financing rail infrastructure -...

Financing rail infrastructureExperience and lessons learned from the UK

March 26, 2008

New Delhi

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16 June 2009 Financing Rail Infrastructure

Agenda

I. Considerations in funding rail infrastructure

II. Private sector involvement – Case studies

III. Impact of the credit crisis

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Governments’ considerations in funding rail infrastructure with private capital

► Generic Funding Considerations► Gain access to private sector funding (and expertise)► Accommodate growing demand for rail services► Protect public interest► Maintain strategic control of the asset


What models have been used to finance rail infrastructure in the UK?

Case study B –Crossrail

Importance of taking long term view regardless of contingent economic situation

Use of innovative sources of funding including business tax

Importance of stakeholders management

Case study C –Network Rail

Regulatory Asset Base financing

Network Rail has raised over £20bn to date

Government guarantee

Regulated utility model still successful in raising debt in the current market

Case study D –Rolling Stock

FinancingROSCOs

PPP

Securitisation

Direct investment?

Case study A –Metronet PPP

Tied supply chain

Misaligned financing

Client – supplier interface

Contract scale and complexity

Poor asset knowledge

Case studies

► The use of private finance is nothing new in the construction of rail infrastructure

► A number of options have recently been used in the UK rail infrastructure


Case study A – Metronet PPP

► Issue► Passenger growth ► Asset becoming unreliable► Need for steady flow of investment

► Approach► Complex PPP contract – output driven► PPP raised £3bn private debt (2002)► Two Infracos were given the

responsibility to ► Manage, Maintain and Renew the

infrastructure► LUL maintained control of the

operation► Government guarantees were granted► 30 years concessions with 7.5 year

review periods

Transport for London

London Underground Limited

Department for Transport

MetroNet BCV &SSL

Passengers

GrantFares

Infrastructure service charge

Funders

Debt£3bn

Equity£350m

Payments

Role

Guarantor

Operator of services

Manage, Maintain and Renew

infrastructure

Office of the PPP Arbiter

StatutoryReviewer

Subcontracts- Rolling Stock & Signals- Track- Stations- Civils

Client

Private Infrastructure

Company


Case study A – Lessons learned:Poorly implemented “PPP” model

► LUL and Metronet functions not well aligned

► Weak Metronet capabilities (Infraco layer)► Difficulty in progressing change

Procurement failures► Incentives in bidding

process, (e.g., dangers of under-priced bids)

►Timing of financing commitments

►Protracted / complex process leading to gaps

►Unwilling client

► Imbalance of risk-reward in contracts► Weak project management► Poor governance and controls

► Bank vigilance weakened by guarantee► Debt over-priced in light of guarantee► Insufficient equity at stake

► PPP contract complexity and need for new procedures

► Priced and contracted on poor asset information and unclear design criteria

Misaligned financing

Client – supplier interface

Contract scale and complexity with poor asset knowledge

Tied supply chain (in a scope/price variable PPP)

1

2

3

4

It should be possible to avoid all of these problems in a future PPP structure: explicit regulated utility model

Tube Lines: the jury is still out►Better supply chain processes, works competitively tendered►Stronger negotiation, client and project management skills►Halo effect?


Case study B – Crossrail

► Background► Severe over-crowding and congestion on existing services into Central London► Support development of London’s finance and business in the City and Docklands► Approach► New East – West link under London, 7% capacity increase (24tph)► Improved access from Central London and Canary Wharf to Heathrow Airport► Projected cost £15.9bn, one of Europe’s largest ever infrastructure projects

Source: Crossrail website


Case study B – CrossrailFunding plan► Funding sourced from both public and private sectors

► Shared financial and political risk, aligning interests► Seen as more than paying for itself via the projected benefits

£ 5.1 B £ 3.5 B £ 2.7B £ 2.3 B £ 2.3 BDfT GLA TfL NR Other

Grant funding

(In UK, >90% tax revenue to central government)

Borrowing over 5 years from 2010

Backed by property tax supplement (from 2010)

Any surplus to be used by TfL

Borrowing via existing authority, backed by new fare revenue

Mayor sets fare policy

First £1 B pre 2010; principal repaid from construction end (2018)

Financing works on mainlines, via usual Regulated Asset Base

Repaid via track access charges

30 yr track access rights

Land sales, Private developer contributions at stations• BAA• City of London Corp.• Canary Wharf Group• Berkeley Homes

Also LUL savings

Funding Benefits

£20+ bn

Forecast to create 30,000 jobs

Up to 14,000 people will be employed at the peak of the lines construction

Boost existing regeneration plans in the Thames Gateway

Benefits Board led by Greater London Authority to secure wider economic opportunities (i.e. housing and development)


Case study B – Features

► Government led confidential bilateral negotiations with each funder (including London business community) to secure commitments and align interests

► Risk of continued legal battles over property and environment

► Need to take a long term view, beyond current economic climate and credit crisis

