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Friday 15 July 2011

Competition Considerations

Following the award of preferred bidder status for 1200 new coaches for the Thameslink route being made to Siemens, there has been much talk of countries in mainland Europe looking after their indigenous train builders, and by implication that the UK should do more to look after the Bombardier plant at Derby, even though the company gives every sign of not being overly concerned about it.

So when cross channel operator Eurostar, which is owned by interests in the UK, France and Belgium, decided to put a new train order out to tender, one might have expected that the successful bidder would come from one of those countries, especially given all the assertions that the French, the largest shareholder, look after their own, and that the existing Eurostar fleet is based on the French TGV.

And such an expectation would have been misplaced: the order for ten new trainsets was won by – yes, it’s them again – Siemens, with a bid based on their Velaro-D design, which derives from the ICE3 train already in service in Germany. Considerable displeasure at the news was registered by French manufacturer Alstom, who proceeded to challenge the Siemens award through the courts.

The Alstom challenge was initially bizarre in nature: it was argued that “only Alstom ‘material’ could be used for trains transiting the Channel Tunnel”, even though the Siemens offer would meet the strict tunnel safety criteria regarding length of train, evacuation and ability to split trainsets. The Alstom challenge has now been struck out, even though the company may still pursue a claim for compensation.

As the head of Siemens’ UK rolling stock division has pointed out, this suggests that the procurement process was fair, given it has had to stand a legal challenge. And that only reinforces the feedback from the Thameslink bid, which tells, generally, that Siemens made the better and lower priced bid, and consequently beat Bombardier fair and square.

Whether Bombardier are serious about retaining a manufacturing capacity in the UK will become clear when they bid for the new trains for the Crossrail project (they are on the shortlist, together with Alstom, Siemens, CAF of Spain and Japanese builder Hitachi). It is by no means certain that they would build in the UK if successful.

Which is another way of saying that there is little point in blaming the EU when the best of two bids wins, especially if the losing bidder isn’t really interested, and the idea that the French always look after their own is another urban myth.


John Ruddy said...

The problem with the procurement process, if it can be described as a problem is that we were not ordering trains. We were ordering provision. We were agreeing to pay a fixed amount each year for the next 25 years for a fixed number of train diagrams to be fulfilled. The winning manufacturer (really consortium including manufacturer), would have to raise the money on the markets to pay for the construction of the trains and use the income from the DfT to pay back the banks.

Siemans has a credit rating of A+ while Bombardier is BB+. Hence it is much cheaper for Siemans to raise the money needed to buy the Siemans trains. This difference is equivalent to about 1.5% a year additional interest - not insubstantial.

Of course, it would actually work out much cheaper if the Government (credit rating AAA) borrowed the money itself, but thats a different story.

Tim Fenton said...

Thanks for looking in, John.

One point you overlook is that one of the banks in the Bombardier consortium also had an A+ credit rating, so they could have done the money raising, rather than the manufacturer.

The Telegraph, which was the source of the "A+ versus BB+" story, might have been better advised being a little more thorough, rather than using only the facts that supported its anti-EU stance.