Financing Megaprojects In The Rail Sector. Andreas Klocke, Head of KfW Regional Office, Bangkok

Financing Megaprojects In The Rail Sector Andreas Klocke, Head of KfW Regional Office, Bangkok

Agenda 1. Background to KfW 2. PPP and the allocation interests and risks 3. Examples of PPP projects in the rail sector a. HSL financing of an infrastructure project b. Arrow LRT Nottingham financing of a turnkey solution 4. Closing Remarks 2

KfW Bankengruppe At a glance Name: KfW Shareholders: Federal Republic 80 %, federal states 20 % Headquarters: Branch offices: Foreign offices: Liable equity: Balance-sheet total: Rating: Frankfurt am Main Berlin, Bonn Brussels and 28 offices in developing and emerging countries EUR 11.6 billion* EUR 329 billion (No. 9 of German Banks) AAA / Aaa Employees: 3.697 (*as of Dec. 31, 2004, liable equity: only KfW, not the group) 3

KfW Bankengruppe New Brand structure * Promotion of SMEs, business founders and start-ups Promotion of housing, environmental and climate protection, education, infrastructure and the social sector Export and project financing, investment and corporate financing Promotion of developing and transition countries Consultancy for the federal government on the privatisation of state enterprises, other advisory services Investment Finance in Germany and Europe Export and Project Finance Financial Cooperation Advisory and other Services * KfW IPEX-Bank at first as a brand name; from Jan. 2008 as a legally independent 100 % subsidiary of KfW Bankengruppe 4

KfW IPEX-Bank Loan portfolio by sectors Total: EUR 64.2 billion 7.0 Manufacturing, Industries, Commerce, Health 0.9 Other 10.5 Shipping 8.1 Basic Industries 3.1 Air- and Seaports, Construction Industries 3.0 Telecommunications and Media 11.7 Aviation 5 10.8 Power, Renewables and Water 9.1 Rail and Road

2. Introduction to PPP a Public Private Partnership (PPP) is commonly defined as a cooperation between the public and private sector concerning the design, financing, building and operation of so far state-performed publicly tasks. PPPs are in general structured in the form of a BOT-project the granting of concessions for passenger transport services plays an important role in the rail sector two major financing models for PPP Projects : Project finance of infrastructure and turnkey solutions Financing of rolling stock by leasing 7

What Governments want and what Governments can do Provide a affordable mass transportation system for its citizen Solve traffic congestion problems Provide a save and reliable transportation system Reduce pollution Political recognition But has budget restrictions Work out a clear strategy and set a reliable framework for rights and obligation. Assume risk of land appropriation Insure that permits and permissions are granted Take currency devaluation risk Take ridership risk in exchange for tariff control 8

What Suppliers want and what Suppliers can do Sell their equipment and services Long term Relationship with customer Reference and showcase for future clients Supply parts and expansion parts Provide maintenance Increasingly take operational responsibility But no long term financial commitments Take construction and completion risks Take performance of the system risk Provide maintenance and take availability risk In some cases take operational risk Provide short term financial support with clear exit 9

What Financier want and What Financiers can do Invest their funds with a return, interest in case of debt, IRR in case of equity Expect the company to generate a profit The project company can control its revenue by setting tariffs and control over costs A stable environment No or minimum interference from public side Provide the funds for the project and relieve the public budget Ensure that the project is constructed in time and budget Effect efficient operation 10

Financing Approaches 100% Private Sector Finance Not feasible anymore. Financiers are not willing to take ridership risk or only with big safety margins Conflict between entrepreneurial freedom and government control on fares Private sector worry of risk of government interference But high possibility that construction and operation is in time and budget. 11

Financing Approaches 100% Government Finance Gives the government control Easy and quick financing But risk of inefficiencies during Construction and operation Potential burden on the budget and therefore often not approved by government and/or parliament Leaves all risks with the government 12

Financing Approaches Government pays for civil works, Private sector finances E&M portion Makes the project more feasible for the private sector. Relieves the budget Danger of conflict on revenue sharing, tariffs, control over the operation Feasibility depends on the allocation of costs to civil works and E&M Danger of incompatibility between Civil and E&M parts if procurement is not done jointly 13

