Executive summary

Background to the report AMION Consulting was commissioned by Merseytravel on behalf of the Liverpool City Region Combined Authority (LCR CA) in June 2016 to appraise the Business Case put forward by Alstom Transport UK Ltd (Alstom). A report was produced by AMION in July 2016 within which a number of recommendations were identified that needed to be considered by the Combined Authority, in discussion with Alstom, as part of determining whether to approve the provision of grant funding. These were as follows:  “the Combined Authority needs to be satisfied that £5 million is the minimum public sector grant necessary for the project to proceed. In developing the Full Business Case, an independent appraisal should therefore be sought of the project costs;  linked to the above, confirmation should be sought from the Group HQ that the project would not proceed without public sector funding due to a failure to meet the hurdle criteria identified within the Business Plan;  clawback arrangements should be agreed, incorporating an ex-post assessment of the Group’s hurdle criteria, to enable repayment of part or all of the grant if the overall IRR of Phase 1 ends up being in excess of the target rate;  consideration should be given to recycling part of the uplift in business rates resulting from the project to the Combined Authority in line with the principles agreed in the Single Investment Fund; and  any grant funding agreement should fully reflect the issues raised in this review, including clawback arrangements, asset disposal and the treatment and management of risk, specifically in relation to potential cost overruns and delivery against key milestones.” Since the July 2016 report, Alstom has provided additional information to support the Business Case, addressing a number of issues raised in the initial AMION review. An independent appraisal of the project costs has also been carried out (see Appendix A), along with an assessment of the market value of the proposed new manufacturing facility (see Appendix B). This report builds on the initial AMION review and provides an appraisal of the Business Case, taking account of the additional Alstom information. The majority of the additional analysis undertaken has related to the Financial Case. The conclusions relating to the Strategic Case, Economic Case, Commercial Case and Management Case remain broadly as presented in the AMION July 2016 report. However, the assessment of these cases has been set out in full again within this document for purposes of clarity.

Overview of the project The proposals developed by Alstom are to create a major new rail manufacturing facility for the UK (referred to as Project Chambertin). If all three phases of the project are taken forward, it could involve approximately 450,000 sq ft (42,000 sq m) being constructed on the HBC Field site at 3MG Widnes, employing some 600 people and providing a new North West Rail Skills Academy. Based on recent tendered performance, with contracts for the Great Western line, East Coast Main line, Thameslink and Crossrail going to Hitachi, Siemens and Bombardier respectively, Alstom UK management believes that there is a necessity to have a manufacturing plant in the UK to secure Merseytravel Alstom Project Chambertin: Review of Business Case Executive Summary – October 2016 future orders. However, Alstom HQ, based in France, would rather wait for a contract win before investing in a new manufacturing facility. The UK Alstom management has established a plan to invest in an interim solution, which would meet short-term strategic need while also allowing for expansion into a longer term solution on site. This solution involves Phase 1 of the project proposals and would enable essential maintenance work (the Pendolino mid-life paint and refit) to be undertaken in house and, it is argued, make the subsequent investment in a new train manufacturing facility more likely. The Grant Funding Business Plan prepared by UK Alstom’s management team states that without further funding the Phase 1 proposals do not pass the capital approval thresholds set for the project and is therefore not able to be progressed for Board approval. Alstom are requesting £5 million of funding support to allow the investment case for Phase 1 to pass the Group’s capital approval thresholds.

Strategic Case There is a clear business need for the project in terms of the short and longer term requirements of the company, relating to the Pendolino mid-life upgrade and the desire to secure future major contracts, thus expanding Alstom's footprint in the UK. The strategic rationale for intervention is also strong, with a large programme of planned activity coming forward, including in relation to HS2 and national electrification work, coupled with recognised skills shortages within the UK rail industry. The benefits expected to be generated by the proposed development align closely with the identified priorities for the Liverpool City Region, particularly in terms of supporting the provision of more sustainable employment and high value jobs. The development of the HBC Field site will also help to generate momentum in bringing forward other investment within the wider 3MG area and aligns with the recognised strategic importance of investing in advanced manufacturing.

Economic Case The Business Plan estimates that Phase 1 of the project will create 476 net additional jobs at the City Region level, providing an overall GVA per annum impact of £43 million. The methodology applied within the Business Plan to calculate the employment and GVA impacts is considered to be, on the whole, reasonable and robust, demonstrating that the project represents good value for money when compared with benchmarks. As part of the review of the business case, a number of more cautious adjustments have been applied. On the basis of this approach, the project would be expected to create 302 net additional jobs at the City Region level and generate an overall GVA per annum impact of £35 million. This still represents good value for money against a public sector cost of £5 million.

