All aboard? Bombardier, train making and industrial policy in the UK

By David Bailey on Dec 29, 11 10:52 AM in Manufacturing

The UK's last train-making factory was yesterday thrown a lifeline - for now at least - after winning a contract worth £188 million to assemble 130 new rail carriages for the Southern franchise.

The plant, now owned by the Canadian multinational Bombardier after numerous ownership changes and accompanying underinvestment, has been under threat since the government controversially selected the German firm Siemens as the preferred bidder for a huge (£1.4 billion) Thameslink trains contract earlier this year.

The latter deal prompted Bombardier to announce over 1400 job cuts at Derby, roughly half of its workforce, leaving many to wonder if the much-hoped for 'rebalancing' of the economy had quite literally hit the buffers.

However, the resulting furore over that Thameslink deal has also forced the government to look again at how it awards such contracts, and has left the Department for Transport somewhat desperately scrabbling around to find contracts that could offer Bombardier's Derby plant a short-term lifeline. Hence yesterday's announcement, which involves a £80 million 'subsidy' from the Department.

Production of the carriages will start later this year. It's welcome news but sadly isn't as enough to support the (current) 3000 or so jobs at Bombardier and more in the rail cluster in and around Derby given that the current London Underground contract expires in 2014. That was why the Thameslink contract was seen by many as so strategically important in supporting the UK's last remaining train maker.

While there may be other small deals coming Bombardier's way (a £120m contract to build new carriages for the CrossCountry franchise may be one such deal) which could be vital in keeping things going in the short term, these deals are small compared to Thameslink, and many think that Bombardier still needs a big order to safeguard its UK operations and jobs - such as that for the forthcoming Crossrail contract.

The Crossrail tender (an order for 60 trains for the Heathrow to Canary Wharf Crossrail route) has been postponed from late 2013 to 2014 to both save costs and to give the government time to review public procurement policy and to include any recommendations form that review into the procurement process.

On the latter, an insightful report earlier this month by the House of Commons Transport Select Committee recommended that future train orders separate out financing from train design and manufacturing when awarding future carriage contracts. The select committee was informed by experts (notably a team coordinated by Manchester University - see below) that Siemens's better credit rating was a key factor in securing preferred bidder status for Thameslink as against Bombardier.

In addition, the Committee report also called for the National Audit Office to review how the Thameslink contract was awarded, and supported the government's wish to put a "sharper focus on UK strategic interest" in awarding future contracts, although to date ministers have failed to say how they will do this and stay inside EU single market rules.

The procurement system certainly needs to change if the same mistakes aren't made all over again on Crossrail. In the UK governments have tended to look at the short term direct costs of contracts and have taken a pretty narrow perspective on 'value for money'. But other countries in the EU seem to be able to take a broader view of what value for money involves and not just focus on the lowest price.

In this case a key factor is the wider jobs multiplier. Whilst more limited in the UK given the hollowing out of our manufacturing base and hence reliance on imports of key components from abroad, almost 20% of Derby's economic output, or £2.6 billion a year, is still derived from the train assembly business, according to a 2010 report by the city council. That report found that 5,010 people were directly employed in the industry in Derby alone, with 3,000 of those at Bombardier.

Easily the most detailed and complete analysis on the subject has come from researchers at the ESRC funded CRESC research centre at the University of Manchester. The authors (Julie Froud, Adam Leaver and Karel Williams at Manchester, John Law (Open University) and Sukhdev Johal (Royal Holloway, University of London), concluded that bundling train leasing with building and maintenance meant that Bombardier's lower credit rating put it at a key disadvantage against Siemens.

The authors also use different - and more complete - calculations to those used by civil servants to look at the economic value of train making at Bombardier, and in so doing include consideration of tax revenues from UK employment and reemployment prospects.

They assume that 1,000 jobs at Bombardier could have been saved by the award of Thameslink contracts to Derby, and argue that the UK government's tax receipts as a result would be nearly £20 million per annum by 2012, with a cumulative social gain of over £100 million. In addition, they highlight the re-employment prospects of Derby workers which are poor given the UK's past record of heavy dependence on publicly funded employment.

But the authors note that the indirect employment benefits from giving Derby the contract would have been limited because of the problem of broken supply chains in rail engineering: many of Bombardier's high value added sub-assemblies and components are already imported (typically from Germany), highlighting in turn the UK's past failure to support the wider supply chain.

The authors highlight the fact that in rail engineering, only 25% of British sectoral intermediate output is domestically sourced, compared with some 55% in Germany.
The UK train industry's capacity to sustain domestic employment is therefore profoundly different. While domestically sourced German intermediate output sustains 72,000 jobs in rail engineering, only 8,000 are sustained in the UK.

And echoing a point I have been making repeatedly about the value-destroying effects of takeovers, the authors criticise the churning of ownership which led to 5 changes of ownership in 12 years at the Derby factory and underinvestment in the plant. A new policy on takeovers is still needed.

And of particular relevance for public policy, the report questions the narrowly conceived "Which? Best Buy" approach of politicians and the civil service in the UK.

On all of these points the authors are bang on and the report ('Knowing what to do. How not to build trains') is well worth reading. A more complete decision making process encompassing the broader economic impact of purchasing decisions on our manufacturing base is essential. Simply hoping for 'rebalancing' isn't enough, particularly in relation to the train building industry. Rather a more intelligent industrial policy is needed, in which procurement policy should play a role.

Without that, the government may find that, down the line, the Bombardier train has switched tracks and gone abroad, taking with it what is left of the UK's train building supply chain.

Professor David Bailey works at Coventry University Business School.

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