Rail PPP Critical Success Factors

Focus: Greenfield Rail Projects

November 26, 2014

2014 IPF Conference

Milan, Italy

Peter James, MBA, CFA

Head, Financial PracticeT: +255 764 465 838| pjames@cpcs.ca| www.cpcs.ca

George Kaulbeck, P.Eng., MBA

Principal and Project Manager T: 506 386 1352 | gkaulbeck@cpcs.ca

Outline

1. CPCS Introduction

– P3 Terms

– CSF Framework

2. International Case Study

3. CSF Recommendations

Our History

CPCS is an international consulting firm providing advisory services to public and private sector clients in the infrastructure sector.

Our services are critical to the development of rail sector throughout the World.

We create value for our clients by providing management, technical, legal and financial and PPP advisory services under one roof.

Global Management Consulting Firm

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Sectors of Expertise

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We are unique. With over 75 staff; business consultants, economists, financial analysts, planners, infrastructure engineering, operations experts, institutional specialists, social specialists and project managers.

We are diverse. CPCS’ multicultural team can provide unique perspectives. Our team consists of 19 different nationalities.

We are forward thinking. In a male dominant industry, CPCS’ fresh approach involves selecting top talent for our teams, women and men. Our team consists of 32% women.

We are well-educated. Our team members hold MBA’s, PhDs, MDs and specialized industry certifications/diploma’s.

We are global. Reaching wide with 22 worldwide offices and plans for more as we continue to expand.

We are multi-lingual: Our languages include English, French, Portuguese, Bengali, Hindi, Japanese, Turkish, Spanish, Arabic, Urdu.

Consulting staff

Support staff

Meet Our Team

Our Clients

GovernmentInternational Financial

Institutions Private Sector

Industry Associations and

Regional Authorities

→ Our clients have included every level of government in Canada, foreign government departments and agencies, industry associations, the private sector and all major international financial institutions, including the World Bank.

Solutions provided by CPCS

Economic AnalysisEconomic Impact AssessmentFeasibility Studies/Project Appraisal

Financial AnalysisFinancial & Operations Modeling

Institutional Development & ReformBusiness Process Evaluation and ImprovementHuman Resources PlanningCapacity Building and Training

Legal/Regulatory/PolicyLegal Due Diligence on PPP ProjectsPreparation of Transaction DocumentsDesign of Regulatory FrameworksDesign and Establishment of Regulatory andPPP AuthoritiesDrafting of Enabling Legislation

Transaction Advisory ServicesInvestor Support and PlanningPPP Capacity BuildingDue DiligenceStrategic Options AnalysisDeal Structuring and MarketingManagement of Bid Process and Negotiations

GIS ServicesInfrastructure, Network and Asset MappingRoute and Supply Chain OptimizationsMultimodal Flow MovementsLocation-Allocation and Decisional ModelingConceptual Modeling in 3D

EngineeringOperational Analysis / ModelingConceptual Design

Keeping Railways on Track with P3s

• Concession

• BOT

• DBO

• BOOT

• DBfOT

• Etc.

Railway Infrastructure

Construction

Use

(access regime and operations)

Maintenance

Ownership

Keeping Railways on Track with P3s

Concession:

• Generally provides the operator with long term access to the rail assets for all operation, investment and financing. The rail assets remain with the public sector and authority for the assets is transferred back to the public sector following the term of the conccesion period.

• Typically, the Operator is responsible for revenue collection

Build – Operate – Transfer:

• Utilized for greenfield railways

• Ownership may be limited to a discrete asset of the railway

• Revenue collection may be the responsibility of the private or public sector

• Variations include:DBO, BOOT, DBFOT, etc

Critical Success Factors (CSFs)

Supportive Legal/

Regulatory/ Institutional Environment

Political Alignment

and Support

PPP lifecycle

Planning

Risk Management

…These CSFs are not mutually exclusive.

CSF: Legal/Regulatory/Institutional

Legislation

• Transport Act

• PPP Act

• Railways Act

Regulatory

• Health and Safety

• Competition

• Economic Enablement

• Rules of engagement

Institutional

• Engineering Bodies

• PPP Center

• Ministry of Rail

…in this category, the legislative environment is the linchpin

CSF: Political Support

Political Support

Masterplan

Citizens

Government or Project Champion

CSF: Risk Management

• There are hundreds of risks which impact the execution of a PPP Project. We have broadly defined these into 2 categories:

Extrinsic RisksMacroeconomic risks

Force majeure risks

Legal and Regulatory risks

Appropriation risks

Expropriation risks

Intrinsic RisksDesign risks

Finance risks

Construction and Procurement risks

Operations and maintenance risks

CSF: PPP Lifecycle Planning

• For a P3, remember 6P:

“Proper Prior Planning Prevents Poor Performance”

• If the 3 other CSFs were not properly accounted for, rail PPP success will be headed for derailment.

Preparation Phase

Project Procurement

Phase

Project Implementati

on and Monitoring

Rail PPP Project Success

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International Rail PPP Study

• CPCS Proprietary database

• We highlight elements designed to support a successful rail PPP.

