ME Railway Development & PPP Financing Framework

4th Annual ME Rail Opportunities – Riyadh – 5/5/2013

Loay Ghazaleh – Advisor, Undersecretary office

Ministry of Works - Bahrain

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1. Regional Railway Policies & Projects Review

2. Global Railway Industry Overview

3. Railway Planning & Technical Studies

4. Railway Technical Parameters

5. Common Railway PPP Concession Types

6. Payment Models in Railways Concessions

7. Railway PPP FEED Model

8. Railway Franchises (UK)

9. Railway PPP Tendering & Bids Evaluation

10. Final Notes on Railway PPP Concessions

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COMMON TRANSPORT POLICY OBJECTIVES

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Integrate land use with transport policy

Adopt Consistent legislation and regulations

Support green sustainable transport, improve air quality, reduce Noise

Increase public transport options and access, reduce severance

Safeguard public safety and transport security.

Improve transport efficiency and encourage competition (Value for money)

Support businesses and create employment opportunities

Implement cross-border integration & interoperability

Connect People & move Goods for economic development and regeneration

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TO BRING A SHIFT TO GREEN TRANSPORTATION

• Appropriate regulations like clean fuel quality standards are

essential to green transport that need to be socially and politically

acceptable.

• Transportation demand management practices to reduce vehicle

trips by increasing vehicle occupancy, reducing vehicle distances

travelled and institutionalize public transit as essential.

Rail transport has comparative advantage over road transport for bulky not time-sensitive goods (Cement, fertilizers, grains, oil products, ores) and container goods, especially when transported on point-to-point routes.

Comparative advantage is assessed in terms of reliability, safety, freight traceability, speed, punctuality, frequency, safety, and comfort for passengers.

There is a real environmental advantage brought about by energy efficiency of diesel or electric traction. Railroad’s carbon footprint could be respectively 65% and 85% lower than that for highway

TERRAPINN – ME RAIL 2013 REPORT

NORTH GCC CROSS BORDER RAILWAY LINKAGES

SAUDI ARABIA RAILWAY MAP

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GCC RAIL NETWORK MAP & NATIONAL RAILS

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QATAR WORLD CUP TRANSIENT TRANSPORT MAP

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GCC RAIL NETWORK MAP

GCC RAILWAY TIMELINE & COSTS Feasibility study endorsed by GCC 30th Summit on December 2009.

Project is economically and financially feasible.

GCC Member States (MS) are well advanced in developing the Detailed Engineering Designs expected to be completed by 2012. (Kuwait to Muscat with a proposed link between Saudi Arabia and Bahrain while extension to Yemen is scheduled for stage II expansion).

Construction is expected to commence by GCC Member States (MS) about 2013/2014 and completed by about 2017.

Total length estimated 2177 km single track mix use – passenger and freight transport.

Total capital cost estimated: US$ 15.5 billion (passenger 200 km / hr. – Diesel Traction)

US$ 25.6 billion ( high speed passenger 350 km / hr. – Electric Traction)

GCC MS formed a Steering Committee - SG Transport Department PMU - to oversee the Implementation of the GCC Railway (focal point). A “GCC Railway Authority” is expected to be formed.

GCC MS Governments pay infrastructure capital costs based on railway length in each MS (Capital & Rolling Stock Cost Sharing).

Concession of Operations & Maintenance to Private Sector

Agreement with World Bank for continued Advisory Service.

Cost of Extension National Lines (member state beneficiary pays).

GCC RAILWAY ESTIMATED EXPENDITURES

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CHALLENGES FOR NATIONAL / REGIONAL RAILWAY PPP Cross Border Technical Issues

Cross Boarders Linkage Points Alignment & Optimized Design. Use of Common Standards and Specifications - open & interoperable standards &

Specification Harmonization Regional Logistics / Use Integration of the Railway Network. Scheduled Design & Construction – Packaging and Implementations - Interface

Management

Standardized Means of Procurement

Packaging for Design, Construction, Operation & Maintenance - Finding the Balance (Large number of smaller contracts or smaller number of larger contracts)

Bidding Documents including PPP Concession Type (specifications to be commercially non-discriminatory that support competitive market, interchangeability & commonality of parts)

Clear procurement guidelines for Technical, Legal & Financial Advisors. Value for Money Bids Assessment for Contractors & Operators that enforce

security of supply and guard against obsolescence while realizing the socio-economic benefit.

Stream line the decision making process

Enabling PPP Environment - Private Sector Participation

Adequate Legal, Economic & Safety Institutional and Regulatory Framework adopting International best practices.

Institutional Capacity Building and Efficient Cross Coordination Strong local financial markets.

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POLICIES CONTEXT FOR RAILWAY PPP MODEL

Land Use Policy; Encourage transit oriented developments

Facilitate accessibility and acquisition for railways corridors.

Transport Policy; Measures to abate congestion, pollution, economic inefficiency

Imposing parking charges, tolls and fuel levies on road transport.

Making cross subsidies to railway to enhance affordability

Adopting whole transport system ‘mindset’ [ road-marine-rail – airport ]

Build Governance Capacity; Accurate budgets forecasts, increase predictability of cost & delivery

Value for money bids evaluations, optimal risk transfer

Cash flow management and local financing

Cross-border & local government management issues and flexibility for change

Government’s Financial Liability / Commitment Cost of Planned Railway (Capital & Rolling Stock and Government

Subsidy)

Cost of Building Extension Lines and other modal transport systems.

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CROSS BORDER COUNTRY REGULATION

Purpose and Form of Regulation

To influence behavior or to mandate requirements in order to achieve outcomes that would not be achieved by the railways acting in their rational interests considering mode of operation, railway market structure, and the economics of different railway markets

Price Regulation

Freight prices – need to regulated through strong competition with other modes

Passenger fares – Some countries may wish to regulate fares for social and environmental reasons

Access Regulation

Under collaborative model of service provision, no need for access rules imposed by regulator

Under open access competition model, access rules required considering „the access charge problem‟

Safety and Standards Regulation

Process based approach or rules based approach are two approaches to safety regulation

Key standards for interoperability need to be defined

KEY ISSUES FOR CROSS BORDER RAILWAY SERVICES

• Minimum needed to ensure interoperability and interfaces control including line side indications and equipment

Technical Specifications for Interoperability

• Customs and immigration checks at origin and/or destination and reporting

Origin-Destination Customs &

Immigration

• Regional railway services and control - control center, real-time information

• Common operating rules and performance

Regional Operations

• Regulatory framework

• Regional Railway Authority creation

Institutional and Regulatory Issues

POSSIBLE REGIONAL RAILWAY MODES OF OPERATION

Single Operator

Model

•Operate regional services along the cross border mainline

•Can be vertically integrated or would obtain access from single infrastructure regional manager or national railway companies

Open Access Competitive (EU Model)

•Each country rail operator has rights of access to all other railways in other countries subject to payment of access charge and available capacity.( access charge issues)

•Requires common rules relating to unfair State subsidies and competition

•Coordination more difficult, long supply lines

•Volume of goods and passengers in early years may not be sufficient to support meaningful competition.

Collaborative Model

•Regional services provided through collaboration between different railways

•Bilateral agreements for providing services, traction, rolling stock and train crew

•Revenue sharing system, example joint determination of services (Particularly passenger)

•Possible cooperation on product development, sales and marketing, timetable development, passenger fares structure and ticketing arrangements, etc.

