International case studies on delivery and finacing – a report for HS2

High Speed 2International case studies on delivery and financing

18 December 2009

International case studies on delivery and financing – a report for HS2

Ref. DPD12725 High Speed 2: phase 1 report

Dear Ian,

Subject: International case studies on delivery and financing – a report for HS2In accordance with our contract dated 2 June 2009, I am pleased to enclose our phase 1 report which examines the lessons learned from a selection of international HSR case studies that we have previously discussed and agreed upon with HS2. The report includes:► Advice on lessons learned from the review of these projects including the

commercial and contractual delivery structures, risk allocation, funding and other relevant issues.

► An indication of the potential sources of funding and finance for a new HSR project.

Our report may not have considered issues relevant to any third parties. Any use such third parties may choose to make of our report is entirely at their own risk and we shall have no responsibility whatsoever in relation to any such use.

Ian JordanHigh Speed Two55 Victoria StreetLondonSW1H 0EU

2

Ernst & Young LLP1 More London PlaceLondon SE1 2AF

Tel: 020 7951 2000Fax: 020 7951 1345www.ey.com/uk

The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. A list of members’ names is available for inspection at 1 More London Place, London SE1 2AF, the firm’s principal place of business and registered office.

Our work in connection with this assignment is of a different nature to that of an audit. Our paper to you is based on publicly available information. We have not sought to verify the accuracy of the data or the information and explanations provided.

Our work has been limited in scope and time and we stress that a more detailed review may reveal additional considerations that this review has not.

Should you have any questions please do not hesitate to contact me on + 44 207 951 1702.

Your sincerely

Manish Gupta

PartnerErnst & Young LLP

18 December 2009

http://www.ey.com/uk


Contents

Section 1 Introduction

Section 2 The shortlist of project has been identified together with HS2

Section 3 A number of lessons can be drawn from the HSR projects examined

Section 4 Key recommendations for HS2

Section 5 Lessons learned: commercial

Section 6 Lessons learned: risks

Section 7 Lessons learned: financing

AppendicesAppendix A HS1, UK

Appendix B TGV, France

Appendix C HSL Zuid, Netherlands

Appendix D TAV, Italy

Appendix E RAVE, Portugal

Appendix F ICE, Germany

Appendix G AVE, Spain

Appendix H Shinkansen, Japan

Appendix I North-South HSR, Taiwan

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A number of lessons can be drawn from the HSR projects examined 6

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Introduction

► High Speed Two (HS2) is assessing the case for providing additional travelling capacity between London and the West Midlands by building a high speed rail line (the Project).

► Globally, there is a large variety of high speed rail (HSR) projects that have been undertaken with varying degrees of success.

► A common theme runs behind all the HSR projects reviewed: from Japan to Italy, developing an HSR network requires a strong vision and cross party political support. HS2 appears to benefit from both:

► A strong champion of the project willing to invest into this vision;

► A cross party support from both the Government and the opposition.

► Despite notable successes, infrastructure projects of this size and complexity will face a variety of challenges throughout their lifecycle, including:

► Varying degrees of political and stakeholder support

► Difficulties in revenue and traffic forecasting

► Ability to complete the construction on time and on budget

► Appetite of private sector for risk

► Meeting the affordability challenge whilst demonstrating VfM

► All of these issues will impact the ability to attract private sector financing in a meaningful and sustainable manner and will require the Government to provide direct and indirect support.

► A variety of contractual delivery structures, risk allocation and funding models have been adopted to address some of the issues outlined above. Whilst recognising that many of these structures and models are context specific and, as such, may not be directly transferrable or applicable to the UK, nonetheless, a review of the international experience will ensure that HS2 can, where possible, apply these lessons to the structuring and implementation of the Project.

► With this in mind, this phase 1 report aims to address the following questions:

► What are the key lessons that can be drawn from the international experience and are they applicable to HS2?

► What are the potential sources of funding, taking into account the evolution of the economic, fiscal and financial context in the medium term?

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High Speed Two (HS2) is assessing the case for providing additional travelling capacity between London

Globally, there is a large variety of high speed rail (HSR) projects that have been undertaken with varying

A common theme runs behind all the HSR projects reviewed: from Japan to Italy, developing an HSR network requires a strong vision and cross party political support. HS2 appears to benefit from both:

Despite notable successes, infrastructure projects of this size and complexity will face a variety of challenges

All of these issues will impact the ability to attract private sector financing in a meaningful and sustainable

A variety of contractual delivery structures, risk allocation and funding models have been adopted to address some of the issues outlined above. Whilst recognising that many of these structures and models are context specific and, as such, may not be directly transferrable or applicable to the UK, nonetheless, a review of the international experience will ensure that HS2 can, where possible, apply these lessons to the structuring and

What are the key lessons that can be drawn from the international experience and are they applicable to

What are the potential sources of funding, taking into account the evolution of the economic, fiscal and


Shortlist of projects studied (agreed with HS2)Projects Relevance to HS2 study

HS1, UK UK project with similar socio-economic considerations. The delivery model has been tried and tested. Although slightly different in geography and passenger base, it should be a useful comparator.

TGV, France Successful HSR network that has been delivered with public funding and, more recently, with both concessions and availability PPPs (respectively with and without transfer of revenue risk to the private sector). The GSMR signalling contract covers the HSR network and is being delivered as a PPP.

HSL Zuid, Holland Recently completed HSR not yet operational because of issues with the procurement of rolling stock and system integration between the sub-structure and the superstructure. The substructure works were delivered on a traditional D&B basis. Other elements of the project were delivered on a PPP basis.

TAV, Italy Built and operated with State backed financing. Open access operator NTV due to start services on the Rome - Milan HSR route in 2011.

RAVE, Portugal Under procurement. Split into six separate PPPs. Vertically separated operation with vertical interfaces. Portuguese State aims to deliver it on a PPP basis, although financing and structure of the project are still evolving since only one project is currently under procurement.

ICE, Germany Similar socio-economic and demand environment and inter-connectivity with airports. Mixed traffic (passenger and freight) experience not particularly successful.

AVE, Spain Extensive HSR network developed with public funding. Successful case study of competition against airlines especially on specific HSR routes (Madrid – Barcelona and Madrid

Shinkansen HSL Network, Japan

Pathfinder project that set the basis for high speed rail projects around the world. The initial HSR was funded almost entirely by government loans to JNR and later privatised. Redevelopment potential around stations.

Taiwan North-South HSR

First stage recently completed in 2007 and the remainder to be complete by 2010. BOT consortium. Originally intended to be entirely privately financed but the government had to step in owing to significant cost overruns driven by procurement issues.

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Shortlist of projects studied (agreed with HS2)Investment Length (km)

economic considerations. The delivery model has been tried and tested. Although slightly different in geography and passenger base, it should be a useful

►£5.2bn ►108

Successful HSR network that has been delivered with public funding and, more recently, with both concessions and availability PPPs (respectively with and without transfer of revenue risk to the private sector). The GSMR signalling contract covers the HSR network and is being delivered

►LGV Est €3.1bn

►Rhine-Rhone €2.5bn

►Sud Atlantique €7bn

►Brittany - Loire €3.4bn

►300 (phase1)

►425

►300

►182

Recently completed HSR not yet operational because of issues with the procurement of rolling structure and the superstructure. The sub-

structure works were delivered on a traditional D&B basis. Other elements of the project were

►€7.2bn ►100

Built and operated with State backed financing. Open access operator NTV due to start services ►€35bn ►900

Under procurement. Split into six separate PPPs. Vertically separated operation with vertical interfaces. Portuguese State aims to deliver it on a PPP basis, although financing and structure of the project are still evolving since only one project is currently under procurement.

►Lisbon-Madrid €2.5bn

►Porto-Vigo €2.2bn

►Lisbon-Porto €4.5bn

►206

►100

►290

connectivity with airports. Mixed traffic (passenger and freight) experience not particularly successful.

n/a n/a

Extensive HSR network developed with public funding. Successful case study of competition Barcelona and Madrid – Seville).

►€53bn will deliver 10,000km by 2020

►1,570 in operation

►1,319 under construction

Pathfinder project that set the basis for high speed rail projects around the world. The initial HSR was funded almost entirely by government loans to JNR and later privatised. Redevelopment

►Unknown ►2,500

First stage recently completed in 2007 and the remainder to be complete by 2010. BOT consortium. Originally intended to be entirely privately financed but the government had to step in

►US$18bn ►345


A number of lessons can be drawn from the HSR projects examinedProjects Lessons learned

HS1, UK ► Importance of setting up a strong project organisation

► Importance of structuring an appropriate risk transfer: attempting to transfer too much risk may not result in VfMTGV, France ► A phased approach to delivering the HSR network is a critical success factor

► HSR projects can extract substantial local fundingHSL Zuid, Holland

► Importance of programme management and initial planning, especially if project is delivered on an unbundled basis

► Risk of underestimating system integration issues and time needed to solve themTAV, Italy ► Ability to raise private finance from the debt capital markets using State guarantees

► Importance of allowing for open access operatorsICE, Germany ► A mixed HSR line is expensive to build and maintain and may not represent VfM

► Air-rail collaboration has virtually eliminated the airline competition between Cologne and FrankfurtAVE, Spain ► HSR projects have attracted substantial EU funding

► Low cost airlines and deregulation will have an impact on the ability to shift passengers to HSR

RAVE, Portugal ► Importance of cross party political support – the project has faced delays due to Government elections highlighting that politicsupport is essential.

► Importance of unbundling to attract private sector participationShinkansen HSL Network, Japan

► Local communities are expected to contribute funding

► Although HSR assets were sold to the private sector to relieve debt burden, the public sector is still significantly involvedTaiwan North-South HSR

► Importance of extensive market sounding in advance of structuring the project

► Importance of careful planning and procurement

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A number of lessons can be drawn from the HSR projects examined

Importance of structuring an appropriate risk transfer: attempting to transfer too much risk may not result in VfM

A phased approach to delivering the HSR network is a critical success factor

Importance of programme management and initial planning, especially if project is delivered on an unbundled basis

Risk of underestimating system integration issues and time needed to solve them

Ability to raise private finance from the debt capital markets using State guarantees

A mixed HSR line is expensive to build and maintain and may not represent VfM

rail collaboration has virtually eliminated the airline competition between Cologne and Frankfurt

Low cost airlines and deregulation will have an impact on the ability to shift passengers to HSR

the project has faced delays due to Government elections highlighting that political buy in and

Importance of unbundling to attract private sector participation

Although HSR assets were sold to the private sector to relieve debt burden, the public sector is still significantly involved in procurement.

Importance of extensive market sounding in advance of structuring the project


Key recommendations for HS2A review of the lessons learned from each project has led to the following recommendations:

Commercial1. It is critical to have a strong project organisation set up to manage the development,

procurement, delivery and funding of the Project.

2. Unbundling of the HSR into key sub-components will facilitate the involvement of the private sector and maximise market appeal.

3. Risk allocation, budgetary considerations and availability of funding drive the selection of each component’s delivery strategy.

4. The contract packages need to balance attracting market interest with an appropriate level of risk transfer.

Risk allocation5. Construction and technical risks associated with post-construction defects represent a significant

challenge for HSR projects.

6. Transferring revenue risk in greenfield rail projects is difficult and does not always represent

7. System integration risk is critical, especially in an unbundled delivery strategy.

Financing8. Direct or indirect government support is crucial to HSR projects.

9. Despite the current market turmoil, capital markets are possibly the best source of funding in the medium term.

10.Other sources of funding should be available to finance the Project.

A detailed description of each recommendation follows.

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A review of the lessons learned from each project has led to the following recommendations:

It is critical to have a strong project organisation set up to manage the development,

components will facilitate the involvement of the private

Risk allocation, budgetary considerations and availability of funding drive the selection of each

The contract packages need to balance attracting market interest with an appropriate level of risk

construction defects represent a significant

rail projects is difficult and does not always represent VfM.

System integration risk is critical, especially in an unbundled delivery strategy.

Despite the current market turmoil, capital markets are possibly the best source of funding in the


Lessons learned: commercial1. It is critical to have a strong project organisation set up with the objective of managing the development, procurement, delivery and funding of the Project► The project organisation should maintain an active involvement from inception to completion.

► Key roles for the project organisation should include:

► Reviewing progress and act as “project manager”, a role that could be supported by engaging an independent entity.

► Making prompt decisions on project issues and, where appropriate, challenging and directing activities of contractors.

► Ensuring integration of different elements of the HSR.

► Managing interfaces with external parties.

► Managing the exposure to risk.

► The importance of a strong project organisation is supported by a number of successful examples:

► The HS1’s experience post restructuring.

► RAVE, the Portuguese HSR’s project organisation.

► A number of other infrastructure projects such as the delivery of Heathrow Terminal 5 and the development of Crossrail.

► Asfinag in Austria, which has the sole responsibility to develop and maintain the highway network using a range of structures, including PPPs to deliver new capacity.

► On the other hand, the Dutch HSR has, according to Netherlands Court of Audit, been negatively impacted by the project being managed by two different government’s departments. This has created issues with the procurement and the delivery of the project with the public sector having to pay availability charges although trains have not yet started operation.

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1. It is critical to have a strong project organisation set up with the objective of managing the development, procurement, delivery and

The project organisation should maintain an active involvement from inception to completion.