Financing Approaches Private sector finances the project Government takes ridership risk, but not performance and operational risks Mobilizes private sector money Leaves the government with ridership risk but also with tariff control Performance and operation risk with private sector, which financiers can asses better than ridership Penalties when performance parameters are not reached insures best service Allocates risks to parties most fairly 14

3. a. HSL Financing of an infrastructure project (1) high-speed rail link between Amsterdam and the Belgian border contract between Infraspeed (a consortium of Siemens, Innisfree, Fluor and Royal BAM Group) and the Dutch government signed in Dec. 2001 due for operation in 2006 concession until 2031 (5 years of construction, 25 years of operation) investment volume: 1.3 bn total route length: 100km 16

3. a. HSL Financing of an infrastructure project (2) HSL is a DBFM-project (design, build, finance and maintain) responsibility for the construction of the civil works remains with the government which will appoint a separate TOC running train services consortium is responsible for: power supply system, the ECTS (European Train Control System) signalling system, the GSM-R communication systems and the ancillary equipment (Siemens) track system and noise barriers (BAM NBM) programme management (Fluor) 17

3. a. HSL Financing of an infrastructure project (3) availability scheme: Infraspeed will receive a fixed revenue from the Dutch state on the basis of performance (availability > 99%), and independent of the level of traffic additionally Infraspeed will get a bonus for each day with an availability > 99% financing structure = classical PFI model with: 605 mn term loan 119 mn subordinated debt bridge facility 400 mn EIB facility 18

3. b. Arrow LRT Nottingham (1) Arrow LRT is a light rail project in Nottingham elaborated on a typical UK PPP mode concession agreement with private Arrow consortium (Carillion, Bombardier, Transdev, NCT, Innisfree, Galaxy) signed in early 1998 concession for 30.5 years start of operations: March 2004 public authorities support project as part of integrated transport policy granted concession 19

3. b. Arrow LRT Nottingham (2) provided construction subsidy Provided a revenue guarantee based on availability launched Park & Ride initiative aiming at reducing the number of cars in the city centre majority shareholder NTC, which controls about 70% of the local bus market and which reorganises its lines in order to optimise coverage and limit overlaps of the traffic system Arrow outsourced turnkey construction of the 14km railway and delivery of signalling and rolling stock to a consortium of Carillion and Bombardier operation to a consortium NTC and Transdev (O&M Contractor) 20

3. b. Arrow LRT Nottingham (3) Total construction cost of approx. GBP 160 mn were financed by Equity (partially contributed by financial investors) Commercial debt Construction subsidy Revenue 80% Availability based, declining to 70% towards end of concession period (deductions are passed to O&M Contractor, limited by cap) Remaining share is derived from farebox revenue and advertising 21

3. b. Arrow LRT Nottingham (4) Nottingham City Council Promoters Nottingham Country Council Promoters Direct Agreement Banks Turnkey Construction Contract Turnkey consortium Bombardier Carillion Concession Agreement Arrow Light Rail Loan Facilities Agreement Turnkey Direct Agreement Operator consortium Transdev Operating & Maintenance Contract Operator Direct Agreement NTC Train Maintenance Contract Subcontractor Direct Agreement Bombardier 22

5. Closing Remarks So, what is the optimal system for Bangkok Government must take over the major part of the ridershiprisk justified as it achieves additional benefits like traffic-flow, pollution and noise reduction, energy saving, tariff control Government finances and builds the civil works, using the cheapest long term funding sources available from IFIs, Banks or Bonds Gives a concession to a private operator to run the train service. Commits a minimum revenue to the operator based on performance and availability, which is at least sufficient to cover financing cost or lease rentals and may be allows a small return on equity. If fare box revenue is lower the Government would top up the difference if fare box revenue is higher the government would get the difference after deduction of an agreed return on equity. 24

Thank you for your attention! Andreas Klocke KfW South-East Asia Regional Office 19 th Floor, Empire Tower 195 South Sathorn Road Bangkok 10120, Thailand Tel: +66 2 670 0467 E-Mail: klocke@anet.net.th 25