Anatomy of a deal: Tracking the negotiations
5 December 2012 | By Christian Metcalfe
The £4.5bn deal between the DfT and Agility Trains allowed trainees to get involved at all levels
Ever since 1825, when the Stockton and Darlington Railway opened as the world’s first public passenger railway, trains have been the most beloved part of the UK transport system - complicated timetables, waiting rooms, Brief Encounters, Agatha Christie and cancellations due to the wrong type of snow all play a part in the national psyche.
In July this year, and after years of public grumbling over the state of the UK’s railways, a landmark £4.5bn 30-year contract between the Department for Transport (DfT) and Agility Trains - a consortium comprising Hitachi Rail Europe and John Laing Investments - was signed for the Intercity Express Programme (IEP), which will replace the fleet of Intercity 125 trains that have been in operation since 1976 with new trains, in a major public-private partnership (PPP) project.
DLA Piper, the consortium’s legal adviser, led the deal through politically and economically testing times, including the collapse in the banking market and a ‘value for money’ review of the project.
The DLA Piper team was led by partner and London head of the projects team Colin Wilson, who
describes the transaction as “the largest PPP project signed in the market this year and the first time PPP has been used in the railway industry. It was both high-profile and high-value at £4.5bn, and also had international significance.
“I have been doing this type of work for almost 18 years and it is by far the biggest deal I have done . Not only was it the largest, it was also very complex, breaking new ground and because of that it was challenging and exciting.”
The deal was to provide a fleet of 92 trains with 596 carriages for the Great Western Main Line (GWML) and the East Coast Main Line (ECML), and for the fleet to be maintained in a number of newly-built and upgraded maintenance facilities, including new depots in Swansea, Bristol, West London and Doncaster.
The consortium was appointed preferred bidder by the DfT in February 2009. The solution selected by DfT was the Hitachi Super Express Train, initially to be built and assembled by Hitachi in Japan with later trains being assembled at a state-of-the-art new facility to be constructed for the ECML project at Newton Aycliffe in Darlington.
The new Super Express Trains will be supplied by Hitachi and based on the reliable Class 395 trains successfully delivered in 2009. The trains will, however, incorporate a number of new features: they will comprise longer 26m vehicles, a first for the UK network, providing significant capacity benefits; they will be a mix of purely electric-powered trains, drawing power from the overhead catenary and innovative bi-mode trains which have the ability to operate in either electric or diesel mode.
As the most significant rolling stock investment programme in the UK for 30 years the political landscape would always be very important. The programme will create 730 new jobs in the rail industry, 200 in construction and thousands more in the supply chain, and the reason Hitachi decided to base its European manufacturing base in the UK.
Following the change in government in May 2010, a value-for-money review undertaken by Sir Andrew Foster in July 2010, and the Government’s comprehensive spending review in autumn 2010, the DfT confirmed its intention to proceed with the IEP project in March 2011.
However, that decision was by no means a foregone conclusion, and a deal that would normally have taken 12 months to close took 18 to 24 months.
Asked why it was that the IEP got the green light while others fell by the wayside, Wilson says: “Agility’s solution with Hitachi trains is an excellent, well-thought-through arrangement, with a new train that will be transformational for the UK rail network, driving exceptional performance targets.
“There is a real need to provide modern trains in the UK and Agility’s solution gave the UK government the confidence it could do that at a competitive price. Our role was to help provide that confidence by working with our client to deliver a legal and business solution that was acceptable to the DfT such that this was an attractive proposition for the UK. As lawyers we don’t just have to advise on the black letter law, our role is as a trusted adviser to the client to get involved in the wider strategy of our clients’ arrangements.
“A deal like this is always going to be in the public eye and have a lot of interest in the market - in that respect you need to really understand the procurement, contractual and financial processes and make sure everything is done correctly. The problems over the recent franchising competition in the UK is an example of what can go wrong and of the public reaction when it does go wrong on a high-profile arrangement.”
