Railway PPPs Trends, PPP Relevant Issues

Railway PPPsTrends, PPP Relevant IssuesXS-Axis ConsultingKaiser-FriedrichPromenade 9361348 Bad Homburgt: 49 6081 9299977m: 49 1523 41356861

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PPP Railway TrendsRailway PPPs are contentiousIncreasingTrendOver the last 25 years, 27 PPPs have been awarded inthe rail sector –16 are in Europe --Rail PPPs arecontroversialPositiveSome argue that they allowed to fund and buildprojects that otherwise would have been impossibleto launch, or that they fostered innovative systems.NegativePPPs are costly to bypass budget constraints that costmore to the taxpayer at the end of the day3

Excerpt of Rail PPPsIndiaFranceTaiwanPortugalPPPs have also been applied toinfrastructurerehabilitation,maintenance and operationprojects in heavy rail (Chile,Mozambique)andmetro(London sUKSouthAfricaThese PPPs rather involvelimited investments and scopeis smaller than the large PPPslisted to the left.4

Overview of Rail PPPsSource: PPPs in the rail sector - A review of 27 projects, Julien Dehornoy, SNCF French National Railways, April 20127 PPPs AirportLinksConstruction & OperationofInfrastructureanddedicated TrainsDelhi ARL is the only onewith new network9 PPPs High SpeedLines4 PPPs Equipment& Rolling Stock7 PPPsConventional LinesInfrastructure PPPs toconnect both ends withconventionalnetworkswith open access tooperator -8 are in EuropeFocus on optimizing lifecycle costs for sub systemssuch as signalling (GSMR), power supply and traincontrol (Alb.Alicante) orrolling stcokc (Waratah)Less complex technically(Eurotunnel,Perp.Figuerres); Also applied tofreight corridors (Adel.Darwin, Liefkenshoek) orto get expertise in markets(Gautrain, Denver Eagle)5

What are Rail PPPs?The term PPP is not well-defined confusion in the minds ofpractitioners:Are often wrongly perceived as modes of partnerships: General cooperation between public and private sector Privatizations Sub-Contracting6

A Common Definition of PPPLevel of PrivateInvolvementKeyDrivers Consistent political commitment Availability of affordable debt Macroeconomic condition Investment climateDBFOBROTBOTPPPManagementContractPerformance basedService ContractService ContractPrivate RiskNo PPP Institutional and legal framework Capacity and expertise to dealwith complexity of PPPs in acountry PPP investment must render VfM Affordability & Risk allocation Significant PPP pipelineCommercializationPublicly OwnedEnterprise7

Key Features of a Rail PPP Contract is awarded or signed between apublic entity (referred to as publicauthority) and a private company Design,construction,operation,maintenance of specific material assets(conventional rail system (including highspeed rail) or any sub-system (track,signaling, rolling stock, etc.) excludinglight rail, metro, people moversKeyFeaturesLong-termSubstantial RiskArangementTransferPublic on Private sector finances the assetincluding debt and equity, but may receiveinitial subsidies or ongoing fees from thepublic authority over the asset’s lifetime Risk sharing although private sectorbears risks of construction, financing,operation and maintenance costs, but mayor may not bear risks related tocommercial revenues.8

Rail PPPs need high DirectFunding –National or EU grants (“blending”)Positive Externalities of Railways and Long payback periods and long lifetimes!Typically 40-60 yearsTrack Access ChargesContrary to the road sector, infrastructureuser charges are systematic in the railsectorMay be differentiated by market segment,where the charge is topped up with markups “that the market can bear”May include a scarcity / congestion chargeMay be used for additional price signals(e.g. noise, ETCS)Regulation under EU law(2001/14/EC)Non-discriminatoryRelated to wear-and-tearDistance-based andtonnage-basedBase level is the “costdirectly incurred” ( short-run marginal cost)9

PPP Types in Rail SectorMost rail PPPs are of the DBFM type, Design-Build-FinanceMaintainAvailability based payment; traffic risks borne by public sector; thePublic sector receives revenue from the track access charges; remunerationbased on making the capacity available, plus other selected quality goalsA minority are Build-Operate-Transfer (BOT-Types)Traffic risk borne by the private partner who obtains the revenue fromtrack access charges plus (possibly) some quality goals, includingavailabilityExperience: Tours-Bordeaux (HSL SEA) and Stockholm-ArlandaFor high-speed, quite often state co-funding around 40%-60% of investment costs10