•Possible closer forms of cooperation, e.g. pooling of rolling stock / other resources or even joint venture

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GLOBAL RAILWAY OWNERSHIP - SECTORIAL POLICIES

The earlier organizational models used in the rail sector were based on: integrated companies, either intra-modal monopolies or in competition with other rail companies on neighboring routes, with or without network access to third-party operators.

Since the 1980s, there has been an increasing trend particularly true in Europe (mandated by the EU) to split up companies owning the rolling stock and those owning the infrastructure (the tracks, signaling, tunnels, bridges, stations and depots).

This separation of rail infrastructure and rolling stock (Western Europe); or total unbundling of functions (United Kingdom) has allowed open access to the tracks by any train operator to any portion of the railway network that meets safety requirements (Franchise system or time-limited contracts), however,

The separation benefit was not fully utilized due to the lower levels of traffic , smaller sizes of companies and the high coordination costs involved.

This separation did not receive unanimous global support. In the United States, virtually all rail networks and infrastructure outside the Northeast Corridor are privately owned by freight lines. Union Pacific in US owns and operates both their rolling stock and infrastructure. Passenger lines, primarily Amtrak, operate as tenants on the freight lines.

In Bundled ownership or shared operation system, operations must be closely synchronized and coordinated between freight and passenger railroads.

Both ownership systems as a result require interoperability regulation including harmonized standards for rail track and vehicles / rolling stock. Thus the question is often not raised in terms of equitable access to the market, but simply in technical terms.

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RAILWAY PROJECTS REVENUES, SUBSIDES & FINANCING

The main source of income for railway companies comes from ticket revenue and advertisement for passenger transport and shipment fees for cargo (Freight revenue may be sold per container slot or for a whole train).

From an economic perspective, it is also not an absolute necessity to fully cover the costs of a railway system from revenues. As private passenger services lost significant ground in competition to the automobile and airplane, Government opted to make up for loses by giving direct subsidies to the state-owned rail operation.

When operations have been privatized where the infrastructure is owned by a government agency, the Government can choose to provide the tracks free of charge, or for a fee that does not cover all costs.

Other option the Government can do is to become stockholders with a cash entrance or by relinquishing locomotives and rolling stock as in Amtrak (US) or Canada's Via Rail.

The macroeconomic risk in railway stems from the prevalence of fixed costs, therefore, lack of flexibility in case of economic turnaround, as well as the fact that income is denominated in local currencies.

Railway financing can take the form of corporate finance, project finance (concessions type) or asset and title finance (rolling stock) while other forms of leasing mechanisms are also available. 21

FINANCING STRUCTURES IN RAILWAY – CREDIT RISK CLASSIFICATION

Lenders often taking a mixture of asset risk, project risk, and corporate risk

Corporate Finance (balance sheet lending) - One in which there is neither a specific asset nor a specific stream of income on which the credit decision is based, but rather lenders are relying on the general financial position of the borrower.

Project Finance (classical concessions) - A long term financing based on the project cash flow rather than the balance sheets of project sponsors.

The income generated by the project is a key factor in the lenders’ credit decision. Project financing structure involves a number of equity investors, known as sponsors, as well as syndicate of banks / lending institutions (Investment / Development Banks, Infrastructure Funds). Lead Arrangers / Underwriters provide primary debt funding.

The loans can be non-recourse or limited recourse loans by establishing a special purpose vehicle - SPV which owns project assets and income.

Asset Mortgage / Title & Lease Finance - Commonly used for financing of rolling stock where the future value of the rolling stock is a key factor in the lenders’ credit risk. Most title financing arrangements involve the separation of legal ownership or title to an asset from the economic ownership of the asset (or the commercial risks and rewards that go with ownership such as the risk or reward of loss or gain in value of the asset).

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ASSET FINANCE EXPLORED - KEY ISSUES

Law Conflict – As in the law chosen for the loan agreement, the law applicable to the security (rolling stock), and the law in the place where the asset is at the time

Financier Liabilities – Like environmental liabilities as a result of taking / enforcing security over the asset, or as a result of its ownership as in a title finance arrangement.

Detention Rights of Third Parties on the Asset – Like what parties may be entitled to detain the asset and prevent its profitable use especially the right to detain rolling stock for safety or security reasons

Asset Maintenance – Preservation of loan to value ratio of the asset is important to the lenders and will want to be sure that the asset is properly maintained and funds are set aside for this purpose throughout the loan tenure.

Insurance – the lenders will want to be satisfied that the insurance of the asset including liabilities to third parties arising in respect of the use of the asset are met.

Insolvency Impact – this relates to risks that restrict enforcement of security on the asset or void guarantees as a result of insolvency proceedings.

Registration – The place where the asset and any security on it need to be registered and what are the consequences of non-registration;

Ability to Sell the Asset Free of Liens and Other Interests – Like will sale has to be done thru a court or can be done by simple enforcement. 23

Service

Quality &

Revenue

Operating

Infrastructure

Costs

Operating Plan

& Capacity

Analysis

Broad

Objectives

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RAILWAY PPP IMPLEMENTATION CYCLE

CIVIL & TRACK • Rail Trail Alignment

• Special Track work

• Utilities

• Roadways/Grading

• Guide way Design

• Track Drainage

• Mechanical

• Signalized At-Grade Crossings

• Safety and Environmental Considerations

• Infrastructure

• Unique Forces

• Derailment Load

• Acceleration & Braking

SYSTEMS & RAIL CARS • Traction Power

• Overhead Contact System

• Communications

• Signaling

• Train Control

• Fare Collection System

• Control centers

• Systems Integration

• Communication

• Rail Car

• Locomotives

• Electronic Security (CCTV, Access Control, Intrusion Detection)

• Fire Protection

• Safety Certification

BRIDGES & STRUCTURES • Bridge Architecture &

Aesthetics

• Grade Separations

• Tunnel & Bridges Construction

• Tunnel design, ventilation, Fire Life Safety

• Rail Structure Interaction Analysis

• Mode of Vibration Frequency Criteria

• impact loading

• adequate rider comfort

STATIONS & FACILITIES • Ridership Forecasts

• Transit Development

• O & M Yards/Depots

• Support Facilities

• Parking facilities

• Entry /Pavilions

• Pedestrian Bridges

• Architecture

• Structural Design

• Pedestrian Amenities

• Landscape

• Visual/Aesthetic

• Signage

• Life/Safety

• Accessibility

• Safety/Security

EXAMPLE; DEVELOPMENT OF HIGH SPEED RAIL PROJECT

RAILWAY TECHNICAL STUDIES

Technical studies for railway projects are done a head of time, its early public release allows solid base for public discussion and successful future bidding translated into;

More time for bids

Correcting any asymmetric information

Contribute to transparency and increase tender attractiveness

Technical studies aim to achieve;

Strategic decision support

Project optimization

Environment approval

Financial analysis support

Better cost & revenue estimates

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REGULATORY AUTHORITY’S ROLE

Importance of regulatory authority’s competence often underestimated or misunderstood. Regulatory authority need to have professionalism, technical and legal competence, resources and ability to do its job

Sound and durable regulatory system is a major protective regime for:

Infrastructure manager

Infrastructure users

Final customers

Taxpayers

Government

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EXAMPLE; POSSIBLE ROLES OF A GCC RAILWAY AUTHORITY

• Development of technical standards for interoperability

• Consistent national approaches to safety regulation

• Common safety methods and targets

• Adoption of common operating procedures

• Spread best practices, Promote railways

• Common conditions of carriage for all GCC regional traffic based on COTIF services

Facilitate / Coordinate /

Promote

• Report to GCC Member States on development of national railways in accordance with agreed interoperable standards and against agreed timescales

