July 27, 2016

British decision to leave European Union will affect rail

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THE decision by 52% of the British electorate which voted in the referendum on June 23 to leave the European Union (EU) is likely to have far-reaching consequences for rail transport not only within Britain but also in the wider railway supply industry.

While the new British government says it is unlikely to trigger negotiations for the country’s exit until the end of the year, the effects of the vote are already being felt even though it will be at least two years from the start of negotiations until Britain actually ceases to be an EU member.

 

As we report this month, one of Britain’s rail freight operators, GB Railfreight, has already suffered a nasty shock as the price of a fleet of 50 freight wagons it is purchasing from Greenbrier Poland went up overnight to the tune of £10,000 per wagon due to the sudden drop in the value of the pound following the referendum result.

The pound fell from $US 1.50 on June 23 to $US 1.28 on June 24, a new 10-year low, and was still trading at around this level on July 19. The situation for the Euro is slightly worse. The pound dropped from €1.31 to €1.22 overnight on June 23-24, and has declined in value since then to €1.19.

This obviously has serious consequences for the import of railway equipment, although exporters will benefit from the weaker pound. But all rolling stock production in Britain is for British train operators, and Britain imports a lot of new trains particularly from Siemens and latterly CAF.

Economists are predicting that the weak pound and the uncertainty surrounding Brexit, which is causing companies to reconsider their investment plans, will reduce growth. This was confirmed by International Monetary Fund (IMF) on July 19, when it announced that it has cut Britain’s growth forecast from 1.9% to 1.7% for this year, and from 2.2% to just 1.3% in 2017. The IMF also predicts that the slowdown in Britain, which is the fifth largest economy in the world, will reduce global economic growth by 0.1%.

While the IMF has revised its pre-referendum warning that Britain could face a recession if it left the EU, and the British government and the Bank of England say they will take steps to shore up the economy, there is still considerable uncertainty about what the future holds.

There are already signs that bidders for the next passenger franchises are reworking their bids to reflect a possible slowing of growth, while managers of existing franchisees will be starting to have sleepless nights as they wonder whether they will be able to meet their escalating premium payments if growth falters.

Britain has been honey pot for train builders with a series of large orders in recent years fuelled by growing traffic, the need to replace life-expired vehicles, and major projects such as Thameslink and Crossrail. But orders could soon dry up if franchisees become more cautious. If this happens, then Britain’s two train builders, Bombardier and Hitachi Rail Europe, may well decide to switch production to their plants within the European Union.

Britain’s new secretary of state for transport, Mr Chris Grayling, will have a lot to think about in his new job. He has already tried to reassure the industry by backing the HS2 high-speed project to link London and Birmingham initially with a second phase taking the line on to Manchester and Leeds.

But Grayling has yet to make a long-awaited decision on where to site a new runway in the London area.

Heathrow or Gatwick airports are the only remaining options, and if Heathrow is chosen, rail will be expected to provide additional capacity to cope with the expected increase in air travellers. Gatwick is already well served by rail, but capacity constraints on the busy London – Brighton main line, which serves Gatwick, will be difficult to resolve.

Grayling will also need to ponder the future of Britain’s infrastructure manager Network Rail (NR). Many existing rail projects have an element of EU funding, and it is far from clear whether the government will make up the shortfall, and NR already faces a funding crisis as project costs are soaring. But NR’s current response is either to scale projects back or delay them rather than getting to grips with the real causes of rising costs. NR could make a start by conducting a reality check to see what things cost in the real world.

If Britain’s economy starts to falter then there will be less money for investment in rail. The only saving grace is that rail transport is a long-term business which means it is able to withstand the ups and downs of the economic cycle better than other industries. But it all depends how bad and how long an economic downturn turns out to be. Only time will tell.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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