National Cargo Operator-Destination Madrid

SFTP NCO – NATIONAL CARGO OPERATOR

DESTINATION MADRID

SETTING A PUBLIC PRIVATE PARTNERSHIP STRUCTURE AND FINANCE

2009-04-30

FRANCISCO FURTADO RAUL PIRES

Table of Contents

1. Introduction ...................................................................................................................................................................... 1

2. Project overview .............................................................................................................................................................. 1

2.1. Complexity and simplifications ............................................................................................................................. 1

2.2. Possible connections and alternatives ............................................................................................................... 1

2.2.1. Base case scenario .............................................................................................................................................. 2

2.2.2. Alternative 1: Sines-Elvas direct ................................................................................................................... 2

2.2.3. Alternative 2: Sines-Elvas phased ................................................................................................................ 2

2.3. General structure of the project ............................................................................................................................ 2

3. Project Operational Studies ........................................................................................................................................ 4

3.1. Demand ........................................................................................................................................................................... 4

3.2. Production, costs and revenues ............................................................................................................................ 6

3.3. Cash Flows and NPVs ................................................................................................................................................. 9

3.4. Flexibility ........................................................................................................................................................................ 9

4. Project Financial Studies ............................................................................................................................................12

4.1. Structured Finance ...................................................................................................................................................12

4.1.1. Rolling Stock ........................................................................................................................................................13

4.1.2. European Funds .................................................................................................................................................14

4.1.3. Equity .....................................................................................................................................................................14

4.1.4. Debt .........................................................................................................................................................................14

4.1.5. Return on Equity ...............................................................................................................................................15

5. Results Assessment ......................................................................................................................................................16

6. PPP design ........................................................................................................................................................................18

6.1. Agents involved ..........................................................................................................................................................18

6.2. Finance sources .........................................................................................................................................................18

6.2.1. Equity .....................................................................................................................................................................18

6.2.2. European grants ................................................................................................................................................19

6.2.3. EIB loans ...............................................................................................................................................................19

6.2.4. Fixed Rate Bonds ...............................................................................................................................................19

6.3. Major uncertainties ..................................................................................................................................................20

6.3.1. Total freight movement ..................................................................................................................................20

6.3.2. Share of the market and competition .......................................................................................................20

6.3.3. Oil Price .................................................................................................................................................................22

6.3.4. Availability of partners ...................................................................................................................................22

6.3.5. New infrastructure developments (future rail, highways, ports) .................................................22

6.3.6. Technical developments in rolling stock .................................................................................................22

6.3.7. Regulatory framework ....................................................................................................................................23

6.3.8. Social/Political unrest .....................................................................................................................................23

6.4. Risk Allocation ............................................................................................................................................................23

6.5. Performance targets and quality control ........................................................................................................24

6.6. Externalities ................................................................................................................................................................24

7. Conclusions ......................................................................................................................................................................25

8. ANNEX ...............................................................................................................................................................................26

9. References ........................................................................................................................................................................26

1. Introduction

This project aim is to structure the implementation of a national cargo operator. It will be

the backbone of freight transport within the country main strategic points (ports, airports and

logistic platforms) and also a viable and efficient connection between Portugal, Spain and

consequently Europe.

2. Project overview

For this purpose, we propose the creation of the National Cargo Operator (NCO) which will

be responsible for all operations to implement the service, satisfy the demand and improve the

overall freight system transport performance. NCO is envisaged as a multi modal freight company,

providing the freight movement service using the railroad as the main axle and then providing the

complementary road transportation, achieving this way a door to door service to its customers. We

plan to use the already existing infrastructure (roads and rail) and, in case it is needed, to construct

and own the new links necessary to better integrate the supply chain.

2.1. Complexity and simplifications

Due to its dimension, complexity and time constraints, we opted to simplify the project. Our

initial idea was to simplify the project by just focusing on the freight rail transport between the

ports of Sines, Setúbal, and Lisboa with the Madrid region but we soon realize1 that this would still

be an impossible task to achieve in such a short period. Given these facts, we decided to orient the

project attention to the container freight movement between the port of Sines and the Madrid

region, which we considered as being the most promising connection due to the growing capacity

and demand of the Port of Sines.

2.2. Possible connections and alternatives

Figure 1 contains, besides the existing Portuguese rail network, the routes and alternatives

we have considered in our project and they represent the subject of our study and analysis.

1 With the help from our teachers

2.2.1. Base case scenario

This corresponds to the option of not making any new investment and using the existing

infrastructure. Nowadays a freight train that goes from Sines to Madrid has to go to Entrocamento

and Abrantes and takes around 9 hours to get to Elvas in the border (Pereira, 2006). There is a new

service provided by IberianLink, a joint between CP and RENFE, which also uses the existing

infrastructure. For this service the trains depart from Lisbon, Sines or Leixões using a electric

locomotive until Entrocamento, then exchange to a diesel locomotive and in the border there is a

new exchange where a RENFE locomotive takes place(Moura, 2009).

This scenario will be used as our reference data to compare the viability of the alternatives

we propose.

2.2.2. Alternative 1: Sines-Elvas direct

It consists in building a direct link between Sines and the border at Elvas at once. Since the

link between Casa Branca-Évora has already been remodeled, this option corresponds in building

the following new links: Sines-Grândola; Grândola-Casa Branca; Évora-Elvas.

2.2.3. Alternative 2: Sines-Elvas phased

In this alternative, instead of building the complete connection between Sines and Elvas we

add the option of flexibility by dividing the construction in two phases:

• Phase 1 – We construct the Sines-Grândola and Évora-Elvas links. Therefore, trains have

to go from Grândola to Évora using the Grândola-Poceirão-Vendas Novas-Casa Branca-

Évora connections, which means an increase in travel time and lower train capacity

compared with the direct connection.

• Phase 2 – Based on our projections and studies, we assess if there is any point in time

that the demand growth justifies the investment in the new link between Grândola and

Casa Branca and if it does, we perform the construction.

2.3. General structure of the project2

Our project will be a Design, Build, Own and Operate for a period of 24 years and due to its

nature, we consider this undertaking as a national interest project. NCO will rent the existing rail

2 A more detailed analysis is given in other sections

Figure 1 - Alternatives from port of Sines to the border at Elvas

Base Case

Sines-Elvas direct

Sines-Elvas phase 1

Sines-Elvas phase 2

infrastructure required for its operations and every new line built will be owned and operated by

NCO with the possibility of renting it to other future companies. Being a national interest project,

the Government will have a fundamental role in the whole project and will be one of the sources of

finance of the project. This investment will be done directly and indirectly, through its rail owned

companies CP and REFER, and it will provide part of the required initial investment and possible

investments that will be required in the future (for instance, when applying the flexibility option).

