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The Middle East has allocated nearly $250bn to various railway projects over the next 10 years with ambitious plan to build around 67,000km of railway tracks throughout the region. The region has the opportunity to build the world’s most advanced passenger and freight transport systems. The presentation touches on all aspects of railway development and strategies in the region including different Public private Partnership (PPP) models and financing / funding advice to better develop rail projects as a sustainable means of transport.
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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.
14
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
Is not necessary for interoperability
Can often be achieved voluntarily 36
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
00973-36711547
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