Type of Service Total

High speed passenger 6

Light Rail 9

Tram 3

Metro 3

Suburban Passenger

Trains 1

Urban Rail 3

Grand Total 25

Year of Contract Signature Total

1990-2000 4

2001-2010 10

2010-2014 10

In development 1

25 Rail PPPs Analyzed

Bangkok’s Skytrain (BTS)

South Africa’s Gautrain

Mumbai’s Metro (3 phases)

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For Today…3 highlighted

Bangkok Skytrain (BTS)• Operator accepted full demand

and revenue risk

• Traffic study forecast flawed

• Poor multi-modal links

• Asian Financial Crisis impacted Operator - unable to service debt (Baht devalued, Foreign debt)

• Dispute resolution mechanism

• Not part of a centralised plan

• Following restructuring, BTS – the railway’s operator recently went public in the largest Thai IPO on record.– $2.13 billion USD (April, 2013)

South Africa’s Gautrain

• DBfOMT

• FX Guarantee by Public Sector

• Integrated with Bus feeder lines

• Finance support by public sector

• Minimum Revenue guarantee with an revenue upside arrangement

• KPIs built into PPP Agreement

• Fare adjustment mechanisms

Mumbai Metro (Phase 1, 2 and 3)• Mumbai Metro 1: BOOT

• Fare Setting mechanism is poorly defined, resulting in numerous legal disputes

• Viability Gap funding by public sector, with remaining by private sector

• Numerous delays relating to ROW land acquisition (Phase 1, 2, 3)

• Construction and Operations specifications are vague in the PPP Contracts

• In November, 2014 the Operator walked away from Phase 2.

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International Rail PPP Study: Success Elements

• Typical Risk Allocations:

BLT BOT Operating

Concession

Design &

Construction

Risks

Mainly

Private Sector

Mainly

Private

sector

Mainly Government

Traffic &

Revenue Risks

Government Typically Shared

Operations &

Maintenance

Risks

Government Private

Sector

Private Sector

Macroeconomic

Risks

Mainly Government

Political Risks Government

BOTOperating

Concession

BLT N/A

Design & Construction

Private

Op

erat

ion

s

Government

Pri

vate

G

ove

rnm

en

t Private sector maintains

rolling stock; infrastructure can be maintained by either

Government or private sector

Maintenance can be by either private sector infrastructure company or Government (or p.s.) operator

Private sector typically maintains infrastructure and

rolling stock

International Rail PPP Study: O&M

BOTOperating

Concession

BLT N/A

Design & Construction

Private

Op

erat

ion

s

Government

Pri

vate

G

ove

rnm

en

t Typically, Government

finances infrastructure / though private sector

may also finance systems and/or rolling

stock

• Private sector finances infrastructure; usually with participation of Government;

• Rolling stock (& some systems) by Government or other private sector participant

Private sector finances

infrastructure and rolling stock; usually

with participation of Government

International Rail PPP Study: Financing

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International Rail PPP Study: Revenue

…Other variations include: Shadow fares, track access charges, Viability Gap Funding

*Established to allow private sector to meet a pre-set DSCR or IRR. May include Concession fees

All Risks with Government

Government collects fare &

non-fare revenues/pays private sector for service or

availability

Risk-sharing with Government

collecting revenues

Service or availability

payments tied to traffic

levels or SLAs

Risk-sharing with Private Sector

collecting revenues

All Risks with Private Sector

Private sector collects

revenues*

Minimum Traffic or Revenue

Guarantees by

Government*

CSF Recommendations

Legal/Regulatory/Institutional:• “Rule of Law” must be clear and predictable

• Framework must support aspects such as: safety standards, land acquisition and basis for private sector involvement

• Consider a dedicated PPP Unit to facilitate the PPP lifecycle

• Develop Institutional capacity for good governance

CSF Recommendations

Political Support:• Improve the VfM aspect:

– Overarching plan or strategy or intermodal framework

– Establish priorities

• Share the benefits:– Include options such a refinance sharing mechanisms. This will

ingratiate the project in the publics eye as the taxpayer shares in the successes

• Guard against the downside:– Transparent procurement process, well designed PPP Contract

– Project Champion

CSF Recommendations

Risk Management Process:

Define

Measure

Allocate

MonitorRisk

Management

….An extensive list of risks and CPCS recommendations for allocation is found in the Paper.

CSF RecommendationsDefine:

Define the risks relating to rail design, finance, operations, legal/regulatory, etc.

Measure:

Determine likelihood of occurrence and potential impact on the project.

Allocate:

Determine whether the public or private sector is best able to manage and mitigate the risk.

Monitor:

The phase is important as the risk allocation, measurement and allocation must be monitored and adjusted if necessary.

CSF RecommendationsPPP Lifecycle Planning

Preparation Phase

Project Procurement

Phase

Project Implementati

on and Monitoring

Rail PPP Project Success

Clear Project SponsorMaster Plan/Feas. Study

Industry ReviewPPP Options Analysis

VfM Analysis

Transparent, open and well communicated Procurement

processBidder feedback on Tender docs

Conflict Resolution FormulaRoles and ResponsibilitiesMonitoring reports/timingCommunication Strategy

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Questions and Discussions

Peter James, MBA, CFA

Head, Financial PracticeT: +255 764 465 838| pjames@cpcs.ca| www.cpcs.ca