Wilson brought together a team of 40 lawyers from around DLA Piper, including partners Paul Hirst, Kathy Sharp, Nigel Drew and Dimitri Papaefstratiou from the UK finance and projects team, and Koji Ishikawa from DLA Piper’s Tokyo office. They were assisted by other specialist lawyers in the real estate, employment, IP, pensions and corporate groups.
Before DLA Piper could get to work on such a deal, the consortium asked it to pitch for the work along with law firms from Hitachi’s and John Laing’s legal panels. While partners may tend to be the face of such pitches, the work of trainees is also an important part of the jigsaw.
“Trainees are instrumental in putting the pitch documents together,” Wilson says. “It helps them to see the whole process - how we market the firm and how we prepare to pitch. It also gives them a fuller understanding of the business proposition of DLA Piper as well as what we do to win work.
“The research they do into the deal and the organisations involved gives us a greater understanding of the project and the background to the deal. It helps us understand what the issues are for clients so we can talk knowledgeably about them in any presentation.”
Rachel Crosier was a trainee in her first seat in DLA Piper’s construction team when she was asked to become involved. “Trainees assist in the preparation of pitches by doing research and pulling together credentials of other projects DLA Piper has been involved in to date using the firm’s pitch resources. You are encouraged to speak to others in the firm that were involved in past projects, which as a trainee is a good way to develop relationships within the firm and gives you good visibility, as people see what you are working on.
“We looked at the previous deals that the DfT had been involved in, doing general research on the internet and also using specialist journals on projects and infrastructure to find out what was going on in the market at the time. You are encouraged to gather information from a range of sources as part of your research so the firm can show it really understands the project and therefore we can sell the value the firm can really add to a client.
“As trainees you are therefore very involved in producing pitch documents, but less so in the actual pitch itself - although if the client asks to see the whole team, you may be asked to introduce yourself.
Usually junior solicitors and those of a couple of years’ qualified have the opportunity to get involved in presenting the actual pitches with the partners.”
Once the research is done, the pitch documents are put together using centrally held base documents that include information about the firm, and standard information not specific to any particular project.
“We work off a standard pitch document and the trainee’s role is to use the information they have researched to make the pitch document specifically relevant to that deal. Once the pitch document is almost complete, the marketing team work on it, to make it look good,” Crosier adds.
Following the successful pitch to the consortium the real work began with the competitive procurement process instituted by the DfT and preferred bidder negotiations taking place over a four-year period. “We worked with the client during the bidding process,” remembers Wilson, “guiding the client through the competitive procurement process to beat the other bidders and be selected as the preferred bidder by the DfT.”
Wilson points out: “While doing a project like this you are always conscious of the needs and safety of the public as the ultimate users as the passengers of the trains. This is of fundamental importance for ensuring a winning solution - various risks need addressing otherwise how will people get to work safely if the trains are not there or of the correct standard. Continuity of service is also paramount when considering the contractual arrangements in a project of this nature”.
Wilson continues: “We helped our clients through the negotiations, working with them to put the deal together and making sure the needs of our clients, the Government and the banks are all balanced so it would be a well-structured, deliverable and bankable project.”
Given the size of the overall programme, the transaction was split into two: an initial funding for the GWML fleet, which reached financial close the day after commercial close in July 2012; and a second financing for the ECML fleet for which a commercial close has been achieved, and for which financial close is targeted for 2014.
Advice on the financing structure for IEP was therefore an important role in view of the difficult funding conditions. Approximately £2.5bn of long-term debt was provided by four distinct groups of banks, some of which were involved in a UK project financing for the first time.
As trains are moving assets providing a key public service, the DfT required considerable flexibility in respect of the deployment of the trains, ranging from amendments to the passenger timetable at one end of the spectrum to redeployment of trains to different routes and use of new depots at the other - so a major challenge during negotiations was to ensure that the interests of all were adequately protected in respect of any such variations.
