Professional Documents
Culture Documents
International Case Studies On Delivery and Finacing - A Report For HS2
International Case Studies On Delivery and Finacing - A Report For HS2
18 December 2009
Ernst & Young LLP
1 More London Place
London SE1 2AF
18 December 2009
Ian Jordan
High Speed Two
55 Victoria Street
London
SW1H 0EU
Dear Ian,
Subject: International case studies on delivery and financing – a report for
HS2
In accordance with our contract dated 2 June 2009, I am pleased to enclose our Our work in connection with this assignment is of a different nature to that of an
phase 1 report which examines the lessons learned from a selection of audit. Our paper to you is based on publicly available information. We have not
international HSR case studies that we have previously discussed and agreed sought to verify the accuracy of the data or the information and explanations
upon with HS2. The report includes: provided.
► Advice on lessons learned from the review of these projects including the Our work has been limited in scope and time and we stress that a more detailed
commercial and contractual delivery structures, risk allocation, funding and review may reveal additional considerations that this review has not.
other relevant issues.
Should you have any questions please do not hesitate to contact me on + 44 207
► An indication of the potential sources of funding and finance for a new HSR
951 1702.
project.
Your sincerely
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.
Manish Gupta
Partner
Ernst & Young LLP
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.
Appendices
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
► 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?
HSL Zuid, Holland Recently completed HSR not yet operational because of issues with the procurement of rolling ►€7.2bn ►100
stock and system integration between the sub-structure
structure and the superstructure. The sub-
sub
structure 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 ►€35bn ►900
on the Rome - Milan HSR route in 2011.
RAVE, Portugal Under procurement. Split into six separate PPPs. Vertically separated operation with vertical ►Lisbon-Madrid €2.5bn ►206
interfaces. Portuguese State aims to deliver it on a PPP basis, although financing and structure ►Porto-Vigo €2.2bn ►100
of the project are still evolving since only one project is currently under procurement.
►Lisbon-Porto €4.5bn ►290
RAVE, Portugal ► Importance of cross party political support – the project has faced delays due to Government elections highlighting that political
politic buy in and
support is essential.
► Importance of unbundling to attract private sector participation
Shinkansen HSL ► Local communities are expected to contribute funding
Network, Japan
► Although HSR assets were sold to the private sector to relieve debt burden, the public sector is still significantly involved in procurement.
Taiwan North-South ► Importance of extensive market sounding in advance of structuring the project
HSR
► Importance of careful planning and procurement
Risk allocation
5. Construction and technical risks associated with post-construction
construction defects represent a significant
challenge for HSR projects.
6. Transferring revenue risk in greenfield rail projects is difficult and does not always represent VfM.
7. System integration risk is critical, especially in an unbundled delivery strategy.
Financing
8. 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.
Level of unbundling
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 Italy
appeal. For example:
► Design then construct - Traditional public sector procurement – Italian TAV, Germany
Spain Taiwan
Spanish AVE
► Design and Construct (D&C), with separate Operation and Maintenance (O&M)
France Japan
– HS1 (Early)
Germany Spain France Italy UK Portugal France Netherlands France Japan Taiwan
Specification State State State State State State State State State State State
Design, build
Substructure State
Operate, maintain
Conces-
ADIF RFF RFI NR / HS1 PPP PPP N/A THSRC
sionaire
Design, build
Deutsche
Superstructure PPP
Bahn (DB)
Operate, maintain
Operations DB RENFE SNCF Trenitalia LCR REFER SNCF PPP SNCF N/A TSC
Financing A mix of options involving private sector funding, bank debt and capital market financing raised directly by the project vehicle
vehi or IM with strong public sector support
► 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
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.
60%
50% Lisbon- Madrid 486 1,314
40% Madrid- Frontera Portugesa 363 2,338
30%
Porto - Vigo 350 1,050
20%
10% Almeria- Murcia 348 2,171
0% Leon-Asturias 332 2,059
Barcelona- Madrid- Lisbon-Porto Antequera- Lisbon- Madrid- Porto - Vigo Almeria- Leon- TGV Est East Rhine TGV Est 320 2,805
Figueras Lev ante Granada Madrid Frontera Murcia Asturias Rhone East Rhine Rhone 200 2,304
Portugesa
Total funding by source TGV Est East Rhine Rhone Brittany- Loire
Regional 736 717 1,203
Other sources 2,389 1,787 2,197
4,000
3,500
3,000
2,500
Funding
2,000
1,500
1,000
500
-
TGV Est East Rhine Rhone Brittany - Loire
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.
Source: NAO report on CTRL progress 2005, HS1 website, Press search, internal presentations
Source: www.dans.knaw.nl/
The value of the PPP element of the project was ► The equipment for testing the upgraded safety system was not delivered on time as the specification was
approximately £1bn. The funding for this element of changed
the project was achieved through 90% gearing. ► Lack of coordinated leadership from the Dutch Government.
Financial close reached on 30 October 2001. ► According to the report from the Dutch Audit Commission, these delays will result in a loss of income to the
The £1bn project financing for the PPP includes: government from access charges totalling around €222m.
