Sam Sherwood-Hale spoke to Jim Eldridge, Regional Managing Director at Rock Rail Australia about his journey through the transportation industry, his experience with Rock Rail and the company’s new venture in Australia…
Prior to your appointment as Head of Rock Rail Australia, you spent a career spanning 37 years at the Commonwealth Bank of Australia, as, among other positions, lead financier of major new infrastructure projects and asset sales. How does that experience inform your new position?
During my time at CBA I worked across a wide range of infrastructure sectors and markets, as you might expect after nearly 40 years! Beyond my more recent focus on transport and rail, other projects I have been involved in have also spanned the health, telecommunications and energy sectors. While technical, regulatory and demand aspects vary across these sectors, key project financing issues such as risk allocation, financing structure etc, remain much the same. Addressing these issues across different sectors gives valuable insight for resolving comparable issues going forward.
My experience has also emphasised the importance of having a strong understanding of the technical aspects of a given infrastructure sector and project. With the patient input that I’ve received over time from engineering colleagues and consultants, I have built up a good understanding of the technical challenges involved which I think is particularly important when it comes to the rail sector. Trains must interact with their rail network and systems, remain responsive to their operational environment and remain adaptable to technological change.
My long-term involvement in competitively bidding complex projects has also fostered a love for financial innovation. The pain of narrowly losing project bids has encouraged me to look beyond the standardised approach to where the specific circumstances of a given project might afford opportunity to financially innovate. With Rock Rail having forged its existence on its willingness to challenge and change how rolling stock is procured in the UK, it is little wonder why I started to sit up and take careful note of what they were doing.
Finally, I would also point to very valuable experience gained in having had to restructure the financial commitments of major CBA clients who succumbed to financial difficulty. This showed me that when negotiated financing terms are put to the test, some are more important than others. This allows me to focus on key issues and be less prescriptive on the less important ones.
You have experience in other transportation and infrastructure sectors. What is it about rail that drew you in now?
While each infrastructure sector has its unique investment needs and challenges, it was my fascination for the more technical (being a ‘would-be engineer’ at heart) that led me to what I would regard as the more challenging end of the infrastructure spectrum – rolling stock and hospital projects. Both involve a higher degree of upfront specification, longer construction terms and bigger life cycle issues which must be understood to deliver better value for asset users.
It was my offshore secondment to CBA’s London office during the global financial crisis of 2007/8 that sparked my love of the rail sector. UK ROSCO ownership was being turned over at a time when many UK & European banks were more cautious which opened the door to new entrant financiers. It was an opportunity that my Bank fully embraced, leading to my personal involvement and sustained passion for the rail sector.
There is also a real need for increased investment in Australia’s railways. As our city populations continue to grow and as environmental challenges increase, new investment is needed more than ever if users are to benefit from cleaner, greener and higher speed commuter services. Given our geography, this is a particularly acute need.
How will your approach compare to say, the aviation industry, which you have experience in?
Within the aviation industry, I enjoyed an early involvement in lease financing of aircraft assets but that was more years ago than I care to remember. What is I think more relevant, was my later role in monitoring of a sizeable equity investment in what was a start-up global aircraft leasing company wanting to enter the market in the aftermath of the global financial crisis.
Overseeing this company’s successful establishment from initial incorporation through to IPO listing, has given me a window into the challenges involved in establishing new businesses in new markets which should prove beneficial for introducing rolling stock leasing into Australia.
Aircraft and rolling stock leasing are not dissimilar in that the asset owner assumes genuine residual value risk through shorter lease terms that are afforded to lessee operators. The asset must remain attractive and fit for purpose if it is to remain ‘on lease’ throughout its life. One key difference however is in the mobility of the asset. The sphere of operation for aircraft is unrestricted compared to rolling stock that must remain compatible to the rail network’s infrastructure. This creates different challenges in how best to manage releasing risk.
You were with Rock Rail prior to this appointment, where you led negotiations for Rock Rail’s successful East Anglia rolling stock deal. What was it about that experience that inspired you to return now?
While I was working with Rock Rail on their East Anglia transaction, I was struck by the team’s passion for bringing about meaningful ‘change for good’ within their industry. There was a real belief in a better way of doing things that delivered better value to government, rail passengers, industry partners and institutional investors at the same time and it was contagious!