Several logistic operators of Portugal will also be interested in the project and they will

participate in the set up of the company by investing a part of the required financial needs of the

project. The port of Sines is a major relevant and interested partner for the project and for that

reason it is also included as one of NCO investor shareholders. Besides these investors, we have also

included other possible private investors in the shareholders pool.

Besides the described partners that will form the equity of NCO, the remaining financial

needs of the project will be covered by the European Community funds, the issuing of fixed rated

bonds and loans made by the European Investment Bank (EIB).

3. Project Operational Studies

3.1. Demand

The key parameter of our Project is the demand of containers (measured in TEUs) from the

port of Sines to Madrid, to be transported by Rail.

To be able to forecast this we looked at:

• historical rail freight movements3 from Portugal to Spain;

• historical container movements in the Ports of Setubal, Sines and Lisbon4, as well as these

ports maximum annual capacities;

• historical movements of containers from the ports mentioned to the hinterlands;

• prospects and capacity for the recent service Iberianlink, connecting the Ports of Leixões,

Sines, Lisbon and Setubal to the Spanish hinterland, namely Madrid;

• Luis Simões (major logistical Portuguese company) data on freight movement to Spain and

from Ports (all done by truck);

• Specialized press articles;

3 Of Containers, data supplied by CP 4 Data from the Ports Authorities, INE and Eurostat

• Experts Insight.

From this several sources and after careful calibration we constructed three scenarios (most

likely, low demand and high demand) and selected the Inputs for the Lattice model, that gives an

extensive array of outcomes for each of the scenarios. Next we present the most relevant data

collected.

From the data presented, and the answers we got from Luis Simões5, we can see that most of

the containers that arrive in the Ports are moved to the hinterland by train, and that the direct

shipment of containers from Portuguese Ports to Spain is negligible.

Still, the recent Iberianlink is reported to be a success6, with a predicted growth rate of 30%

for the next two years. Furthermore, the Port of Sines container terminal will expand is capacity to 1

500 000 TEUs per year. This expansion will be made counting on the Port capability to expand is 5 See Annex 1 6See Annex 2 (magazine articles)

Movement (TEUs) Unloaded Maximum Capacity (TEU)Years Setubal Lisbon Sines Setubal Lisbon Sines

1997 666 160408 Unload 170000 442500 750000

1998 2031 166152 Total 340000 885000 1500000

1999 964 179942 source: Port Lisboa, Port Sines, Consulting Port Setubal

2000 2069 1937332001 2913 2163742002 4649 246213 Setubal Lisbon Sines

2003 5785 275387 v (growth rate) 22.28% 5.30% 59.93%2004 9699 255776 9802 σ (variance) 41.04% 7.22% 22.18%2005 6450 258124 25816

2006 8018 255414 621902007 5906 277662 731352008 9976 277854 116559

source: Eurostat, Porto Lisboa, Porto Setubal, Transportes em Revista

Variance and Growth rates (per year) from the data

Figure 2 - Data from Ports

Containers Moved From Ports (TEUs)-2008

Setubal Lisbon Sines Containers Moved to Spain 2007

Total 19952 555708 233118 tons TEUs Revenue Revenue/Teu

By Rail 8,030 346,533 209806 47,162 3144 411,878 € 131 €

Rail Share 40% 62% 90.00% source CP

Source CP

IberianLink Characteristics (now 3 trains per week, possibilitie of 5)

Train Capacity (Teus) Frequency/Week W TEUs Per Year

44 3 52 6,864

44 5 52 11,440

Predicted Growth Rate in the 2 next years - 30%source: Transportes em Revista

Figure 3 - Data from Rail (in Ports and to Spain)

hinterland to Spain (Sines is at the same distance to Madrid as Barcelona, main Port that supplies

that city). So this port expansion7 depends on the construction of a new rail line to connect it to

Madrid. It´s importance is recognized by the European Union, and this line is on the TEN-T priority

projects. As for Rail as whole its share of total freight movement in Portugal as been slowly growing

in the last years and this seams a trend for the next years.

So the main factors to determine the parameters to input in the Lattice model were the Sines

Port historical and predicted growth rates as well as its capacity, and the Iberianlink record. We

calibrated8 these values for the Lattice so that in the most likely scenario, at the end of the 24 years

(24-27 because each period we consider are 3 years…) we got an average demand of about 440 000

TEUs, a bit more than half of Sines Capacity (of unloaded Containers) and a Probability Distribution

that allows for values as low as 5 000 TEUs and as high as 750 000 TEUs (the maximum capacity).

For the High scenario the final average is almost 700 000 TEUs, but the maximum value is still about

750 000 TEUs. In the low demand, average falls to 106 000 TEUs and the maximum value we can

obtain is about 280 000 TEUs moved. For all, we assumed that the starting point was a connection

like the Iberianlink function at maximum capacity, with 5 trains per week, each one carrying 44

TEUs, that gives a value of 11 440 TEUs per year.

3.2. Production, costs and revenues

But the fact that there is Demand doesn´t mean we can take advantage for it, since we might

be constrained by capacity of the lines we are using. Other crucial production factors are the price

we obtain per TEU shipped to Spain, our main source of revenues, the costs of operation and

maintenance, as well as the necessary initial investments. It’s not worth to match demand if the

costs to attain it are higher than the benefits.

7 Also Setubal port is well below is possible capacity, but we won´t focus on that… 8 See “Calibration1_LikelyScenario/Low and High” spread sheets in the respective files.

Parameters (per Year) Low Most Likely High S (start value) 11440 11440 11440v (Growth Rate) 5.99% 10.00% 12.48% σ (variance) 23.40% 21.11% 7.51%u (upside) 1.39 1.47 1.47 d (downside) 0.83 0.8 0.86 p (probability) 0.71 0.86 0.98

Parameters For Lattice Demand - TEUs From Sines to Spain By Rail

Figure 4 Parameters for the several Scenarios

The approach we pursued was to determine for each alternative9, the capacity, the

maintenance costs, the operational costs and the necessary initial investment. We used the

parameters in Figure 5.

Figure 5 - Production Parameters

This parameters were calculated based on several sources (CP, Refer, Magazines…), each

value is justified in the spreadsheet “Table1-Parameters”, of the excel file. Then we applied these

values to each section of each alternative we considered to make the connection from Sines and

Madrid (this was made on a table that is also presented in the mentioned spreadsheet). Than we

combined the sections of each alternative and constructed a second table (in the “Table2-

Alternatives-Costs” spreadsheet) that as a synthesis of the operational, maintenance and investment

costs, as well as the critical capacity, for each alternative.

On the next page we present the two mentioned pages.