• Publish reports on the performance of GCC railways

Monitor / Report • Work with the national railways to develop likely future capacity requirements for regional services so that national railway plans can reflect this

• Appeal function/arbitration role in the event that two or more railways can’t agree on the provision of regional services

Other Functions

BIDS TECHNICAL PARAMETERS - OUTPUTS FOCUSED

1. User Service - Fares, Journey Time, Availability, Reliability, Comfort, Safety

2. Planning

Planning / Layout / Corridors / Stations Traffic type Passage / Freight points Systems integration

3. Infrastructure Design

4. System Safety and Security Requirements

5. Technology & Operations

External Interfaces Requirements - Interoperability and flexibility of usage between passenger & freight

Compatibility of different suppliers’ equipment (available in several languages)

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Recent approaches to use FEED (Front End Engineering and

Design – pre-construction services) for turnkey delivery, has

proven successful (very similar to oil & Gas)

1. USER SERVICE - OPERATIONS & MARKETING FOCUS

Market segmentation - understand the railway market with focus on customer benefits like;

Integrated scheduling and ticketing Operational flexibility Real time information Single seat journey

Focus on ‘whole journey’ and ‘experience’; Stations need to be;

Attractive meeting places Natural towards surrounding land uses With multiple entry points and moving walkways

Build Image and Marketing

Signage and branding Address perception issues Continuously monitor and develop products

Focus on User Service (Fares, Travel Time, Reliability of Service, Comfort, Convenience and safety)

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RAIL CARS & PASSENGER COMFORT

Double glazed and tinted windows,

Improved car body

insulation

Comfortable , adjustable

seating

Toilets Adaption for

Local Costumes

Bed / private rooms Option

2. Planning

Route location , Service Planning and Systems Integration

Revenue & Demand Forecasting - Business Case & Marketing

Health, Safety & Environment Assessment

Operational Assessment , Capacity & Interface Management

Station Access Planning & Transport Architecture

3. Infrastructure Design

Track design - Noise , Vibration & Ventilation

Bridges ,Tunnels – Geo-technical , Utilities Diversions

Service Stations , Depots , Freight terminals , Control Centers

Stabling , Fueling & Maintenance Facilities

4. Systems , Safety & Reliability

Reliability, Availability, Maintainability, And Safety (RAMS)

Signaling & Communications (e.g. ERTMS standard)

Control & Data Systems Engineering & Assurance

Risk assessment

5. Technology & Operations

Appropriate Transport Mode Technology

Traction , Vehicle / Rolling Stock Styling & Design

Vehicles & Facilities Operating Costs (Diesel or Electric)

Structural Crashworthiness of Passenger Rail Vehicles

Electrifications & Plants (Energy Feeding Systems)

Wheel-Rail Interfaces, Control-Command

Traction , Vehicle / Rolling Stock Dynamics Simulation

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MULTI DISCIPLINARY RAILWAY PROJECTS

Civil/

Structural

Track

Architecture/Urban Design

Rolling Stock /

Vehicles

Signaling System

Automatic Controls

Safety/

Security

Testing/

Commissioning

• Rail projects are complex that require large, multi-disciplinary

team of designers, contractors and manufacturers with high degree

of coordination and integration to ensure safety certification prior

to revenue service

TECHNICAL STANDARDIZATION At shared interfaces,

Standardize everything necessary to meet the essential requirements like safety, healthy, availability, reliability, environmental protection and especially technical compatibility.

Elsewhere

Standardize those which is necessary to ensure mutual recognition of vehicle authorization and Safety Management Systems

And where market opening for common components adds value

Everything else – Beware!

Too much standardization (e.g. couplings, design technical solutions) inhibits innovation and market entry.

Interchangeability of vehicles and components

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EXAMPLES – AGREED GCC INTEROPERABLE SPECIFICATIONS

Mandatory Parameter Specification

Track gauge Standard 1435 mm

Structural clearance

Allowance for double stack

containers plus catenary to

cater for future

electrification

Axle load 32.4 tons

Passenger train speed 200 km/h

Freight train speed 80-120 km/h

Signaling system ETCS level 2

Max. train length Freight: 2,000m

Passing loop length Minimum: 2,500m

Level crossings None on mainline

MODAL TRAFFIC MANAGEMENT SYSTEMS Road (Intelligent Transport Systems – ITS); EASYWAY – Europe-

wide ITS deployment on main trans-European road network corridors. Advantages near 15% reduction of congestion, less fatalities and less co2 emissions.

Cross Border Rail (European Rail Traffic Management System – ERTMS). ERTMS aims at creating cross-border rail traffic that enables speeds higher than 200 km/

Rail

ETCS ; European Train Control System

Speed limits are transmitted from track to train

Driver response is monitored continuously

On-board computer stops train if speed limit exceeded

GSM-R; A radio system similar to GSM (but with specific frequencies for voice and data exchange between the driver and central control

Aviation (Air Traffic Management – ATM); SESAR (Single European Sky ATM Research) Development Phase

Inland waterways (River Information Services – RIS)

Maritime (Vessel Traffic Management and Information Services – VTMIS)

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55%

10%

10%

5%

8%

10%

2% Construction

Contracting

Right of Way

Acquisitions

Rail Car Procurement

Systems ( signalling

& Communication)

Consultants /

Professional Services

GENERAL COST DISTRIBUTION FOR RAIL PROJECTS

Rail capital projects delivered under traditional EPC approaches typically result in the following cost profile

• Almost one-half (45%) typically goes to non-construction

contracting and “soft costs” (professional services and project

management). PPP & FEED models delivery results in improved

cost utilization.

GENERAL TURNKEY COST DISTRIBUTION FOR RAILWAYS

5%

11%

2%

12%

2%

22%

11% 8%

18%

2%

32%

49%

14% 12%

Line Construction Station Construction

Fare Collection System Train Control

Communication Traction Power / Rolling Stock

Mechanical & Electrical Vertical Transport / Elevators

Track work Architectural

Structural Civil / Site Work

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SYSTEMS PACKAGES IN RAIL WAY

Operations Control Centers

Network Traffic Management

Integrated Railway Operation

Signaling Control

Communication

Modes – Radio, Tetra, GSM-R

Multi modal Systems Communication

Transmission

Passenger Services

Passenger information & Comfort

Video Surveillance & Security

Fare Collection System

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SERVICE YARDS / STATIONS

INTEROPERABILITY (TRACK GAUGES)

Track gauge is a technical term used in railways to define the spacing of the rails in an individual railway track.

It is the dominant parameter determining interoperability.

Broad gauge

Brunel 2,140 mm (7 ft. 1⁄4 in)

Indian 1,676 mm (5 ft. 6 in)

Iberian 1,668 mm (5 ft. 5 2⁄3 in)

Irish 1,600 mm (5 ft. 3 in)

Russian

1,520 mm (4 ft. 11 5⁄6 in)

Standard gauge (Stephenson)

standard 1,435 mm (4 ft. 8 1⁄2 in)

Medium gauge

Scotch 1,372 mm (4 ft. 6 in)

Cape 1,067 mm (3 ft. 6 in)

Meter 1,000 mm (3 ft. 3 3⁄8 in)

Narrow gauge

Three foot 914 mm (3 ft.)

