Experiences with PPP in Rail Projects

Mukul Saran Mathur

Head of UIC Asia

Regional Unit

New Delhi

Manila-March 2010

• Key Drivers for Rail PPP

• Structures and Models

• Success factors

• Areas for Rail PPP

• Successful and Failed Rail PPP

• Indian Experience of SPV– Assessment of SPV Model(PRCL)

– Lessons Learnt

Presentation Structure

Key Drivers for Rail PPPs

•Reducing Government Financial Support•Need for growth in Infrastructure•Interest of private investors/ strategic Investors

•Growing Customer Expectations•New Technology and Modernisation•Providing seamless logistic solutions

•Reducing costs of labour and O&M•Better Asset Utilisation•Safety and Reliability•Reducing Time and Cost overrun

•Higher Economic Growth in Asia•Population Growth•Higher Urbanisation•Environment issues

Need for private capitalChanging Environment

Need for Quality and InnovationNeed for Efficiency and Costs

Choice of structure may be based on desired level of responsibility

• Several PPP models, allowing flexibility to select the model to fit the need

Public Responsibility Private Responsibility

Design-Build Design-Build-

Maintain

Design-Build-

Operate

Design-Build-

Operate-Maintain

Build-Own-

Operate-Transfer

Build-Own-

Operate

Service contracts Mgm’t contracts Lease Concession Divestiture

New Projects

Existing Services and Facilities

Spectrum of Models

•Ownership of Assets•Responsibility of Investment•Assumption of Risks•Duration of Contract

PPP Models Structures

•Supply and Management Contract•Turnkey Projects•Lease•Concessions•Private ownerships

• Joint Venture• Public-sector business

enterprises• Contractor models• Leaseback arrangements

• Critical services may take time to implement under the PPP model

5

PPP model via an analysis of application

Cri

ticality

Hig

hL

ow

Service providerPublic sector Private sector

Signaling /

system operation Passenger / freight

handling

Track / system

construction

Food service

Materials supplySystem operation

& maintenance

Track / system

design

Risk Allocation in Railway projectsRisk Allocation Remarks

Planning Public Flexibility is required

Design &Construction Risk Private Railways should be responsible if the design parameters are changed

Operating and Technology Obsolescence

Private Penalties for failure to meet service requirements. Technology obsolescence can be because of Railways insistence on particular technology

Demand Private/ Public Should be supported by penalties

Residual Value Private Fitness of purpose to be ensured

Financing Private

Legislative Public

Force majeure Private/Public Insurable risks to be transferred to private

Success Factors

Integration of Economic Interests•Avoid business cases driven by each party

Long Term Financial Engagement•Arrangements for future asset maintenance and expansion•Realistic revenue projections and Traffic guarantees•Strong commitment of stakeholders

Appropriate Risk Allocation•Allocate risks to party which has better control on risk•Utilise key strengths and capabilities

Transparency•Clear costing mechanism•Facilitate competition•Measurable performance indicators

Project Preparation• Streamlining licenses / permits; expedite land acquisition• Clear definition of project scope and objectives• Standardized documentation• Flexibility in choosing PPP arrangements-Choose a structure which suits the project and

desired level of control

Areas for Rail PPP

•Freight Lines•Metro Lines•High Speed Lines•Terminals•Multi modal logistic Parks•Production Units

•Container Trains•Passenger High endservices•Terminal Operations

•Hospitality & Tourism•Catering•Preservation of Heritage•All on Board services

Infrastructure

Services

Operations

International rail PPP Projects-Unsuccessful

•22km link between airport andStockholm city coting $US 600million•Full revenue risk transferred toprivate•Failure as too optimisticpassenger forecasts

•108km link between Channel Tunneland London with investments ofPounds 2.2 billion operated by LCR•Full financial risk transferred toprivate•Optimistic passenger forecasts andlow public infrastructure charge

•Highly efficient and transparentcompetitive procurement•Contract completed in less thanone year•one government entity wasassigned with well definedresponsibility to handle theprocurement

Arlanda Express (1999 )

Channel Tunnel Rail Link (2007)

Opening date: 7 Sep 2009

Length: 77,7 miles (125 km)

Max speed: 186 miles per hour

(300 km/h)

Investment: $ 9.952 Billion

(€7.154 Billion)

30 year concession

Business Model

Several building contracts

Substructure

One PPP-InfraspeedSuperstructure

Passengers operation HSA(Public + Private)(Joint venture NS + KLM)

Traffic ManagementState/Railway manager

(ProRail)

International projects – HSL Zuid (Netherlands)