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Merseytravel Alstom Project Chambertin: Review of Business Case Executive Summary – October 2016

Appraisal summary table Alstom Business Plan Business Plan review Public sector financial cost £5 million £5 million Discounted public sector cost £4.9 million £4.9 million Net additional jobs 476 302 Net additional GVA, £41.6 million £33.8 million discounted (annual) Net additional GVA, £120.5 million £98.1 million discounted (cumulative, 3 years) Significant non-monetised Creation of a new North West Creation of a new North West impacts Rail Skills Academy, providing Rail Skills Academy, providing 15,000 training days per annum 15,000 training days per annum Subsequent investment and the Subsequent investment and the creation of 400 further jobs, creation of 400 further jobs, dependent on securing dependent on securing additional manufacturing additional manufacturing contracts contracts Agglomeration benefits Agglomeration benefits associated with bringing forward associated with bringing forward a site within a key strategic area a site within a key strategic area Discounted public sector cost £10,300 £16,300 per job BCR (annual GVA) 8.5 : 1 6.9 : 1 BCR (cumulative GVA) 24.5 : 1 19.9 : 1 Value for money category Good Good

Commercial Case The commercial structure is considered to be clear and straightforward. Subject to obtaining funding approval and in turn internal Board approval, Alstom will take full responsibility for the development of the site and operation of the new facility. There is no requirement for public sector intervention beyond initial funding support. The project also seems to be well developed and in a position to proceed quickly, with few dependencies and constraints beyond securing planning consent and funding approval

Financial Case A Phase 1 capital cost of £34.876 million has been identified, based on a cost plan developed by Alstom, informed by initial estimates from quantity surveyors and adjusted in line with quotes received from contractors. An independent appraisal of the construction costs has been carried out by Modero. Overall, based on the findings of the Modero report and a high-level review of the financial model, the assessment presented by Alstom appears reasonable. A requirement for £5 million of public sector grant funding is identified by Alstom in order to meet the approval thresholds applied by Alstom HQ to large scale capital projects. The approval thresholds for Project Chambertin are:

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Merseytravel Alstom Project Chambertin: Review of Business Case Executive Summary – October 2016

 net cash out to be no more than £10 million any year of development;  IRR to be at 14%; and  payback to be 7 years. The IRR approval threshold is set per project based on an internal analysis of cost, cash flow and risk. Each project is scrutinised against the global Alstom context. According to Alstom, the initial cost for the project was deemed to be too expensive and relatively high risk, which resulted in the requirement for 14% IRR with the inclusion of £5 million public sector funding. A considerable part of the risk identified relates to the UK political volatility and the stop-start nature of UK funding commitment for transport projects. Confirmation has been received from the Group HQ that the project would not proceed without public sector funding due to the project otherwise representing poor value for money. Sensitivity testing has also shown that if a residual land value is included in Alstom’s financial model, public sector support is still required for the project to achieve the identified approval thresholds. Overall, it is considered that there is a financial case for £5 million of public sector funding support to ensure the project is deliverable. Suitable overage / clawback arrangements will need to be established to allow for repayment of part or all of the grant if the overall IRR of Phase 1 ends up being in excess of the target rate.

Management Case The Business Plan and Grant Application set out the overall structure of the UK management and how the project is to be delivered by a special project team established for the development. Alstom has recent experience of delivering similar projects elsewhere in the UK and a strong and successful track record within the rail industry, including large contracts associated with Crossrail and the National Electrification programme. The Business Plan and Grant Application incorporate a relatively detailed risk register, with controls set out in relation to each main risk area. However, despite active management by Alstom, there remains the risk that construction costs will continue to increase and/or timescales slip such that Alstom is not able to undertake the Pendolino paint contract in-house. Both such instances could lead to the project being abandoned. It will therefore be important that the Combined Authority put in place mechanisms to safeguard their funding position in the event of abandonment.

Recommendations Overall, it is considered that on the basis of the Business Plan and Grant Application prepared by Alstom, and the supporting information, a reasonable case exists to provide grant funding of £5 million in support of the proposed project. In addition, a number of the previous outstanding issues identified in the AMION July 2016 review report have subsequently been addressed. There are, however, a number of recommendations that the Combined Authority should consider in determining whether to approve the provision of grant funding. These include the following:  as part of any grant funding agreement, a condition should be set that Alstom inform the Combined Authority if the final tender prices received from contractors are significantly lower than currently estimated, with the level of grant funding adjusted as appropriate;  overage / clawback arrangements should be agreed, incorporating an ex-post assessment of the Group’s hurdle criteria, to enable repayment of part or all of the grant if the overall IRR of Phase 1 ends up being in excess of the target rate;

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Merseytravel Alstom Project Chambertin: Review of Business Case Executive Summary – October 2016

 confirmation should be sought from Alstom that they are able to comply with the requirements of Articles 13 and 14 (regional investment aid) and Article 31 (training aid) under the General Block Exemption Regulation (GBER);  consideration should be given to recycling part of the uplift in business rates resulting from the project to the Combined Authority in line with the principles agreed in the Single Investment Fund; and  any grant funding agreement should fully reflect the issues raised in this review, including overage / clawback arrangements, asset disposal and the treatment and management of risk, specifically in relation to potential cost overruns and delivery against key milestones.

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