Swedish

three foot 891 mm (2 ft. 11 1⁄10 in)

Imperial 762 mm (2 ft. 6 in)

Bosnian 760 mm (2 ft. 5 15⁄16 in)

Minimum gauge

Fifteen inch 381 mm (15 in)

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TRACK GAUGES MAP

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RAIL PLANNING - RAILWAY NETWORKS CHARACTERISTICS

Metro / Mass Transit / Light rail / Monorail /Guided buses

Max. Design Speed 80 km

Service Headway (min)

Peak 2 min

Off-peak 10

No. of City Passenger Stations 100 +

No. of City Major Interchange Stations 15 +

High Speed Passenger Rail

Design Speed (Alignment, Track and Structures) 350 km/h

No. of City Stations (desired long stations spacing) 5-

Journey Time (desired target) Optimal

Passenger Railways / Heavy rail / Suburban

Max. Design Speed (Alignment, Track and Structures) 250 km/h

No. of City Stations (desired few) 10-

Journey Time (desired target) Optimal

Freight Railways (Heavy haul freight)

Design Speed 120 km/h

Freight Terminals Custom

Slab Track Axle Load 25 t

Max. Train Length 3,000 m

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DIESEL VERSUS ELECTRIC LOCOMOTIVES

Lines with low traffic frequency (mostly long-distance lines) are not feasible for electrification as the lower running cost of electrified trains may be overcome by the higher costs of grids & maintenance.

Electric locomotives are constructed with greater power output than most diesel locomotives, thus, almost all high speed trains are electric.

The high power of electric locomotives gives them the ability to pull freight at higher speed over gradients; in mixed traffic conditions this increases capacity when the time between trains can be decreased.

Electric trains are more energy-efficient than diesel-powered trains. If powered by low-carbon generating stations, an electric train can produce a lower carbon footprint.

Electric trains regenerative braking allows the power to be returned to the electrification system so that it may be used by other trains on the same system or returned to the general power grid. This is especially useful in mountainous areas where heavily loaded trains descend long grades.

Central station electricity can be generated with higher efficiency than a mobile engine/generator in Diesel-Electric locomotives. Energy sources such as nuclear power, renewable hydroelectricity, or wind power can be used at stations.

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TYPICAL USA DIESEL - ELECTRIC LOCOMOTIVE

EU LOCOMOTIVE TAG

EXPECTED SERVICE LIFE - ROLLING STOCK (YEARS)

Service Life of rolling stock depends on the speed characteristics of the material used and the service assigned to it while interiors in most cases may need servicing before the end of service life.

Type of Vehicle Top Speed Years

Freight Wagons for Conventional

Lines

Speed Under 100Km/h 40

Freight Wagons for Conventional &

High Speed Lines

Speed Over 100Km/h 30

Passenger Cars For Long Distance &

Regional Services

Speed Over 120Km/h 25

Passenger Cars For Suburban &

Metropolitan Services

Speed Under 120Km/h 15

Motor Train Unit Speed Under 120Km/h 15-25

Locomotives for Services In

Conventional Lines

Speed Under 200Km/h 25

Locomotives for Services In High

Speed Lines

Speed Over 200Km/h 20

Cars for High Speed Lines Speed Over 250Km/h 15

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EXPECTED SERVICE LIFE - TRACK SUPERSTRUCTURE COMPONENTS (LOAD & YEARS)

Track usually consists of steel rails installed on sleepers (UK) / ties (US) and ballast, on which the rolling stock moves. A slab track where the rails are fastened to a concrete foundation resting on a prepared subsurface are also possible

Sleepers or Ties are used to facilitate drainage of water, to bear the load from the railroad ties, and also to keep down vegetation that might interfere with the track structure.

Continuous welded rail is generally used to reduce track vibrations and misalignment.

Service life of track superstructure components depends largely on the volume of traffic sustained and speed. The shortest component is the ballast which requires renovation without changing the rails or sleepers.

Component

Expected Life

in Million

Gross Tons

Expected Life in

Years for Traffic

35,000 t/day

Rail in Ballasted Track 500 40

Concrete Sleepers 500 40

Ballast (shortest Life) 250 20

Safety Facilities N/A 10 – 50

Electrification Facilities

( Distribution & Substations)

N/A

10 - 50

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EXPECTED SERVICE LIFE – INFRASTRUCTURE (LOAD & YEARS)

Type Of Infrastructure Infrastructure

Element Years

Earth Works

Small embankments in

soft ground 50

Large embankments in

stable ground 100

Tunnels, Bridges & Other

Works

Drainage Works 80 – 100

Large works ( tunnels,

viaducts) 80 – 100

Access Facilities &

Stations

Structural elements

(façade, drainage

structures, etc.)

10 - 50

Elements of habitability 2 – 10

Aesthetic elements 1 - 5

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ARCHITECTURE OF THE EUROPEAN RAIL STANDARDS

UNIFE, the association of the European rail manufacturing industry and European Rail Agency (ERA), are the main contributors to building and maintaining the European system of regulations and standards

EU standards are freely available in the public domain

Technical Specifications for Interoperability (TSI) and other railway regulations are downloadable from the ERA website -www.era.europa.eu

EN standards Information avalable on - www.cen.eu, www.cenelec.eu

The European standardization system (UIC, CEN, CENELEC, UNIFE, ERA, ECC, etc.) which is being further enhanced through various MoU’s, is generally open, flexible, whilst ensuring safety and interoperability and can be used both in the case of dedicated High Speed lines or mixed traffic situation.

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COOPERATION / MOU’S AMONGST EUROPEAN RAIL STANDARDS ENTITIES

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1 NTA/HRS/018 Trains Standard (including Diesel, Electric, Diesel-electric, and bi-mode)

2 NTA/HRS/0025 Interface between Electric Trains and Surrounding Environment Standard

3 NTA/HRS/011 Railway Planning and Alignment Development Standard

4 NTA/HRS/012 Permanent Way Standard

5 NTA/HRS/014 UAE Structure Gauge Standard

6 NTA/HRS/019 Standard for Railways Civil Infrastructure (including Tunnels, viaduct and buildings)

7 NTA/HRS/013 Stations Standard

8 NTA/HRS/021 Depot, Marshaling (separating) Yards and Siding Standard

9 NTA/HRS/000 Interoperability

10 NTA/HRS/001 UAE Railway Standards Plan

11 NTA/HRS/002 Railways Standards Change Procedures

12 NTA/HRS/003 Non-Compliance with Railway Standards

13 NTA/HRS/004 Exemptions to Railway Standards

14 NTA/HRS/005 Railways Business Plan Standard

15 NTA/HRS/999 Requirements for a Standard

16 NTA/HRS/016 Signaling System Standard

17 NTA/HRS/017 Telecommunication System Standard

18 NTA/HRS/006 Railway Operations Standard

19 NTA/HRS/010 Approval of Opening of Railway System for Public use Standard

20 NTA/HRS/020 Standard for Operational & Train Control Rooms

21 NTA/HRS/023 Ticketing and Revenue Collection Standard

22 NTA/HRS/007 Railway Infrastructure Maintenance Standard

23 NTA/HRS/022 Infrastructure Protection Standard

24 NTA/HRS/026 Railway Environment Standard

25 NTA/HRS/029 Railway Fire Systems Standard

26 NTA/HRS/030 Railway Competency Standard

27 NTA/HRS/031 Security & Disaster Planning Standard

28 NTA/HRS/015 Electrification Systems Standard (including third rail and catenary)

29 NTA/HRS/027 Traction Power Systems and Connection to UAE National Grid Standard

30 NTA/HRS/028 Railway Mechanical and Electrical Systems Standard

31 NTA/HRS/024 Rail-Road-Marine Interface Standard

32 NTA/HRS/032 Design, Development and Operation of Freight Terminals‟

33 NTA/HRS/033 Handling and Carriage of Freight by Rail, including Dangerous Goods

34 NTA/HRS/01 Tram

35 NTA/HRS/02 Metro

36 NTA/HRS/03 Rail Guided System (GLT)

37 NTA/HRS/04 Personal Rapid Transit

38 NTA/HRS/05 Automated People Mover

39 NTA/HRS/06 Mono Rail

40 NTA/HRS/07 Funicular (cliff railway)

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In The 1990s, Design-Build was the “New Trend” for the rail

industry in the United States. Today, the rail industry as a

whole is moving forward with more and integrated

Alternative Project Delivery models worldwide and

increasing Level of Private Sector Responsibility and Risk.