Reviewing progress and act as “project manager”, a role that could be supported by engaging an

Making prompt decisions on project issues and, where appropriate, challenging and directing activities of

The importance of a strong project organisation is supported by a number of successful examples:

A number of other infrastructure projects such as the delivery of Heathrow Terminal 5 and the

Asfinag in Austria, which has the sole responsibility to develop and maintain the highway network using

On the other hand, the Dutch HSR has, according to Netherlands Court of Audit, been negatively impacted by the project being managed by two different government’s departments. This has created issues with the procurement and the delivery of the project with the public sector having to pay availability charges


Lessons learned: commercial (cont’d)2. Unbundling of the HSR into key sub-components will facilitate the involvement of the private sector and maximise market appeal► A wide variety of packaging options exist to deliver HSR projects ranging from:

► A single contract for all the works

► Unbundling the project into multiple packages based on technical and risk considerations

► Permutations or combinations of the above

► International experience shows that unbundling elements of the HSR system can help access additional funding and investors, resulting in better risk allocation and potentially better financing terms. However, unbundling will increase interface and integration risk which needs to be actively monitored and managed.

► Each element can then be delivered using different models to maximise market appeal. For example:

► Design then construct - Traditional public sector procurement – Italian TAV, Spanish AVE

► Design and Construct (D&C), with separate Operation and Maintenance (O&M) – HS1

► Design Build Operate & Maintain (DBOM) – Portuguese HSR

► A combination of D&B for the civil works and DBFM for the rail systems – Dutch HSR

► However, unbundling requires a lot more input from the project organisation to manage interface risks

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Lessons learned: commercial (cont’d)

help access additional funding and investors, resulting in better risk allocation and potentially better financing terms. However, unbundling will increase interface and

Design and Construct (D&C), with separate Operation and Maintenance (O&M)

Dutch Private sector involvement

Leve

l of u

nbun

dlin

g

France (Early)

Japan

Taiwan

HS1Portugal

Holland

Italy

GermanySpain

France


Lessons learned: commercial (cont’d)This table gives a broad overview of the role played by the public and the private sector in the projects that we have examined:

Germany Spain France Italy

ICE AVE TGV (original) TAV HS1 post restructuring

Specification State State State State State

SubstructureDesign, build

Deutsche Bahn (DB)

ADIF RFF RFI NR / HS1Operate, maintain

SuperstructureDesign, build

Operate, maintain

Rolling stockSupply

RENFE SNCFNTV

LCRMaintain Trenitalia

Operations DB RENFE SNCF Trenitalia LCR

Financing A mix of options involving private sector funding, bank debt and capital market financing raised directly by the project vehi

Increasing involvement of the private sector

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Lessons learned: commercial (cont’d)

UK Portugal France Netherlands France Japan Taiwan

HS1 post restructuring RAVE TGV (partner-

ship contract) HSL Zuid TGV (concession) Shinkansen Taiwanese

HSR

State State State State State State State

NR / HS1 PPP PPP

State

Conces-sionaire N/A THSRC

PPP

LCR CP SNCFState

SNCF N/ANS

LCR REFER SNCF PPP SNCF N/A TSC

A mix of options involving private sector funding, bank debt and capital market financing raised directly by the project vehicle or IM with strong public sector support

Increasing involvement of the private sector


Lessons learned: commercial (cont’d)3. Risk allocation, budgetary considerations and availability of funding drive the selection of each component delivery strategy► The planning and specification of HSR systems is generally carried out by the State as in all the case

studies reviewed in this report.

► There are a number of alternatives which can change the risk profile, for example, the pricing mechanism adopted and the approach to design risk.

► Infrastructure

► Although a common approach does not exist, the review indicates that, initially, the tendency was for the infrastructure to be delivered by the public sector using traditional procurement models and to be operated and maintained by the legacy infrastructure manager. More recently, delivery models involving the private sector have been adopted more widely.

► Signalling

► Traditionally delivered by the State using traditional procurement models in most European countries, although a tendency exists to involve the private sector in the delivery of these elements.

► Both the Portuguese HSR and, more recently, the French TGV have opted for the signalling system to be delivered through a separate PPP. This is to mitigate the interface risk that could arise from using different signalling systems across different parts of the network. An alternative to this is to specify a standard compatibility system in the contract.

► Rolling stock

► The procurement and financing of rolling stock tends to be consistent with the approach adopted on the traditional rail network. Hence, HSR rolling stock has traditionally been purchased and held on balance sheet by several state owned HSR operators such as Trenitalia, Renfe and SNCF.

► On the other hand, PPPs have been used for the Dutch HSR, the Intercity Express Programme (underway) and in a rolling stock order in New South Wales, whereas the Pendolinos fleet in the UK were financed by Angel Trains using a capital market structure.

► Given its relatively long economic life and its ability to attract stable cash flows, rolling stock is seen as one element of HSR projects where the private sector will be increasingly involved.

► Operation

► Generally carried out by the legacy state operator although open access operators are now an increasing threat to their dominance in many segments and will soon increase their involvement due to EU legislation. 11

Lessons learned: commercial (cont’d)3. Risk allocation, budgetary considerations and availability of funding

The planning and specification of HSR systems is generally carried out by the State as in all the case

There are a number of alternatives which can change the risk profile, for example, the pricing mechanism

Although a common approach does not exist, the review indicates that, initially, the tendency was for the infrastructure to be delivered by the public sector using traditional procurement models and to be operated and maintained by the legacy infrastructure manager. More recently, delivery models involving

Traditionally delivered by the State using traditional procurement models in most European countries, although a tendency exists to involve the private sector in the delivery of these elements.

Both the Portuguese HSR and, more recently, the French TGV have opted for the signalling system to be delivered through a separate PPP. This is to mitigate the interface risk that could arise from using different signalling systems across different parts of the network. An alternative to this is to specify a

The procurement and financing of rolling stock tends to be consistent with the approach adopted on the traditional rail network. Hence, HSR rolling stock has traditionally been purchased and held on balance sheet by several state owned HSR operators such as Trenitalia, Renfe and SNCF.

On the other hand, PPPs have been used for the Dutch HSR, the Intercity Express Programme (underway) and in a rolling stock order in New South Wales, whereas the Pendolinos fleet in the UK

Given its relatively long economic life and its ability to attract stable cash flows, rolling stock is seen as one element of HSR projects where the private sector will be increasingly involved.

Generally carried out by the legacy state operator although open access operators are now an increasing threat to their dominance in many segments and will soon increase their involvement due to


Lessons learned: commercial (cont’d)4. The contract packages need to balance attracting market interest with an appropriate level of risk transfer► The capacity and competency of the construction market has a large bearing on the size and complexity of

individual contracts and different approaches have been adopted in this area:

► The Italian TAV opted for awarding larger contracts to minimise the number of interfaces.

► HSL Zuid opted for six geographical packages for the substructure (e.g. land, civils, tunnels, bridges, viaducts) to increase market participation and to meet a tight delivery schedule. It also adopted horizontal interfaces between civil works and superstructure (track, catenary, emergency systems and signalling) and separate train operation.

► RAVE opted for five geographical packages with vertical interfaces, a network-wide signalling PPP contract and separate train operation.

► Whilst there is no “off the shelf” contractual solution that can be applied to HS2, the following principles have been adopted with good results:

► A phased approach – due to the large financial commitment required by an HSR project, a phased approach can aid affordability by spreading the commitment over a number of consecutive phases. Phasing will also ensure that the capacity of the local construction market is not stretched with a consequent negative impact on the price of resources.

► Packages of works – due to the scale and complexity of HSL projects and to the associated level of risk smaller packages of works help to diversify the risk of exposure to a single contractor or consortium

► Delivery method – a balanced risk allocation is crucial in attracting interest of bidders and finance providers

► The Taiwan HSR was originally intended to be entirely financed, built and operated by the private sector but this proved impossible as lenders demanded government guarantees on the debt provided

► The Dutch government carried out extensive market sounding before finalising the commercial structure of the HSR project

► Attempts to transfer too much risk to the private sector will result in reduced market interest in the project

► Early engagement with the market is seen as crucial in ensuring a realistic risk allocation and in attracting market interest

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Lessons learned: commercial (cont’d)4. The contract packages need to balance attracting market interest with

The capacity and competency of the construction market has a large bearing on the size and complexity of

The Italian TAV opted for awarding larger contracts to minimise the number of interfaces.

HSL Zuid opted for six geographical packages for the substructure (e.g. land, civils, tunnels, bridges, viaducts) to increase market participation and to meet a tight delivery schedule. It also adopted horizontal interfaces between civil works and superstructure (track, catenary, emergency systems and

wide signalling PPP

Whilst there is no “off the shelf” contractual solution that can be applied to HS2, the following principles

due to the large financial commitment required by an HSR project, a phased approach can aid affordability by spreading the commitment over a number of consecutive phases. Phasing will also ensure that the capacity of the local construction market is not stretched with a

due to the scale and complexity of HSL projects and to the associated level of risk smaller packages of works help to diversify the risk of exposure to a single contractor or consortium

a balanced risk allocation is crucial in attracting interest of bidders and finance

The Taiwan HSR was originally intended to be entirely financed, built and operated by the private sector but this proved impossible as lenders demanded government guarantees on the debt provided

The Dutch government carried out extensive market sounding before finalising the commercial structure

Attempts to transfer too much risk to the private sector will result in reduced market interest in the project

Early engagement with the market is seen as crucial in ensuring a realistic risk allocation and in attracting


Lessons learned: risks5. Construction and technical risks associated with post-

defects represent a significant challenge for HSR projects► Cost and timetable overruns will largely be driven by the type of contract used and by the experience and

competency of the contractor

► Entering into a fixed-price, date-certain turnkey contract with experienced contractors is the most common way to mitigate the risk of cost or timetable overruns. However, these are not common in rail projects.

► Whilst our analysis has highlighted that fixed price projects are not always possible, the UK railway structure does allow for, and has delivered, projects to a fixed price. The issue can be one of timetable: in order to set a fixed price, the project will need to be developed to at least GRIP 5 (or equivalent detailed design).

► Guarantees and warranties may also be required to mitigate construction risk. The link between design and construction is an important factor here.

► It is important that the contractual structure protects the public sector from the financial consequence of delays in the delivery of the infrastructure

► Cost overruns due to changes in law and other specified circumstances are generally retained by the State. For instance

► the Dutch government asked the PPP partner to upgrade the signalling system which had originally been specified. This led to greater costs retained by the state;

► HS1 successfully adopted target price contracting where cost risk was shared between LCR, Bechtel, Rail Link Engineering, and through an insurance program placed by a group of insurers…

► …however, as mentioned above, a strong client body is required to manage these contracts if cost risk is to be managed

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-construction defects represent a significant challenge for HSR projectsCost and timetable overruns will largely be driven by the type of contract used and by the experience and

certain turnkey contract with experienced contractors is the most common way to mitigate the risk of cost or timetable overruns. However, these are not common in rail

Whilst our analysis has highlighted that fixed price projects are not always possible, the UK railway structure does allow for, and has delivered, projects to a fixed price. The issue can be one of timetable: in order to set a fixed price, the project will need to be developed to at least GRIP 5 (or equivalent –

Guarantees and warranties may also be required to mitigate construction risk. The link between design

It is important that the contractual structure protects the public sector from the financial consequence of

Cost overruns due to changes in law and other specified circumstances are generally retained by the State.

the Dutch government asked the PPP partner to upgrade the signalling system which had originally

HS1 successfully adopted target price contracting where cost risk was shared between LCR, Bechtel, Rail Link Engineering, and through an insurance program placed by a group of insurers…

…however, as mentioned above, a strong client body is required to manage these contracts if cost risk


Lessons learned: risks (cont’d)6. Transferring revenue risk in greenfield rail projects is difficult and

does not always represent VfM► Few projects have attempted to transfer traffic risk to the private sector. The LCR example in the UK

highlights the risk inherent in forecasting traffic in greenfield rail projects.

► In the rail sector, with the notable exception of airport rail links and other vertically integrated railway links with limited intra-modal competition, it is not common for infrastructure providers to take demand risk in a greenfield railway such as the HS2. This is due to the fact that, although railways are not new to the use of private financing, they are still seen as a complex environment: safety critical, operationally complex, with several stakeholders and at risk of political and regulatory interference. Furthermore, given the large investment and high operational gearing, with some notable exceptions such as Japan, it is not common for passenger railways to cover the cost of the infrastructure investment and turn a profit within a timeframe that can be attractive to the private sector.

► The requirement for State subsidies to rail operations is an accepted principle with operations in many major countries still State owned. One solution to this is to split construction from operations and seek to recover the construction bill over a number of concession periods, eg the approach proposed for HS1.

► Patronage is difficult to predict and so is consumer preference for substitute modes of transport. Longer distance traffic projections, using new, high-quality rail services, present specific challenges to forecasters. This may result in lower credit quality for HSR schemes that are structured to pass patronage, and therefore revenue, risk to lenders. There is evidence of a tendency to include overly optimistic revenue forecast in transport PPP project.

► With the notable exception of some of the French HSR schemes (e.g. TGV Atlantique), most HSR projects that we have examined include either a revenue guarantee (e.g. CTRL) or no revenue risk is passed on to the infrastructure provider (e.g. Dutch HSR, Portuguese HSR)

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6. Transferring revenue risk in greenfield rail projects is difficult and

Few projects have attempted to transfer traffic risk to the private sector. The LCR example in the UK

In the rail sector, with the notable exception of airport rail links and other vertically integrated railway links modal competition, it is not common for infrastructure providers to take demand risk in a

greenfield railway such as the HS2. This is due to the fact that, although railways are not new to the use of private financing, they are still seen as a complex environment: safety critical, operationally complex, with several stakeholders and at risk of political and regulatory interference. Furthermore, given the large investment and high operational gearing, with some notable exceptions such as Japan, it is not common for passenger railways to cover the cost of the infrastructure investment and turn a profit within a timeframe

The requirement for State subsidies to rail operations is an accepted principle with operations in many major countries still State owned. One solution to this is to split construction from operations and seek to recover the construction bill over a number of concession periods, eg the approach proposed for HS1.

