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Financing rail infrastructureExperience and lessons learned from the UK
March 26, 2008
New Delhi
16 June 2009 Financing Rail InfrastructurePage 2
Agenda
I. Considerations in funding rail infrastructure
II. Private sector involvement – Case studies
III. Impact of the credit crisis
16 June 2009 Financing Rail InfrastructurePage 3
Governments’ considerations in funding rail infrastructure with private capital
► Generic Funding Considerations► Gain access to private sector funding (and expertise)► Accommodate growing demand for rail services► Protect public interest► Maintain strategic control of the asset
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What models have been used to finance rail infrastructure in the UK?
Case study B –Crossrail
Importance of taking long term view regardless of contingent economic situation
Use of innovative sources of funding including business tax
Importance of stakeholders management
Case study C –Network Rail
Regulatory Asset Base financing
Network Rail has raised over £20bn to date
Government guarantee
Regulated utility model still successful in raising debt in the current market
Case study D –Rolling Stock
FinancingROSCOs
PPP
Securitisation
Direct investment?
Case study A –Metronet PPP
Tied supply chain
Misaligned financing
Client – supplier interface
Contract scale and complexity
Poor asset knowledge
Case studies
► The use of private finance is nothing new in the construction of rail infrastructure
► A number of options have recently been used in the UK rail infrastructure
16 June 2009 Financing Rail InfrastructurePage 5
Case study A – Metronet PPP
► Issue► Passenger growth ► Asset becoming unreliable► Need for steady flow of investment
► Approach► Complex PPP contract – output driven► PPP raised £3bn private debt (2002)► Two Infracos were given the
responsibility to ► Manage, Maintain and Renew the
infrastructure► LUL maintained control of the
operation► Government guarantees were granted► 30 years concessions with 7.5 year
review periods
Transport for London
London Underground Limited
Department for Transport
MetroNet BCV &SSL
Passengers
GrantFares
Infrastructure service charge
Funders
Debt£3bn
Equity£350m
Payments
Role
Guarantor
Operator of services
Manage, Maintain and Renew
infrastructure
Office of the PPP Arbiter
StatutoryReviewer
Subcontracts- Rolling Stock & Signals- Track- Stations- Civils
Client
Private Infrastructure
Company
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Case study A – Lessons learned:Poorly implemented “PPP” model
► LUL and Metronet functions not well aligned
► Weak Metronet capabilities (Infraco layer)► Difficulty in progressing change
Procurement failures► Incentives in bidding
process, (e.g., dangers of under-priced bids)
►Timing of financing commitments
►Protracted / complex process leading to gaps
►Unwilling client
► Imbalance of risk-reward in contracts► Weak project management► Poor governance and controls
► Bank vigilance weakened by guarantee► Debt over-priced in light of guarantee► Insufficient equity at stake
► PPP contract complexity and need for new procedures
► Priced and contracted on poor asset information and unclear design criteria
Misaligned financing
Client – supplier interface
Contract scale and complexity with poor asset knowledge
Tied supply chain (in a scope/price variable PPP)
1
2
3
4
It should be possible to avoid all of these problems in a future PPP structure: explicit regulated utility model
Tube Lines: the jury is still out►Better supply chain processes, works competitively tendered►Stronger negotiation, client and project management skills►Halo effect?
16 June 2009 Financing Rail InfrastructurePage 7
Case study B – Crossrail
► Background► Severe over-crowding and congestion on existing services into Central London► Support development of London’s finance and business in the City and Docklands► Approach► New East – West link under London, 7% capacity increase (24tph)► Improved access from Central London and Canary Wharf to Heathrow Airport► Projected cost £15.9bn, one of Europe’s largest ever infrastructure projects
Source: Crossrail website
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Case study B – CrossrailFunding plan► Funding sourced from both public and private sectors
► Shared financial and political risk, aligning interests► Seen as more than paying for itself via the projected benefits
£ 5.1 B £ 3.5 B £ 2.7B £ 2.3 B £ 2.3 BDfT GLA TfL NR Other
Grant funding
(In UK, >90% tax revenue to central government)
Borrowing over 5 years from 2010
Backed by property tax supplement (from 2010)
Any surplus to be used by TfL
Borrowing via existing authority, backed by new fare revenue
Mayor sets fare policy
First £1 B pre 2010; principal repaid from construction end (2018)
Financing works on mainlines, via usual Regulated Asset Base
Repaid via track access charges
30 yr track access rights
Land sales, Private developer contributions at stations• BAA• City of London Corp.• Canary Wharf Group• Berkeley Homes
Also LUL savings
Funding Benefits
£20+ bn
Forecast to create 30,000 jobs
Up to 14,000 people will be employed at the peak of the lines construction
Boost existing regeneration plans in the Thames Gateway
Benefits Board led by Greater London Authority to secure wider economic opportunities (i.e. housing and development)
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Case study B – Features
► Government led confidential bilateral negotiations with each funder (including London business community) to secure commitments and align interests
► Risk of continued legal battles over property and environment