PPP CHALLENGES IN TRANSPORT

National / regional strategic planning and setting priorities (scheduled delivery).

Land & transport policy issues, regulation and management at various levels of government

Public sector skills to deal with PPP complexity during procurement & contracts management.

Building pipeline & scoping projects (size/ability to finance)

Selecting the appropriate PPP concession type including forecasting demand and assessing users ability to pay for services

Incentives and fair market behavior; industry-wide codes and specifications

Availability of infrastructure funds, and guarantees for PPP.

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NOTES ON PPP BIDS STRUCTURING

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• Bidders should be free to optimize and innovate in areas that do not

compromise the strategic goals of the railway project.

• Different PPP & Financing strategies may encourage more or less

private sector investments.

• Passengers Traffic / Demand Forecast, rarely accepted by private

sector when affordable alternative transportation means are

available.

• Passengers Traffic / Demand Forecast, rarely accepted by private

sector when one or more of the following factors existed:

• Exclusivity to certain volumes

• Government guarantee for minimum traffic

• Government grants

• The shift to availability-based payment model is increasing (nearly

60% of all projects awarded since 2000)

BUILD–OPERATE–TRANSFER (BOT); BUILD–OWN–OPERATE–TRANSFER (BOOT) The specific characteristics of BOT / BOOT of being transferred to the

Public sector upon expiration of the concession period make both suitable for capital intensive infrastructure projects with technology component like highways, roads mass transit, railway transport and power generation.

BOOT & BOT are methods which find very extensive application in countries which desire ownership transfer and operations at the end of the contract mostly popular in upgrades, rehabilitations.

A BOOT structure differs from BOT in that the private entity owns the works while in BOT specific concession rights are granted. The project company bears the technical risk (during the construction and the maintenance), the operation risk, most of the commercial risk and financial risks in either type.

The fees / tolls / tickets are collected directly by the concessionaire or by the Government directly or indirectly through special tax, general fund, bonds, etc.

If the Government makes the collection, it pays shadow or availability payment to the concessionaire.

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BOO (BUILD–OWN–OPERATE) BTO (BUILD – TRANSFER - OPERATE)

BTO contracts are almost identical to BOT in terms of procedure and scope and are used when the physical life of the project and the financial arrangements coincides with the concession period with the Investor getting the benefits of any residual value of the project.

The difference is in BTO the title transfer from investors to state agencies happen upon completion of construction and before the project operation starts.

In both scheme, the concessionaire arrange for project finance. The government only agrees to purchase the services produced for a fixed length of time (usually availability based with deductions system for non availability of the services) or allows the investor to operate the project over a period of time so that the investor can recover both capital and earn reasonable profits.

In railway with assets life reaching nearly 40 years, special accounts need to be created to facilitate the assets transfer at the end of the concession.

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BLT (BUILD–LEASE–TRANSFER)

Under BLT a private entity finances and builds a complete project and leases it to the government. This way the operations control over the project is transferred from the project owner (shareholders) to a lessee (Government).

After the expiry of the leasing, the ownership of the asset and the operational responsibility are transferred to the government at a previously agreed price.

This framework is suitable for foreign investors to avoid both Government risk as the project company maintains the property rights and avoiding operational risk as the project is leased to the Government.

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DBFO (DESIGN–BUILD–FINANCE–OPERATE) DCMF (DESIGN–CONSTRUCT–MANAGE–FINANCE)

DBFO (Design–Build–Finance–Operate)

DBFO is very similar to BOOT except that there is no actual ownership transfer. The contractor assumes the risk of financing till the end of the contract period as in BOOT.

DCMF (Design–Construct–Manage–Finance)

In this framework, a private entity is contracted to design, built, manage, and finance a facility based on the specifications of the government.

Project cash flows result from the government’s payment for the rent of the facility in form of periodical payment (availability or shadow) or by direct payment from the users to the private entity.

The government has the advantage that it remains the owner of the facility / infrastructure and has the price and quality control.

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DBFOT (DESIGN–BUILD–FINANCE–OPERATE-TRANSFER) DBFOT combines both DBFO & BOOT with

ownership transfer. Most suited to railways.

Partial demand risk allocation to public partner through traffic bands (volume) including sharing of extra revenues. Unlike a full concession, the scope of services for the Private Sector can exclude ridership and demand risks or fare collection

Land acquisition/expropriation for service corridors, stations, etc. allocated to private partner (except public properties). The same applies to EIA / Archeological risks.

Penalties/incentives due to reliability of arriving times, cover demand in rush hours, accidents, safety, environment sustainability

Periodic availability & performance-based payments are made to private partner as milestones are met. The payments can come from different sources; Fare Box Revenue (collected by either), shadow or availability payments.

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AVAILABILITY CONCESSIONS MODEL Payments are not made by Public sponsor until facility is

operational (available). Incentives / penalties are made based on service quality, accidents and environment issues.

If facility or portion of facility is not available (i.e., a station or rail car, railway lane) deductions are made automatically as set in contract.

Performance is minority component of the pay structure – a facility can be available, but not or sub performing (e.g. passengers can not access station, landscaping not maintained to agreement).

Availability structure creates high quality revenue stream to the concessionaire without demand risk, thus allowing better access to capital markets.

Contract terms include detailed O&M provisions. If O&M are not met, availability payment deductions are made.

Promotes whole-life costing approach during design and construction

Encourages contract compliance, completion on time and better capital maintenance

Concessionaire is required to return the project in a “like new” condition at end of concession term (30-50+ years). Special fund can be set for this purpose.

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AVAILABILITY PAYMENT REGIME

Payment to the Private Sector =

+ Availability + Performance Payments

– Availability Deduction

– Performance Deduction

Payments based on availability / service quality

Reward a Concessionaire who makes the railway assets available with full line capacity for the whole operational day; and

Reward a Concessionaire who maintains in good condition other assets that do not directly affect the availability.

Deductions due to non-availability or deficient assets conditions (below minimum limit)

Bonus to good condition of other assets that do not directly affect the availability of the railway

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AVAILABILITY PAYMENT MECHANISM

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• Public Sponsor makes periodic payments to Private Partner

• Return on equity reflects level of transferred risk

• Private Partner finances (debt and equity) against payment stream

AVAILABILITY MODEL KEY BENEFITS

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Public Sector PPP Concerns Benefits to Availability Model

Transport Projects often lack stand-

alone financial viability.

PPP availability model reduces

unwarranted financial risk.

Public Sector need to specify policy

requirements

o Fare affordability

o Competing facilities

o Control over operating and

safety standards

Public Sponsor retains control over user

fees

Provisions against competing facilities

not necessary

Performance Requirements allow Public

Sponsor to control operating outputs

Public Sector needs to control

project cost exposure

Payments do not start until facilities are

completed and operating

Public Sponsor’s total payment

obligation is capped

Public concerns over long term

concessions project

Availability structures make shorter

contract periods more feasible

Need to attract good competition

from private bidders

Availability deals tend to attract a wider

group of investors and contractors

PPP approach needs to provide

Value for Money in transferring risk

to Private Sector

Encourages whole life approach to

design, construction and operations

Economic drivers are more within the

control of the private developer

THE SHADOW PAYMENT MODEL

Most appropriate for operational contract for rolling stock

Public partner (tax-payer) pays a rent (leasing) to the concessionaire in proportion to traffic and infrastructure use based on a previously determined scale / per passenger sum. Public sector retains control of fares and collection

Can include hybrid payments with fixed availability payment to cover minimum debt service while equity return reliant on shadow fares.

