed to
be key contracts under the train operators’ franchise agreements, then there
will also be a requirement for the chosen consortium to sign a direct agreement
with the DfT giving the DfT an option to take a new contract if there is a
problem with the existing one or the existing franchise is terminated.
When the DfT comes up for air from amongst the bid submissions for East
Midlands, West Midlands and the new Cross Country franchises, it will no
doubt be interested to see what the worldwide rail industry has to offer in
response to the IEP accreditation questionnaires. European train manufacturers
have been gearing up for this for a long while and will no doubt be keen for
the deal – whether the UK Roscos’ appetite is still waning in the face of the
possible Competition Commission investigation of the UK rolling stock
leasing market remains to be seen.
Whatever their views, bearing in mind the amount of interest that has been
shown to date, and the high stakes, picking a short list is unlikely to be an
easy task.
Naomi Horton is part of the rail team at Denton Wilde Sapte LLP.
TRAIN AVAILABILITY CONCEPTS
Increasingly since privatisation, trains have been procured on the basis of
not just a design, manufacture and supply contract, but with inclusion of a
maintenance contract, usually running for at least the remaining life of the
current train operator’s franchise.
The supply and maintenance contracts are then bundled together such
that the real obligation of the manufacturer/maintainer is an output-based
obligation to supply trains that meet availability and reliability requirements
set out in a performance regime on a daily basis. It then pays liquidated
damages to the operator if the required standards are not met. For the operator
it has the advantage that if the operator's trains do not run, are late or break
down – or are dirty, if cleaning is also covered by the arrangements – then
there is a quick and simple mechanism, in theory at least, to decide whether
the supplier pays damages. This saves the operator having to work out whether
the problem was caused by maintenance or manufacture defect and the
consequent losses suffered.
The manufacturer/maintainer will be relieved from paying damages for
matters deemed to be down to the operator, such as vandalism in service or
improper use, and perhaps damage caused by the infrastructure. In the IEP,
the DfT has taken this one step further by requiring the manufacturer and
financier to join up before submitting a bid – all risks in relation to the supply
of the train can then be parcelled up within the joint venture/consortium.
Whilst this will no doubt make life easier for the operator and the DfT, bidders
will have to think carefully about how they package up these risks between
themselves before they bid – and will need to choose their partners carefully.
DEPARTMENT FOR TRANSPORT
So what role is the DfT playing in engineering this programme? From the
start, the DfT has wanted to have control of this train replacement project –
MAY 2007 : RAIL PROFESSIONAL
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