9 Base Case, Sines Elvas Direct and Sines Elvas phased

Value Unit

Discount Rate (8) 12% Percentage

Cost remodeling(1) 0.78 10^6€ p/km

Cost new line(2) 3.2 10^6€ p/km

Capacity old line(3) 2 trains p/day

Capacity remodeled and new line(3) 100 trains p/day

1 TEU ≈ X TON(4) 22 tons

Capacity Train New 66 TEUs/Train

Capacity Train old 44 TEUs/Train

Maint. costs old line 0.01 10^6€ p/km/year

Maint. costs new line(5) 0.01 10^6€ p/km/year

Cost TEU new lines (6) 0.30 euros

Cost TEU old lines (6) 0.40 euros

Price per TEU(7) 334.30 euros

Rolling Stock Aquisition(9) - 1 44000000.00 euros

Rolling Stock Aquisition(9) - 2 56000000.00 euros

Figure 7 - Alternatives Costs and Capacities of each alternative

As can be seen, to fit the scope of this assignment we limited the amount of options we intended to explore…

We chose to approach it as an economical and financially viable project per se and that is why we selected a discount rate of 12%, a

common rate applied in developed countries for private projects, although for projects of such national (and European) strategic

importance sometimes the discount rates can go to 4-5%.

TEUS TEUS TEUS 10^6 euros 10^6 euros euros euros euros Years

Sections Critical Capacity LX-Sines Critical Capacity Sines-Elvas Critical Capacity Poceirão-Elvas Inv. Maint. Cost TEU LX-Sines Cost TEU Sines-Elvas Cost TEU Poceirão-Elvas Construction Time

Base Case

Sines-Ermidas Sado

Ermidas Sado-Grândola

Grândola-Poceirão

Lisboa-Entrocamento-Elvas 27544 27544 0 5 51 0 108

Sines-Elvas

DIRECT

Poceirão-Grândola

Sines-Grândola

Grândola-Casa BrancaCasa Branca-ÉvoraÉvora-Elvas 495792 2065800 528 3 32 57 0 2

Sines-Elvas

Phase1

Sines-GrândolaGrândola-PoceirãoPoceirão-Casa BrancaCasa Branca-ÉvoraÉvora-Elvas 495792 27544 464 3 32 0 63 1

Sines-Elvas

Phase 2.1

Poceirão-Grândola

Sines-Grândola

Grândola-Casa Branca

Casa Branca-Évora

Évora-Elvas 495792 2065800 64 3 32 57 0 1

Sines-Lisboa-Elvas

Phase 2.2

Sines-Grândola

Grândola-Poceirão

Poceirão-Casa BrancaCasa Branca-ÉvoraÉvora-Elvas 495792 2065800 47 3 32 57 1

Sections distance(km)

Capacity (train

p/day)

TEU Cap Section

p/year

Maint.Cost

106€

Cost/TEU/pk

m €

Cost section

p/TEU €

Capacity (train

p/day)

TEU Cap Section

p/year

Maint.Cost

106€ Cost/TEU/pkm

Cost section

p/TEU Inv. 106€

Capacity (train

p/day)

TEU Cap Section

p/year

Maint.Cost

106€

Cost/TEU/p

km

Cost section

p/TEU Inv. 106€

Sines-Ermidas Sado 50.7 2 27544 0.6591 0.40 20.28

Ermidas Sado-Grândola 27.4 2 27544 0.3562 0.40 10.96

Grândola-Poceirão 65 24 495792 0.65 0.30 19.5

Sines-Grândola 40 100 2065800 0.4 0.30 12 128

Grândola-Casa Branca 20 100 2065800 0.2 0.30 6 64

Casa Branca-Évora 25 100 2065800 0.25 0.30 7.5

Poceirão-Casa Branca 60.1 2 27544 0.7813 0.40 24.04 100 2065800 0.601 0.30 18.03 46.878

Évora-Elvas 105 0 100 2065800 1.05 0.30 31.5 336Lisboa-Entrocamento-Elvas 271 2 27544 3.523 0.40 108.4

Existing line Remodelling line New line

Figure 6 - Calculation of Costs/Capacity for each section

3.3. Cash Flows and NPVs

To compute the cash flows we first calculated the Production we were able to satisfy and

the demand that wasn´t constrained by capacity (that we assumed to be the lines capacities, given

by the number of trains they can take and the extent of those trains).

Then we calculated the costs, which are the investments in new lines, plus the maintenance

costs of the lines (they are our infrastructure) we manage and the operational costs that depend on

the production. As you can see in Figure 7 for each alternative there are different values. In the

excel spreadsheets there are comments on the cells that have an explanation on how the values are

computed.

The revenues are the production (TEUs moved to Spain), multiplied by the Price. In the

RENFE (Spanish main Rail Company) webpage the prices to move containers from the Ports of

Sines/Setubal and Lisbon are available10.

Using the Lattice model, for each period there are several possible Demands, each with a

probability, so for each period we get several possible Cash flows. We simply discount these cash

flows to the corresponded period they were made and multiply each of the period cash flow for its

probability, that way we get for each period an expected discounted cash flow, simply add them and

we have the expected Net Present Value. Or we can only discount after having the expected value of

each period cash flow like shown in the figure below.

Figure 8 - Expected NPV for the Sines-Elvas Direct Alternative

3.4. Flexibility

One of the main instruments to cope with uncertainty is to have a flexible design of the

project that will minimize the costs when there are down sides (in our case low demand from Sines

10 See “Table1-Parameters” Spreadsheet

Probability -528,000,000.00 5452310 9552043 14362632 20124007 27132190 35755136 46452617 59801237Weighted -5,103.17 852894 2734219 5889486 10683598 17628239 27425418 41025336Cash Flow -30,559.55 65917 479390 1458316 3343634 6614019 11946887

-7,620.99 -4,598.60 58435 273255 793425 1864787-1,441.32 -3,171.19 3296 40473 155221

-243.71 -850.81 -761.16 4322-38.82 -180.52 -352.24

-34.20Witout Initial Investment

0 1 2 3 4 5 6 7 8

E [Cash Flow] 0 5,447,207 10,374,377 17,155,147 26,486,844 39,329,124 57,002,671 81,325,011 114,797,403PV( E[Cash Flow]) 0 3,877,215 5,255,982 6,186,318 6,798,513 7,185,284 7,412,604 7,527,411 7,563,094ENPV over 18 years 36,715,916

ENPV over 24 years 51,806,422

With Investment0 1 2 3 4 5 6 7 8

Initial Investment 528,000,000.00 €Op Cash Flow 0 € 5,447,207 € 10,374,377 € 17,155,147 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,011 € 114,797,403 €PV( E[Cash Flow]) 528,000,000 3,877,215 5,255,982 6,186,318 6,798,513 7,185,284 7,412,604 7,527,411 7,563,094ENPV over 18 years 491,284,084

ENPV over 24 years 476,193,578

to Madrid) and easily take advantage when opportunities emerge. Our flexible option consisted in

just building the Sines-Grândola (see Figure 1) and Évora-Elvas sections of the Sines-Elvas line (the

key sections to get a better connection to Spain), leaving for latter the option to add the Grândola-

Casa Branca section.