Patronage is difficult to predict and so is consumer preference for substitute modes of transport. Longer quality rail services, present specific challenges to forecasters.

This may result in lower credit quality for HSR schemes that are structured to pass patronage, and therefore revenue, risk to lenders. There is evidence of a tendency to include overly optimistic revenue

With the notable exception of some of the French HSR schemes (e.g. TGV Atlantique), most HSR projects that we have examined include either a revenue guarantee (e.g. CTRL) or no revenue risk is passed on to


Lessons learned: risks (cont’d)7. System integration risk is critical especially in an unbundled delivery

strategy► The experience of the Dutch HSR to date shows that underestimating the system integration challenge

associated with horizontal interfaces can lead to delays in the commissioning of the project. Furthermore, the requirement to introduce a new ERTMS system caused considerable delay in the start of revenue operation

► Vertical vs. horizontal interfaces between packages of work – depending on the elements of work the separation of elements will create different issues:

► a vertical interface might create a technology lock in, where an authority is required to go to the same system supplier to avoid interface issues between, for example, different signalling systems. This is the reason why the French TGV and the Portuguese HSR have opted for a network approach to the signalling and the GSMR that have been let as a separate PPP contract;

► a horizontal interface might create integration issues where a rolling stock and a signalling system provided under different contracts may not integrate seamlessly. Such an instance occurred in Taiwan where the infrastructure was developed to European standard but Japanese Shinkansen technology was adopted for the rolling stock.

► The issue highlights the importance of clearly defined contractual specifications and of a single point of responsibility for managing the interfaces.

► Feedback from a rail system manufacturer active in the HSR arena indicates that an integrated approach to the procurement of rolling stock and signalling is often the preferred route of the private sector, especially where the manufacturer provides both systems and rolling stock.

15

7. System integration risk is critical especially in an unbundled delivery

The experience of the Dutch HSR to date shows that underestimating the system integration challenge associated with horizontal interfaces can lead to delays in the commissioning of the project. Furthermore, the requirement to introduce a new ERTMS system caused considerable delay in the start of revenue

depending on the elements of work the

a vertical interface might create a technology lock in, where an authority is required to go to the same system supplier to avoid interface issues between, for example, different signalling systems. This is the reason why the French TGV and the Portuguese HSR have opted for a network approach to the

a horizontal interface might create integration issues where a rolling stock and a signalling system provided under different contracts may not integrate seamlessly. Such an instance occurred in Taiwan where the infrastructure was developed to European standard but Japanese Shinkansen technology was

The issue highlights the importance of clearly defined contractual specifications and of a single point of

Feedback from a rail system manufacturer active in the HSR arena indicates that an integrated approach to the procurement of rolling stock and signalling is often the preferred route of the private sector, especially

Signalling/Telecommunications (PPP)

Capacity allocation and railway traffic management: State/REFER

Substructure/Super structure

PPP PPP PPP PPP PPP

Passenger transport: 1 concession agreement

Railtechnical installations: 1 DBFM contract

Civil-technical foundation: 6 D&C contracts

Connections with existing rail infrastructure: 1 D&C contract

HSL Zuid contracting structure

RAVE contracting structure


Lessons learned: financing

► The current credit crisis – including such things as the collapse of the market for bond financing, whether or not backed by monoline insurers, the dramatic increase in financing margins (cost of debt), and the difficulty of syndicating large borrowing in the traditional way – has a direct impact on the ability to finance very large public infrastructure programmes.

► Although the current issues may dissipate in the medium term, certain underlying changes may be more long-lasting and more impactful given the planning horizon for the HSR programme.

► HSR funding must consider the underlying dynamics of HSR projects whose revenue often does not cover operating costs. A high level of government support must therefore be allowed for.

► HSR funding must consider the longer term and its inherent uncertainties – it is simply not possible to reliably predict the exogenous factors that will impact a project. The funding structure must be robust and tested against a number of severe worst, but realistic, case scenarios

► The original CTRL deal had insufficient equity capital to reflect the risks in the project. As a result the project was not robust in the face of lower than expected revenues and did not provide sufficient incentives to tackle the issues where the investment at risk was relatively low.

► In the financing of Taiwan’s HSL, higher than normal use of equity reflected the high risk profile that debt providers attached to this massive project.

16

including such things as the collapse of the market for bond financing, whether or not backed by monoline insurers, the dramatic increase in financing margins (cost of debt), and the difficulty

has a direct impact on the ability to finance very large

Although the current issues may dissipate in the medium term, certain underlying changes may be more lasting and more impactful given the planning horizon for the HSR programme.

HSR funding must consider the underlying dynamics of HSR projects whose revenue often does not cover operating costs. A high level of government support must therefore be allowed for.

it is simply not possible to reliably predict the exogenous factors that will impact a project. The funding structure must be robust and

The original CTRL deal had insufficient equity capital to reflect the risks in the project. As a result the project was not robust in the face of lower than expected revenues and did not provide sufficient

In the financing of Taiwan’s HSL, higher than normal use of equity reflected the high risk profile that debt


Lessons learned: financing - core funding8. Direct or indirect government support is crucial to HSR projects► Governments remain central to the planning, development and promotion of HSR services, and

appropriately focused support remains an important credit enhancement for related transactions.

► Despite notable successes, attracting substantial private sector financing to high speed rail projects has encountered problems, partly owing to the scale of the investment required and partly due to a perception among financiers that the complex, safety critical and multi-stakeholders environment of rail projects make them a riskier investment than other simpler infrastructure projects such as highways.

► The public sector funded approach to constructing such projects has also to some degree been reasonably consistent amongst the projects considered. This is to be expected of transportation projects, which display a high initial capital expenditure and relatively low passenger income.

► Government support to HSR projects has been provided either directly through grants or indirectly through minimum revenue guarantees or a revenue stream either guaranteed or paid directly by government. For example:

► The Dutch Government paid for the funding and construction of the civil works of the Dutch HSR.

► The UK government credit enhanced the CTRL project through a structure designed to create an unconditional and irrevocable stream of payments of Track Access Charges due from Eurostar. They are payable irrespective of usage, availability and / or performance.

► The Taiwanese HSR, which was originally tendered as a BOT where the private sector would build and finance it without government assistance, eventually received wide ranging government support when the Project Company could not meet their financial obligations.

► It is important that HS2 and the other public sector promoters approach the funding on a commercial basis and recognise explicitly the different characteristics and uses of each tranche of funding. In other major projects there has been a tendency for public sector funding to be treated as a homogenous source of funds. This lack of definition has had an impact on the subsequent ability to manage risk and cost overruns.

17

core funding8. Direct or indirect government support is crucial to HSR projects

Governments remain central to the planning, development and promotion of HSR services, and appropriately focused support remains an important credit enhancement for related transactions.

Despite notable successes, attracting substantial private sector financing to high speed rail projects has encountered problems, partly owing to the scale of the investment required and partly due to a perception

stakeholders environment of rail projects make them a riskier investment than other simpler infrastructure projects such as highways.

The public sector funded approach to constructing such projects has also to some degree been reasonably consistent amongst the projects considered. This is to be expected of transportation projects, which display

Government support to HSR projects has been provided either directly through grants or indirectly through minimum revenue guarantees or a revenue stream either guaranteed or paid directly by government. For

The Dutch Government paid for the funding and construction of the civil works of the Dutch HSR.

The UK government credit enhanced the CTRL project through a structure designed to create an unconditional and irrevocable stream of payments of Track Access Charges due from Eurostar. They

The Taiwanese HSR, which was originally tendered as a BOT where the private sector would build and finance it without government assistance, eventually received wide ranging government support when

It is important that HS2 and the other public sector promoters approach the funding on a commercial basis and recognise explicitly the different characteristics and uses of each tranche of funding. In other major projects there has been a tendency for public sector funding to be treated as a homogenous source of funds. This lack of definition has had an impact on the subsequent ability to manage risk and cost over-


Lessons learned: financing - core funding8. Direct or indirect government support is crucial to HSR projects (cont’d)► EU funding – Substantial funding of European HSR projects. Generally, EU funding for HSR comes in the following forms:

► Trans-European Transport Network (TEN-T) funding - The EU has tabled its proposals for funding TEN2007-2013. In selecting the projects, the EU has given priority to cross-border projects and environmentally friendly modes suchrail.

► Cohesion funds - The Cohesion Fund is a structural instrument that helps Member States to reduce economic and social disparitiesand to stabilise their economies

► European Regional Development Funds (ERDF) - helps stimulate economic development and regeneration in the least prosperous regions of the EU. Funding is targeted to meet three objectives set down by the EC: convergence; regional competitiveness; European territorial cooperation

► EIB loans – the European Investment Bank is extremely active in providing debt finance for HSR projects both on a commercial basis or under a so called “Structured Finance Facility”, where the EIB guarantees a portion of the bank debt until the project achstate operation. On the first section of the Portuguese HSR the EIB provided all bidders with up to 50% of the capital costsby the bank.

0%10%20%30%40%50%60%70%80%90%

100%

Barcelona-Figueras

Madrid-Lev ante

Lisbon-Porto Antequera-Granada

Lisbon-Madrid

Madrid-Frontera

Portugesa

Porto - Vigo Almeria-Murcia

Fund

ing %

% EU Funding % Other funding

18

core funding8. Direct or indirect government support is crucial to HSR projects (cont’d)

Substantial funding of European HSR projects. Generally, EU funding for HSR comes in the following forms:

The EU has tabled its proposals for funding TEN-T projects for the period border projects and environmentally friendly modes such as

The Cohesion Fund is a structural instrument that helps Member States to reduce economic and social disparities

helps stimulate economic development and regeneration in the least prosperous regions of the EU. Funding is targeted to meet three objectives set down by the EC: convergence; regional competitiveness;

the European Investment Bank is extremely active in providing debt finance for HSR projects both on a commercial basis or under a so called “Structured Finance Facility”, where the EIB guarantees a portion of the bank debt until the project achieve steady state operation. On the first section of the Portuguese HSR the EIB provided all bidders with up to 50% of the capital costs estimated

Leon-Asturias

TGV Est East RhineRhone

Line Total EU funds Other fundingBarcelona-Figueras 3,460 8,915 Madrid- Levante 1,223 11,187 Lisbon-Porto 675 3,825 Antequera-Granada 600 755 Lisbon- Madrid 486 1,314 Madrid- Frontera Portugesa 363 2,338 Porto - Vigo 350 1,050 Almeria- Murcia 348 2,171 Leon-Asturias 332 2,059 TGV Est 320 2,805 East Rhine Rhone 200 2,304


Lessons learned: financing - core funding8. Direct or indirect government support is crucial to HSR projects

(cont’d)► Regional funding – HSR services can bring many benefits to the regions which they serve, especially in

areas around stations. As such regional contributions can comprise a significant proportion of funding. However regional buy-in and funding is dependent on the political will at the local level for a new line, and the local benefits it is expected to deliver. For example:

► A major driving force behind the development of the Shinkansen network was to bring economic benefits to the regional, as well and national, economy. This was borne out post construction, with growth in the local economies and development of new business areas. As such, local communities served by Shinkansen lines were expected to contribute a proportion of matched funding to finance the new lines.

► Local and regional funding has also been a major source of finance in several French TGV lines which have recently been built. TGV Est, East Rhine-Rhone and Brittany-Loire HSLs have benefited from local funding amounting to 24%, 29% and 35% (respectively) of total funding requirements.

► Negotiations on the political concessions made in order to receive local funding have led to delays to financing agreements in France. For example, for the Sud-Atlantique TGV, the local government in Poitiers agreed to contribute funding only after the State agreed to guarantee further investment in the road network in the area. Negotiations over the number of station stops in regions along the line, especially in the centre of France, have also delayed finalisation of local funding.

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

TGV Est East Rhine Rhone

Fund

ing

Regional Other sources

Total funding by source TGV Est East Rhine RhoneRegional 736 717 Other sources 2,389 1,787

19

core funding8. Direct or indirect government support is crucial to HSR projects

HSR services can bring many benefits to the regions which they serve, especially in areas around stations. As such regional contributions can comprise a significant proportion of funding.

in and funding is dependent on the political will at the local level for a new line, and

A major driving force behind the development of the Shinkansen network was to bring economic benefits to the regional, as well and national, economy. This was borne out post construction, with growth in the local economies and development of new business areas. As such, local communities served by Shinkansen lines were expected to contribute a proportion of matched funding to finance the new lines.

Local and regional funding has also been a major source of finance in several French TGV lines which Loire HSLs have benefited from local

funding amounting to 24%, 29% and 35% (respectively) of total funding requirements.

Negotiations on the political concessions made in order to receive local funding have led to delays to Atlantique TGV, the local government in

Poitiers agreed to contribute funding only after the State agreed to guarantee further investment in the road network in the area. Negotiations over the number of station stops in regions along the line, especially in the centre of France, have also delayed finalisation of local funding.

Brittany - Loire

Brittany- Loire1,203 2,197


Lessons learned: financing - core funding9. Despite the current market turmoil, it should be possible to access the

capital markets in the medium term► It should be possible to attract significant core funding from the private sector which could be structured as

debt which is serviced from farebox revenue or revenue support from the DfT

► The capital markets still represent an obvious source of financing infrastructure assets with their stable index linked cash flows which match the long term liabilities of pension funds

► Although the UK experience of floating Railtrack on the stock market has not been successful a number of examples exist where stock markets have been used or are planned to be used to finance infrastructure.

► Canadian National Railway was floated in 1995 and has since traded on the New York Stock Exchange and its market capitalization has increased from C$2 billion to more than C$18 billion today.

