Wednesday, June 28, 2017 4:42 PM /Fitch Ratings
Fitch Ratings views the increase in the number of joint-venture bids with foreign players for UK rail franchises as marginally positive for Fitch-rated UK rail operators as this strengthens the bids in relation to franchise requirements and limits the UK companies' capital exposure.
On 22 June 2017, the UK Department for Transport (DfT) announced the shortlisted bidders for the West Coast Partnership and South Eastern franchises. The number of foreign bidders has increased significantly over the last few years, often acting as joint-venture partners with established UK train operators.
Joint ventures with foreign bidders are also positive as they come at a time when we view increasing risks for train operators in the UK market. This is due to rail franchises awarded in the past four years having more risky contracts on average, primarily due to the replacement of the full revenue share/support mechanism with a more limited GDP linked revenue share/support mechanism. In addition, the risk capital amount for train operating companies has increased for some of the recently re-let franchises, and political uncertainty surrounding potential renationalisation continues to be a background issue.
The majority of foreign railway bidders are state-owned enterprises with significantly larger domestic operations than UK operations. We believe this increase in foreign participation is driven by the need to diversify outside of home markets that have matured. In the case of European railways, the enforced liberalisation of their own markets by EU law is eroding their monopoly status and influencing their movement to different markets.
UK companies operating in UK rail bids, such as Stagecoach Group plc (BBB/Stable) and FirstGroup plc (BBB-/Stable), are more frequently developing a partnership approach, where they look to bid in a joint venture with a foreign player. This will likely be useful in the case of the West Coast Partnership franchise, due to commence in April 2019, where the presence of bidders with high-speed rail experience will be beneficial due to the inclusion in the franchise of HS2 high-speed services from 2026.
Two of the three shortlisted bids for the West Coast Partnership franchise include First Trenitalia West Coast Ltd (a joint venture between FirstGroup and Trenitalia (BBB/Stable)) and West Coast Partnership Ltd (a joint venture between Stagecoach, Virgin and SNCF (AA/Stable)). Both Trenitalia of Italy and SNCF of France are state-owned railways with extensive high-speed rail operations in their domestic markets.
The third shortlisted bid is MTR West Coast Partnership Ltd (a joint venture between MTR Corporation Ltd (AA+/Stable) and Guangshen Railway Company). MTR cooperates with Guangshen on high speed railway networks between Hong Kong and China and has experience of the UK rail industry through its operations of Crossrail and as a joint venture in the upcoming South Western franchise with FirstGroup.
The South Eastern franchise does not include a high speed rail element but there will likely be a greater focus from the DfT on cooperation with Network Rail who operate rail infrastructure in the UK, to increase capacity and efficiency of services for the region.
This is reflected by the inclusion of new foreign companies with infrastructure experience in the bidding process such as Japanese firms East Japan Railway Company and Mitsui (as South Eastern Holdings Ltd, a joint venture with Abellio) and Trenitalia. The remaining two bidders are the incumbent operator Govia, and Stagecoach. Both companies have extensive experience of operating in the UK rail market.
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