Sector analysis: Rail
The second round of the rail franchise battle sees many firms not traditionally known for their rail expertise scooping up the work, writes Richard Parnham
During the next two years, 17 out of the current 25 rail franchises will be up for renewal, and the existing rail operators are jostling for the coveted preferred bidder status. Last month, M40 Trains, the holding company of Chiltern Railways, became the first train operating company (TOC) to become preferred bidder for a new £370m 20-year franchise between London and Birmingham. In the same month the Shadow Strategic Rail Authority (SSRA), advised by Linklaters & Alliance and Eversheds, announced that three companies – Stagecoach Holdings, FirstGroup and Sea Containers -would be allowed to bid for the South West Trains franchise, run by Stagecoach.For the law firms advising the rail sector, the stakes are high. Not only is the current franchise tender process providing new work for firms acting for TOCs, those firms that represent the winning franchise holders will be assured of new work. The new TOCs are expected to make far greater use of external law firms as they invest in infrastructure and new rolling stock.So which firms stand to gain most work from the rail sector? Simmons & Simmons, which handles more than 80% of Railtrack’s legal work, can be guaranteed a place at the top table. Simon Osborne, Railtrack’s company secretary and solicitor, says the firm will continue to handle Railtrack’s major project work, such as the Channel Tunnel Rail Link. Similarly, Norton Rose continues to be highly active in the train leasing sector, representing the three rolling stock companies in their introduction of train protection and warning system equipment.However, it is which firms act for the TOCs that may cause the greatest surprise. According to research carried out by hemscott.NET, many of the firms that advise TOCs have not previously been recognised as rail experts. For example, Ashurst Morris Crisp is currently the legal adviser to National Express, which holds five of the 25 rail franchises, while Osborne Clarke advises Prism Rail, which holds four franchises in the southern half of the UK.One explanation for the lack of recognition of rail expertise is that the industry has changed rapidly since privatisation. Few firms have built up sufficiently long-term relationships with their clients to allow them to stand out among their peers. Many of the franchise owners that dominate the rail scene did not exist when the original franchises were awarded four years ago. Prism Rail is a good example of the rapid pace of change. Earlier this year, the company announced it would be taken over by National Express and that it would also hand back two of its existing rail franchises, Cardiff Railway and South Wales & West Railway, to the Strategic Rail Authority in March 2001.As a result of this upheaval, several firms that now act for the rail franchise holders have only been elevated to the position of main adviser within the last 12 months. Pinsent Curtis has only recently been nominated main adviser to Arriva, owner of the Northern Spirit and Merseyside Electric franchises, while Burges Salmon became a main adviser to the FirstGroup alongside Slaughter and May and Paull & Williamsons within the last 12 months.But some firms have been sidelined as the industry has matured. GB Railways originally instructed Lawrence Graham on its flotation in 1996, but by 1999 the company had settled on Theodore Goddard and Denton Hall as its main advisers. By 2000, the company had changed its mind again, now claiming Theodore Goddard and Goodman Derrick as its main legal counsel. According to Mark Swindell, head of rail at DLA, the consolidation among rail franchise holders is a direct result of government policy. “Franchise holders will move towards a kind of public-private partnership, where rail operating companies take significant risks with regards to infrastructure, rolling stock and stations,” says Swindell, who acts for Vivendi Environmental, owner of the two Connex franchises.“The Government wants TOCs to be able to stand up to Railtrack, rather than be small companies that make small profit margins. I believe the existing TOCs will not be able to win the new franchises unless they have the financial ability to slug it out with Railtrack.” Jeremy Simon, corporate services director at Prism Rail, shares this view. “The SSRA is encouraging joint venture investments between the TOCs and Railtrack, but also between the TOCs and third parties,” he says. “Although Railtrack has vast amounts of money to invest, it is not enough by itself for the huge modernisation that is required over the next 10 years.” Simon points to Chiltern Railway, which has been awarded a 20-year franchise, as an example of a model for future development. John Laing now ultimately owns Chiltern Railways. “John Laing are investing substantial sums into structural improvements. As a construction group, they are well placed to do that,” says Simon. The consolidation of the rail industry has led to concerns that law firms could become embroiled in conflict situations. Simmons has deliberately targeted other emerging rail markets rather than risk a conflict with Railtrack. The firm has built up a portfolio of international work over the past 12 months, which includes acting on an underground infrastructure project in Dublin, as well as for one of the new London Underground infrastructure companies.The perils of law firms acting in a conflict situation were most graphically illustrated in 1999 when Sea Containers, owner of the Great North Eastern franchise, applied for an injunction against Denton Hall, effectively preventing it from working for rival train service Virgin Trains. The subject is still a sensitive one among private practice and in-house lawyers. Virgin Trains refuses to disclose which firms are on its legal panel beyond saying that it uses a “selection of high-quality law firms” while Richards Butler, the firm that took over from Denton Hall, was initially nervous about confirming its involvement with Great North Eastern. It is understood that Sea Containers insisted that panel firms acted exclusively for them. Richards Butler was appointed precisely because it did not have a significant rail practice. The next few years look promising for firms involved in the railway industry. New, longer franchises for train operators, increased investment and renewed government support promise to create a boom for firms acting for rail clients. As in 1996, with the new franchises up for grabs, the field is again open for firms to make their mark in this sector. Their only challenge is to be on the winning side.Richard Parnham is assistant editor of business and legal portal hemscottlegal.com.
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