► CLRL itself will not raise debt but just focus on core task of procurement and delivery

► Incorporate private risk-taking (stations, mainlines)

► Many risks too complex and unknown to price privately► Motivated delivery partner for design and project management,

incorporating flexibility and target costing mechanisms► National rail network access rights – essential for long-term

security of the project (30 year debt horizon)

Management of financial risks

Stakeholders management

Funding led by Government borrowing, leveraging private sources

1

2

3


Case study C – Network Rail – RAB financing

Issues► Large passenger growth► Underinvested assets► Railtrack entered into Administration in

2001

Approach► Network Rail, a company limited by

guarantee, took over Railtrack in 2002 ► Renewals and enhancements are funded

through third party debt► The Government decides the output and

control fares through DfT► The ORR approves the price of the output

and fixes the Track Access Charges (TACs) and level of grant support

Department for Transport

Network Rail

Users

Passengers Train

Operators

GrantsPerformance

Payments

Track Access

Charges

Freight Operators

Fare

box

Debt Funders

Debt

Fare

box

Track Access

Charges

Subsidy / PremiumOffice of Rail Regulation

TACs + Grants = O&M + Debt Service + Premium

Third party debt = Renewal and Enhancement


Case study C – Features

► Network Rail has not yet raised any financing without government guarantee

► In the current financing markets Network Rail is unlikely to be able to raise finance at competitive rates without guarantee

► Used in the UK in the transport, telecoms, power and water sector

► Model promotes asset stewardship and is fundable in the current market

► Regulator provides confidence and stability to the private sector and supports efficient delivery

► Set return on RAB promotes private sector investmentRegulator involvement

Government support still required

Regulated utility model1

2

3


► Budgetary constraints – “pay-as-you-go” instead of up-front capital payments

► Risk transfer and whole-life cost reduction► “Off-balance sheet” treatment► Potential cash release for public sector

without loss of control (sale and lease back)

► Commercial discipline in the procurements

► Increasing attractiveness of infrastructure assets for equity investors

► Tax arbitrage (~ lowers cost of capital by 2-3%)

► Sensible risk sharing► Significant availability of long term

funds [temporarily unavailable, increasing lease pricing]

Public sector Private sector

Case study D – Moving away from traditional rolling stock funding – additional drivers


Case study D – Simplified examples of commercial & funding structures employed

ROSCO(Asset Owner) Govt / DfT

Train operators

Under-takings

Lease rentals

Supply rolling stock

Franchise agreement

(7-10 years)

Shareholders / Funders

DfT Supplier

TOC

Supply contract

Franchise agreement

Governmentundertakings MaintenanceRS Maint

SPV

Operating lease

Long-TermFunding

UK Intercity Express

UK ROSCOs

Angel Trains(Asset Owner) Govt / DfT

Train operators

S-54 undertaking

Lease rentals Supply rolling stock

Franchise agreement

(12/15 years)

Source: Ernst & Young

West Coast Train Finance(SPV - Funding Vehicle)

Capital lease rentals

Rollingstock

Capital markets(15 year debt)

85% debt

RBS

15% equity

Securitisation


Impact of the credit crisis – the plumbing is broken

Funders Projects

£ £

Intermediaries

Monoline insurersRating agenciesCommercial banksInvestment banks


Impact of the credit crisis – Infrastructure Financing

►The failure of the monolines has closed the capital markets►Credit losses and liquidity constraints have reduced bank lending capacity►Banks are very selective on the projects they are lending to►Lenders avoid syndication and refinancing risk►“Club deals” with more lenders involved►Limited and expensive short tenor debt►Banks seek strong sovereign support of projects


Impact of the credit crisis – Government intervention

►Direct intervention through the provision of matching debt facilities►Continued promotion of infrastructure projects►Increased involvement of multilateral agencies such as EIB►Co-financing►Setting up of an infrastructure bank to co-invest►…


► Plenty of room for the private sector in the financing and delivery of passenger rail infrastructure and fleets

► Private participation comes in many shapes and sizes

► Allows governments to increase capacity by raising a significant volume of funding and doing so sooner

► Governments always specify outputs (and safety requirements) and maintain ultimate control over the assets both during and after the partnership

► Despite the protracted credit crisis, a deep pool of equity remains committed to the sector

► Public interest has been protected with good safety, operational performance and value for money

► Private capital is needed on a substantial and sustainable basis to meet today’s needs for public transport

Rail assets can successfully be funded and delivered through a variety of structures

Gianluca FavaloroInfrastructure AdvisoryErnst & Young LLP, UK

Direct Tel: +44 (0) 207 951 1113Mobile: +44 (0) 776 850 4268E-mail: [email protected]


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© Ernst & Young LLP 2008. Published in the UK. All rights reserved.

This preliminary 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. In particular any numbers, initial valuations and schedules contained in this document are preliminary and are for discussion purposes only. The information contained in this document should be treated as strictly confidential.

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