The public authority's payment can also take into account the concessionaire's performance like the number of trains closed to traffic or safety issues.

Demand risk on public partner , however, per passenger shadow fare often tapers down with increased usage to limit public sector exposure and private sector super profits while higher variable costs with higher usage are accounted for.

Many of the benefits are retained of both full concession and availability models - flexibility and concessionaire's financial contribution - without some of the perceived downsides of each.

Equity return requirement higher than pure availability model but less than concession model.

Major challenges is for public sector to retain fare flexibility and for private sector to get predictable cash flow

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O & M - AFFERMAGE & LEASES

In pure affermage & leases, the private party operates the investments financed by the public authority against a fee (typically 8 – 15 years); - Leasing and affermage differ in terms of fees collection risks and how the Operator is paid from fees.

In the concession type the operating asset investment costs are borne by the operator . The concessionaire acquires or leases the locomotives & rolling stock typically for 10 to 30 years. Both settings allow separation of the management of operations and infrastructure.

In Pure O & M; affermage (leasing) contracts are used when private equity and commercial debt are not available and there is private sector efficiency benefit. The awarding authority remains responsible for financing and managing investment in the assets, which is supposed to come, at least in part, from the rental payment/ surcharge.

In Concession type O & M; affermage (leasing) are preferable in railways; the responsibility for investments is shared between the public authority and the operator based on road transport logic, whereby investment in infrastructure is public and the cost of its maintenance borne by the user (via fuel levies), while investment and operation of the rolling stock are private.

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PURE O & M - AFFERMAGE & LEASING CONTRACTS

In pure Leasing , portion of the receipts going to the awarding authority as owner of the assets as a lease fee (usually fixed) and the remainder being retained by the operator. The operator takes on commercial and collection risk (with incentives to perform). Usually Operators require assurances to revenue increases and compensation/ review mechanism if they do not meet projections;

In pure Affermages, the operator retaining the operator fee out of the revenue and paying an additional surcharge that is charged to customers to the awarding authority to go towards investments that the awarding authority makes/ has made in the infrastructure. The authority takes on commercial and collection risk.

In Pure O & M, it is not unusual for the cost of maintenance and some replacements to be passed to the operator. The operator may take some degree of asset risk in terms of the performance and may also be put in charge of overseeing capital investment program/ specific capital works;

Typical O & M contracts include minimum maintenance or replacement provisions towards the end of the contract, so that operating facilities are handed back in an operational condition.

The conceding authority still has to bear the cost of infrastructure rehabilitation or urgent repair works (tracks and fixed equipment), as private concessionaire is rarely given the responsibility for infrastructure works; Railways need full rehabilitation every 15 to 20 years, compared to 7 to 10 years for roads.

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PPP MODELS SUMMARY

Best Approach is to work backwards - Decide on the capital and O & M

requirements , allocate the risks then , the PPP type will emerge!

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Project Development

•Funding

•Stakeholder alignment

•Planning regulations

•Land acquisition

•Operational requirements

•Organizational structure

•Contract terms

•Design Spec.

Design & Construction

•Design finalization

•Procurement

•Construction & fit out

•Value management & engineering

•Risk management

•Stakeholder collaboration

Testing & Commissioning

•Construction

•Fit out

•Systems integration

•Testing & commissioning

•Third party collaboration

Operation •Rail operations

•Promotion of project benefits

RAILWAY PPP FEED CONCEPT;

Single, integrated “turnkey” PPP contract that includes;

Design & Construction

Systems & Vehicles

Operations & Maintenance (if desired)

Private Financing (as applicable)

Community/Stakeholder Outreach

Owner (Government) maintains policy control

Starts under (Phase 1) Development and environmental phase with focus on driving “constructability” and “basis of design” concepts early in the project cycle (independent from selected environmental consultant)

Brings “delivery” services on board earlier (as compared to the typical lengthy use of “advisory” services) under a total integrated solution.

PPP FEED TENDER

Consortiums competing for two-phase awards with qualifications based selection process with acceptance of price/schedule/scope/quality and performance risk.

Phase 2 is awarded upon completion of:

All project environmental clearances

Approved “basis of design”

Acceptable Phase 1 performance

Acceptable Phase 2 pricing

Agreeing on the PPP financing model.

PPP FEED MODEL ADVANTAGES

Resolves the increasing difficulty in developing and/or maintaining technical and managerial capacity on the owner’s side; insufficient focus/lack of qualified resources.

Allows better community and stakeholder support as it includes community and stakeholder outreach elements to ensure support throughout the entire project development and implementation life-cycle.

Results in reduced OH rates during development phase and Serves best interests of Rail agencies and the public.

Allows more project delivery responsibility and accountability with private sector contracting partner, including acceptance of more risk.

Serves the entire spectrum of “Greenfield” (new capacity) and “Brownfield” modernization rail project types.

Offers an opportunity to the engineering and construction industry to reduce its “innovation deficit” and evolve from its dependency on past practices.

FEED MODEL - OWNER/PUBLIC SECTOR FUNDING

Owner/Public Sector provides for the development of:

Comprehensive program plan

The “Basis of Design” requirements

The Scopes of Work

Preliminary price and schedule values

Plan for managing public outreach, stakeholder coordination and third-party impacts

Firm Fixed Price/Not to Exceed pricing and schedule

Limited Self-Perform Work

Contracting process for subcontractors

A single point of responsibility for total program/project delivery

Owner supported program management, project controls, project

Reporting, safety, quality assurance, etc. services

FEED MODEL - PRIVATE SECTOR FINANCING MODEL

Private Sector provides for the development of:

All the previous PLUS

Delivery through at-risk private sector financing (Including possible “gap financing”)

Payment subject to overall price, schedule, scope, quality program and project delivery performance

Higher risk/reward considerations

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PRIVATIZATION & RISK

UK RAIL FRANCHISES SYSTEM

It is Government policy in UK that passenger rail services are publicly specified, procured and, where necessary, funded but are privately delivered by train operators - for a specified period on a specified part of the network - with objectives to improve railway performance, replacing direct subsidies, stimulate competition, control costs and conform to service specifications.

Train companies bid for franchises on the basis of quality of service they intend to offer and the amount of funding they require (subsidy) or the premium they would be prepared to pay for the use of infrastructure to run these services. Franchise agreements generally run for 7–10 years.

Demand risk is partially shared risk in the first 4 years thus resulting in better bids. Train operators can generate more revenue through attracting more passengers, raising unregulated fares and other commercial income. (Regulated fares are tied to retail price index)

Responsibility for the operation and condition of the track rests with Network Rail Company while strategic decisions on major investment, which also affect service to passengers, are the responsibility of the Network Rail Company / UK Department for Transport.

Room is allowed to increase capacity in franchise contracts, to improve the quality, reliability, accessibility and security of passenger services through station refurbishment and investment in rolling stock.

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NOTES ON UK FRANCHISING

Franchising is still considered in UK, the best way to secure rail services for tax payers and fare payers a like.

Most franchises are receiving government support because they cannot meet their financial targets despite traffic being at record high.

