So, the Thameslink rolling stock contract (see below) is finally signed, the finance is signed (on Thursday 27) and Siemens is unquestionably delivering those trains. I’ve been on the phone to some very well-placed sources to try and sift fact from fiction and factoid. What follows is my best stab at a dissection of how this project was brought successfully (but slowly) to fruition.
Why did the project take so long? Because the first batch of trains is now not due till late 2015, and late 2015 was when the DfT originally intended to have all the trains ready at the time of requesting tenders. Siemens themselves, having been designated preferred bidder in July 2011 (behind schedule), had a target of December that year for contract signing.
I’m told by sources that the time it took was reasonable given the complexity of the project. For example: you have Siemens building trains and Siemens maintaining them. But it doesn’t own the trains; the trains are owned by Cross London Trains, a company owned jointly by Siemens Project Ventures (a wholly owned but legally separate subsidiary of Siemens), 3i Infrastructure and Innisfree. That same company borrows the £1.585 billion of debt from 20 banks to build the trains (along with £175 million of equity and subordinated debt from the shareholders). But to reduce the risk involved, Siemens offered guarantees to Cross London Trains: it has posted a bond that can be called on if there is a cost overrun during construction, and it has also undertaken to absorb certain penalties levied against Cross London Trains for technical faults when the trains are operational**. Meanwhile, the European Investment Bank gets some of its debt covered by another guarantee, this time from the private banks…
Now, you may say, everyone knew from the outset how complex the project (if not the transaction) would be: the type of procurement was set, the number of trains and the type of performance-based contract. And once the tender documents were released in November 2008, they knew exactly how complex. And you’d be right.
But this was the first procurement of its kind. A government-led but privately-financed contract, halfway between a PFI project and a rolling stock lease agreement. And because it was privately financed and governed by contracts between a web of different parties, it was necessary to specify what would happen in every contingency – contingencies which had not had to be considered in train-building projects before.
For example: the banks initially expected that in the event of the project company going bankrupt, they would have the right to ‘step-in’ and take over ownership of the project. This is normal in PFI projects. But a PFI hospital can’t be moved, whereas trains can be sold abroad. The idea of Thameslink being stripped of its trains (horror of horrors, they might end up in Germany!) was too much for the DfT’s blood, and they said no. Eventually a compromise was reached, but only after much arguing.
Another, more conventional sticking point was what price the project company should pay for its debt. Initially the suggestions it sent out were too low – debt starting at a margin of about 175bps (1.75 per cent) over Libor. This eventually went up to 285bps, and then down to 265bps starting point, where it now rests. But again, arguing had to happen first. And I’m told that the three shareholders, Siemens, 3i and Innisfree, all had their own ideas of what the project should look like.
They weren’t the only ones. Because Thameslink rolling stock was an unprecedented deal, there was no model for it to follow, and various suggestions were thrown in about other transactions that elements should be copied from: the M25 widening PFI, the Intercity Express Programme (which, though superficially similar, is more of a PFI-type structure) and of course good ol’ rolling stock leases. All this added to the delay.
I am also told that Cross London Trains’ financial adviser, Barclays Capital, weren’t quite as proactive as they might have been. I have no way of proving this; however it’s undeniable that the four structuring banks (including Bank of Tokyo-Mitsubishi and Germany’s KfW) had a lot on their plate, and the two banks in charge of documentation (Lloyds and Japan’s SMBC) most of all.
**In this sense, those who complain that relaying on private finance gave Siemens a competitive advantage over Bombardier (because it had a higher credit rating) have a point. Although Cross London Trains (not Siemens AG) is the borrower, Siemens is actually liable for aspects of the trains’ construction and operation. But to try to translate Siemens’ higher credit rating than Bombardier into a direct discount of the project debt relative to Bombardier (as some learned minds have done) is foolish, because it’s an indirect relationship: Siemens is not borrowing the money.