So the last section is only built if the increase in Production it allows can deliver cash flows

that support the costs of this extra investment. And of course due to this the initial investment is

also smaller. On Figure 9, Figure 10 and Figure 11 we present several comparisons between the

option with flexibility and without it.

Figure 9 - Value of flexibility for the several scenarios

Figure 10 - Comparison of the several Alternatives in the “most likely” scenario

Figure 11 - VARG curve, Phased and Direct Alternatives in the "most likely" scenario

High Demand Most Likely Low Demand

Project with Option OFF $446,811,439 Project with Option OFF $449,400,397 Project with Option OFF $454,651,901Project Flexible (option in) $439,145,569 Project Flexible (option in) $442,919,784 Project Flexible (option in) $454,651,901Value of Flexibility $7,665,870 Value of Flexibility $6,480,613 Value of Flexibility $0

Project Direct (Sines-Elvas) $455,420,014 Project Direct (Sines-Elvas) $476,193,578 Project Direct (Sines-Elvas) $502,151,150Project Flexible (option in) $439,145,569 Project Flexible (option in) $442,919,784 Project Flexible (option in) $454,652,041Value of Flexibility $16,274,445 Value of Flexibility $33,273,794 Value of Flexibility $47,499,110

Value Of Flexibility

Alternatives Inititial Investment Max NPV Min NPV Expected NPV(Euros) (Euros) (Euros) (Euros)

Base Case (Iberian Link) 0 € 16,834,278 € 37,597,520 € 18,962,012 €SinesElvasDirect 528,000,000 € 451,803,646 € 533,200,824 € 476,193,578 €SinesElvasPhased (flexible) 464,000,000 € 422,817,358 € 482,975,573 € 442,919,784 €

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

-540.00 € -520.00 € -500.00 € -480.00 € -460.00 € -440.00 € -420.00 € -400.00 €

Cumulative Probability

NPV (€)

Millions

VARG curves - Comparison Direct vs Phased

SinesElvasPhased NPV (SinesElvasDirect)

As presented on Figure 9, in this case, flexibility has always a high value. Performing a

sensitivity analysis on the discount rate the flexible solution maintains a higher expected NPV,

when compared with the “built all at once” solution.

Figure 12 - Sensitivity analysis for NPVs in the "most likely" scenario

Here we should add that through the Lattice model, for each period and for the several

possible outcomes of each period, an evaluation is made if it’s worth to call in the flexible option.

This involves evaluating, from the state we are in, given the future range of option if we gain more

by investing and increasing our capacity (and decreasing maintenance and operational costs per

TEU), or if we are better without making the investment and using the initial infrastructure. The

“technicality” can be appreciated in “LatticeSinesElvasPhased” spreadsheet of the files.

Figure 13 - When is the Option called in the most likely scenario

To calculate the expected NPV we need to evaluate every possible path of the Lattice, in this

case 256 (in the spreadsheet example given to us, there were only 6 periods, what is equivalent to

600,000,000

500,000,000

400,000,000

300,000,000

200,000,000

100,000,000

0

20

%

19

%

18

%

17

%

16

%

15

%

14

%

13

%

12

%

11

%

10

%

9%

8%

7%

6%

5%

4%

3%

NP

Vs

(eu

ros)

NPVs varing with Discount Rate

Sines Elvas Phased

Sines Elvas Direct

0 1 2 3 4 5 6 7 8

Excercise CALL NO NO YES YES YES YES YES YESOPTION ? NO NO NO NO NO NO NO2.6 NO NO NO NO NO NO

NO NO NO NO NONO NO NO NO

NO NO NONO NO

NO

64 different paths…) different possible NPVs, and for each we have to judge if along the path the

option in is considered or not.

4. Project Financial Studies

As can be seen in the excel files and Figure 10, Figure 11 our “economical” NPVs are

negative, and the Base Case (Iberian Link) presents the higher value (even though it’s still

negative…). But this can be misleading because there are inputs that we still didn´t accounted for,

such as the European Union funds that cover 50% to 70% of the construction costs of the new

lines. Second, we should also analyze the cash flows the alternatives generate in each period and, in

the option seen in Figure 14, each period generates considerable returns, which does not happen

for the base case where all periods give negative cash flows.

Figure 14 - Cash Flows of Phased Alternative, most likely scenario.

So, although the Base case as an apparently better value of NPV, in fact, the other options

have lower values due to the very high initial investment and the fact that the higher returns only

come further in the future, and their weight is greatly reduced due to the discount rate effect.

4.1. Structured Finance

So, to proper set up our PPP and its financial structure (and even institutional structure…)

we started by the concept, moved to analyze the project economics/engineering and then on top of

that designed the best financial arrangements to support the project. In Figure 14 we present the

structured finance for the Phased alternative, the one that provided the best economical solution, in

the “most likely” scenario. For the other scenarios we tested also our financial arrangements, the

results and analysis are in the Results Assessment. The consequences on the PPP institutional

setting, financial sources and the risk allocation are discussed in further detail on chapter 6 (PPP

design).

Without Investment acounted For0 1 2 3 4 5 6 7 8

E [Op Cash Flow] 0 € 1,930,249 € 6,190,393 € 8,029,278 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PV E [Op Cash Flow] 0 € 1,373,913 € 3,136,246 € 2,895,438 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €ENPV over 18 years 28,801,998 €

ENPV over 24 years 43,892,503 €

With Investment0 1 2 3 4 5 6 7 8

Initial Investment 464,000,000 € 64,000,000 €E [Op Cash Flow] 0 € 1,930,249 € 6,190,393 € 8,029,278 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €E [Cash Flow] 464,000,000 € 1,930,249 € 6,190,393 € 55,970,722 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PV( E[Cash Flow]) 464,000,000 € 1,373,913 € 3,136,246 € 20,183,604 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €ENPV over 18 years 458,277,044 €

ENPV over 24 years 443,186,539 €

Figure 15 - Phased Alternative, most likely scenario, cash flow with financial arrangements

We started with the cash flows generated from the project, than added the infrastructure

investments; we selected period 3 to call in option because it gave the better expected NPV11.