► Both Deutsche Bahn and, more recently, China Railways are looking into a possible equity offerings

► The international review shows that credit enhancements are often required to access the capital markets

► Italian HSR bond issues and CTRL notes issues have benefited from credit enhancements provided by the Italian and UK governments. Recent bond issues for railway projects have been made by the Chinese Ministry of Railways (US$6bn in Dec 2007).

► Securitisations of revenues or track access charges should also represent a source of funding in the medium term

► The challenge for HS2 is to structure the project in a way which delivers the discipline and diligence which the capital markets require.

20

core funding9. Despite the current market turmoil, it should be possible to access the

It should be possible to attract significant core funding from the private sector which could be structured as

The capital markets still represent an obvious source of financing infrastructure assets with their stable

on the stock market has not been successful a number of examples exist where stock markets have been used or are planned to be used to finance infrastructure.

Canadian National Railway was floated in 1995 and has since traded on the New York Stock Exchange and its market capitalization has increased from C$2 billion to more than C$18 billion today.

and, more recently, China Railways are looking into a possible equity offerings

The international review shows that credit enhancements are often required to access the capital markets

Italian HSR bond issues and CTRL notes issues have benefited from credit enhancements provided by the Italian and UK governments. Recent bond issues for railway projects have been made by the

Securitisations of revenues or track access charges should also represent a source of funding in the

The challenge for HS2 is to structure the project in a way which delivers the discipline and diligence which


Lessons learned: financing – other sources10. Other sources of funding should be available to finance the ProjectTraditional► Commercial bank loans – Commercial bank loans have been used extensively on HSR projects. For

example, CTRL, the Dutch HSR and the French TGV have all used commercial bank funding alone or in combination with bond funding.

► Construction finance – could fund construction of some components and be re-financed on completion. This is relatively under-utilised in major UK infrastructure projects but could tap into the market for construction company credit and performance risk. This form of funding would straddle the core and equity tranches.

► Infrastructure funds - The dramatic growth of infrastructure funds (both private and publicly traded) is focusing a very large supply of investor capital (mainly but not exclusively equity) on public works projects, large and small, transport or otherwise. There is a strong attraction towards European infrastructure assets due to the growing use of PPPs and the generally favourable regulatory systems for utilities and transportation infrastructure. In recent months we have seen significant interest in the market for the potential privatisation of HS1.

Alternative► Private placements and infrastructure funds – a number of investors such as pension funds and debt

infrastructure funds exist that are ready to provide debt, mezzanine or equity financing to infrastructure projects.

► The infrastructure fund of Credit Agricole recently provided mezzanine as well as equity finance in a bid to develop the first section of the Portuguese HSR.

► Rail transportation network operator RailAmerica will refinance its debt after recently selling US$740 million of 8-year senior secured notes in the private placement market.

21

other sources10. Other sources of funding should be available to finance the Project

Commercial bank loans have been used extensively on HSR projects. For example, CTRL, the Dutch HSR and the French TGV have all used commercial bank funding alone or in

financed on completion. This utilised in major UK infrastructure projects but could tap into the market for construction

company credit and performance risk. This form of funding would straddle the core and equity tranches.

The dramatic growth of infrastructure funds (both private and publicly traded) is focusing a very large supply of investor capital (mainly but not exclusively equity) on public works projects, large and small, transport or otherwise. There is a strong attraction towards European infrastructure assets due to the growing use of PPPs and the generally favourable regulatory systems for utilities and transportation infrastructure. In recent months we have seen significant interest in the market for the

a number of investors such as pension funds and debt infrastructure funds exist that are ready to provide debt, mezzanine or equity financing to infrastructure

recently provided mezzanine as well as equity finance in a bid

will refinance its debt after recently selling US$740


Lessons learned: financing – other sources10. Other sources of funding should be available to finance the Project

(cont’d)► Regulatory Asset Base financing – Applying the RAB model, used in the UK utilities and Network Rail,

would allow HS2 to develop the system using public funds, both equity and debt, benefiting from the implicit or explicit guarantee of the Treasury with the consequent reduction in the cost of financing.

► The RAB model would allow the adoption of a rolling debt programme using short term funding until the credit markets stabilise. The tenor of the short term funding could be the same as the interval between periodic reviews. Extensions could be funded by additions to the RAB.

► Should HS2 provide a credit guarantee to raise any of the initial RAB financing, it is important to structure it in such a way that it can be removed at a later date. To this end, future potential intercreditor issues will need to be examined in detail.

► Property – Mass transport and HSR improvements have a strong track record of delivering property and economic benefits to the areas they serve. Property Development Funding comes from the following sources:

► Where land has been acquired for the construction of the HSR a development opportunity may exist after construction. This can be land adjacent the HSR corridor or above the stations.

► The new HSR could allow the redesignation of land from industrial to residential or the intensification of current residential land, both leading to increases in land value through adding public transport capacity. The capture of an element of this value could be achieved through S106 contributions.

► While it would clearly be a mistake for a funding plan to rely entirely on property values, capturing a share of the benefits of increased property value, or asking for business contributions, is a tried and tested method used in many other countries. A successful example in this area is the Hong Kong Metro (MTR) whose revenues from real estate development in 2004-05 were in excess of 40% of its fare box income.

► Motor fuel taxes – In the US motor fuel taxes are the single largest sources of revenue for transportation at both the federal and state levels. However, there is an emerging debate over whether fuel taxes are wellsuited to meet long-term revenue needs and other objectives.

► Other examples could include use of right of way for energy distribution, telecoms and other linear infrastructure, sale of air rights (e.g., in urban/suburban locations). It may also be possible, depending on the future evolution of emissions trading schemes (ETS), for the rail system to sell credits as it takes market share from more polluting modes.

22

other sources10. Other sources of funding should be available to finance the Project

Applying the RAB model, used in the UK utilities and Network Rail, would allow HS2 to develop the system using public funds, both equity and debt, benefiting from the implicit or explicit guarantee of the Treasury with the consequent reduction in the cost of financing.

The RAB model would allow the adoption of a rolling debt programme using short term funding until the credit markets stabilise. The tenor of the short term funding could be the same as the interval between

Should HS2 provide a credit guarantee to raise any of the initial RAB financing, it is important to structure it in such a way that it can be removed at a later date. To this end, future potential inter-

Mass transport and HSR improvements have a strong track record of delivering property and economic benefits to the areas they serve. Property Development Funding comes from the following

Where land has been acquired for the construction of the HSR a development opportunity may exist after construction. This can be land adjacent the HSR corridor or above the stations.

of land from industrial to residential or the intensification of current residential land, both leading to increases in land value through adding public transport capacity. The capture of an element of this value could be achieved through S106 contributions.

While it would clearly be a mistake for a funding plan to rely entirely on property values, capturing a share of the benefits of increased property value, or asking for business contributions, is a tried and tested method used in many other countries. A successful example in this area is the Hong Kong Metro (MTR)

05 were in excess of 40% of its fare box income.

In the US motor fuel taxes are the single largest sources of revenue for transportation at both the federal and state levels. However, there is an emerging debate over whether fuel taxes are well-

Other examples could include use of right of way for energy distribution, telecoms and other linear infrastructure, sale of air rights (e.g., in urban/suburban locations). It may also be possible, depending on the future evolution of emissions trading schemes (ETS), for the rail system to sell credits as it takes market


AppendicesPage

Appendix A HS1, UK 24

Appendix B TGV, France 28

Appendix C HSL Zuid, Netherlands 32

Appendix D TAV, Italy 35

Appendix E RAVE, Portugal 38

Appendix F ICE, Germany 40

Appendix G AVE, Spain 41

Appendix H Shinkansen, Japan 43

Appendix I North-South HSR, Taiwan 46

23


Appendix A: HS1, UKOverview of project► High Speed 1 (HS1), formally known as the Channel Tunnel Rail Link (CTRL), is a

108 km high-speed railway line running from London through Kent to the British end of the Channel Tunnel.

► It is a greenfield project that interfaces with the existing heavy rail network at major stations and terminals.

► The original contract was awarded in 1996 to London & Continental Railways Limited (LCR) and was later restructured in 1998 into two distinct phases. ► The first phase runs from the Channel Tunnel portal to north Kent and was opened to

passenger traffic on 28 September 2003.► The second and final section of the line, travelling across the River Thames and into

London St Pancras, opened on 14 November 2007. ► Built at a cost of £5.2bn, the new link allows trains to travel at speeds of 300 kilometres

per hour (190mph), cutting journey times by 40 minutes and increasing service frequency.

► In addition to the international Eurostar services, the route will be used for high-speed ‘CTRL-DS’ domestic commuter services between Ashford International in Kent and London with intermediate stations at Ebbsfleet and Stratford. This service was inaugurated in June 2009.

► The rolling stock owner is HSBC

Lessons learned for HS2► The project is unlikely to fully transfer project risk without some recourse back

to the Government. Any HSR projects should therefore be based on an appropriate transfer of project risks to the private sector.

► The ability of the private sector to withstand the financial impact of project risks is crucial. The original CTRL deal had insufficient equity capital to absorb the project risks, resulting in most of the risk being transferred back.

► Over-optimism should be discouraged, specifically with respect to demand risk and system delivery. Such risks can prove to be unsustainable and result in all of the risks reverting to the Government. A more balanced approach could have resulted in the Government transferring more long term risk than they achieved in the restructured project.

► The success of HS1 after the restructurings shows the importance of project organisation to the successful outcome of a HSR project.

24

Map of the project

Diagram of the original project organisation

UK Government

Funders LCR

Eurostar UK URL Rail link engineering

Contractors

Shareholders

Direct agreements

Direct grantsDevelopment agreement

Equity

Management agreement

Construction contracts

100% ownership

Source: HS1 website


Detailed information: HS1, UKCommercial► The design, build, finance, and operate concession contract for the CTRL, the

largest of the UK's private finance initiative (PFI) projects at the time, was awarded to LCR in 1996 and was originally supposed to last until 2086. The brand name HS1 was adopted in 2006.

► The line was originally planned to be constructed as a single project, however after running into financial difficulties in 1998, the CTRL project was restructured and divided into two sections:

► Section 1 runs 46 miles from the Channel Tunnel portal to Fawkham Junction (near Southfleet in north Kent) and cost £1.9bn. Section 1 was opened to passenger traffic on time in 2003 and on budget.

► Section 2 completed the rail link, feeding a 24-mile HSR from Southfleet into central London's St. Pancras Station. It was opened on time and on budget in 2007 at a cost of £3.3bn.

► As part of the 1998 rescue plan it was agreed that, following completion, section 1 would be purchased by Railtrack, along with an option to purchase section 2. In return, Railtrack committed to operate the whole route as well as St Pancras railway station which, unlike all other former British Rail stations, was transferred to LCR/Union Railways in 1996.

► In 2001, Railtrack announced that, due to financial problems, it would not purchase section 2 once it was complete. This triggered a second restructuring. The 2002 restructuring plan agreed that the two sections would have different infrastructure owners (Railtrack for section 1, LCR for section 2) but with common management by Railtrack.

► Following yet further financial problems at Railtrack, its interest in the CTRL was sold back to LCR, who then sold the operating rights for the completed line to Network Rail, Railtrack's successor. Under this arrangement LCR became the sole owner of both sections of the CTRL and the St Pancras property, as per the original 1996 plan.

25

► According to its website, HS1 Ltd is the owner of the high-speed railway infrastructure and stations along the route. Through its technology and design it is in essence a stand alone HSR. The use of the high-speed route by both international and domestic traffic, produces technical boundaries, interfaces and contractual interdependencies to manage. For example: ► Network Rail (CTRL) is the maintainer and operator of the railway

infrastructure, train operating companies offer services to passengers on the railway.

► HS1 Ltd’s railway infrastructure has physical connections with Eurotunnel, the DBS freight depot at Dollands Moor and the Network Rail classic railway at Ashford, Ebbsfleet, Ripple Lane and domestic lines north of London.

► Each of these boundaries is defined through a contractual relationship and implemented through working practice agreements. Much of the contractual framework and working practices are evolving, reflecting the new nature of the railway.

► The experience of HS1 shows the importance of project organisation to the successful outcome of a HSR project.

► In terms of contracting for the projects, target price contracting has worked successfully:► Contracts are tendered on a design and build basis► 30% to 50% design complete► Contractor bids rates for labour, materials, overhead, etc., and a target cost,

and gets paid all his costs► Pain/gain-share mechanism comes into place against target

► The benefits of the target price contracting model are:► Alignment of interests between principle and agent► More effective partnering► Open book/transparent and better handling of variations► Alliancing of awarded contracts to deal with size


Detailed information: HS1, UK (cont’d)Risk► CTRL achieved more risk transfer than in previous PPP/PFI programmes in

the UK.

► Despite the change in financing following the restructuring in 1998, the project construction risk was retained by the private sector although additional parties were brought on board to make the project more deliverable.

► The operation of Eurostar UK was also outsourced with some sharing of the revenue and operating cost risks.

► Overall, in the restructured deal, the UK Government had reassumed some of the project risks, although the view was taken at the time that the occurrence of these risks was negligible. The Government would secure some upside risks should the project be successful.

► According to a report by NAO, prior to the start of major construction activities for section 2, LCR arranged a risk transfer agreement, known as the Cost Overrun Protection Programme.

► Under the programme, LCR paid £87m to Bechtel and a group of insurers to bear £315m of the first £600m of any cost overruns including a contractually determined and capped risk for inflation.

► For the taxpayer, the cost overrun on section 2 that is not absorbed by the Cost Overrun Protection Programme would, under current arrangements, ultimately flow through to the Department’s future loans to LCR.