When I joined in May 2016, Rock Rail had only just secured its first rolling stock deal with much scepticism across the industry as to whether it could deliver on a second and more substantive sized procurement. No one is second guessing that now. What a small team of highly specialised people has been able to achieve in transforming the market and in introducing a whole new source of funding, is impressive. It was a bit of a David and Goliath scenario of a small new entrant taking on the ‘might’ of the incumbent rolling stock providers (ROSCOs) who had seen little challenge since privatisation three decades prior.
My experience with Rock Rail was both invigorating and challenging. It’s an environment and culture that I very much enjoyed and one that remains in the business today. It has a ‘can do’ attitude that I believe will also bring reformative change to the Australian market.
Since 2016, Rock Rail has secured £3 billion of new rolling stock fleets for multiple franchises in the UK. How will your approach to Australia be different?
The uniqueness of the Rock Rail model is in being able to provide operators with a long term, fixed and competitively priced lease rental profile that lessees need only commit to incrementally, through short term leases with options to renew. In this way, operator lessees still maintain the longer-term cost certainty normally provided through longer-term contracts, while also being able to retain asset flexibility through periodic lease renewal.
Rock Rail is able to deliver both these benefits due to having directly accessed long-term, fixed rate funding from major global institutions including pension funds and insurance companies. Institutions welcome the long-term tenor and low volatility (non-GDP driven) return profile that the industry can provide. Rock Rail is supported by a growing number of major institutional investors who have come to appreciate the benefits of its leasing model.
Rock Rail believes these benefits along with its provision of specialist rail asset management services, have application to all markets and are fundamental to how we deliver significant value to the markets that we operate in.
That said, while the need for investment in new rolling stock and infrastructure clearly exists in both the UK and Australia, each market has its own characteristics, challenges and opportunities which will impact where we can bring most value.
While Australia faces many of the same drivers for investment as the UK including growing passenger numbers and the ongoing need to update its rail infrastructure, one of the more immediate specific challenges is dealing with the sheer scale of urbanisation which is occurring, particularly in major cities along the eastern seaboard. More and more people are seeking to live within commuting distance of our major cities. This is pushing up travel distances and the need for infrastructure upgrades and new high capacity commuter rail fleets.
The rail industry model is also very different in both markets. Unlike the UK which saw privately owned ROSCOs and franchise operators take over the supply of vehicles and operation of services when the industry was privatised in the mid 1990s, the Australian market remains largely publicly funded, owned and operated. This represents a very heavy burden on public sector funding.
So in recognising the real need for increased investment in Australia’s railways, our approach here, is on introducing a leasing alternative to help address this procurement challenge, with our priority on the provision of cleaner, greener trains that better service the high growth corridors in and around the major cities such as Brisbane, Melbourne and Sydney.
What does Rock Rail hope to achieve with this move into the Australian market?
Most major passenger rolling stock fleet procurements that have occurred in Australia in recent times have experienced some level of difficulty. Whether pursued in partnership with a privately owned consortium under Australia’s standardised Public Private Partnership (PPP) approach or by way of direct procurement from a global supplier, many of these projects have experienced costly program delays with train performance post-acceptance remaining problematic for an extended period.
Rock Rail envisages a more collaborative form of procurement, one where its specialist knowledge and strength of supplier relationships can help optimise whole life cost outcomes. Rolling stock is a global business that needs sector experienced and well-connected players who are able to work alongside local procurement authorities, train operators and global manufacturers for realising the best outcomes.
The need for specialist input doesn’t stop once a fleet is accepted into service. Rolling stock is not a static but a dynamic operational asset that needs to be actively managed throughout its asset life. Rock Rail’s full-service asset management teams do just that. They manage performance ramp up, monitor maintenance effectiveness and efficiency, while also continuing to evaluate asset enhancement options. These teams are supported by Rock Rail’s bespoke ‘live’ data analysis platform (RockStar). This provides fleet performance diagnostics and risk analysis and underpins critical evaluation of maintenance and other asset management options and strategies for optimising performance.
The long-term institutional funding model I mentioned earlier also comes into play here. This supports the shorter term leasing that generates operational flexibilities and financial efficiencies not otherwise attainable under long-term concession and/or maintenance agreements. The lessee has the opportunity on lease maturity to re-evaluate how a given fleet has performed and/or how it has been maintained and to either renegotiate terms or pursue other options. This acts as a powerful incentive upon the lessor for getting things right.