4.1.1. Rolling Stock

Then we add the rolling stock acquisition costs (based on the recent CP fleet renewal

numbers), this wasn´t included in the economical analysis for a reason, and it’s also a consequence

of the Project concept and institutional setting. CP is one of the stakeholders of this company, so it

will support these costs. Actually the equity investment is exactly 95% of the costs of the rolling

11 This doesn´t mean we will do it in that year, it means it is the most likely option we will make. The value of flexibility is exactly to have the capacity to make decisions in the future and don´t compromise everything at the beginning. As you will see in the other scenarios the years we choose are different.

t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 t = 7 t = 8

Period 0 1 2 3 4 5 6 7 8

Years 0 3 6 9 12 15 18 21 24

Value 0 € 1,930,249 € 6,190,393 € 8,029,278 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PresentV 0 € 1,373,913 € 3,136,246 € 2,895,438 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €

Value 464,000,000 € 0 € 0 € 64,000,000 € 0 € 0 € 0 € 0 € 0 €

PresentV 464,000,000 € 0 € 0 € 23,079,042 € 0 € 0 € 0 € 0 € 0 €

Value 44,000,000 € 0 € 0 € 56,000,000 € 0 € 0 € 0 € 0 € 0 €PresentV 44,000,000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Value 232,000,000 € 0 € 0 € 32,000,000 € 0 € 0 € 0 € 0 € 0 €PresentV 232,000,000 € 0 € 0 € 11,539,521 € 0 € 0 € 0 € 0 € 0 €

Value 276,000,000 € 1,930,249 € 6,190,393 € 79,970,722 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PresentV 276,000,000 € 1,373,913 € 3,136,246 € 8,644,083 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €

Equity

CP 41,800,000 € 0 € 0 € 50,400,000 € 0 € 0 € 0 € 0 € 0 € Port of Sines 13,800,000 € 0 € 0 € 1,599,414 € 0 € 0 € 0 € 0 € 0 € Private Logistic Operators 13,800,000 € 0 € 0 € 1,599,414 € 0 € 0 € 0 € 0 € 0 € Government 41,400,000 € 0 € 0 € 5,597,951 € 0 € 0 € 0 € 0 € 0 € Refer 13,800,000 € 0 € 0 € 1,599,414 € 0 € 0 € 0 € 0 € 0 € Private Investors 12,460,000 € 0 € 0 € 1,215,924 € 0 € 0 € 0 € 0 € 0 €

Total Equity Value 137,060,000 € 0 € 0 € 62,012,118 € 0 € 0 € 0 € 0 € 0 €PresentV 137,060,000 € 0 € 0 € 22,362,191 € 0 € 0 € 0 € 0 € 0 €

Fixed Rate Bonds Issued Value 55,200,000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 55,200,000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Payment of Bonds

24 Year Maturity 0 € 0 € 0 € 0 € 0 € 16,560,000 € 16,560,000 € 16,560,000 € 71,760,000 €

Total Payment Value 0 € 0 € 0 € 0 € 0 € 16,560,000 € 16,560,000 € 16,560,000 € 71,760,000 €PresentV 0 € 0 € 0 € 0 € 0 € 3,025,450 € 2,153,456 € 1,532,787 € 4,727,700 €

European Investment Bank Value 100,488,000 € 10,101,790 € 10,101,790 € 10,101,790 € 10,101,790 € 30,305,370 € 30,305,370 € 30,305,370 € 30,305,370 €Loan - 1st Loan PresentV 100,488,000 € 7,190,255 € 5,117,881 € 3,642,807 € 2,592,878 € 5,536,678 € 3,940,898 € 2,805,053 € 1,996,582 €

European Investment Bank Value 0 € 0 € 0 € 24,244,116 € 0 € 0 € 0 € 0 € 0 €Loan - 2nd Loan PresentV 0 € 0 € 0 € 8,742,671 € 0 € 0 € 0 € 0 € 0 €

Payment Value 0 € 0 € 0 € 0 € 3,262,939 € 3,262,939 € 8,701,170 € 8,701,170 € 8,701,170 €PresentV 0 € 0 € 0 € 0 € 837,515 € 596,127 € 1,131,497 € 805,377 € 573,251 €

Value 16,748,000 € 8,171,541 € 3,911,397 € 3,816,279 € 13,122,115 € 10,799,185 € 1,436,130 € 25,758,465 € 4,030,862 €PresentV 16,748,000 € 5,816,342 € 1,981,635 € 18,817,973 € 3,368,120 € 1,972,971 € 186,754 € 2,384,194 € 265,562 €

Value 16,748,000 € 8,576,459 € 4,665,062 € 848,783 € 13,970,898 € 3,171,713 € 4,607,843 € 30,366,308 € 34,397,170 €PresentV 16,748,000 € 10,931,658 € 8,950,023 € 27,767,996 € 31,136,116 € 29,163,145 € 29,349,899 € 31,734,093 € 31,999,654 €

FINAL NPV 31,999,654 €

Acumulated

Final Cash Flow

Value

E [Operational Cash Flow]

(without initial Investment )

Initial Investment

(New Lines)

Rolling Stock Aquisition

European Union

Funds (outwright grant)

Cash Flow with Investments,

Operations and EU Grant

stock acquisition. This can be seen as CP conceding part of their Rolling Stock, personnel and

knowhow to the new company, more than as a financial transaction.

4.1.2. European Funds

Although the European Funds can cover up to 70% of the project new infrastructure costs,

we used some caution and just considered a cover of 50%.

4.1.3. Equity

We defined the Equity contributions as being determined by what will foster the project

dynamic more than the pure financial gains. So, finance was structured as a tool to provide a sound

economical project, and maximize its performance and not as an end to maximize itself. In the end it

will be the cash flows generated and the services provided that will be determinant to evaluate the

value of the project.

CP contribution to the equity was 95% of the rolling stock costs (for the 1st Phase and 90%

for the second phase, if the option is called in).

The Port of Sines will come up with 5% of the investment necessary to cover the initial costs

of the project (after discounting the European Union Funds). Several private logistical operators

(like Luis Simões, or a foreign company like Fedex) should also contribute in the same measure as

Port of Sines, as well as Refer. The Government will enter with 15% of the required investment of

the initial cost coverage. Then there will be room for other Private investors (like other Rail

companies, why not Railex or Deutsche Bahn?) that should put a value equivalent to 10% of the

sum of the above mentioned. In the end each actor share is resumed in Figure 16.

For the Phased option, in the most likely scenario, the Equity/Debt ratio is 0.97, which is

almost one (half debt, half equity).

4.1.4. Debt

There will be two forms of Debt, first are Bonds issued by the company with a fixed 5% year

rate12. This is a very appealing rate since maturity will be reached in 24 years, so every year the

investor will get 5% of his initial investment for a 24 year period (this gives a 120% return, plus the

initial investment…). The catch is that NCO will only start to pay the returns on the 5th period (15th

year). For the project is good the diversify the sources of finance, to involve investors that don´t

want to be shareholders (it´s less risky…) and it allows NCO to receive money at the start of the

12 In the Excel file there are detailed explanations and comments on this and the Loans

project that it will only have to pay back 15 years from now. They will be issued in a value

correspondent to 20% of the initial necessary investment.

We will also go to the European Investment Bank for a Loan, given the scope of the Project it

will be granted, and it as very favorable conditions. We can start to pay after the end of

construction; the interest rate is indexed to Libor and it´s 2% per year; we also intend to negotiate

the payment and in the first periods (first 4 periods, 12 years) have a lighter burden and pay more

latter on. This loan will be paid on a 24 years period.