26

Detailed information: HS1, UK (cont’d)Financing► The project was originally planned to be privately financed, however, these

plans were abandoned in 1997 after projected Eurostar revenues were found to be overly optimistic.

► The £5.2bn total cost for the CTRL consists of £1.9bn for section 1 and £3.3bn for section 2.

► Two stages of financing for the project: one to fund the first two years of the project and another which secured the bulk of funds required for LCR to fulfil its obligations.

► Funding for the construction of the first stage was from bank loans (£430m from a syndicate of banks) secured against Eurostar UK. Equity of £60m was provided by the shareholders.

► Funding for the construction of the second phase was proposed through a flotation of the business and bank debt. However, following the restructuring at the end of 1998 (splitting the construction in two sections), in order to ensure that financing construction was not based on Eurostar’s performance, the following structure was used:

► Direct grants payable by the UK Government

► Debt, which was a combination of:

Commercial bonds and bank debt secured against LCR’s revenue from track access charges and from government payments for domestic access to section 1 (both of which were guaranteed by the government)

Bank debt secured against payments of Government grants for the construction of section 2.


Detailed information: HS1, UK (cont’d)Financing (cont’d)► The DfT decided not to increase further direct Government grants for the

project, it agreed to guarantee £3.75bn of publicly raised debt to reduce LCR's overall cost of financing.

► In addition, the DfT also agreed to lend public money directly to LCR up to a specified limit if it ran out of cash.

► In 2004 the project raised £1.25bn in loan notes for section 1 of the construction. The transaction involved securitization of government-paid or guaranteed track access charges (TACs) from section 1.

► The credit ratings (AAA/Stable/A-1+) assigned to the loan notes issued reflect the credit enhancement provided by the government, through a structure designed to create an unconditional and irrevocable stream of payments of two types of TACs, domestic capacity charges payable by the government and TACs payable by Eurostar (UK) Ltd. which were guaranteed by the government to directly repay the rated notes. Neither TAC streams are affected by deductions for actual asset availability, usage or performance.

► The HS1 example highlights the importance of government involvement in financing and risk transfer in an HSR project.

27

Detailed information: HS1, UK (cont’d)Other► The line enabled regeneration around stations on route, particularly with the

opening of high speed commuter services between Kent and London St Pancras.

► Key interface with domestic rail network which accounted for:

► 12.5% of construction activity

► £400m cost of work

► Plus £150m new assets

► The government has recently taken formal control of LCR and its financial subsidiaries as the next step towards the restructuring and sale of the operating concession HS1. In May the EC provided LCR with a £5bn grant of state aid to write off its debt and bring about the unbundling of the HS1 infrastructure and Eurostar operations.

► The restructuring means that each of LCR’s businesses will be established on a commercial basis, ending long term guarantees and removing the need for ongoing public support. The infrastructure activities will be consolidated into a single entity and then sold. Debt cancellation and a more sustainable financial structure are expected to lead to a reduction in track access charges. The concession period will be shortened, all guarantees to the company will be cancelled and infrastructure use will be on a commercial basis at market rates.

Source: NAO report on CTRL progress 2005, HS1 website, Press search, internal presentations


Appendix B: TGV, FranceOverview of project► The first line of the TGV network was first opened in 1981 between Paris and

Lyon and the network now extends throughout the country, with eight new lines either under construction or in the pipeline, including extensions within France and to surrounding countries.

► The network is currently operated by VFE, the long-distance rail branch of SNCF, the French national rail operator. Whereas, Réseau Ferré de France (RFF), also state owned, owns and manages the network, and is responsible for upgrading, developing, and enhancing it and ensuring its overall coherence.

Lessons learned for HS2► The success of the TGV network has in part been due to the development of

the network in phases on the basis of the lines which were expected to be more successful being developed initially. This has been critical due to costs and capacity for mobilising engineering and construction capacity.

► There are benefits from relying on local authority funding to bear some of the project costs, requiring that local regions that benefit from the TGV in terms of the regeneration and growth. Local funding has been significant in several TGV lines, comprising approximately 25-35% of total funding, however the number of stakeholders involved requires that negotiations be carefully managed to avoid delays.

► More recently, TGV lines have been procured on a PPP basis, with either demand or availability risk, which has allowed more lines to be built with the help of private financing and expertise.

► The TGV experience successfully demonstrates the ability to develop the HSR infrastructure through the national railway infrastructure manager who will also be responsible for ongoing maintenance of the classic rail network.

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Map of TGV network in France

Organisation diagram

French state

SNCF(Operator)

RFF(Infrastructure

manager)


TGV, France: overview of lines examinedEast European (LGV Est)► In planning since 1996, the LGV Est européenne (often shortened to LGV Est)

is an extension to the French HSR network, connecting Paris and Strasbourg and other major cities in eastern France. In March 2007 the RFF opened the 300km line between Vaires-sur-Marne near Paris to Baudrecourt in the Moselle (phase 1). Phase 2 of the construction, from Baudrecourt to Vendenheim (Bas-Rhin) near Strasbourg, is expected to be completed by 2015.

► As well as the line, the project also involved:

► Construction of three TGV stations

► Upgrades and improvements to terminal lines and facilities

► Modernisation of city centre stations

► Electrification of lines through the Vosges valleys to permit seamless TGV running

Rhine Rhone► The Rhine-Rhone HSR will be 425km long and comprise three branches made

up of three complementary lines.

► This new project, which has been in the planning stage since 1992, is the biggest railway engineering project in France following completion of the first part of TGV Est in 2007.

► The first section of the three-line TGV Rhine-Rhone project to be approved is the eastern branch, linking Dijon and Mulhouse – a distance of 140km (87.5 miles). It will eventually be joined by the western branch towards Paris and the southern spur towards the Lyon/Rhone-Alps region (see diagram on slide 28). Work began on the eastern branch in 2006 and the project is planned to be complete in 2011.

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TGV, France: overview of lines examined► The experience of LGV Est and Rhine-Rhone show that a phased approach to

building new lines is a workable model. This approach has been used previously on all other TGV lines, and has been critical to their success. The first stage is built to full capacity before other sections are commenced, this eases the financing burden and also makes best use of the market capacity for engineering and construction companies.

Sud Atlantique► The project involves the construction of approximately 300km of high speed

railway line between Tours and Bordeaux.

► Currently in negotiations with competing bidders for the PPP concession and financial close is expected to be achieved in the first half of 2010. The line is expected to be in operation in 2016.

Brittany-Loire Valley► The line will link Connerré to the east of Le Mans and is expected to cut travel

times between Paris and Rennes by 37 minutes, shortening it to one hour and 27 minutes.

► The project involves the construction of approximately 182 km of new line and approximately 32 km of connections (at Le Mans, Sablé-sur-Sarthe and Laval). No new stations will be built. The section to the north of Le Mans is intended to be used for transporting both passengers and freight.

► Currently in negotiations with competing bidders for the PPP concession.


Detailed information: TGV, FranceCommercial► One of the roles of RFF, as infrastructure manager, is the provision of new rail

infrastructure. For example, in the development of new HSR lines, RFF contracts out the engineering works and the ongoing maintenance of the new and existing infrastructure. RFF charges access fees to SNCF (the national rail operator) for the use of the rail infrastructure.

► The new HSR lines are delivered through RFF who then provides the infrastructure to SNCF on an availability basis. RFF acts as project manager and allocates contracts for the development of the infrastructure on a section by section basis bringing in specialist contractors to work on the civil works in order to mitigate against the default risk of a single contractor and to counter any resource constraints in the market.

► In 2007, RFF was allowed to enter into PPPs to finance and deliver projects, after safety and development legislation came into effect. This has allowed France to build more projects beyond the capacity of the state budget, as well as share risks with project partners.

► The two forms of involving the private sector are:► Concession model, whereby rail operators pay an access charge based on

their actual use of the infrastructure. As a result demand risk lies with the concessionaire.

► Partnership contract (contrat de partenariat public-privé), whereby RFF pays a rental or availability fee over the life of the agreement based on the performance of the private sector partner, regardless of actual use of the assets, as such demand risk remains with RFF.

► The use of PPPs to finance and build the line has several objectives:► Accelerate the development of a national rail network by carrying out more

projects concurrently in a budget constrained environment.► Maximise the use of public funds by mobilising financial resources from the

private sector.► Reducing project costs by integrating the design, construction, maintenance

and so on.► SNCF maintains the operation of track and control of maintenance of safety

systems including signals and pointwork.

30

Risk► RFF charges access fees to SNCF for usage of the rail infrastructure but does

not take any usage risk associated with it.► The interface risk between the different infrastructure works is retained by RFF

and hence by the French State. ► Sud Atlantique LGV is a concession model and therefore the concessionare

takes the demand risk.► However, Brittany-Loire Valley HSL is a partnership contract, as such demand

risk remains with RFF.► The reason Sud Atlantique was chosen to have a concession model and

Brittany-Loire was chosen to have a partnership contract was that the French Government wanted to test these models. The demand forecasts for the Sud Atlantique line were more certain, therefore it made sense to have demand risk model tested on this line.

► There remains confusion about the two different types of contract, especially the concession contract as the concessionaire does not mange operations, and its only client is SNCF, so taking revenue risk does not make sense entirely.

Financing► The initial TGV projects were developed and funded by SNCF on a corporate

basis and guaranteed by the State.► More recent TGV projects have been developed and funded by RFF. RFF can

borrow money in the international markets to enable it to undertake major projects but not on a particular project basis. This funding is supported by government guarantee and is restricted to the amount that RFF can repay from the access fees.

► The rolling stock for the TGV lines is procured by SNCF and is funded through lease commitments.

► In addition to borrowings, the TGV lines have also been developed with grant funding from local sources. This funding is dependent on the political will at the local level for a new TGV line, and the local benefits it is expected to deliver. ► Local entities which contribute to financing include, the city and county

council, district council and regional council.


Detailed information: TGV, France (cont’d)Financing (cont’d)

► Owing to the number of stakeholders involved, it is essential that the negotiations be properly managed, RFF is responsible for this. Financing negotiations have caused delays on the Sud Atlantique line, with local stakeholders demanding political gains for their contribution.

► Local authorities can raise finance to contribute by borrowing (issuing bonds) to specialised commercial banks.

► Local involvement is highlighted by the following projects.

East European HSL phase 1► The total cost of completing phase 1 was €3.1bn, backed by a unique financing

structure uniting 22 partners including the French state, 17 local authorities served by the line, Luxembourg, the EU, SNCF and the RFF.

► It was the first TGV construction in which local communities participated in funding together with the state government and European Union. Their input was fixed following negotiations with the local communities and contributions depended on travel time decrease benefits to Paris.

► Local funding amounted to approximately €736m, in addition RFF secured €755m in borrowing from the EIB.

East Rhine-Rhone Line► The total cost of the project is estimated at €2.5bn. Whilst the majority of funding has

come from the state and RFF borrowings, the TGV line has also been developed with grant funding from local sources amounting to approximately €717m. In addition, the project has €66m in financing from the Swiss government, as the line will bring economic benefits there.

► RFF has secured €625m in borrowing from the EIB to finance the line.

Brittany-Loire Valley ► RFF is seeking a private partner to design, build, finance, operate and maintain the

182km of rail line for a period of 45 years. The invitation to tender for the so-called 'partnership contract' to build LGV Bretagne – Pays de la Loire was published in December 2008 and bids were submitted in May. The contract is currently priced at €3-4bn.

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Detailed information: TGV, France (cont’d)► A total of three consortia led by France's big three developers – Bouygues, Eiffage and

Vinci – have been pre-qualified.► In terms of funding, RFF is providing the largest share: €1.02bn. The contribution from

the State is €990m, with an equal amount to be provided by local authorities. Of this €990m, the Brittany region and other bodies are providing €896m, with the Loire region making its largest-ever rail investment of €94m.

► The project had been re-tendered on OJEU to take advantage of recent changes to French law, which allows the state to guarantee up to 80% of the private sector financing required for PPPs and concessions, be it senior debt or bonds, up to a maximum of €10bn. It is understood that the guarantee can be used for projects in addition to any regional or local subsidies. The amended tender also gives candidates the opportunity to submit BAFOs without committed bank letters, permitted under a revision to France's PPP framework law.

► Recently, the president of Caisse des Dépôts et Consignations (CDC) pledged to provide a total of €500m to help the regional authorities finance their part of the project. This loan, which covers approximately half of the regions' total funding requirements, would be made at a significant discount to current market prices and would be long-term, perhaps as long as 40 years.

Table: % funding by sourceTGV Est East Rhine Rhone Brittany-Loire

French State 39% 31% 32%Regional funding 24% 29% 35%RFF 22% 26% 33%SNCF 2% 4% n/aEU 10% 8% n/aLuxembourg 4% n/a n/aSwitzerland n/a 3% n/a

Source: RFF website, press search, S&P report on SNCF, EY colleagues in Paris office


Appendix C: Hogesnelheidslijn Zuid or HighNetherlandsOverview of project► 100 km line under construction between the Netherlands and Belgium. Originally scheduled for completion

in 2007, it is now expected to open before the end of 2009. It will be served by newly renovated Thalys trains from Amsterdam to Paris and Brussels.

► The line will also be used by domestic V250 trains exclusively operated by NS Hispeed, a joint venture between Nederlandse Spoorwegen and KLM.

► The project has been procured on the basis of a PPP contract between Rijkswaterstaat, an agency of the Dutch Ministry of Transport, Public Works and Water Management, and the Fluor-Infraspeed until 2030. It is responsible for design, construction, financing and maintenance.

► The main challenges of the project are the delays to the construction timetables caused by late delivery of the trains as well as issues with the European Rail Traffic Management System.