► Loan facilities provided through an international ► Furthermore, capital costs rose from a projected €3-5bn in the mid-1990s to over €6bn in 2006. The report
commercial banking consortium with the lead also predicts that the whole HSL-Zuid
HSL project will only achieve break even about 2022.
arranging banks being Bayerische Hypo-und ► The report blamed the Dutch transport ministry for a lack of co-ordinated
co leadership of the various
Vereinsbank, ING, KBC, Kreditanstalt für contractors during the construction period. Operational risks and uncertainties were not well managed, and
Wiederaufbau, Dexia Credit Local and Rabobank: the ministry’s understanding of the risk was incomplete. In particular:
► €605m syndicated term loan (comprised of two ► The ministry wanted train operations to start whilst the European Train Control System equipment was
Senior loans with a term of approximately 27 still being tested. At the same time, the Passenger Transport Directorate required that full access tariffs
years) be paid as soon as the trains started running. HSA has now decided not to run any trains until the
► €119m subordinated debt bridge facility European Train Control System has been fully tested and passed 'fit for purpose'.
► €15m working capital facility ► There are concerns that passenger numbers may have been significantly overestimated.
► The project’s ‘TEN’ status made it eligible for a loan ► There are also doubts about the punctuality of the high speed trains, which risk being delayed where they
from the EIB with a principal value of approximately have to share tracks with 140 km/h services on the conventional network between Amsterdam and
€400m. Hoofddorp and through Rotterdam. HSA has demanded a reduction of €16m a year in its premium
payments to compensate for an under-estimation
under 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
HSL 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
Ref. DPD12725 High Speed 2: phase 1 report 34
Appendix D: TAV, Italy
Overview of project Map and diagram of the 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.
► The bond offerings were issued by Infrastrutture SpA, with funding then ► Minimising land take and environmental costs by constructing lines next to
advanced to RFI via a loan agreement. The notes benefited from indirect existing motorways has led to high costs. On some projects highway works
recourse to the Italian government, which covered interest during construction accounted for 30% of the project costs.
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
Source: http://www.rave.pt/tabid/189/Default.aspx
► In the current financing environment the procurement process must allow for PPP PPP PPP PPP PPP
the capacity of the banking market .
► Progress so far: for the second phase of the Lisbon-Madrid HSR two consortia 3,000
€m
have been shortlisted for the final stage. The bidders need to submit final 2,000
offers backed by commercial bank letters.
1,000
60%
beat the AVE in terms of speed, passengers are better
40% able to use their time on the train, especially for
business travel.
20%
► The opening of the Barcelona-Madrid line highlighted
0%
the fall in airlines’ dominance. In its first ten months it
Barcelona-Figueras Madrid- Lev ante Antequera-Granada Madrid- Frontera Almeria- Murcia Leon-Asturias
carried 2m passengers, in 2008 its share of the total
Portugesa
market rose from 28% to 38%.
Total EU funds Other funding ► However, now that airlines have been deregulated, AVE
% EU Total EU may face increased competition from low cost
Line Total cost €m investment funds operators.
Madrid- Levante 12410 10% 1223.2 ► Many believed that the decision to build the first HSR
Barcelona-Figueras 12375 28% 3459.7 between Madrid and Seville (rather than to Barcelona)
Madrid- Frontera Portugesa 2700 13% 362.5 was a politically motivated decision. Seville is the home
Almeria- Murcia 2519 14% 348.3 town of the then prime minister, Felipe González.
Leon-Asturias 2391 14% 331.7
Antequera-Granada 1355 44% 600 ► The network connects small provincial cities like
Valladolid and Segovia, as well as major cities.
Ref. DPD12725 High Speed 2: phase 1 report 42
Source: press search, internal reports
Appendix H: Shinkansen, Japan
Overview of project Map of the 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.
► Local government 33.3% ► Direct impacts of the Shinkansen include reduced travel time, increased transit
capacity, job creation during the construction and operation, and
► Local communities served by a new HSL are expected to contribute a environmental benefits.
proportion of matching funding.
► Indirect impacts included reduction in congestion of other transport modes and
► The initial HSL was funded almost entirely by government loans to JNR – significant regional development. For example, the growth in population
although the World Bank contributed a small proportion of the total funding between 1975 and 1991 in the area around the line was approximately 18%
requirement. higher than growth in the rest of the country. Furthermore, over the same time
► In March 1987, JNR was privatised party as a result of losses incurred due to period, the growth in the number of companies in the area along the line was
huge investment not counterbalanced by increasing farebox revenues. 21% higher than the rest of the country.
► Following the privatisation of JNR in 1987, the state has progressively scaled ► A key feature of the Shinkansen was the development/redevelopment of
back its funding contribution to the organisation with the introduction of more stations along the route and urban development of the surrounding area. This
private funding in successive projects. brought major economic and cultural benefits to the local economy. For
example:
► 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 ► The area around Shin-Yokohama St. station created a new business area
assist in the funding of new HSLs. 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
► The new HSL lines have had a financial impact on the existing network in 2002 Fifa World Cup.
terms of revenue decrease, which has resulted in reduced investment and
asset degradation. This affected the ability of freight operators to efficiently run ► The railway company also encourages non-transport business inside the
along the existing lines that they rely on. railway station, for example, shopping centres and office buildings.
Approximately 15% of revenues derive from this channel.
www.ey.com/uk
Ernst & Young LLP, 1 More London Place, London SE1 2AF.