Fitch Teleconference

8 April 2010

High Speed Rail Projects:

Large, Varied and Complex
Nicolas Painvin
Senior Director, Head of Transport and Social
Infrastructure, EMEA
Agenda
Introduction: Few Projects, Many Concerns

Politics, Policy, Legal Framework

Complexity

Demand

Conclusion
Very Few PPP Rail Projects: Alleged Reasons

> Few new rail lines in general

– EU15 in 2004 vs 1970; rail lines = 10% less, motorways: 350% more
> PPP not necessary adequate for rail?
– Existing structures do a good jobs
– Players are by nature monopolistic
– Rail is loss making
– Rail is integrated
> None of these reasons prevent from implementing PPPs
> But they influence the risks matrix

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Is PPP Not Successful for Rail?

> Most projects posted difficulties indeed:

– Eurotunnel operated on the verge of bankruptcy for years
– Taiwan High Speed Rail co. : opened 1 year delay, traffic < forecast
– HSL Zuid: delay in operational commencement, ETCS issues
– CTRL (HS1): PPP route abandoned; demand over-estimated
– …
– … not a fatality, but a function of risk analysis and risk allocation

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Key Risks Groups Observed by Fitch

> Politics, policy, legal framework

> Complexity
> Demand (not in all projects, but critical if present)
> Echoes many of the conclusions of Fitch’s report on large
infrastructure projects (‘large projects, giant risks?’, May 2009)

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Politics, Policy, Framework

> Track record of applicable legislation

– PPP legislation + rail regulatory framework
> Essentiality of the project
– Measured eg by expected socio-economic return
> Political commitment for the project
– Consensus among ruling parties, public acceptance, long-term
financial commitments
> Lengthy decision process
– May cause changes in scope, adverse development vs starting
hypotheses

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Politics, Policy, Framework (cont.)

> Interference / decision power of Public sector

– eg Perpignan Figueras: Spanish HSL missing
– Route design
– Authorisation and land acquisition process (local authorities)
> Govt involvement in incumbent TOCs
– Bias in favour of TOC vs project company
> Trade unions traditionally strong
– Pressures against “private parties” involvement
> Pressure of governments on diverse parties (incl. financiers)
– Rail are flagship projects; governments may press on banks and
investors to make the funding available (eg Eurotunnel)

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Complexity

> Lengthy decision process

– Increased completion risk
– Higher potential impact (cost escalation)
– “conditioning” phase (land acquisition, diversion of utilities,
mitigation etc)
– Demand can change in the during gestation process (eg low cost
airlines did not exist when Eurotunnel was decided)
> Capital intensity
> Technical intensity
> Interfaces
> Scope of PPP

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Capital Intensity

> Size > EUR1bn

– Requires large consortia; + difficult to align interests
– Reduces competition for EPC contractors
– Risk of contractor exposed to subcontractors: real back-to-back?
> Cost
– Approx 2x + expensive than road per km
– Rail projects are 3x bigger on average
> Long completion phase
– Escalation costs risk
– Deviation of scope
– Cost overruns: +45% on average (Flyvbjerg). But includes non-PPP projects
and refers to deviation to initial estimate (not at financial close)

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Technical Intensity

> Low gradients of routes

– More structures, notably tunnels
– Increase geological risk
> Lower error margin allowed in civil works
– High speed requires very stable geometry
– Safety requirements (more similar to airports)
> Variety of high tech systems
– Tracks, signalling, telecom, power supply
> Safety (beware of upgrade cost allocation)
> Industry concentration (only a few players)

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Interfaces

> Project vs wider system

– Functional
> EU encourages separation infra / service
> Rail infra not in direct contact with end-users
– Network
> Position of project in rail network (independent,…, highly dependent)
> Upstream and downstream capacity is critical
> Within project
– Ground/train: track and catenary
– Electromagnetic interference
> Design and condition of rolling stock is critical
– To be carefully mitigated in documentation if not in project’s scope

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Scope of PPP

> Infra system + service (proprietary)

– Isolated facilities (eg airport express links)
> Infra system + service (interoperable)
– eg CTRL-HS1 (Eurostar + others)
– eg Eurotunnel (Shuttle + trains)
> Full system, no service
– eg Perpignan Figueras
> Part of system
– eg HSL Zuid

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Scope of PPP (cont.)