► Approximately €1bn funding was provided by Infraspeed, a commercial bank financing consortium and the EIB.

Lessons learned for HS2► Missed programme management opportunity. The Dutch Government underestimated the time required for

system integration.► Following market consultation undertaken by the Dutch Government, it became apparent that the private

sector were not in favour of retaining demand risk. This risk is retained by the Dutch Government.► The Dutch Government have retained considerable risks relating to the provision of the sub

in the project. The procurement of any HSL will need to consider the retention of key risks so that overall best value for money is achieved.

► The Dutch HSR has, according to the Dutch Audit Commission, been negatively impacted by the project being managed by two different government departments. This has created issues with the procurement and the delivery of the project, with the public sector having to pay availability charges although trains have not yet started operation. This highlights the need for joined up government for project management and proper planning in the procurement stages.

32

Map of the project

Diagram of commercial structure

Appendix C: Hogesnelheidslijn Zuid or High-Speed Line South,

100 km line under construction between the Netherlands and Belgium. Originally scheduled for completion in 2007, it is now expected to open before the end of 2009. It will be served by newly renovated Thalys

The line will also be used by domestic V250 trains exclusively operated by NS Hispeed, a joint venture

The project has been procured on the basis of a PPP contract between Rijkswaterstaat, an agency of the -led consortium

Infraspeed until 2030. It is responsible for design, construction, financing and maintenance.

The main challenges of the project are the delays to the construction timetables caused by late delivery of

1bn funding was provided by Infraspeed, a commercial bank financing consortium and the

Source: Ministerie van Vekeeren Waterstaat presentation

Passenger transport: 1 concession agreement

Railtechnical installations: 1 DBFM contract

Civil-technical foundation: 6 D&C contracts

Connections with existing rail infrastructure: 1 D&C contract

Source: www.dans.knaw.nl/

Missed programme management opportunity. The Dutch Government underestimated the time required for

Following market consultation undertaken by the Dutch Government, it became apparent that the private sector were not in favour of retaining demand risk. This risk is retained by the Dutch Government.The Dutch Government have retained considerable risks relating to the provision of the sub-surface works in the project. The procurement of any HSL will need to consider the retention of key risks so that overall

The Dutch HSR has, according to the Dutch Audit Commission, been negatively impacted by the project being managed by two different government departments. This has created issues with the procurement and the delivery of the project, with the public sector having to pay availability charges although trains have not yet started operation. This highlights the need for joined up government for project management and

http://www.dans.knaw.nl/


Detailed information: HSL Zuid, NetherlandsCommercial► The public sector is the contract manager with responsibility for ensuring the contractual

matrix delivers the required outputs. In addition, it is responsible for safety, access and system integration.

► The construction has been divided into four workstreams contracted out:► Substructure: (civil-technical foundation) delivered by the Dutch Government on a

traditional basis (to allow Dutch Government to retain the risk) and contracted out to six D&C contractors

► Superstructure (rail systems): awarded to a contractor (Infraspeed) on a DBFM basis► Network connections: awarded to one D&C contractor► Passenger transport: one concession-agreement (HSA)

► A competition was held to secure a private sector partner for the delivery of the infrastructure from the track level upwards on a PPP basis.

► A concession for 30 years was awarded to the successful consortium (the Infraspeed consortium consisting of: Fluor Daniel BV, Koninklijke BAM/NBM Amstelland NV, Siemens Nederland NV, Siemens Transportation Systems, Innisfree Limited and Charterhouse Project Equity Investment Limited).

► The PPP contract includes the provision and maintenance of the track, safety systems, power supply systems, sound barriers and communications systems.

► Siemens Nederland has successfully delivered the power supply system, the ERTMS signalling system, the GSM-R communication systems and the ancillary equipment. BAM Rail has successfully supplied the track system and noise barriers and Fluor Infrastructure has successfully provided program management services.

► The government has sold the right to run trains on the HSL to the consortium High Speed Alliance (HSA), a JV between Dutch Railways (NS) and Royal Dutch Airlines (KLM). HSA will pay the Dutch government for the exclusive right to domestic transport on the high speed line for a 15-year period.

► Network connection work was contracted out to other building firms. In late January 2001, the HSL Project Organization signed the contract for this with a consortium established for this purpose, which included Ballast Nedam, BAM NBM and HBG Civiel.

33

Detailed information: HSL Zuid, Netherlands

The public sector is the contract manager with responsibility for ensuring the contractual matrix delivers the required outputs. In addition, it is responsible for safety, access and

technical foundation) delivered by the Dutch Government on a traditional basis (to allow Dutch Government to retain the risk) and contracted out to

Superstructure (rail systems): awarded to a contractor (Infraspeed) on a DBFM basis

A concession for 30 years was awarded to the successful consortium (the Infraspeed

The PPP contract includes the provision and maintenance of the track, safety systems,

Siemens Nederland has successfully delivered the power supply system, the ERTMS R communication systems and the ancillary equipment.

BAM Rail has successfully supplied the track system and noise barriers and Fluor

High Speed Alliance (HSA), a JV between Dutch Railways (NS) and Royal Dutch Airlines (KLM). HSA will pay the Dutch government for the exclusive right to domestic transport

Network connection work was contracted out to other building firms. In late January

established for this purpose, which included Ballast Nedam, BAM NBM and HBG Civiel.

Risk► The Dutch Government took the view that it would be unable to

successfully transfer the risks related to the sub-structure works and ground conditions, and decided that this aspect of the project would be best delivered by the Dutch government on a traditional basis, with other aspects being delivered on a PPP basis.

► The PPP did not include the transfer of any demand risk. Infraspeed is remunerated on an availability basis, subject to deductions for unavailability of the infrastructure.

► Infraspeed guarantees 99.46% availability of the line over the 25 year concession period from 2006 to 2031. As of 2006, the Dutch government will pay Infraspeed an annual fee for making the HSL infrastructure available, which allows Infraspeed to cover its expenses and recover its investments. The sum paid depends on the actual availability: if Infraspeed fail to realise 99.46% availability, the fee is reduced.

► Although the private sector consortium did not take revenue risk, the Dutch Government developed a payment mechanism based on penalties (deductions) for disruption caused by non-availability.

► The payment mechanism and the supporting transport model are used to quantify the impact of infrastructure failures on the passenger and on the operating company. The same model is also used in the management of the operating company to quantify the impact of an operating failure on passengers.

► According to a report by the Dutch Audit Commission, whilst the construction contracts made the contractor responsible for the risks associated with the construction, maintenance and operation of the railway line, the major financial risks remain with the State. If there are delays in completing the substructure or superstructure, for example, the State will bear the resulting loss. Its dependence on third parties prevents the State from managing many of the risks effectively.


Detailed information: HSL Zuid, Netherlands (cont’d)Other► Delays to the construction timetables and cost overruns were caused by several factors:

► Late delivery of the train sets from the HSA joint venture contractor.

► The ERTMS (European Rail Traffic Management System) modifications due to a change in protocol were underestimated.

► Upgrading of the signalling system.

► The equipment for testing the upgraded safety system was not delivered on time as the specification was changed

► Lack of coordinated leadership from the Dutch Government.

► According to the report from the Dutch Audit Commission, these delays will result in a loss of income to the government from access charges totalling around

► Furthermore, capital costs rose from a projected also predicts that the whole HSL

► The report blamed the Dutch transport ministry for a lack of cocontractors during the construction period. Operational risks and uncertainties were not well managed, and the ministry’s understanding of the risk was incomplete. In particular:

► The ministry wanted train operations to start whilst the European Train Control System equipment was still being tested. At the same time, the Passenger Transport Directorate required that full access tariffs be paid as soon as the trains started running. HSA has now decided not to run any trains until the European Train Control System has been fully tested and passed 'fit for purpose'.

► There are concerns that passenger numbers may have been significantly overestimated.

► There are also doubts about the punctuality of the high speed trains, which risk being delayed where they have to share tracks with 140 km/h services on the conventional network between Amsterdam and Hoofddorp and through Rotterdam. HSA has demanded a reduction of payments to compensate for an underwill reduce its potential revenue.

► Belgian infrastructure manager Infrabel may pursue its own claim against the Dutch transport ministry for the delay to the start of services. Until HSLLGV4 estimated to be worth around

FinancingThe Dutch government finances:

► The substructure of the HSL

► The PPP infrastructure payments to Infraspeed

► These are partly financed by revenue from HSA

Total costs: €7.2bn.

The value of the PPP element of the project was approximately £1bn. The funding for this element of the project was achieved through 90% gearing.

Financial close reached on 30 October 2001.

The £1bn project financing for the PPP includes:

► Loan facilities provided through an international commercial banking consortium with the lead arranging banks being Bayerische Hypo-und Vereinsbank, ING, KBC, Kreditanstalt für Wiederaufbau, Dexia Credit Local and Rabobank:

► €605m syndicated term loan (comprised of two Senior loans with a term of approximately 27 years)

► €119m subordinated debt bridge facility

► €15m working capital facility

► The project’s ‘TEN’ status made it eligible for a loan from the EIB with a principal value of approximately €400m.

Source: Dutch Audit office report, press search, HSL Zuid Website, EY colleagues in Dutch office34

Detailed information: HSL Zuid, Netherlands (cont’d)

Delays to the construction timetables and cost overruns were caused by several factors:

Late delivery of the train sets from the HSA joint venture contractor.

The ERTMS (European Rail Traffic Management System) modifications due to a change in protocol were

Upgrading of the signalling system.

The equipment for testing the upgraded safety system was not delivered on time as the specification was

Lack of coordinated leadership from the Dutch Government.

According to the report from the Dutch Audit Commission, these delays will result in a loss of income to the government from access charges totalling around €222m.

Furthermore, capital costs rose from a projected €3-5bn in the mid-1990s to over €6bn in 2006. The report also predicts that the whole HSL-Zuid project will only achieve break even about 2022.

The report blamed the Dutch transport ministry for a lack of co-ordinated leadership of the various contractors during the construction period. Operational risks and uncertainties were not well managed, and the ministry’s understanding of the risk was incomplete. In particular:

The ministry wanted train operations to start whilst the European Train Control System equipment was still being tested. At the same time, the Passenger Transport Directorate required that full access tariffs be paid as soon as the trains started running. HSA has now decided not to run any trains until the European Train Control System has been fully tested and passed 'fit for purpose'.

There are concerns that passenger numbers may have been significantly overestimated.

There are also doubts about the punctuality of the high speed trains, which risk being delayed where they have to share tracks with 140 km/h services on the conventional network between Amsterdam and Hoofddorp and through Rotterdam. HSA has demanded a reduction of €16m a year in its premium payments to compensate for an under-estimation of the running times through Belgium, which it believes will reduce its potential revenue.

Belgian infrastructure manager Infrabel may pursue its own claim against the Dutch transport ministry for the delay to the start of services. Until HSL-Zuid opens, Infrabel expects to lose track access income on LGV4 estimated to be worth around €9m a year.

Source: Dutch Audit office report, press search, HSL Zuid Website, EY colleagues in Dutch office


Appendix D: TAV, ItalyOverview of project► The project involved the design, construction and operation of principle lines of

a HSR connecting the north and south of Italy through the cities of Turin, Milan, Bologna, Florence, Rome and Naples, totalling more than 900km.

► The project started in 1991, but went through a complex authorization process.

► In accordance with EU directives, Italy has split railway operations from railway ownership. The Italian railway group (Ferrovie dello Stato, ‘FS’) manages the infrastructure and performs all maintenance and repairs through the rail infrastructure company Rete Ferrovaria Italiana (RFI). FS is charged with managing the HSL project.

Lessons learned for HS2► Private financing was well received, but it was well backed by the state

indicate that much depends on the willingness of the state to offer support.► The size and competencies of the local construction market have a large

bearing on the size and complexity of the individual contracts let as part of the HSR projects. TAV believe that minimising the number of interfaces through awarding larger contracts is preferable to awarding smaller contracts.

► City centre stations have been chosen in preference to parkway stations, as TAV believe these provide a better opportunity to create a multi-modal transport interchange with existing rail services.

► The Italian experience has demonstrated the ability of public-private participation in developing an HSR as well as the use of Not for Profit structures in structuring the project.

► The Italian experience, with the withdrawal of private sector parties from the project, highlights the frustrations that can develop and can jeopardise HSL. A true partnership approach is required to deliver a successful project.

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100% ownership

Italian State Treasury

Italian State Railway Holdco

(FS)

Rail infrastructure company

HSL Company (TAV)

Train operating company

100% ownership

100% ownership

Direct funding

MonitorRole

Source: commons.wikimedia.org/wiki/File:Italy_TAV.png

Map and diagram of the project


Detailed information: TAV, ItalyCommercial► In 1991 FS awarded a 50-year concession to TAV to develop, design, finance

and construct HSL projects throughout Italy.

► Originally TAV was 40% privately owned, but in 1997 the Italian State Railway Holding Company bought out the private shareholders.

► FS also awarded construction contracts to construct non-urban sections of infrastructure, however owing to delays in the purchase of land for construction, these contractors withdrew.

► Upon completion of the HSL projects, ownership is transferred to RFI although TAV retains the right to charge a usage fee.

► RFI in turn charge Trenitalia or other train operating companies who use the HSL infrastructure.

► NTV (Nuovo Trasporto Viaggiatori) was granted the licence and authorisation to perform the passenger services on the high speed network and will start these services in the first half of 2011.

► NTV was created in December 2006 by Italian businessmen Luca Cordero di Montezemolo, Diego Della Valle, Gianni Punzo and Giuseppe Sciarrone.

