すべての電車はわれわれたちがいただいた (all your trains are belong to us): Intercity Express

Hitachi's Intercity Express train (pic: Department for Transport)

Hitachi’s Intercity Express train (pic: Department for Transport)

It’s taken seven years, but the UK government has finally finished agreeing on the supply of new trains to replace the ageing InterCity 125 and 225 sets used on the Great Western and East Coast main lines, under the Intercity Express Programme. This project will deliver a big boost to the manufacturing and financial sectors, while reinforcing a socially useful sector of the economy and confirming the state’s vital role in supporting business with targeted investment.

Not here though, but in Japan.

The private financing deal signed by the Hitachi-led Agility Trains consortium on Tuesday brings to £5.7 billion the value of payments they can expect in return for designing, building, financing, delivering and maintaining 122 trains (financing for the first phase of 57 trains was signed in 2012). The overwhelming majority of that money is going into the pockets of Japanese companies and being spent in Japan.

For a start, Hitachi is building the trains. True, the DfT likes to repeat in endless press releases that it’s going to assemble the trains at a new factory in Newton Aycliffe, County Durham, a conveniently deprived area in the north-east. This will create about 730 jobs. But most of the actual components, including the most expensive ones like the motors and bogies, will be designed and manufactured in Japan, and that’s where the real money is. (Roger Ford’s piece in the March issue of Modern Railways is particularly informative about this.)

Hitachi is also the 70 per cent shareholder of the two project companies, Agility Trains West and Agility Trains East, that will own the trains once they are built and receive the £5.7 billion (net present value) of payments – effectively lease payments, though they also cover maintenance costs – from the train operators. The other 30 per cent is held by John Laing, a British construction and infrastructure investment firm.

Finally, the loans raised to finance the Intercity Express project comes mainly from Japan, and that is where the debt service payments will go. The latest phase of IEP totals £2.2 billion of investment. Of that, two state-owned Japanese banks, the Japan Bank for International Cooperation and the Development Bank of Japan, are taking the lion’s share: JBIC alone is lending £860 million. Commercial Japanese banks* make up five of the remaining ten banks, of which only two – HSBC and Lloyds – are British. Finally. Japanese export credit agency NEXI has stepped in to provide a guarantee on £150 million of the commercial debt.

Why such heavy Japanese financing? Partly because JBIC and the DBJ have a strong mandate to help Japanese businesses win work abroad, which they are doing handsomely: JBIC’s £860 million ticket far exceeds what a commercial bank would be prepared to lend. Partly because Hitachi is an existing client of theirs and they have a strong relationship. And partly because Japanese banks have a strong deposit base and low interest rates in Japan make foreign lending highly attractive to them, at precisely the time other banks are retreating from long-term loans like these.

It does make you wonder why Britain can’t have a state investment bank helping British industry succeed abroad. Our own efforts in the field of export credit are also puny, despite recent improvements. The Intercity Express deal shows that strong state bank involvement needn’t crowd out commercial lenders, so what’s the problem with setting up a state investment bank?

P.S. Special thanks are due to Mark Ravinet and Asano Ishikawa for their diligent work translating the headline of this blogpost into Japanese. Geeky reference explained here.

*They are: Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation, Mizuho, Mitsubishi UFJ Trust Bank and Sumitomo Mitsui Trust Bank, per European Investment Bank press release here

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About René Lavanchy

You can contact me at rene dot lavanchy at googlemail dot com.
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