The system needs to be flexible and encourages innovation to allow operators to adopt to services changes in demand. An inter-city service is very different from a regional operation.

It also needs a system that is fit for purpose, attractive to bidders, flexible to cope with economic fluctuations and delivers real improvement for passengers.

Minimum 5 years, with 7 -10 years are ideal with to the option to extend.

The system needs residual value mechanisms to encourage investment in projects that will give a return beyond the end of the franchise.

Bidders should be responsible for the risks they can manage with a mechanism to adjust premium payments or subsidy requirements according to national economic performance.

More competition is needed as it spurs real improvements and increases traffic for both the franchise incumbent and the newcomer.

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PUBLIC AND PRIVATE BODIES IN RAIL FRANCHISING (IN UK)

The Department / Ministry for Transport - set the overall framework and strategy for railways and provide public funding. The Department / Ministry specifies, procures additional rolling stock and oversees delivery of franchises to private Train Operating Companies’.

Regulatory Authority’s - Office of Rail Regulation - Usually an independent statutory body led by a Board that regulates network rail’s stewardship; secures compliance with relevant health and safety law; licenses operators of railway assets; and enforces competition law in the rail sector.

Network Rail / Infrastructure Company - a company that owns and operates the fixed rail infrastructure, including rail stations, which it mainly leases to train operators. It is responsible for the reliability of the network and leads on performance and industry planning. This can be a Government unit (can receive grant funding) or a private company.

Train Operating Companies (TOCs) - are special purpose companies, which hold rail franchise. The train operators pay Network Rail Company for station access and track access charges.

Rolling Stock Leasing Companies (ROSCOs) - own the rolling stock that is leased to Train Operating Companies.

Passenger Protection Groups – can be a statutory funded bodies or private entities to protect passengers’ interests whenever decisions are taken that affect rail service

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Best And Final Offers!

BEST PRACTICES IN PPP TENDERING & CONTRACT MANAGEMENT

Maintaining competitive pressure throughout the bidding process;

Proper / optimal allocation of risks . Optimal overall cost of finance, commercial incentive.

Providing incentives to the private sector for the delivery of quality services and potential for innovation and increased efficiencies. Allow third party revenues

Encouraging innovative delivery solutions by use of an “outputs / outcome” specification approach allowing the Integration of service and operational needs with facility design and construction

Offering incentives for the benefit of both parties (e.g. periodic cost benchmarking and sharing mechanisms);

Target long-term partnership contract that provides a degree of cost certainty to government and revenue security to the bidder with clearer focus on respective responsibilities.

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EXPECTATIONS - PRIVATE SECTOR BIDDERS

PPP - Private Sector Bidders Are Expected To:

Undertake the detailed design and construction of the railway to the requirements of the Client

Procure finance for the associated capital costs; and

Operate and maintain the railway to the requirements of the Client over a concession period usually 25 Years Plus.

Therefore;

Partners (many) – need maturity + competence and controlled supply chain interests.

Contracts structure need to allow change over time (technological obsoleting, economic down turns, shareholders change, etc.).

Optimal risk allocation and in particular demand risk or users volume - In railway projects it is usual to consider; Existing Users, Diverted Traffic from other modes and Generated Traffic from the project.

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UNBUNDLING COMPLEX RAILWAY PROJECTS

Unbundling can be a viable option and can increases private sector involvement.

Unbundling of less-commercially-viable railway assets is a big plus!

Unbundling increases public sector management risk and more challenging interfacing risks.

Usually in unbundling capacity allocation and traffic management are borne by State.

Each PPP Package can cover a specific route section in unbundling; examples;

Substructure (Tunnels, bridges): D&C contracts

Superstructure (e.g. rails / stations) → DBFM

Control Systems → DBFM or own Specified

Signaling and communication → PPP

Rolling Stock and Operations → O & M PPP Concession

EXPECTATIONS - NAVIGATING THE COMPLEXITY!

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RISKS & ALLOCATION IN RAILWAY PROJECTS – EXAMPLE!

Typical Railway Project Risk Allocation Planning & scheme impact on city Government

Rolling stock design & approval SPV / Government

Third Parties Claims SPV

Safety Issues SPV

Performance of Trams / Rail SPV

Fares policy, tickets pricing regime Varies

Future demand for rail system Joint , Traffic Bands

Revenue collection & payments Tickets, shadow, availability

Financing funding gap Government

Environmental impact / Archeological issues SPV - Contractor

Construction ground conditions SPV - Contractor

Construction schedule SPV - Contractor

Construction price SPV - Contractor

Import duties, levies & taxes SPV

Permissions, planning & permits SPV / Government

Acquisition of ( public / private) land rights SPV / Government

Moving utilities services SPV

Interface & systems integration SPV

Integration with other facilities / assets SPV

Interoperability - key for transit traffic SPV / Government

Long term maintenance SPV - O & M Contract

Railway hand back SPV

Government interference , termination Government

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FINANCING & FUNDING STRATEGY – THE RIGHT MIX!

Financing Strategy

ECA & Project

Procurement Strategy Future

Borrowing Needs

Environment Issues (EU Funding)

Contracts and

Securities Local

Banks Sector

Experience

Revenues Currency

Hedging Needs

Local Banks

Capacities

Success of project financing, attracts private sector to future projects

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TRANSPORT FINANCING – INTERNATIONAL SOURCES

MENA REGION MAIN FUNDING SOURCES

•Very liquid , Driving pricing lower

•Pressed on tenors, but available for quality assets

•Sibor (Saudi Interbank) hedging market is limited to 5-7 yr.

Local GCC Banks

•Tight liquidity, Prices are higher, but offset by lower libor

•Tenor is available for quality assets

•Libor hedging is very deeps; 23+ years

International Banks

•Amount is linked to procurement

•Tenor is mostly limited by OECD consensus

•Some offer direct loans to home companies

Export Credit

Agencies

•Rapidly developing

•Tenors average life are 8-11 years

•Still requires sponsors guarantees

Bonds and Sukuks

NOTES ON RAILWAY FINANCING STRATEGY

The concession type and/or financing structure may impose certain impact on developers’ returns or offer better returns to railway developers.

Developers think first in terms of relative size of investment to project returns.

Developers evaluate;

Streams of revenue independent from the project company

Additional revenue like commercial adds, use of associated real-estate

Equity share of the concession provider

Leverage and government grants

Timing of cash invested relative to cash received - Equity bridge loans;

Equity reduction prospects to other parties , IPOs

FINANCING SOURCES - COPING WITH BASEL III

Global liquidity has improved since the 2008 financial crisis but remains scarce with secondary market syndication still limited. Pricing still above pre-crisis levels

Basel III requires banks to hold

Higher percentage (6%) of Tier 1 capital of "risk-weighted assets,

Additional capital conservation and discretionary counter-cyclical buffers (2.5 % each),

Matching assets and liabilities tenors,

Resulting in tighter lending appetite, increasing the overall cost of funds (higher margins) with Infrastructure deals of (20-23 years) tenors limited (shorter tenors)

VALUE FOR MONEY ANALYSIS NOTES

Rail and transit projects are subject to scrutiny by many stakeholders. VfM analysis determines whether the chosen procurement route is the best option for the public sector and users.

PPP structure can provide VfM if it can reduce the public sector subsidy compared to traditional funding. a project must be revenue positive to show VfM.

The value for money of the Project as a PPP depends on the discount rate used.

If most risks are transferred to the private sector, value for money will decline since the premium demanded will outweigh the benefit.