► NTV has ordered from Alstom 25 of its ultra high speed AGV1 trains at a cost of €650m. The contract covers the maintenance of these trains (not included in the above amount) for a 30-year period, and an option for a further 10 trains. The AGV train, having a capacity of around 500 seats in 11 coaches, will operate on the Italian high speed network at a speed of 300kph.

► The bond offerings were issued by Infrastrutture SpA, a subsidiary of the financial intermediary responsible for the funding of major infrastructure projects in Italy.

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Risk► The state meets any shortfalls between debt service payable to Infrastrutture

and net forecast TACs. Net TACs are forecast after deducting operating, financing and tax expenses. However, operating expenses are subject to a cap, leaving operating risk with RFI. Net forecast TACs are recalculated every five years, and adjusted for inflation. Ultimately, non-payment risk rests with the government.

► Demand risk is borne in the first instance by the train operators. However, given the very high capital costs of the project, the train operators would be likely to keep trains running with lower load factors. The breakeven point is estimated at a load factor of 50%, the load factor embedded in Ferrovie dello Stato's forecasts is 70%. Nevertheless, if traffic was so low as to lead train operators to reduce booked capacity, TACs would fall below expectations and the shortfall would have to be covered by the state. RFI expects to allocate train paths mainly through contracts lasting for maximum of 12 months, but operators would also be able to enter into long-term agreements. If a train operator decides to cancel booked capacity, it would be subject to a penalty payment, represented by the booking fee or the full usage charge, depending on the time of cancellation.

► The concession with RFI is subject to termination in the event of continuing material breaches by RFI in its undertakings. Credit risk resulting from a termination is mitigated by a law which provides that the new concessionaire will be jointly liable for debt with RFI and Infrastrutture. In addition, any sums due from the state to RFI will be allocated to repay Infrastrutture’s debt, and the state will be responsible for servicing Infrastrutture’s debt until a new concession is granted.


Detailed information: TAV, Italy (cont’d)Financing► TAV is 60% funded through interest free loans from FS and 40% through

capital market issues underwritten by explicit government guarantees.

► These guarantees relate to the credit worthiness of the usage payments from RFI and hence TAV does not carry any usage risk.

► Project costs are estimated at €35bn of which, according to a report by Standard and Poor, in 2004 €18bn had been financed. Of this, €5bn was made up of state funding, including equity, €8bn was state guaranteed debt, and €6.5bn came from the issuance of loan notes. In addition €140m of EU funding was made available as the projects are trans-European transport projects.

► The bond offerings were issued by Infrastrutture SpA, with funding then advanced to RFI via a loan agreement. The notes benefited from indirect recourse to the Italian government, which covered interest during construction and repayment of the principle once the railway was operating.

► All tranches were rated Aa2, which is the sovereign rating of the Republic of Italy.

► The bonds carry a zero risk rating and were marketed to the traditional buyers of sovereign bonds.

► The key sources of cash flow for the project are:

► Track access charges

► Rental of commercial space in stations

► State transfers covering any shortfall in debt service

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Other► The Italian Government transferred planning and consent risk to TAV in 1991.

However, land expropriation and compensation issues have taken considerably longer than anticipated to resolve given the multitude of public and private stakeholders affected by the individual HSL projects. The inability of the private sector partners in TAV to effectively manage this risk was a contributory factor to their withdrawal from TAV in 1997.

► To avoid further planning consent difficulties, the government introduced a majority rule for stakeholders which has led to the process speeding up considerably, although on certain lines there have still been significant delays.

► Minimising land take and environmental costs by constructing lines next to existing motorways has led to high costs. On some projects highway works accounted for 30% of the project costs.

Detailed information: TAV, Italy (cont’d)

Source: S&P report, press search


Appendix E: RAVE, PortugalOverview of project► The Portuguese HSR network plan comprises five main lines:

► Lisbon - Madrid 206km, expected to be completed in two phases by 2015

► Porto - Vigo 100km, expected to be completed in two phases by 2013

► Lisbon - Porto 290km, expected to be complete in 2015

► Aveiro - Salamanca

► Evora – Faro - Huelva

► The main objectives are economic growth, better connections to the rest of Europe, regional development, enabling a more sustainable transport system, and increasing competitiveness in port, airport and logistics systems.

Lessons learned for HS2► The project is planned to be built using a phased approach with operating

revenues contributing a significant portion of funding (42% on the Lisbon-Madrid line and 52% on the Lisbon-Porto line).

► The project has faced delays owing to elections, highlighting that political buy in and cross party support is essential.

► So far the project organisation model (see table adjacent) has proved successful.

► In the current financing environment the procurement process must allow for the capacity of the banking market .

38

Source: http://www.rave.pt/tabid/189/Default.aspx

Map of the project

Capacity allocation and railway traffic management: State/REFER

Signalling/telecommunications (PPP)

Substructure/superstructure

PPP PPP PPPPPP PPP

Project organisation:

http://www.rave.pt/tabid/189/Default.aspx


Detailed information: RAVE, PortugalCommercial► REFER is the manager of Portugal's rail infrastructure and is responsible for

two distinct activities:

► Infrastructure construction and renewal

► Infrastructure management, including maintenance, capacity management, route allocation and traffic control

► The high-speed network is being developed by Rede Ferroviaria de Alta Velocidade, S.A. (RAVE), which is 40% owned by REFER, with the remainder being directly owned by the state.

► The Portuguese government is retaining control of the capacity allocation and traffic management on the HSR project, but is contracting out the construction of the substructure and superstructure to five PPPs. In addition, the signalling and telecommunication are contracted out to a PPP.

► Progress so far: for the second phase of the Lisbon-Madrid HSR two consortia have been shortlisted for the final stage. The bidders need to submit final offers backed by commercial bank letters.

Risk► The matrix shows the risk

allocation for the project:

Risk: Public PrivatePoliticalPlanningFinancingProjectLand expropriationConstructionAmbienceArchealogicalMaintenanceAvailabilitySafetyTrafficForce Majeur

Source: press search, RAVE presentations, S&P report39

Detailed information: RAVE, Portugal

Financing► Funding for the construction of Portugal's high-speed rail line will be provided

by several sources, in addition to the commercial banks backing the PPP partners.

► The Lisbon-Madrid line is being completed in two sections, the first covering the crossing of the Tagus river, and the second to the Spanish border. The total investment will be €2.5bn, €600m for the first section and €2.4bn for the second section.

► The Lisbon-Porto line involves a total investment of €4.5bn.

► The Porto-Vigo line is also being completed in two sections, the total investment is €2.2bn, €845m for the first section and €1.4 for the second.

Other► Finalising the PPP for the construction of the second phase of the Lisbon-

Madrid line has been delayed, pending the outcome of the country's elections in September. In addition, the tender for the construction of the Tagus river crossing section has also been pushed back.

► According to a source close to the deal, as reported in Infra News the project depends largely on the outcome of the elections. There is an ongoing debate on whether there should be a mixture of public and private funding of Portuguese infrastructure, which is causing significant delay. This debate will also determine the way forward for the rail project.

-

1,000

2,000

3,000

4,000

5,000

Lisbon-Madrid Porto-Vigo Lisbon-Porto

€m

Operational Cash flow s EU funding

Public funding (during construction) Public funding (during operations)

Funding sources Lisbon-Madrid Porto-Vigo Lisbon-PortoOperational Cash flows 1,050 - 2,340 EU funding 675 550 675 Public funding (during construction) 325 352 990 Public funding (during operations) 450 1,298 495


Lessons learned for HS2► ICE demonstrates the difficulties of mixed use lines, and that proper planning

is essential.► ICE has successfully competed against air travel, with Lufthansa cancelling its

domestic route between Frankfurt and Cologne.

Appendix F: ICE, GermanyOverview of project► ICE (Intercity Express) is the German network of high speed trains. The first

ICE trains came into service in 1989, and were running a regular service by 1991. The network now extends throughout the country and connects most major cities, and also cities in neighbouring countries.

► 90% of Germany’s rail network is owned and managed by Deutsche Bahn AG (DB), including the ICE services.

► It was intended that DB would go to IPO in late 2008 but this was postponed due to market conditions, it remains under state control.

► The train sets used on the network have been through several generations of improvements. There have been several accidents and derailments of ICE trains, including the worst ever accident involving a high speed train in 1998, killing 101 and injuring 88.

► The planning of the ICE network involved extensive debates over the issue of using the lines for mixed traffic, or solely for passenger services.

► Although freight traffic brings significant revenues, mixed use of tracks is difficult as there are large speed differences between passenger and freight traffic. In addition, required night time slots for freight traffic could not be allocated as the HSL requires high levels of maintenance that can only be done at night.

► Problems can be avoided by harmonising timetabling as well as building switches and loop tracks to allow trains to pass each other.

► To avoid additional costs the DB strategy has been to create separate priority networks for both fast and slow trains, and investment has been made according to the designated status of each line, which essentially means that ICE trains will run on their special lines and freight will run on the original slow lines.

40

Source: http://upload.wikimedia.org/wikipedia/commons/thumb/7/7b/ICE_Network.png/450px-ICE_Network.pngPress search, DB website, journal articles

Map of the project

http://upload.wikimedia.org/wikipedia/commons/thumb/


Appendix G: Alta Velocidad Española (AVE), Spain Overview of project► The first AVE line was inaugurated in 1992 between Madrid and Seville and

paved the way for the expansion of the network around the country.

► The entry into service in 2010 of 438km of HSR between Madrid and Valencia will make Spain the country with the most HSR in service in the world with 2,200km.

► The investment of €53bn will deliver 10,000km by 2020.

► The investment committed to the HSR up to 2008 is about €24bn, excluding Madrid-Seville. This investment has delivered:

► 1,570km of HSR in operation

► 1,319km under construction

► The Spanish HSR network has been delivered with State and European funding.

Lessons learned for HS2► AVE has benefited from significant EU funding, especially on its cross border

lines. Furthermore, as AVE links regions which are relatively economically deprived, it has benefited from special EU regional development funds.

► Significant market share was taken from airlines through a competition agreement with Iberia when it was still in state hands, however now that the airlines have been deregulated the AVE may face increased competition.

41

Appendix G: Alta Velocidad Española (AVE), Spain

Source: www.watford-group.org/conf-coming.html

Map of the project

http://www.watford-group.org/conf-coming.html


Detailed information: AVE, SpainFinancing► The lines constructed have received a high percentage of EU funding which comes from various sources:

► Trans-European Transport Network (TEN-T) funding – the EU has tabled its proposals for funding TENT projects for the period 2007-2013. In selecting the projects, the EU has given priority to crossprojects and environmentally friendly modes such as rail.

► Cohesion funds – the Cohesion Fund is a structural instrument that helps Member States to reduce economic and social disparities and to stabilise their economies.

► European Regional Development Funds (ERDF) – helps stimulate economic development and regeneration in the least prosperous regions of the EU. Funding is targeted to meet three objectives set down by the EU: convergence, regional competitiveness, European territorial cooperation.

► Cross-borders projects receive a larger percentage of total investment.

0%

20%

40%

60%

80%

100%

Barcelona-Figueras Madrid- Lev ante Antequera-Granada Madrid- FronteraPortugesa

Almeria- Murcia

% to

tal c

osts

Total EU funds Other funding

Line Total cost €m% EU investment

Madrid- Levante 12410 10%Barcelona-Figueras 12375 28%Madrid- Frontera Portugesa 2700 13%Almeria- Murcia 2519 14%Leon-Asturias 2391 14%Antequera-Granada 1355 44%

42

The lines constructed have received a high percentage of EU funding which comes from various sources:

the EU has tabled its proposals for funding TEN-2013. In selecting the projects, the EU has given priority to cross-border

the Cohesion Fund is a structural instrument that helps Member States to reduce

helps stimulate economic development and regeneration in the least prosperous regions of the EU. Funding is targeted to meet three objectives set down by the EU: convergence, regional competitiveness, European territorial cooperation.

► The Spanish government is highly committed to long term plans for the network and estimates that the cost will be met from allocating 1.5% of GDP to national infrastructure until 2020. It forecast that, with additional revenue from concessions, it will generate a cumulative investment budget of €250bn of which half will go to rail. Spain will be spending € 10bn on rail infrastructure investment this year alone, € 6bn of it on new high-speed lines.

► EIB granted a €200bn loan to help construct the line between Madrid and Barcelona.

Other► When the Madrid-Seville line was built, Iberia (Spain’s

airline) was under state control. One of the reasons the line was so successful is that the government of Spain did not allow the airline to be competitive over the route.

► AVE has taken a significant market share in domestic travel from airlines. Domestic airlines have lost a fifth of their passengers in the space of a year, long-distance trains have gained almost a third. Although airlines can beat the AVE in terms of speed, passengers are better able to use their time on the train, especially for business travel.

► The opening of the Barcelona-Madrid line highlighted the fall in airlines’ dominance. In its first ten months it carried 2m passengers, in 2008 its share of the total market rose from 28% to 38%.

► However, now that airlines have been deregulated, AVE may face increased competition from low cost operators.

► Many believed that the decision to build the first HSR between Madrid and Seville (rather than to Barcelona) was a politically motivated decision. Seville is the home town of the then prime minister, Felipe González.

► The network connects small provincial cities like Valladolid and Segovia, as well as major cities.

Almeria- Murcia Leon-Asturias

Source: press search, internal reports

Total EU funds

10% 1223.228% 3459.713% 362.514% 348.314% 331.744% 600


Appendix H: Shinkansen, JapanOverview of project► The world’s first HSR entered into service in Japan in 1964.

► The Japanese Shinkansen network has been developed since the introduction of the first service with performance levels that are seen as a benchmark for railway performance in terms of reliability and punctuality.

► Now there is nearly 2,500km of high speed line in service, more than any other country in the world.