If we call in the option we will make o second loan to the EIB, in similar conditions but with

a shorter payment time.

4.1.5. Return on Equity

This combination of sources gives a constant positive cash flow, and a positive NPV for the

project (in the most likely scenario). Still we didn´t counted the return on equity. This is shown in

Figure 16.

Figure 16 - Return on equity at the end of the project and share of equity of each stakeholder

The cash flow provides the Private partners with a present value in the end of the project

(24 years) very close to the initial investment they made (let us remind that discount rate is 12%),

if we extended the period in analysis than this would be covered… But the Privates will be able to

do this because we assume the state (and public companies) won´t receive their share of return on

equity. But some comments are required:

First the State can and should buy bonds to invest in the project, and this was a way to get

returns; the sunk investment taken is not so extraordinary that couldn´t be justified by other

sources of income, like increase in taxes due to growing economic development, the best example is

the Port of Sines expansion, this link is key for its continuous expansion, so even if the Port of Sines

won´t gain win millions with this, it will have to do it to be able to gain millions on the Port

activities (or at least cover the ongoing infrastructure and service investments)…

initial invest. (% of share) With Gov Comp. Without Gov. Comp CP 41,800,000 € 30.5% 9,759,124 € Port of Sines 13,800,000 € 10.1% 3,221,912 € 11,023,346 € Private Logistic Operators 13,800,000 € 10.1% 3,221,912 € 11,023,346 € Government 41,400,000 € 30.2% 9,665,735 € Refer 13,800,000 € 10.1% 3,221,912 € Private Investors 12,460,000 € 9.1% 2,909,059 € 9,952,963 €

Return by end of project (PV)

In combination with the Ports of Setubal, Lisbon and other sources of cargo (that´s why it´s

important to bring a nice logistical operator on board) the results could be even more positive.

5. Results Assessment

In order to assess the global results we obtained we present the following graphs (in the

excel files more information is available, for instance VARG graphics for every alternative in every

scenario are presented):

Figure 17 - Financial NPVs

The “High demand” scenario doesn´t provoke great changes in the financial structure of the project,

but it greatly improves its performance. In the low scenario case there is a greater impact, the

second option is not called in (and a second loan with EIB is not pursued) and the government is

forced to pay a share of the debt service. The private Investors (shareholders, not the bond buyers)

will also be hurt because there are less returns of the cash flow. We made the option that half the

cash flow generated would go to pay the debt and the rest would stay in the company.

0 €

20,000,000 €

40,000,000 €

60,000,000 €

80,000,000 €

100,000,000 €

120,000,000 €

140,000,000 €

160,000,000 €

180,000,000 €

20

%

19

%

18

%

17

%

16

%

15

%

14

%

13

%

12

%

11

%

10

%

9%

8%

7%

6%

5%

4%

3%

NP

Vs

(eu

ros)

Discount Rates

Financial NPVs of Phased Option in all scenarios

Most Likely

High

Low

Figure 18 - Return on Equity for Phased Option

Figure 19 - Cash flow for the low scenario (phased alternative)

Most Likely


High


Low

initial invest. (% of share) With Gov Comp. Without Gov. Comp CP 41,800,000 € 39.3% 2,579,192 € Port of Sines 9,160,000 € 8.6% 565,201 € 1,000,627 € Private Logistic Operators 9,160,000 € 8.6% 565,201 € 1,000,627 € Government 27,480,000 € 25.8% 1,695,603 € Refer 9,160,000 € 8.6% 565,201 € Private Investors 9,676,000 € 9.1% 597,040 € 1,056,995 €




Value 0 € 707.484 € 3.006.559 € 5.010.384 € 6.522.352 € 7.323.671 € 8.365.174 € 8.760.663 € 9.163.251 €PresentV 0 € 503.573 € 1.523.216 € 1.806.795 € 1.674.125 € 1.338.007 € 1.087.804 € 810.884 € 603.694 €

Value 464.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

PresentV 464.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Value 44.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 44.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Value 324.800.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 324.800.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Value 183.200.000 € 707.484 € 3.006.559 € 5.010.384 € 6.522.352 € 7.323.671 € 8.365.174 € 8.760.663 € 9.163.251 €PresentV 183.200.000 € 503.573 € 1.523.216 € 1.806.795 € 1.674.125 € 1.338.007 € 1.087.804 € 810.884 € 603.694 €

Equity

CP 41.800.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Port of Sines 9.160.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Private Logistic Operators 9.160.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Government 27.480.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Refer 9.160.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Private Investors 9.676.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Total Equity Value 106.436.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 106.436.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Fixed Rate Bonds Issued Value 36.640.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 36.640.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Payment of Bonds

24 Year Maturity 0 € 0 € 0 € 0 € 0 € 10.992.000 € 10.992.000 € 10.992.000 € 47.632.000 €

Total Payment Value 0 € 0 € 0 € 0 € 0 € 10.992.000 € 10.992.000 € 10.992.000 € 47.632.000 €PresentV 0 € 0 € 0 € 0 € 0 € 2.008.197 € 1.429.395 € 1.017.415 € 3.138.096 €

European Investment Bank Value 48.148.800 € 4.840.270 € 4.840.270 € 4.840.270 € 4.840.270 € 14.520.811 € 14.520.811 € 14.520.811 € 14.520.811 €Loan - 1st Loan PresentV 48.148.800 € 3.445.209 € 2.452.232 € 1.745.450 € 1.242.377 € 2.652.898 € 1.888.280 € 1.344.041 € 956.662 €

European Investment Bank Value 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €Loan - 2nd Loan PresentV 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €

Payment Value 0 € 0 € 0 € 0 € 0 €PresentV 0 € 0 € 0 € 0 € 0 €

Government Debt Service Value 21.850.975 € 21.330.224 € 21.132.479 € 57.571.185 €(payment of Bonds and Debt) PresentV 3.992.091 € 2.773.774 € 1.956.014 € 3.792.911 €

Value 8.024.800 € 4.132.786 € 1.833.711 € 170.113 € 1.682.082 € 3.661.835 € 4.182.587 € 4.380.331 € 4.581.625 €PresentV 8.024.800 € 2.941.635 € 929.015 € 61.345 € 431.749 € 669.004 € 543.902 € 405.442 € 301.847 €

Value 8.024.800 € 3.892.014 € 2.058.303 € 2.228.416 € 3.910.498 € 7.572.334 € 11.754.921 € 16.135.252 € 20.716.878 €PresentV 8.024.800 € 5.083.165 € 4.154.149 € 4.215.494 € 4.647.243 € 5.316.246 € 5.860.148 € 6.265.590 € 6.567.437 €

FINAL NPV 6.567.437 € Equity/Debt Ratio 1,26

Value

E [Operational Cash Flow]

(without initial Investment )

Initial Investment

(New Lines)

Rolling Stock Aquisition

European Union

Funds (outwright grant)

Cash Flow with Investments,

Operations and EU Grant

Acumulated

Final Cash Flow

6. PPP design

This will be a Design, Build, Own and Operate for a period of 24 years. Nevertheless, a

performance evaluation after 10 years should be done and assessed if the NCO should continue as it

is, i.e., private (mixed capital) operator or whether it should be transferred to the State or other

solutions. The scheme in Figure 21 describes the structure, the agents involved and their relations

and the financial mechanisms that together set up the PPP we are proposing.