Areas for Rail PPPInfrastructureFreight linesMetro linesHigh speed linesTerminalsMulti modal logistic parksProduction unitsOperationsContainer trainsPassenger high end servicesTerminal operationsServicesHospitality & tourismCateringPreservation of heritageAll on board servicesSource: www.db.de11

er/FreighthandlingTrack/ systemconstructionCriticallyHighPPP model via anAnalysis of ApplicationSystemoperation &maintenanceMaterialSupplyLowFoodservicePublic SectorService ProviderPrivate Sector12

Typical Rail PPP DriversJustified if more cost-effective and/or faster/better delivery at same costVfMApplied in many countries (PPP comparator, VfManalysis)Not known with certainty (it is a counter-factualanalysis)EfficiencyGainsTypically expected to be positive (if not very large)May be outweighed by higher contracting andfinancing costsPoliticalPressurefrom TopAlways a risk of fitting the analysis around the desiredresultA rational 2nd best choice when under a tight fiscalconstraint13

Allocation of the RiskPublicSharedPrivateProject ManagementDesignAdminstrative permitsConstructionRisk of soilOperation/ MaintenanceLand AcquisitionQuality and ServiceCommercial/ traffic riskInfrastructure renewalTechnological evolutionChange in LawUnforseen ChangesLitigation risk against contract14

Key Drivers for Rail PPPsChanging EnvironmentHigher economic growth in AsiaPopulation growthNeed for Private CapitalReducing Government financialsupportNeed for growth in infrastructureHigher urbanisationEnvironment issuesNeed for Efficiency & CostsInterest of private investors/ StrategicInvestorsNeed for Quality & InnovationReducing costs of labour and O&MGrowing customer expectationsBetter Asset utilizationNew technology and modernizationSafety and reliabilityProviding seamless logistic solutionsReducing time and cost overrun15

Two Schemes forRailways in FranceTrain pathTrain operatingcompaniesTrain operatingcompaniesInfrastructure TollsGrant andavailability paymentSPVGrantConcessionaireOperatingDesign, Build, Maintenance, RenewalRemuneration based on performanceand availability (reliability, regularity,etc. )DBFM (Contrat de Partenariat)Remuneration based on level traffic/revenue and on performance andavailability (reliability, regularity, etc. )BOT (Concession)16

AdvantagesRespect of delays and costs : Project on time and on budget;lump sum contractBundling of asset construction and operation ;Life cycle cost (LCC) optimizationRisk allocationPerformance basedBrownfield risk : extension of existing network17

DisdvantagesFinancial costs (mainly after financial crisis) club deal vs syndicationliquidity issues : limited final takerising of commercial bank margins andfees (project finance debt from 70 bpsto 250 bps and more)Reduction in number of financial institutions active in the marketShorter maturities of bank lending :from 35 years to 10-15 years, notcovering entire project life (except public banks)Transaction costsWidening gap between the “private” WACC and the cost of public debtComplexity of interfaces with the existing network (connections, systems)18

Difficulties in Rail PPPsIn other sectors PPP project:implementation gives control to private concessionaireover design, construction, maintenance, operation &revenue collectionReasonable control over business with non‐competingfacilitiesFacilities are generally standaloneIn Railways , rail connectivity is a part of the network with trainoperation being a network activity. By policy IR is the only trainoperatorPrivate Operation on IR network not permissibleMaintenance on passenger intensive lines generally notgiven to concessionaire on safety issuesTariff freedom cannot be givenCompeting facilities can enhance traffic riskShortage of rolling stock or congestion on IR networkwill impact project viabilityABAB19

Thank you for yourAttentionDr. Azadeh Kopp-MoiniManaging DirectorXS-Axis Consulting GmbHKaiser-Friedrich Promenade 9361348 Bad HomburgGermanyt: 49 6081 9299977m: 49 1523 4135686http: www.xs-axisconsulting.dee: akopp@xs-axisconsulting.de20

Overview of Rail PPPs Source: PPPs in the rail sector - A review of 27 projects, Julien Dehornoy, SNCF French National Railways, April 2012 7 PPPs Airport Links 9 PPPs High Speed Lines 4 PPPs Equipment & Rolling Stock 7 PPPs Conventional Lines Construction & Operation of Infr