Lessons learned for HS2► Although the Japanese government effectively sold HSR assets to help

relieve the historic JNR debt burden, its current procurement policy recognises the benefits to retaining public ownership of future HSR assets and levying track access charges to HSR Operators.

► Since the introduction of the first service the Japanese government has subsequently introduced more private sector involvement and finance to facilitate further network development. This has been as a consequence of the privatisation of JNR in 1987 and the scaling back of state involvement in financing.

► Recent HSRs have had a lower cost/benefit ratio than older lines and are partly driven by political motives rather than economic cases.

► Local communities served by a new HSL are expected to contribute a proportion of matched funding.

► New HSR lines have reduced revenues on the existing lines that in some cases have resulted in reduced investment in the existing system affecting freight operations.

43

Source: http://www.rtri.or.jp/japanrail/JPG/Japan.Map.Shinkansen.jpg

Map of the project

http://www.rtri.or.jp/japanrail/JPG/Japan.Map.Shinkansen.jpg


Detailed information: Shinkansen, JapanCommercial► Following the successful introduction of the High Speed Rail service in 1964,

the Japan Railway Construction Public Corporation (JRCC) was established to procure future HSLs and classic rail services on behalf of the State.

► Subsequent lines were constructed by JRCC, with JNR (the state railway body) responsible for service operation and infrastructure maintenance. The network is run on a vertically segregated basis.

► Upon privatisation of the heavily indebted JNR in 1987, the new entity, Japanese Railways (JR), bought the existing HSL infrastructure from the government for a sum of approximately £46bn.

► JRCC remains the government funding conduit, infrastructure provider and ultimate owner of HSLs.

► JRCC levies track access charges on JR, the operator of the HSL services.

44

Detailed information: Shinkansen, JapanRisk► It has been argued that prior to privatisation in 1987, some lines were built for

political reasons, rather than capacity shortage and demand for railway travel. Investment could not be met by increasing fares as JNR was initially forced to keep fares low as part of national policy. A boom in motor car ownership contributed to lower demand. Although some lines were profitable, it was not enough to offset the loss-making routes. In 1976, to amend losses caused by the previous price control policy, fares were increased, but this led to a fall in demand.

► Coupled with a period of low growth in the 1970s, a growing deficit in JNR led to the government deciding to freeze all Shinkansen projects except those already under construction in 1982.

► This freeze was lifted shortly before privatisation of the JNR in 1987.


Detailed information: Shinkansen, Japan (cont’d)Financing► Historically, the funding sources for lines under construction had been:

► State Loans 66.7%

► Local government 33.3%

► Local communities served by a new HSL are expected to contribute a proportion of matching funding.

► The initial HSL was funded almost entirely by government loans to JNR –although the World Bank contributed a small proportion of the total funding requirement.

► In March 1987, JNR was privatised party as a result of losses incurred due to huge investment not counterbalanced by increasing farebox revenues.

► Following the privatisation of JNR in 1987, the state has progressively scaled back its funding contribution to the organisation with the introduction of more private funding in successive projects.

► The 1987 privatisation sum is payable to the government over a 30-year term with interest of 5.2%. Part of this payment is however allocated to JRCC to assist in the funding of new HSLs.

► The new HSL lines have had a financial impact on the existing network in terms of revenue decrease, which has resulted in reduced investment and asset degradation. This affected the ability of freight operators to efficiently run along the existing lines that they rely on.

45

Detailed information: Shinkansen, Japan (cont’d)Other► A major driving force behind the development of the Shinkansen network was

the benefits it brought to the regional and national economy.

► Direct impacts of the Shinkansen include reduced travel time, increased transit capacity, job creation during the construction and operation, and environmental benefits.

► Indirect impacts included reduction in congestion of other transport modes and significant regional development. For example, the growth in population between 1975 and 1991 in the area around the line was approximately 18% higher than growth in the rest of the country. Furthermore, over the same time period, the growth in the number of companies in the area along the line was 21% higher than the rest of the country.

► A key feature of the Shinkansen was the development/redevelopment of stations along the route and urban development of the surrounding area. This brought major economic and cultural benefits to the local economy. For example:

► The area around Shin-Yokohama St. station created a new business area in Yokohama, and led to growth in businesses and employment as well as the construction of an event and sports arena which was a venue during the 2002 Fifa World Cup.

► The railway company also encourages non-transport business inside the railway station, for example, shopping centres and office buildings. Approximately 15% of revenues derive from this channel.

Source: journal articles, press search


Lessons learned for HS2► The project was originally tendered as a BOT where the private sector would build and finance it without

any government support. The THSRC consortium was selected based on its proposal that did not include any request for government assistance. However, lenders to THSRC demanded and eventually received wide ranging government support in the event that THSRC could not meet its financial obligations.

► The eventual structure used for the project was dictated by the private sector and the funders. This suggests that any project structure should be considered taking into account a realistic evaluation of what the private sector can deliver, perhaps through a consultation process.

► Procurement has been surrounded by political controversy. The line was first specified to use European train sets, but then the decision was changed to use Shinkansen trains instead. Many believed this was a political move, and the subsequent disruption to the rail superstructure specification has contributed to the cost overruns. This example highlights how important planning is in the procurement stages.

Overview of project► The line will link Taipei to Kaohsiung at a total length of 345km with a 90 minute journey time. During the first

stage of the operation, eight stations of the HSR will be in operation by 2010.

► The Taiwan HSR is based on Japan's Shinkansen system and its Taiwan High Speed 700T train is a variant of the 700 Series Shinkansen.

► An express train capable of running at up to 300kmh (186mph) will travel from Taipei City to Kaohsiung City in about 90 minutes, in comparison to 4.5 hours on the conventional western trunk line.

► Initially the operating company looked at German and French high-speed technology, which went as far as a test train being assembled using German ICE power cars and French TGV Duplex intermediate trailers for demonstration test runs in northern Germany. However, after much deliberation Japanese technology was chosen.

► By 2033, 336,000 passengers are expected to be carried, which will see the high-speed line account for 5.5% of the transportation market in Taiwan.

► Actual construction began in March 2000 and running tests started in January 2005. In late October 2005, Taiwan High Speed Rail passed its targeted speed of 300kmh (186mph) to 315kmh (197mph) during testing . Operation began in 2007.

Appendix I: North-South HSR, Taiwan

46

The project was originally tendered as a BOT where the private sector would build and finance it without any government support. The THSRC consortium was selected based on its proposal that did not include any request for government assistance. However, lenders to THSRC demanded and eventually received wide ranging government support in the event that THSRC could not meet its financial obligations.The eventual structure used for the project was dictated by the private sector and the funders. This suggests that any project structure should be considered taking into account a realistic evaluation of what

Procurement has been surrounded by political controversy. The line was first specified to use European train sets, but then the decision was changed to use Shinkansen trains instead. Many believed this was a political move, and the subsequent disruption to the rail superstructure specification has contributed to the cost overruns. This example highlights how important planning is in the procurement stages.

The line will link Taipei to Kaohsiung at a total length of 345km with a 90 minute journey time. During the first

The Taiwan HSR is based on Japan's Shinkansen system and its Taiwan High Speed 700T train is a variant

An express train capable of running at up to 300kmh (186mph) will travel from Taipei City to Kaohsiung City in about 90 minutes, in comparison to 4.5 hours on the conventional western trunk line.

speed technology, which went as far as a test train being assembled using German ICE power cars and French TGV Duplex intermediate trailers for demonstration test runs in northern Germany. However, after much deliberation Japanese technology was

speed line account for

Actual construction began in March 2000 and running tests started in January 2005. In late October 2005, Taiwan High Speed Rail passed its targeted speed of 300kmh (186mph) to 315kmh (197mph) during testing

South HSR, TaiwanMap of the project

Source: http://www.thsrc.com.tw/en/

http://www.thsrc.com.tw/en/


Detailed information: North-South HSR, TaiwanCommercial► The original concept was to be entirely publicly procured, however, the

government decided to withdraw the funding and instead have the HSR Project built by a private sector venture with a Build-Operate-Transfer (BOT) model.

► The government granted THSRC (a consortium led by Alstom Transport SA of France and Siemens AG of Germany) a concession to finance, construct, and operate the High Speed Rail System for a period of 35 years and a concession for HSR station area development for a period of 50 years.

► The trainset is built by a consortium of Japanese rolling stock builders, most notably Kawasaki Heavy Industries.

► To share the benefits with government, the THSRC promises to appropriate parts of yearly earnings to government for HSR further development and construction. This amount is 10% of earnings before tax every year during the HSR operating concession period regardless of the performance of the concession company. The accumulated amount cannot be less than US$3.4bn.

47

South HSR, TaiwanRisk► Design and build contract with a franchise being let to a private sector operator

to operate and maintain the system.

► The State intended to transfer demand risk to the private sector operator who would also be responsible for the operation and maintenance of the system.

► The project has been surrounded by political controversy, particularly in relation to THRSC’s awarding of the rolling stock contracts to the Taiwan Shinkansen Consortium instead of the Eurotrain. Shortly after Eurotrain had won the bid, THSRC declared the tender re-open to TSC, who finally won it. The Japanese government had offered soft loans to finance the project and the leader of the bid promised funds if TSC was chosen.

► Allegations were made that the decision was largely political, paving the way for President Lee Teng-hui's visit to Japan. Although this was strongly denied, after a lengthy arbitration process, the court ruled in March 2004 that THSRC should pay compensation of US$32m to Eurotrain. In November 2004, THSRC agreed to pay US$65m (US$89m with interest) to Eurotrain.

► Earthquakes are a significant consideration in Taiwan and one of the benefits of the Shinkansen trains is they are built for protection against earthquakes.


Detailed information: North-South HSR, Taiwan (cont’d)Financing► The project has a construction value of approximately US$18bn.► By March 2009 THSRC had accumulated losses of US$2.13bn, amounting to

over 65 percent of the firm’s capital.► THSRC expects that restructuring will be complete by the end of 2009, which

has entailed re-negotiating terms of bank debt (with government assistance). ► Financial institutions are now considering a new package of syndicated loans

to the rail firm to retire current borrowings. In addition, the government hopes to encourage insurance firms to inject funds into the HSR company.

► The project was initially planned to be entirely privately funded through the sale of preferred shares to institutional investors. However, due to massive cost overruns THSRC failed to raise the required capital.

► THSRC focused on covering the funding gap through bank debt. This in turn created significant delays as the private sector demanded and received overt financial support from the Taiwanese Government in the event of default of THSRC.

► A government guaranteed debt facility for the first part of the project was raised in 2000 totalling US$10bn. It was split into three 15-year tranches, priced at around 90bp over Taiwan's one-year post office savings rate.

► In March 2005, the Taiwanese government stepped in to buy securities worth US$237m.

► In addition, in 2007 THSRC raised US$300m from the sale of pre-IPO convertible bonds in the international market.

► Overall, public financing will account for approximately 20.6% of the total cost including land acquisition, planning, design, supervision and civil work for under-structures in Taipei sections.

► Private investment accounts for 79.4% of the total cost and includes civil works, stations, track work, electrical and mechanical system, maintenance bases, and financial cost.

► Higher than normal use of equity reflects the high risk profile that debt providers attached to this project.

48

South HSR, Taiwan (cont’d)Other► The project has been subject to delays mainly due to:

► Financing and contractual issues.

► Safety testing and certification. For instance there were three derailments during the tests in early November 2006.

► Problems with adjusting the Japanese Shinkansen bullet train system to European specifications caused by procurement controversy as the infrastructure was built to European specifications. These included electrification and signalling, as well as training drivers.

► Cost overruns have been incurred, mainly due to:

► Delays

► An insufficient number of passengers. For the first five months of 2009, daily ridership amounted to only 87,000 passengers – 30 percent of the number predicted

► A heavy interest burden on the debt raised

► Unreasonable amortisation requirements

► In its present state, the company does not meet the terms for a mandatory government takeover and, despite the firm’s financial troubles, the government at present has no plan to take over THSRC.

► The project’s cost overruns have incited high public controversy, with critics pointing out that THSRC failed to meet its funding targets on time and breached its promise to finance the project entirely from private funds.Source: THSRC website, press search, journal articles


This document necessarily represents only part of the information which we considered in carrying out our work, being that which we considered to be most relevant to our understanding of your needs, in the light of this engagement. It contains several assumptions that are based on general knowledge of the markets and have not be proven or substantiated.

The information in this document is for discussion purposes only, and will be supplemented by matters arising from any oral presentation by us, and should be considered in the light of this additional information.

This document has been prepared by Ernst & Young. The information and opinions contained in this document are derived from public and private sources which we believe to be reliable and accurate but which, without further investigation, cannot be warranted as to their accuracy, completeness or correctness. This information is supplied on the condition that Ernst & Young, and any partner or employee of Ernst & Young, are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such supply.

49

This document necessarily represents only part of the information which we considered in carrying out our work, being that which we considered to be most relevant to our understanding of your needs, in the light of this engagement. It contains several assumptions that are based on general knowledge of the markets and

The information in this document is for discussion purposes only, and will be supplemented by matters arising from any oral presentation by us, and should be considered in the light of this additional information.

This document has been prepared by Ernst & Young. The information and opinions contained in this document are derived from public and private sources which we believe to be reliable and accurate but which, without further investigation, cannot be warranted as to their accuracy, completeness or correctness. This information is supplied on the condition that Ernst & Young, and any partner or employee of Ernst & Young, are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such supply.

Ernst & Young LLP

Assurance Tax Transactions Advisory

www.ey.com/uk

The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London SE1 2AF.

© Ernst & Young LLP 2009. Published in the UK. All rights reserved.

High Speed 2: phase 1 report 50

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Documents

International case studies on delivery and finacing – a report for HS2