> The broader the scope, the more numerous the risks
> The narrower the scope, the more interaction with third parties
and the least control on interfaces
> Balance is difficult to asses, depends on actual experience and
expertise of project sponsors
> Scope also a driving factor for Revenue structure

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Demand: Revenue Structure

> Rail specifics

– Rail infra manager (RIM) has only a few clients; bargaining position
less favourable
– Charging structure may affect commercial choices of TOCs
– Variation of a few trains a day has major impact on RIM
> Infra + Rail Service
– Revenue function of pax number
– RIM has higher command of demand
> Track access charges
– Weaker control on demand
– Exposure to TOCs

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Focus on Track Access Charges

> Several possible charging structures:

– Booked capacity (~offtake agreement); Long-term agreement
allowed by EU directive (typically 5 yr); reduces risk and can be used
as security
– Actual throughput (pax, seats, weight/size of trains etc.)
– Combination of capacity and % turnover of TOCs (similar to airports
sub-concessions)
> Credit considerations:
– High degree of tariff flexibility may partly offset traffic risk
– Visibility of network (contractual, regulatory)
– Volatility of charges (depends on width and variety of base)
– Existence of balancing mechanisms/re-openers

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Demand Forecasts: Reliability

> Optimism bias

– Overestimation in 9 out of 10 rail projects; toll roads: 5 out of 10
– Eurotunnel, CTRL-Eurostar UK, Arlanda-Express, Taiwan, Orlyval
> True for grantors…
– Public bodies: rail projects are “landmark” projects, highly visible and
associated to modern and environment-friendly: policy makers may
inflate business cases
> …and for private bidders
– Lower request for public grants is often an overarching criterion in
tenders
– Traffic risk (when included in project scope) is a convenient variable
to inflate in order to reach better-looking base cases and
accommodate for lower upfront grants

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Demand Forecasts: Technical Difficulties

> Estimate of demand for transport in a corridor is in essence

identical for all modes
> Rail traffic is a complex function of
– Competitiveness of other modes (journey time is paramount, cost,
comfort, safety)
– Each type of link (HSL, conventional rail, airport link, freight) has
different modelling
– Rail is usually longer distance than road: Demand on one stretch
depends on upstream and downstream capacity/offering/economics
– Pricing policy (of the infra, but more importantly of TOCs, which can
be outside of the RIM’s control)

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Demand Forecasts: Technical Difficulties (cont.)

> Long gestation process

– Environment may change between initial forecast and
commencement date (eg Eurotunnel and low cost airlines)
> Few TOCs (no pure and perfect competition)
– behaviours of economic agents difficult to anticipate
> End-users are not the Infra’s direct customer
– Similar to airports
> Price elasticity likely to be higher for rail than for road
– TACs represent 30% of train ticket on French TGVs vs ~10% for
motorway journey and flight ticket
> Strong informational advantage for TOCs vs RIM

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Demand Forecasts: Long-Term Trends

> Competitive advantage to other modes is quite strong

– Speed (notably HSL) and door-to-door journey time (for 300km – 700km)
– Comfort (eg wifi in train: enhances attractiveness to business travellers)
– Safety
– Reliability
> Actual growth of recently opened lines is impressive
– In all countries, HSL boosts train usage (but not always as much as
expected)
> Externalities better reflected
– Climate awareness and air pollution
– Land use (rail infra transports 45x more pax than road for same land use)

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Conclusions

> Rail projects may entail more risks than average infrastructure
> Political sensitiveness a source of both support and threat for
projects
– Beware of non-established frameworks
> Complexity usually well managed by strong players
– Geology and structures more critical
– Interfaces to be monitored
> Demand more difficult to assess than for road and air travel
– Network effects make it more complex to assess and difficult to control
– Flexibility/Visibility on charging mechanisms key to offset demand risk

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