Another innovation of the agreement was a so-called ‘no train, no pay’ structure, whereby Agility would be paid by the train operating companies for providing the trains each day for service, but in the event that Agility does not meet the performance regime relating to availability in service, reliability and standards of cleanliness and presentation, those payments will be subject to deductions.
While trainees are not involved directly in the negotiations on a deal like this, their involvement at the negotiation table is essential.
“During negotiations it is important to track the positions of both parties,” says Crosier. “The negotiations occurred over a long period, and it was essential to have a record of them, so we had an issues list which was updated after each negotiation with the positions reached and any new issues between the parties. When an agreement was reached on a particular issue, we would update the drafting in the documents to reflect the agreed position.”
In addition to the primary contract agreed between the DfT and Agility there were two subcontracts between Agility and Hitachi for the manufacture and maintenance of the trains.
Partner Kathy Sharp had responsibility for these negotiations. She describes it as a “back-to-back flow-down” process by which “you take the primary agreement at the top level and make sure that any changes to that are passed down into the sub-contracts with Hitachi.
“There was a lot of paper wrangling and you have to think in 3D. You have to look at what is agreed at the top-level negotiations and then negotiate with the subcontractor to implement that. The subcontractor may not always like what is agreed with the Government in the primary agreement and it is important for our client, in this case Agility, not to get stuck in the middle, so we negotiate with Hitachi in its role as subcontractor to ensure an appropriate risk share and bankable position.
“The first job [of a trainee] was to ensure that every time a change is made at the primary agreement level you look at the sub-contract and flow it down into either the manufacturing or the maintenance sub-contract, or both.
“Rachel did the first cut of a draft flow-down of the changes to the sub-contract and then went through and worked up a list of issues. After every meeting with the other side the issues list was updated and the draft contract amended to reflect the agreed changes.
“While some of the changes would be mechanical, some would require a lot more thinking about, particularly if they affected both sub-contracts. It is important therefore for the trainee, in order to work out what is agreed in the primary agreement and how that affects the sub-contract, to understand how the primary structure works. That is why I say you need to think in 3D - you not only need to think how the changes come down from the primary agreement but also how they go across to the other sub-contract.”
As the deal heads towards completion there is still plenty, if not more, to do for trainees. “In the last few weeks before completion you concentrate on CPs (conditions precedent). This is the evidence that parties need to provide before the documents are signed, for example the articles of association,” Crosier says. “The process of checking the CPs is trainee-led. The trainee, supervised by a junior lawyer, is responsible for checking that all the CPs have been satisfied before anything can be signed.”
Then there is the closing. This was no ordinary closing and took place over four days at DLA Piper’s London offices with more than 150 people attending. As well as representatives of the Government, consortium and Hitachi, there were also lawyers from Freshfields Bruckhaus Deringer which advised the DfT, Ashurst which advised the funders, Shoosmiths which advised Hitachi, Clifford Chance which advised the European Investment Bank, Simmons & Simmons which advised Network Rail and Hollingworth Bissell which advised the former British Railways board.
Crosier describes the feeling at the end of closing: “The agreement was signed very late in the evening, with people there from Agility, Hitachi and John Laing, including some who had flown in from Japan especially for the signing, the banks and other law firms. It was such an incredible feeling to see the documents being signed. Everyone celebrated late into the night.”
What about the effect of working on the deal? “To have worked on such a high-profile deal with such a long-term contract term at thisstage in my career is amazing,” she enthuses, “and having that knowledge of the negotiations as well as an established relationship with the client at such a junior level is really fantastic, as the project will evolve over the next 30 years and this will be something that I can stay involved in throughout my career.”
While the effect on her CV is important, Crosier also highlights the effect on her skills of drafting and negotiation. “Sitting in on negotiations with experienced partners and clients and seeing how things will play out and how matters were moved forward is something that law school can’t teach you,” she says. “You have to experience first-hand a project like this to really sdevelop these skills.”