► Need to take a long term view, beyond current economic climate and credit crisis
► CLRL itself will not raise debt but just focus on core task of procurement and delivery
► Incorporate private risk-taking (stations, mainlines)
► Many risks too complex and unknown to price privately► Motivated delivery partner for design and project management,
incorporating flexibility and target costing mechanisms► National rail network access rights – essential for long-term
security of the project (30 year debt horizon)
Management of financial risks
Stakeholders management
Funding led by Government borrowing, leveraging private sources
1
2
3
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Case study C – Network Rail – RAB financing
Issues► Large passenger growth► Underinvested assets► Railtrack entered into Administration in
2001
Approach► Network Rail, a company limited by
guarantee, took over Railtrack in 2002 ► Renewals and enhancements are funded
through third party debt► The Government decides the output and
control fares through DfT► The ORR approves the price of the output
and fixes the Track Access Charges (TACs) and level of grant support
Department for Transport
Network Rail
Users
Passengers Train
Operators
GrantsPerformance
Payments
Track Access
Charges
Freight Operators
Fare
box
Debt Funders
Debt
Fare
box
Track Access
Charges
Subsidy / PremiumOffice of Rail Regulation
TACs + Grants = O&M + Debt Service + Premium
Third party debt = Renewal and Enhancement
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Case study C – Features
► Network Rail has not yet raised any financing without government guarantee
► In the current financing markets Network Rail is unlikely to be able to raise finance at competitive rates without guarantee
► Used in the UK in the transport, telecoms, power and water sector
► Model promotes asset stewardship and is fundable in the current market
► Regulator provides confidence and stability to the private sector and supports efficient delivery
► Set return on RAB promotes private sector investmentRegulator involvement
Government support still required
Regulated utility model1
2
3
16 June 2009 Financing Rail InfrastructurePage 12
► Budgetary constraints – “pay-as-you-go” instead of up-front capital payments
► Risk transfer and whole-life cost reduction► “Off-balance sheet” treatment► Potential cash release for public sector
without loss of control (sale and lease back)
► Commercial discipline in the procurements
► Increasing attractiveness of infrastructure assets for equity investors
► Tax arbitrage (~ lowers cost of capital by 2-3%)
► Sensible risk sharing► Significant availability of long term
funds [temporarily unavailable, increasing lease pricing]
Public sector Private sector
Case study D – Moving away from traditional rolling stock funding – additional drivers
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Case study D – Simplified examples of commercial & funding structures employed
ROSCO(Asset Owner) Govt / DfT
Train operators
Under-takings
Lease rentals
Supply rolling stock
Franchise agreement
(7-10 years)
Shareholders / Funders
DfT Supplier
TOC
Supply contract
Franchise agreement
Governmentundertakings MaintenanceRS Maint
SPV
Operating lease
Long-TermFunding
UK Intercity Express
UK ROSCOs
Angel Trains(Asset Owner) Govt / DfT
Train operators
S-54 undertaking
Lease rentals Supply rolling stock
Franchise agreement
(12/15 years)
Source: Ernst & Young
West Coast Train Finance(SPV - Funding Vehicle)
Capital lease rentals
Rollingstock
Capital markets(15 year debt)
85% debt
RBS
15% equity
Securitisation
16 June 2009 Financing Rail InfrastructurePage 14
Impact of the credit crisis – the plumbing is broken
Funders Projects
£ £
Intermediaries
Monoline insurersRating agenciesCommercial banksInvestment banks
16 June 2009 Financing Rail InfrastructurePage 15
Impact of the credit crisis – Infrastructure Financing
►The failure of the monolines has closed the capital markets►Credit losses and liquidity constraints have reduced bank lending capacity►Banks are very selective on the projects they are lending to►Lenders avoid syndication and refinancing risk►“Club deals” with more lenders involved►Limited and expensive short tenor debt►Banks seek strong sovereign support of projects
16 June 2009 Financing Rail InfrastructurePage 16
Impact of the credit crisis – Government intervention
►Direct intervention through the provision of matching debt facilities►Continued promotion of infrastructure projects►Increased involvement of multilateral agencies such as EIB►Co-financing►Setting up of an infrastructure bank to co-invest►…
16 June 2009 Financing Rail InfrastructurePage 17
► Plenty of room for the private sector in the financing and delivery of passenger rail infrastructure and fleets
► Private participation comes in many shapes and sizes
► Allows governments to increase capacity by raising a significant volume of funding and doing so sooner
► Governments always specify outputs (and safety requirements) and maintain ultimate control over the assets both during and after the partnership
► Despite the protracted credit crisis, a deep pool of equity remains committed to the sector
► Public interest has been protected with good safety, operational performance and value for money
► Private capital is needed on a substantial and sustainable basis to meet today’s needs for public transport
Rail assets can successfully be funded and delivered through a variety of structures
Gianluca FavaloroInfrastructure AdvisoryErnst & Young LLP, UK
Direct Tel: +44 (0) 207 951 1113Mobile: +44 (0) 776 850 4268E-mail: gfavaloro@uk.ey.com
16 June 2009 Financing Rail InfrastructurePage 19
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