August 01, 2012

Are PPPs the way to fund high-speed rail construction?

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FUNDING the construction of high-speed lines was widely discussed at the UIC's eighth world congress on high-speed rail staged in Philadelphia, United States, last month. This is hardly surprising considering the strain on governments reeling under a mountain of debt and banks struggling to stay afloat in the current economic crisis.

Even mighty China is feeling the pinch, as Mr Zhang Jianping, a former director general with the Ministry of Railways, revealed. "The global financial crisis has turned into a sovereign debt crisis which has led to a slowdown in most countries," Zhang explained. "Even in China this has had an impact, with a little slowdown in 2010 and 2011, and China's railway debt has become a more important issue."

This is putting it mildly. As we reported last month, the Ministry of Railways' debt-to-asset ratio currently stands at about 60%, and in May the ministry made the unprecedented step of inviting private investors to participate in Chinese rail projects.

Conversely, Zhang said that high-speed rail investment can be a tool to stimulate the economy, but it depends on the specific project. He also pointed out that demand from investors even more eager than before to earn a rapid return on the investment does not sit easily with rail projects which take a long time to plan, build and recover their costs. This has always been a problem for rail, but in the current climate it is becoming more acute.

Professor Andrew McNaughton, chief engineer for Britain's HS2 project, said the British government has accepted that the new high-speed line from London to Birmingham cannot be funded without public funding, but the government does not have to be the sole funder. "The City view is that things that last 20 to 30 years can be funded quite feasibly by the private sector, and there is considerable potential for funding stations privately," McNaughton explained. "But the cheapest way to fund structures that last 100 years is through government funding."

McNaughton pointed out that some of the convoluted financing mechanisms favoured until quite recently are no longer being considered. Although one has to question whether the message has got through to Britain's Department for Transport which is still valiantly pushing ahead with its Inter-city Express Programme to procure a fleet of dual-mode trains despite five years of negotiations with Hitachi over their design and how to fund the project. As McNaughton put it: "Funny money doesn't get you a high-speed railway."

Ms Martha Lawrence, transport sector manager with the World Bank, said that high-speed rail can pay for itself but not in many places. Referring to public-private partnerships (PPPs), Lawrence said the golden rule is to put the risk with the entity that can best manage it. She also warned that if demand risk is included then either nobody will bid or the cost will be very high.

However, this does not appear to be the case in France, where French Rail Network (RFF) has awarded the country's first PPP contact which includes commercial risk. The government wanted to build four high-speed lines simultaneously for the first time to stimulate the economy, but did not have enough money to fund them in their entirety, while RFF lacked the resources to implement the projects on its own.

RFF subsequently awarded a 50-year PPP contract last year to Lisea, a subsidiary of Vinci Concessions, to build the 302km Tours - Bordeaux TGV Sud-Europ Atlantique line. The government is providing e4bn of funding, while the consortium will contribute e3.2bn in debt and e800m in equity. This is the first time in France that one company will be responsible for building, operating and maintaining an entire line, but it required a change in French law to break the RFF/SNCF monopoly on building and operating lines. Uniquely in France, Vinci will build its own train control system and operate the line with its own signalling staff.

It is also the first time that a private company will bear the revenue risk on a new line project. Every train that uses the new line will incur a toll related to its capacity. "The tariff is set in the contract,"

Mr Fadi Selwan, COO with Vinci Concessions, told IRJ in Philadelphia. "The contract allows us to increase the tariff each year within a formula. RFF has to approve the calculation each year, and if it does not validate the increase it has to compensate us for the difference. In 2016, any operator will be allowed onto the French network, and we cannot set a different tariff for them."

The tariff will be much higher than that charged by RFF for using other high-speed lines, which is the price operators must bear for the benefit of attracting private funding. But Selwan is convinced the line will be a success as it will reduce the Paris - Bordeaux journey time by 65 minutes to 2h 5min. Selwan says that a lot of people currently fly between the two cities as they still perceive that flying is faster than taking a TGV, but a two-hour journey time will kill air competition.

Selwan is adamant the PPP model adopted in France is the way forward for high-speed infrastructure, as he is keen to see it taken up elsewhere. "I'm lobbying for a PPP for HS2 in Britain," he told me. Whether it will get past McNaughton and the British government is another matter. There is also a question over the ability of private companies to raise sufficient funds for a project in the current climate. In any event, PPPs are certainly here to stay.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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