Delivering investment

If you’re in doubt that Public Private Partnerships in rail can be successful, then read on

Written by EIM

At a time when the financial crisis dominates headlines around the world, speaking about increasing investments in rail infrastructure might seem risky or simply not timely. An even more challenging exercise is to speak about the use of public private partnerships (PPPs) in the railway sector, considering that rail PPPs are not widespread so far. However, the real challenge is to argue that rail PPPs are actually a way of riding out the crisis and can improve the competitiveness and sustainability of the EU.
    
This ambitious view is shared by the European Commission, which is keen for the private sector and private capital to be brought into projects as soon as possible. “It is difficult to understand what the long-term effects of the crisis will be. I am rather optimistic because infrastructure projects provide a more attractive harbour for investors than some of the recent investment opportunities in finance” said Johnathan Scheele, director for Transport Logistics, TEN-T and Co-Modality at the European Commission’s Transport department in an interview for the EIM “Finding the Funds” brochure1.
    
On a similar note, in a resolution on the European Economic Recovery Plan, the European Parliament “emphasises the European Investment Bank’s role in refinancing existing public private partnerships” and explicitly stresses the need for “new methods of financing transport infrastructure” as well as the need “to take measures that accelerate and facilitate investments”2.

Debunking myths
There is a myth in the railways that PPPs simply do not work, or do not deliver the expected results. This has indeed been the case for some well known projects, such as:

• The Prague airport link project, blocked due to differing interests amongst too many stakeholders.
• The Eurotunnel between France and the UK. Although the consortium was created in 1985 and the tunnel was opened in 1994, it paid shareholders their first-ever dividend only in 2009.
• The HSL South in the Netherlands was completed almost two years behind schedule because problems were experienced in the implementation of the ERTMS system.

However, rail PPPs are not just a sad story. In January 2009, Infrabel’s Liefkenshoek rail PPP project was awarded the “Infrastructure Deal of the Year 2008” by the British magazine PFI. The prestigious award recognises the original way in which one of Belgium’s largest mobility projects is being financed. The aim of the project is to expand and renew the rail infrastructure on the Left Bank of the port of Antwerp, in order to absorb the expected 8-15 per cent increase in rail traffic through the port by 2020. This project will be financed through a PPP for the construction work. A private consortium (LOCORAIL NV) will be responsible for the construction and financing of the direct rail link between Antwerp’s Left Bank and Right Bank harbour area.
    
Infrabel will be allowed to use the infrastructure for 38 years on the condition that it pays an annual compensation of approximately €50 million. After that period, Infrabel will receive full ownership of the infrastructure without further obligations.
    
Last year, another Infrabel PPP – the Diabolo project was awarded the Transport Deal of the Year 2007 in recognition of its original financing scheme. The Diabolo is intended to help address growing road congestion by doubling rail’s share of the airport market to 30 per cent by 2030.
    
This project represents a total investment of €550 million: €300 million financed as part of a Public Private Partnership and €250 million financed by Infrabel. It will directly link the train station at the airport to major Belgian rail arteries as well as to various European cities, such as Amsterdam, Paris and Frankfurt. Under the PPP agreement, Northern Diabolo NV will be responsible for maintaining the airport line for the next 35 years, until the assets are transferred to state ownership in June 2047.
    
If you are starting to think that successful rail PPPs are unique to Belgium, a valid counter-example can be found in Sweden, where two major rail related projects – the Arlanda airport link and the Öresund bridge – have been brought forward by means PPP schemes, with some success.
    
The new line connecting Stockholm city centre with Arlanda airport was built as a Build-Operate-Transfer (BOT) project. The line was completed on time in 1999 and almost within budget. Operations have been profitable since 2005 and the line provides very punctual services (97 per cent on time).
    
In 1991 Sweden and Denmark reached an agreement to build a fixed connection over the Öresund strait. It is a combined two-track rail and four-lane road bridge-tunnel linkng Copenhagen with Malmö. The Swedish and Danish states took over the bridge once it had been completed (in 2000) by a private consortium and its subcontractors. As a final result, the current volumes of traffic have surpassed the initial expectations.
    
Major role
PPPs have played a major role in financing the Portuguese High Speed Network. In particular, the construction of high speed stations of Évora, Oeste, Leiria and Aveiro as well as signalling, telecommunications, substructure and superstructure of the Lisbon-Poceirão HSL have been carried out as a PPP. The realisation of the network is still ongoing and will contribute to reducing the drawbacks from the country’s peripheral position, speeding up the economic and technological development and achieving a better modal distribution, both for passenger and freight, thus reducing the actual hegemony of road transport.
    