6.1. Agents involved

As previously stated, we intend this project to be regarded not as an introduction of

competition, although somehow inevitable, but as a structuring of the freight cargo movement. The

agents involved in our project are those who participate in the equity of NCO, the European

Investment Bank through its loans, the European Community through its grants and the private

investors that acquire the issued bonds. Besides them, the principal agent in the whole process is

the State, which is involved directly and indirectly (through CP and REFER) in the equity as well as

the proposed main bond buyer.

6.2. Finance sources

NCO funds will be raised by 4 different sources: equity; EC grants; EIB loans and finally by

issuing fixed rated bonds.

6.2.1. Equity

A part of the financing will come from a pool of assets/funds assembled by the main

stakeholders of this project. Figure 20 states the distribution of equity of NCO and as we can see the

private sector is represented with a around 30% of the total shares whereas the State has directly

30% plus 40% through its public companies CP and REFER.

Figure 20 - Equity distribution

(% of share) CP 30% Port of Sines 10% Private Logistic Operators 10% Government 30% Refer 10% Private Investors 9%

Equity

The private investors can be either national or international players. We consider that this

can be an attractive strategic investment for foreign rail companies and logistic operators because

of the potential the Sines port can bring to their supply chains in a European scale.

6.2.2. European grants

The European grants we are foreseen to obtain will come from the following different EC

programs:

• Marco Polo program (shift of freight movement from roads to rail/sea)

• European Regional Development Fund (ERDF)

• TEN-T European program

• Motorways of the Sea program

Due to the fact that the Sines-Madrid-Paris railway link is one of the TEN-T priority links,

this project can receive funds up to 70% of the required investment on infrastructure but, to reflect

possible problems that can occur and to make it less dependent on those grants, we have

considered only 50%. This grant will be used in the start of the project for the Sines-Elvas direct

alternative but for the Sines-Elvas phased option, the fund will be used in the start of the project

and also when the flexibility option of constructing the Grândola-Casa Branca section is given the

“green light”.

6.2.3. EIB loans

The European Investment Bank provides loans at very good interest rates for projects that

are in the scope of the EC objectives and NCO falls in this category. These loans will be required

when investments are needed, i.e., at the start of the project for both alternatives and, for the

phased alternative, when it is decided to construct the new link. They will start to be repaid 3 years

after they are granted, taking advantage of the possibility given by the EIB to start the payment of

the loans only after construction and at beginning of operations, the so called grace period (EIB,

2009).

6.2.4. Fixed Rate Bonds

The final funding mechanism for our project will be the issue of bonds with a maturity of 24

years, paying an annual fixed interest rate of 5%, with the coupons repayment to start after 15

years from the start of the project. This would enable us to receive cash when issuing the bonds and

only cash-out after at least 15 years, when the projections in the most likely scenario provide good

operational cash flows that can cover these repayments.

These bonds can represent a good investment to the State as they can receive the interest

on their investment and at the same time send a strong message that this project is backed by the

Government. Also, the State can foster the acquisition of these bonds by the private sector by

providing accessible loans through its national bank CGD.

6.3. Major uncertainties

The project contains several uncertainties associated which can affect its performance. The

following subsections describe the ones we considered relevant.

6.3.1. Total freight movement

Given this is the major uncertainty of the project, we have dedicated our attention to its study

and considered several scenarios for different types of growth to understand the strengths and

weaknesses of the project (see Project Operational Studies). We consider this risk to be very important

due to the fact that, even if we capture a substantial share of the market, if there is a significant

reduction in total freight movement we will not be able to generate enough returns to cover the

financial needs of the project. Also, it is important that not only the Sines port continues to expand but

also that the container movement, which is market segment we are addressing, also expands. This is

partially mitigated by having a flexible design.

6.3.2. Share of the market and competition

The viability of this project depends on, not only having a growing demand, but on the ability of

this growth to be captured by NCO. In Figure 3 we can see that currently 90% of the total containers

moved in Sines where using the rail mode which leads us to conclude that there is a considerable

probability that the containers that come to Sines to go to Madrid will in fact use the rail mode13.

13 We have also inquired Luís Simões to assess how many containers they move to Madrid from Sines by road and the answer was that only Tons were moved, not containers. See Annex A, Luís Simões. (2009)

NCO

Special purpose vehicle

Build new lines Remodel existing lines

Design the alternative paths and phases for the service it will provide

Owns the new and

remodeled lines

Operates container freight cargo between Lisbon/Sines and Madrid as well as possible intermediate services

Receives payment for owned

infrastructure rented to other

possible operators.

Pays fees to REFER owned infrastructure that NCO might use in its routes.

Possible payments to CP for use of its rolling stock

State

Debt

European

Funds

European Investment Bank

Equity/Shareholders

• CP • REFER • Government • Logistic Operators (ex: Luís

Simões) • Port of Sines • Other investors

Investors Buy

BuyLoans

Receives for ton/km

Other costs:

• Maintenance costs • Operational costs • Outsourcing services Other revenues • Other services

(inventory manage, administrative, etc)

Figure 21 - PPP Scheme

Bonds

• Issue Fixed rated Bonds

To make sure that this growth is captured, and since the main goal is to connect Sines to Madrid,

the connection from the border to Madrid as to be reliable and efficient, otherwise this can hinder the

success of the project.

6.3.3. Oil Price

This is significant part of our operational costs but we also consider that high oil prices can be an

advantage to us because it will increase much more the price/costs road transportation. Either way, it’s a

significant factor to take into account in terms of uncertainty.

6.3.4. Availability of partners

As seen in Figure 20, the private sector (port of Sines, private logistic operators and other

private investors) represent around 30% of the total equity of our project which means it is

important to attract them to invest in the project to cover the required NCO financial needs. By

having the Government involved in the project with around 70% of equity (direct and indirect) as

well as the probable main bond buyer this represents a strong incentive for privates to invest in the

project.

6.3.5. New infrastructure developments (future rail, highways, ports)

From a national perspective, this is a risk that can be somehow mitigated since the State is

directly involved in the project and it will, in principle, not build other infrastructure that can cause

instability in NCO but this can in fact happen. There is also the possibility that Spain can build new

infrastructure, for instance, a new or expanded port, or can create the conditions to have very

competitive prices in existing ports, which can cause the Sines demand to reduce substantially and

shift to other ports.

