Page 3: Risk and return
In the newly-formed private sector, bidding for contracts to provide rolling stock and railway services depends on risk and reward. Although ALSTOM has a large market share and considerable experience in the industry, each tender it makes varies according to train specifications, maintenance agreements, provision of spares and financing. This therefore places more emphasis on managers to assess carefully whether each project is worth the risk and what the associated rewards are likely to be.
In order to manage risk, ALSTOM has pioneered a critical change in focus for train builders by moving from being simply a train builder to a service provider. By the late 1980s, passenger vehicles were becoming complex systems, incorporating an increasing amount of high value equipment from specialist suppliers. It was realised at ALSTOM that, although these more complex trains were an opportunity to improve the quality of the product, the risk of non-performance or late delivery had increased. The key was to integrate the work of specialist suppliers so that such risk could be successfully managed.
Privatisation has meant that risks have been taken away from the Government and transferred to the private sector. For example, under the Private Finance Initiative (PFI), ALSTOM successfully bid to provide trains and services for London Underground’s Northern Line. ALSTOM’s bid was to take the asset risk by providing trains for the line for twenty years, with the Government paying ALSTOM for the performance of each asset. This involved building 636 new vehicles, with full maintenance for the next 20 to 36 years and running 85 trains each day that meet journey times. Penalties are imposed if trains do not meet deadlines and bonuses added if they do - so it is vital that the trains are reliable.
As ALSTOM now has a contract to supply trains for the Northern Line for a period of twenty years, it can no longer think only of the cost of building trains. It must consider the long-term cost of the asset. It is, therefore, in ALSTOM’s interest to keep trains in pristine condition and improve them during their lifetime as this reduces maintenance costs and earns more bonuses.
The Northern Line project provided ALSTOM with key experience – not just in constructing projects but also in financing them. By taking the asset risk for the project, ALSTOM extended its role as a train manufacturer to act as a rolling stock company. ALSTOM then went to the financial markets to provide the funds for building the trains with financiers who took the financial risk for the project.
The West Coast Main Line project
In order to provide services for the next twelve years, ALSTOM had to create a structure which would work with Railtrack, the train operating company owned by the Virgin Group, and the rolling stock companies with leases on the existing fleets. To provide the train operating company with services for 48 fully maintained trains a day, ALSTOM has taken over the responsibility for six maintenance depots and more than 700 staff.
The first phase of the Passenger Upgrade (PUG1) involves strengthening the electrical power supply and laying higher quality track to accommodate trains which can operate at 200 km/h. To meet Virgin’s aspirations for the route, Railtrack will then upgrade the infrastructure further (PUG2) to make the first track in the world to feature 225 km/h running on existing alignment. ALSTOM bought into the Virgin vision by forming an alliance with Fiat Ferroviaria of Italy to build trains with the advanced tilt technology to meet the requirements of the Virgin plan. ALSTOM/Fiat is to supply 54 eight-car trains worth around £500 million, with all of the components coming together at the ALSTOM plant in Birmingham, where the new train was first conceived and designed.
To meet its franchise plan, Virgin needs the new trains to start earning money as early and as quickly as possible. The first train is due to roll out early in 2001 and production is scheduled to run at four trains a month so that all 54 are available for service when PUG1 is completed, allowing 200 km/h running from the end of May 2002.