Rock Rail has financed five large rolling stock fleets totalling more than 1,500 vehicles valued at over £3 billion in just four years. This represents over 40 per cent of all new UK passenger train orders since February 2016 which is all-the-more astounding given Rock Rail has only selectively bid a certain number of procurements.
Seeing the positive change that Rock Rail has wrought in the UK rail market has inspired me to bring about much needed reform to how rolling stock fleets are procured and managed in my own country. The opportunity to introduce a whole new approach that has the over-arching objective of delivering better value outcomes for rail passengers and the public, is both challenging and exciting.
Tell me about Rock Rail’s asset specific, off balance sheet funding model. How does it differ to the standard public private partnership (PPP) model?
Rock Rail is focussed on delivering new rolling stock fleets that are well specified for their intended infrastructure and operational environments and are of sufficient size for delivering train services that are essential and significant to the relevant network.
By confining its asset focus in this way, Rock Rail is able to offer public transport authorities and operators a highly competitive, fixed, long term, lease option for procuring rolling stock that limits their initial commitment to rentals payable under a shorter term lease.
Unlike existing publicly funded and PPP models, this allows more public funds to remain available for other investment needs and maintains complete flexibility for the public sector and operators in terms of future fleet choices.
It also means the accounting impact for the lessee can be minimised in that its on-balance sheet capitalisation can be confined to rent payable under the initial lease without extending to all payments that are pre-contracted under a long term PPP project deed.
This is possible because Rock Rail, as asset owner, assumes full residual value risk both in terms of the fleet’s releasing and other ownership risks across the life of the assets. This is where Rock Rail’s leasing model fundamentally differs from other rolling stock procurement models where ownership risks typically sit with the public sector.
As I mentioned earlier, rolling stock is not a ‘fixed asset’, it must respond to future changes in technology, regulations, and operating environment. Rock Rail’s asset management team is focused on ensuring our fleets do just that by remaining fit for purpose throughout their operational life. This includes actively managing for future mid-life operational and technology upgrades and for providing funding mechanisms for doing so where necessary.
Why do you think the latter model is the standard? What are the benefits of Rock Rail’s approach?
Compared to the UK, rolling stock procurement options in Australia have been more limited. Aside from directly contracting a global manufacturer, the only other procurement option in use has been the PPP. As with PFIs in the UK, Australian PPPs involve long term commitments made on standardised terms that have been developed for the purpose of wide application across all forms of infrastructure procurement.
PPPs are better suited to asset procurements of modest technical complexity that have a known or relatively static operational environment, such as schools, courts and housing. They are less well suited to assets that involve greater technical specification and/or obsolescence exposure and, more importantly, that must remain fit for purpose throughout a more dynamic, demand driven operational environment.
PPPs are essentially a single point in time procurement that seeks to identify and allocate risk for all foreseeable project issues and events as at transaction closure. Assets that are more technical in nature and must respond to operational change need the flexibility that long term pre-contracted arrangements cannot provide. Procurement authorities and operators must be able to change usage requirements without the constraint of a long term maintenance contract.
This is particularly so when it comes to rolling stock. Without a means for accommodating future unanticipated changes in network infrastructure, signalling, train configuration and service frequency or patterns etc, the useful life of a fleet can be curtailed. Longer term pre-contracted maintenance arrangements can also be rendered sub-optimal by changes in fleet service patterns and/or usage levels.
This is where Rock Rail’s leasing model comes to the fore. It involves upfront collaboration with the procuring authority to understand the future demands of the fleet and how this can best be reflected in its design. Rock Rail specialists also oversee the fleet throughout its operation, addressing any performance issues or required change or modification for maintaining performance.
However, the ultimate form of comfort afforded is by way of shorter-term leases. Should future required changes to the rail network occur, procurement authorities are no longer ‘locked into’ long term arrangements with little or no flexibility for re-negotiating. The periodic right of lease renewal gives them the flexibility to be able to adjust terms as a condition of renewal or to even return the fleet where alternative options are considered more attractive at the time.
Jim Eldridge is Regional Managing Director at Rock Rail Australia