Private sector generally includes risks in cost estimates while the Public sector rarely does and budgets are often optimistic for the lowest cost and earliest completion not the most likely! Actual past history costs can be indicative.

Most private sector company’s alternative options are priced on a ‘take it or leave it’ basis due to lack of incentives!

Value for Money and affordability of options should be tested multiple times and be constantly refined starting from the project screening phase to financial close. Factors Inducing VFM

Project Operational & Social Benefits (Appropriate cost allocation)

Financial Criteria (Optimum Whole Life Cost)

Technical Criteria (Comprehensive Specification, Fit for purpose, Innovation, Time & Quality)

Safety, Health & Environmental Criteria

Managerial Criteria (Incentive & Monitoring, Risk Management, Disputes & Contractual Aspects)

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CALCULATION OF VFM

Calculates the indicative Net Present Value (NPV) or Net Present Cost (NPC) of the project under a traditional delivery model - Risk adjusted, whole-life cost of a project.

Acts as a benchmark against alternative delivery methods / proposer bid financial models or shadow bid model (the project under PPP delivery model considering project financing, risk transfer, innovations and efficiencies); and

Must take into account the value of “retained risks”. (Calculation of the financial impact of a range of possible outcomes should such risks materialize)

Monte Carlo simulation / sensitivity analysis allows estimates to be made of the impacts and likelihoods of individual risks utilizing the “most likely outcome” rather than the mean value used in NPV.

Notes on Calculation;

Capital costs - should reflect the full resource costs of the project, including opportunity cost of public assets used in the project, adjusted for risks.

Operating costs - whole life cost of maintaining the asset to the same standards required from the Private operator.

Projected revenues - Included only if bidders will be allowed to set tolls and should be adjusted for inflation.

Availability payments by the Client to Concessioners - comprises fixed and indexed components in both local currency and foreign. Weighted availability that combines both local and foreign payments assuming long term exchange rate to be used.

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VFM DISCOUNT RATE & DISCOUNTED CASH FLOW

Discount Rate should represent the real opportunity cost of capital, adjusted for inflation (& subsidies, if any), for public projects (Government bonds can be used as a guide). This is not the interest rate of private finance!

There is no agreement on which discount rate should be used for the transport sector. It has been a rather common practice to use lower rates for rail projects as environmental and social benefits are not realized immediately.

Discount rate should reflect the “aggregate preference for the present” of the economic actors performing the investment.

In practice, acceptable rates of discount are often set at country level for infrastructure, and can reflect not only economic realities but budget constraints in the public sector (public cost of borrowing).

High discount rates will favor the acceptance of projects with lower investment and/or a concentration of benefits in the short term, whilst lower rates will push forward those projects with longer-term returns.

Discount rates currently used in the railway sector fall within the 3% to 6% range for most projects appraised in developed countries.

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MIXED RESULTS - IMPROVING CONCESSION CONTRACTS

Optimal conditions for implementing a concession

The conceding authority must be strong and extremely present. Assets should be accurately assessed The regulatory conditions need to be stable. The project preparation phase is crucial, Adequacy of the bidding arrangement and strong candidates is a must The presence of international institutions is keys to the success. Concessions remain feasible for lines with very high traffic density. In Cross border projects, conceding States cooperation is paramount.

Globally; Northern American private rail operators have shown a greater interest in Latin America concessions while Indian and Chinese & Brazilian operators show interested in Africa. European railways, for their part, remain relatively closed to the private sector, except in the United Kingdom. ME is still open field especially in city mass transient (Riyadh, Kuwait, Qatar) and in railway O & M concessions.

The use of traditional, long-term concession contracts (with a moratorium on repayment of principal during the investment period) to shift the financial risk to the private sector had disappeared after the 2008 financial crises.

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SUCCESS - GETTING STAKEHOLDERS TO ACT TOGETHER

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CROSS BORDER CONCESSIONS – SEAMLESS REGIONAL RAILWAY

Cross border concessions should allow interconnection with pre-existing infrastructures as well as for interconnection of different high speed corridors as the same rolling stock need to be operated on corridors going through technical borders.

In cross border concessions for regulatory and political purposes, the concession is structured legally as two separate concession contracts signed by each country (subsidiaries of an overall concession holding company) with the intention of the for the concession to be run political borders as a seamless operation.

The concession covers the provision of services over the entire rail network. As large amount of freight traffic is expected to be cross-border, and the success of each operation is expected to depend on the joint operations coordination of the total network.

The projects’ commercial risks associated with the concessions (including the operations, investment, and most importantly, traffic risks) are usually assigned to the concession companies and their lenders.

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REHABILITATION CONCESSIONS - FIGHTS FOR SURVIVAL!

Usually railway assets, consisting of the railway infrastructure, locomotives and rolling stock and maintenance facilities, are conceded for use by the governments to the concession companies while the ownership of the infrastructure still rests with the government.

The concession companies are responsible for the rehabilitation and maintenance of all assets to specified standards and for the achievement of minimum investment levels and traffic growth targets stipulated in the concession contracts.

The concession companies make payments to the government of concession fees for use of the conceded assets that can include a one time entry fee in addition to an annual variable fee. (usually a percentage of gross revenues but can be a flat fee).

The concessionaires are expected to make a minimum, annual investment over the initial years to upgrade and rehabilitate the main rail line and rolling stock and to grow the business.

It is imperative to create both a “conceded assets account” for all of the public assets associated with the concession and an “acquired assets account” for the newly acquired or improved assets and these accounts need to be amortized and audited frequently and mutually over time.

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FINANCING - MITIGATING POLITICAL AND GOVERNMENT RELATED RISKS

Operators argue that new railway projects including track rehabilitation and renewal should be financed by governments as the life expectancy of these assets (often 40-50 years) makes it impossible for private companies to pay for them and recoup this investment over the 20-30 year life spans of normal concession / financing agreements.

One Solution is for concessionaires to agree to finance initial investment, with governments committing to compensate concessionaires for unamortized investment at the end of the concession period. Operators question the willingness and/or ability of governments to make good on potentially large commitments made earlier by other official’s.

As a consequence, concessionaires insist that governments pay for some or all of the initial investment, by securing “soft” loans and on-lending these funds to concessionaires. This approach raises questions about Governments ability to monitor contract compliance while representing the rights of the lenders, yet most new rail concessions in Africa are of this kind. The private operators can slow down privately financed track toward the end of the concession period in case of government failure to make good on end-of-contract payments.

Another solution is to use a full or partial risk guarantees that will be triggered by the failure of the government to meet its contract termination payment obligations or breach of contract terms (and failure to pay any liquidated damages). Such guarantees play important role in increasing investor interest during the bidding process and provide a level of certainty to lenders including both commercial banks and multi-lateral financing agencies.

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RAILWAY PRIVATIZATION

Through privatizing operation, many Governments seek to completely release themselves from financing investment and operation. This objective is not realistic especially with low traffic density; public financing for infrastructure investment continues to be required.

When operation is privatized, the State should mainly expect management to be improved, greater professionalization and a normalization of relationships with the operator – rather than a provision of private capital which will remain limited by risks and moderate profitability.

Old railway networks in many parts of the developed world are insolvent as maintenance and investment lagged, revenues dropped, while the workforce continued to expand.

Where it is difficult to make railway operation sustainable due to the high level of fixed costs, the only financially profitable projects are those that improve existing assets. The other best thing to do in this case is to shut down the railway line.

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Loay Ghazaleh,

MBA, BSc. Civil Eng.

Advisor,

Undersecretary office

Ministry of Works,

Bahrain

loay.ghz@gmail.com

00973-36711547

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