DisadvantagesAdvantages

• Life Cycle transfer of

superstructure to a private entity

• Construction Cost Transparency

• 5% Cost Savings

• Annual fee on guaranteed

availability

Complex Interfaces between

Super & Substructure

Opening date: 2004

Length: 1420km

Investment: A $ 1.3 Billion

Concession : 50 years/ BOOT

Operator : Freight Link

International projects – Alice Springs-Darwin

Advantages

•Government got therequired infrastructure byFunding approximate 30%

•Optimized Risk allocation

•Achieved 90% share of multimodal traffic in first 5 years

•Reduction in CarbonEmissions

Container OperationsSPV/ Joint venture Route for Port Connectivity's

PPP-Indian Experience

•267 km Surendranagar-Pipavav GC•189 km Hassan Manglore GC•301km Gandhidham-Palanpur GC•112km Krishnapatnam Port New line•82km Haridas Paradeep New Line•62km Bharuch Dahej GC•Angul Sukinda NL in pipeline•Likely Generation of non railwayresources US$ 0.8 billion

15 Container operators grantedpermission for providing ContainerServices generating US $ 0.5 billionbetween 2006-2010

Wagon Investment Schemes generatedUS $ 0.3 billion

Cost Sharing Projects with number of State Governments for rail development in States

Wagon Investment Schemes

Lender

RVNL

Promoters

InvestorsSPV

EPC

Contractors

O&M

ContractorUsers

Equity

Equity Concession

Contracts

Contracts

DebtTraffic Guarantees

Project Specific SPVs

Port Connectivity Projects-SPV Route

Government Role

•Initial Project Development , land acquisition and arrange Clearances•Fixing Design parameters•Part Equity payment (minor)•O&M given under contract by SPV•Bear Cost of Passenger train operation•Collect Revenue and than apportion

Salient Features

•Partnership with Strategic Partners for Equity and formation of company•Debt is raised on a pre determined debt-equity ratio•Project execution with assured funding under a construction agreement with SPV•Apportionment of revenue on pro- rata distance basis•Expenses recovered from SPV on a fixed and variable cost basis•Asset to get transferred to IR after shareholders get the mutually agreed return on investment•30 year concession

Strategic Investor Role

•Equity Payments•Traffic Guarantees

AgreementsShareholder Agreement, Concession Agreement ,Construction Agreement, O&M Agreement, Traffic Guarantee Agreement

Assessment of Pipavav Railway Corporation

•Completion of line in one yearwithout any cost overrun•Procurement of materials andtransportation to site by SPV wasfaster•Staffing was benchmarked to bestpractices resulting in reduction ofmanpower from 1600 to 800•Mechanized maintenancepractices and multi skillingadopted•IR worked as contractor to privatesector observing tight schedules•IR contribution was Rs 98 crore inproject cost of Rs 373 crore

•Absence of private sectorconstruction capabilities•Port ownership changedmidway resulting in delay ofprivate equity•Port traffic did notmaterialize leading to dropin revenues and delay inrepayment of liabilities•No regulatory mechanismfor competing routes•Multiple role ofgovernment

Benefits Weaknesses

Rights with Riders

•Right to create AdditionalFacilities•Right to commercialexploitation of assets•Right of fixing special tariff

IR: Balancing Interests ?

•Railways as Shareholder, Construction Contractor, O&M Contractor, Concessioning Authority•No service parameters specified•Tariff policy with railways•Capping the equity returns with early termination clause•Railways right on moving on different routes•Absence of regulator

•Financing and Construction risk with railways•Absence of clauses which forces investor to pay equity and penalties for traffic guarantees•Absence of Transparent Bidding process

Advantage railways Advantage Investor

Lessons learned

17

Over -coming Obstacles

•Define clear objectives and measurable goals that need to be achieved through PPP•Prepare and Plan for PPP implementation•Transparency in Bids•Strong PPP organisation•Commitment from top •Avoid Multiplicity of Roles of Government Agency ( Partner, Overseer ,Arbitrator)•Balance the interests of investors and public•Accurate cost allocation•Clear policy on competing routes•Transparent guidelines for revenue sharing- NTKM or trains or wagons ?•Regulatory Mechanism to be in place

Forward Looking Approach

•Clear and Transparent Concession terms•Give SPV freedom to operate and expand business•Allow Construction, Maintenance and Operations to non government agencies for achieving true private sector efficiencies•Give freedom to own assets and to provide services on SPV decided tariffs

Moving with Caution

•Capping of Returns for Investors•Monopolistic Rights to Investors

Thank You

ms.mathur@gmail.com

mathur@uic.org