6.3.6. Technical developments in rolling stock

These developments can be either an advantage as well as a disadvantage. An advantage due

to the fact that there are some advances that can facilitate the movement of cargo by container (like

refrigerated containers or fast loading and unloading mechanisms for rail container cars) and a

disadvantage if new developments arise in the road haulage sector that can shift the container cargo

movement to trucks.

6.3.7. Regulatory framework

Again, depending on the framework implemented, it can either be an advantage (more EU or

national restrictions on the road haulage sector) or disadvantage (for instance, if it is allowed that

huge articulated road vehicles are allowed to operate) for NCO operations. .

6.3.8. Social/Political unrest

It has to be considered but both Portugal and Spain have had for the last decades a stable

period of stability.

6.4. Risk Allocation

Over leverage and decoupling between shareholder and stakeholders interests as been a

source of many problems in today’s financial (and the rest…) world. So, when setting up the

financial structure one main concern is that the risk of the project should be mainly assigned to the

shareholders/stakeholders that will pool their resources and form the bulk of the equity cake. The

objective is to have an integrated approach to Financing, Designing, Building and Operating. This

implies that the design, construction, and operational risk will be shared by the shareholders and it

is in their best interest to turn the project a successful operation. Since they are equity holders and

share the risk, they will have an important role in mitigating this risk, which they can accomplish by

making use of the NCO services as well, adjusting their supply chains and operations to take full

advantage of NCO.

In many PPP arrangements the risk of the project is split in Design, Construction,

Commercial and availability with different partners coping with different risks. This is not our

approach, each partner is accountable according to its share of equity. So in this case the private

sector represents 30% of the total equity which, according to some experts14, is considered a good

allocation of the risk.

Since this project is of strategic national interest, it is paramount that the State supports it.

The State will have a part of the equity share (that will only be repaid if there are available funds

after all other private investors are paid), and also be one of the main bond buyers. Nevertheless,

the intention is that, at least the bonds will be repaid at the end of the project with a large amount of

money coming from the earned interests. This considerations plus the fact that the EIB is giving a

considerable loan (that should be paid in the project lifecycle) that, in case of default the State can

be called in to assume the debt, implies that a substantial part of the financing and commercial risks 14 Professor Werner Rothengatter, which gave a session about financing of PPP projects, stated that 30% of equity and 70% of Government fund was not only a good proportion as it was the one being used in the Stuttgart 21 project.

are within the State side, so in fact the private risk is not exactly 30% as their share indicates. Still as

the results of return on equity in the “low demand” scenario show they still bare a considerable

commercial risk.

As well, the State will also assume the “Bureaucratic Risk”, that is getting environmental

(and other required) licenses for the possible new links to be constructed.

6.5. Performance targets and quality control

This will be a DBOO with a possibility of transfer at the final of the 24 year concession

period. What we propose is to devise a performance mechanism and metrics that can evaluate how

is the project running. If after the 24 year period the project is performing well according to the

defined metrics then it should not be transferred to the state but instead a new concession period

should be awarded. This is another measure that creates the incentive for NCO to be focus,

productive and efficient.

The performance indicators and quality measures we will use are:

• Share of the market –Setting different targets for freight movement to Spain, above and

below 400km in Portugal;

• Availability of infrastructure we own and services we provide, with the exception of third

parties causing the lack of availability (this applies to the services since we will use

infrastructure we don’t own).

• Capacity to cover the debt obligations to EIB and bond holders and provide profits to the

private shareholders, with the government being awarded its part of the profit if and only

enough funds are available.

• Ability to reduce total CO2 emissions due to freight traffic movement.

• Reduction of travel time between certain established points, (ex: Sines-Madrid)

6.6.Externalities

In our assessment, we have no considered the externalities explicitly but, with the

considerable involvement of the State in the whole project, it is implicit that, although it may not get

direct profit from the project itself, there are substantial positive externalities that will be realized:

• CO2 emission reduction

• Less energy consumption

• Economic development of the region of Sines and its hinterland

• More tax revenues from operations, land developments, contracts with major

logistic players, etc.

• More efficient logistic operations inside Portugal and better connection to Europe

through Spain.

• Attraction of industries that rely on the reliable and efficient logistic operations,

which can be provided by Sines and NCO.

7. Conclusions

Even though this report tackles all the main issues necessary to set up this PPP there were

some important items that weren´t considered like the Cost of Capital, namely the weighted average

capital cost or the impact of taxes in the financial structure.

The fact that with our results the project cannot be sustained without some form of

subsidization is a result of the infrastructure costs being internalized, that is not the case of most

Rail projects, in fact with the outcomes we obtained even part of those investments could be

covered. This vertical approach allows a complete accountability of the project benefits and costs,

and this is also the business model employed in countries with the most efficient and effective rail

freight sectors (USA, China or Germany are examples). For instance, in the base case scenario if the

costs of maintenance with the lines are not accounted (as we did) the project would give a very

positive result, and not the numbers we achieved.

We also focused our attention exclusively in the Port of Sines, and the movements from that

Port to Madrid, but there are other Ports that would benefit from this line, other destinations

besides Madrid and other sources of demand besides the Ports. If this is considered we would have

more stakeholders (the Ports of Lisbon and Setubal…) and more sources of revenues. Exactly

because of the importance of this infrastructure to the Ports maybe there share in the Project should

be higher, and if some shipping lines were included it would be even better, this way the project

would be more than a rail line it would be a part of a transatlantic supply chain from Madrid (and

even France…) to the Americas and Africa.

Although care was taken, it is necessary to tune better some of the parameters we used,

namely the capacity we considered for the lines and the associated costs. Further alternatives have

also to be considered, namely construction of the line through Poceirão and not directly to Casa

Branca. Additional modeling and optimizing tools should also be employed.

Our main conclusion is that this is a Project worth studying more, that with the proper

engineering, institutional and financial framework can deliver great returns per se, even financial,

not to mention the externalities and direct benefits for the Maritime and Logistical sector. And if this

work can in any way help to deliver this project it will already be very useful.

8. ANNEX

Annex 1- Luís Simões. (2009.). QuestõesLuísSimoes - MIT Portugal.doc.

Annex 2 – Magazine articles

Annex 3 – Data from CP

9. References

EC. (2009, 04). Transport - Priority Projects. Retrieved from EC Transport:

http://ec.europa.eu/ten/transport/maps/doc/axes/pp16.pdf

EIB. (2009, 04). Individual Loans. Retrieved from

http://www.eib.org/products/loans/individual/index.htm

Luís Simões. (n.d.). QuestõesLuísSimoes - MIT Portugal.doc.

Moura, C. (2009, March 23). Transportes Em Revista. Retrieved from

www.transportesemrevista.com

Pereira, P. (2006, January). Transportes em Revista. Retrieved from www.transportesemrevista.com

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