fitch high speed rail projects apr2010

8/8/2019 Fitch High Speed Rail Projects Apr2010

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Agenda

Introduction: Few Projects, Many Concerns

Politics, Policy, Legal Framework

Complexity

Demand

Conclusion



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Very Few PPP Rail Projects: Alleged Reasons

> Few new rail lines in general – EU15 in 2004 vs 1970; rail lines = 10% less, motorways: 350% more

> PPP not necessary adequate for rail?

– Existing structures do a good jobs

– Players are by nature monopolistic

– Rail is loss making

– Rail is integrated

> None of these reasons prevent from implementing PPPs> But they influence the risks matrix




Is PPP Not Successful for Rail?

> Most projects posted difficulties indeed: – Eurotunnel operated on the verge of bankruptcy for years

– Taiwan High Speed Rail co. : opened 1 year delay, traffic < forecast

– HSL Zuid: delay in operational commencement, ETCS issues

– CTRL (HS1): PPP route abandoned; demand over-estimated

– …

– … not a fatality, but a function of risk analysis and risk allocation




Key Risks Groups Observed by Fitch

> Politics, policy, legal framework> Complexity

> Demand (not in all projects, but critical if present)

> Echoes many of the conclusions of Fitch’s report on largeinfrastructure projects (‘large projects, giant risks?’, May 2009)




Politics, Policy, Framework

> Track record of applicable legislation – PPP legislation + rail regulatory framework

> Essentiality of the project

– Measured eg by expected socio-economic return

> Political commitment for the project

– Consensus among ruling parties, public acceptance, long-termfinancial commitments

> Lengthy decision process – May cause changes in scope, adverse development vs starting

hypotheses




Complexity

> Lengthy decision process – Increased completion risk

– Higher potential impact (cost escalation)

– “conditioning” phase (land acquisition, diversion of utilities,

mitigation etc)

– Demand can change in the during gestation process (eg low costairlines did not exist when Eurotunnel was decided)

> Capital intensity

> Technical intensity

> Interfaces

> Scope of PPP




Capital Intensity

> Size > EUR1bn – Requires large consortia; + difficult to align interests

– Reduces competition for EPC contractors

– Risk of contractor exposed to subcontractors: real back-to-back?

> Cost – Approx 2x + expensive than road per km

– Rail projects are 3x bigger on average

> Long completion phase

– Escalation costs risk

– Deviation of scope

– Cost overruns: +45% on average (Flyvbjerg). But includes non-PPP projects

and refers to deviation to initial estimate (not at financial close)




Technical Intensity

> Low gradients of routes – More structures, notably tunnels

– Increase geological risk

> Lower error margin allowed in civil works

– High speed requires very stable geometry

– Safety requirements (more similar to airports)

> Variety of high tech systems

– Tracks, signalling, telecom, power supply

> Safety (beware of upgrade cost allocation)

> Industry concentration (only a few players)




Interfaces

> Project vs wider system – Functional

> EU encourages separation infra / service

> Rail infra not in direct contact with end-users

– Network> Position of project in rail network (independent,…, highly dependent)

> Upstream and downstream capacity is critical

> Within project

– Ground/train: track and catenary – Electromagnetic interference

> Design and condition of rolling stock is critical

– To be carefully mitigated in documentation if not in project’s scope




Scope of PPP

> Infra system + service (proprietary) – Isolated facilities (eg airport express links)

> Infra system + service (interoperable)

– eg CTRL-HS1 (Eurostar + others)

– eg Eurotunnel (Shuttle + trains)

> Full system, no service

– eg Perpignan Figueras

> Part of system – eg HSL Zuid




Scope of PPP (cont.)

> The broader the scope, the more numerous the risks> The narrower the scope, the more interaction with third parties

and the least control on interfaces

> Balance is difficult to asses, depends on actual experience and

expertise of project sponsors

> Scope also a driving factor for Revenue structure




Demand: Revenue Structure

> Rail specifics – Rail infra manager (RIM) has only a few clients; bargaining position

less favourable

– Charging structure may affect commercial choices of TOCs

– Variation of a few trains a day has major impact on RIM

> Infra + Rail Service

– Revenue function of pax number

– RIM has higher command of demand

> Track access charges

– Weaker control on demand

– Exposure to TOCs




Focus on Track Access Charges

> Several possible charging structures: – Booked capacity (~offtake agreement); Long-term agreement

allowed by EU directive (typically 5 yr); reduces risk and can be usedas security

– Actual throughput (pax, seats, weight/size of trains etc.) – Combination of capacity and % turnover of TOCs (similar to airports

sub-concessions)

> Credit considerations:

– High degree of tariff flexibility may partly offset traffic risk

– Visibility of network (contractual, regulatory)

– Volatility of charges (depends on width and variety of base)

– Existence of balancing mechanisms/re-openers




Demand Forecasts: Reliability

> Optimism bias – Overestimation in 9 out of 10 rail projects; toll roads: 5 out of 10

– Eurotunnel, CTRL-Eurostar UK, Arlanda-Express, Taiwan, Orlyval

> True for grantors…

– Public bodies: rail projects are “landmark” projects, highly visible andassociated to modern and environment-friendly: policy makers mayinflate business cases

> …and for private bidders

– Lower request for public grants is often an overarching criterion intenders

– Traffic risk (when included in project scope) is a convenient variableto inflate in order to reach better-looking base cases andaccommodate for lower upfront grants




Demand Forecasts: Technical Difficulties

> Estimate of demand for transport in a corridor is in essenceidentical for all modes

> Rail traffic is a complex function of

– Competitiveness of other modes (journey time is paramount, cost,

comfort, safety) – Each type of link (HSL, conventional rail, airport link, freight) has

different modelling

– Rail is usually longer distance than road: Demand on one stretch

depends on upstream and downstream capacity/offering/economics – Pricing policy (of the infra, but more importantly of TOCs, which can

be outside of the RIM’s control)




Demand Forecasts: Technical Difficulties (cont.)

> Long gestation process – Environment may change between initial forecast and

commencement date (eg Eurotunnel and low cost airlines)

> Few TOCs (no pure and perfect competition)

– behaviours of economic agents difficult to anticipate

> End-users are not the Infra’s direct customer

– Similar to airports

> Price elasticity likely to be higher for rail than for road – TACs represent 30% of train ticket on French TGVs vs ~10% for

motorway journey and flight ticket

> Strong informational advantage for TOCs vs RIM




Demand Forecasts: Long-Term Trends

> Competitive advantage to other modes is quite strong – Speed (notably HSL) and door-to-door journey time (for 300km – 700km)

– Comfort (eg wifi in train: enhances attractiveness to business travellers)

– Safety

– Reliability> Actual growth of recently opened lines is impressive

– In all countries, HSL boosts train usage (but not always as much as

expected)

> Externalities better reflected – Climate awareness and air pollution

– Land use (rail infra transports 45x more pax than road for same land use)




Conclusions

> Rail projects may entail more risks than average infrastructure> Political sensitiveness a source of both support and threat for

projects

– Beware of non-established frameworks

> Complexity usually well managed by strong players

– Geology and structures more critical

– Interfaces to be monitored

> Demand more difficult to assess than for road and air travel – Network effects make it more complex to assess and difficult to control

– Flexibility/Visibility on charging mechanisms key to offset demand risk



Fitch Ratings

www.fitchratings.com

New York

One State Street PlazaNew York, NY 10004+1 212 908 0500+1 800 75 FITCH

Fitch Group Fitch Ratings Fitch Solutions Algorithmics

London

101 Finsbury PavementLondonEC2A 1RS44 20 7417 4222

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