Finally, in order to debunk the myth of “general lack of confidence in rail PPPs”, it is useful to bear in mind that the French rail infrastructure manager RFF is developing the South Europe Atlantic High Speed Link Project (SEA HSL) as a PPP. Construction works will start in 2012 and it should become operational as of 2016, generating from 3.5 to 5 million additional passengers per annum.
    
From a private sector perspective, a consortium led by TDF has been recently selected by RFF as preferred bidder to fund, construct, operate and maintain a 14,000 km GSM-R radio communications network in France. The consortium includes Vinci Energie, Vinci Concessions, telecoms group SFR and AXA Investment Managers Paris.
    
Alstom is also looking into a number of possible projects in France, Italy and Portugal, including the Lyon-Turin rail link.

The truth about PPPs
Having shown that successful PPPs are possible in the railways, it is worth focusing on the most common challenges faced in the implementation of PPPs and possible solutions.
    
The impact of cultural issues is often underestimated when it comes to PPPs. However, they need to be taken seriously because there are significant differences among EU countries – the motto of the EU is not “united in diversity” for nothing. As an example, the UK has quite a long tradition of PPPs, whereas Eastern European countries are still a bit suspicious about the involvement of private actors in railway projects.
    
Moreover, it is of utmost importance to avoid complex consortia and to define a clear division of tasks amongst all partners involved in the project. Someone once said that a PPP is like a marriage: not everything can be foreseen in the long term and the objective should be from the beginning to establish a long-term relationship which creates a sustainable impact. As for every marriage worthy of this name, the partners should be able to have a quick and well coordinated reaction to any unforeseen event, re-structuring the contract when necessary. Common commitment, willingness and motivation are basic. The “if everything else fails, try a PPP” approach just does not work. Therefore the partners should work together to build, develop and improve a solid partnership and avoid prescriptive contracts.
    
Asked to suggest the magic formula of a successful PPP project, Jonathan Scheele admitted that actually this formula is still to be discovered: “Each PPP project has its own characteristics. Based on the past experiences, I can say that a PPP project will not work if it is treated purely as an accounting exercise. PPP projects should generate sufficient revenues to account for higher private capital investments and to generate a profit for private investors; moreover, risk sharing must be made clear and there should be a clear division of roles.” All in all, the structure of a good PPP project is not set in a stone and “flexibility” seems to be the password to the success.
    
Legislation has not been specifically designed for PPPs, but rather for general contracting processes, such as public procurement and concessions. New legislation could be used to create more clarity, for instance on the rules that should be applied when entrusting tasks to third parties. Moreover, the distinction between the different financial instruments (Loan Guarantee Instrument for Trans-European Transport Network, EU contribution to availability payment, Trans European Network Risk capital facility) remains uneasy and further clarifications on their practical use are needed. In order to solve these problems, the Commission might provide clear guidelines and foster the spread of best practices.

What future for rail PPPs
The launch of the European PPP Expertise Centre (EPEC) in September 2008 is definitely a good step forward in order to strengthen the organisational capacity of the public sector to engage in PPP transactions. EPEC was jointly setup by the Commission and the EIB and allows PPP taskforces in EU Member and candidate countries to share experience and expertise, analysis and best practice relating to PPP transactions.
    
Although there is a widespread belief that the current financial crisis will lead to the end of PPPs, EIM prefers to embrace the opposite and more optimistic school of thought according to which the role of PPPs can instead be strengthened by the credit crunch.
    
In fact, in order to re-launch the EU economy, active cooperation between private and public actors is of essence, as private involvement creates efficiency gains. Moreover, as a lesson learnt from the current situation, investors should consider infrastructure projects to be safer and more attractive than financial products subject to fluctuation. Therefore, Member States should foster infrastructure investments rather than adopt the defensive strategy of protectionism.
    
At the same time, this could be the right moment to address the long expected “green breakthrough” of the European economy. Bearing in mind that rail is the most environmentally friendly transport mode, such a positive approach would result in increased interest in rail infrastructure PPPs and the generation of benefits for European citizens through economic growth, improved environmental protection and the development of the European transport system.
   
It goes without saying that the European Institutions have an important role to play in triggering this positive “chain reaction”. In particular, financial instruments should be tailor-made for the railways and should be linked to environmental performance as well as to the implementation of the EU legislation.

EIM itself is keen to ensure that all financing opportunities are explored to create a basis for executing as many rail infrastructure projects as possible. In this regard, EIM acts as a forum for the exchange of information on PPP in rail infrastructure projects.
    
To conclude, PPPs as such are not the panacea of the EU economy. A structured change of the EU economy is needed in order to address a positive change following the recent major crisis. However, it is worth looking into PPPs with a “yes, we can” approach and learning from best (and worst) practices rather than giving up on the basis of mere myths.

Notes
1. http://www.eimrail.org/Finding_funds_3edition.pdf.pdf
2. http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P6-TA-2009-0123+0+DOC+XML+V0//EN