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Rail

Efficient rail transport can stimulate trade, link production sites to regional and international markets, promote national and cross-border integration and facilitate access to the labor market, education and health services. With growing commitment to environmentally sustainable transportion solutions, rail is an important element of a low carbon transport strategy, releasing between three and ten times less carbon dioxide than driving or flying.

There is a long history of private investment and financing in railways. The development of railways across Europe and in the United States in the 19th century played an important role in both their demographic and industrial development.  In recent decades, railway PPPs have been used in emerging markets to rehabilitate and rejuvenate existing general freight and passenger rail operations, to finance greenfield rail lines to serve dedicated, heavy haul end users like mining, or to finance above rail investment (rolling stock) where there is a separation of above and below rail operations.

Issues

  • Revenue guarantees and market risk

    A primary difference between a PPP passenger railway project and a PPP power project is the absence of a universal offtake agreement.  Although commercial carriers may make contracts with railway operators for...

    A primary difference between a PPP passenger railway project and a PPP power project is the absence of a universal offtake agreement.  Although commercial carriers may make contracts with railway operators for long-term rail access, such contracts will, generally, not cover the entire period of the concession. Further, just as with roadway and bridge projects, there is no guarantee that once the project is completed private passengers will use the service. Even with market testing and traffic forecast, the project company can be left holding the majority of the market risk for the project. For this reason, lenders will seek to allocate this risk to another party. Certain methods have been developed to allocate part of this risk to the grantor, such as through shadow tolls.

  • Track access charges

    The revenue stream for the owner of the rail track is usually based on track access charges, which operators pay in order to run their rolling stock on the network. Track access charges are usually based on:

    • a fixed track charge (set against...

    The revenue stream for the owner of the rail track is usually based on track access charges, which operators pay in order to run their rolling stock on the network. Track access charges are usually based on:

    • a fixed track charge (set against fixed track upkeep costs);
    • a variable track usage charge based either on the number of net ton kilometers or passenger kilometers recorded or the number of train slots used or a combination of both; and
    • a variable traction electricity charge, if applicable, (for the power consumed by the operator’s trains).

    This payment structure works well within the framework of project financing where the lenders will want a fixed part of the payment stream generated by end users to cover debt service.  

  • Interface with existing transport services

    PPP railway projects often need to be linked to existing transport services, since they may involve the construction of new lines or networks or the enhancement of an existing network.

    When a railway project must connect to the national railway...

    PPP railway projects often need to be linked to existing transport services, since they may involve the construction of new lines or networks or the enhancement of an existing network.

    When a railway project must connect to the national railway service (which may suffer from operation and maintenance failures, inefficient scheduling or high cost for users) the project company’s efficient operation of the rail project may be inhibited. Specific undertakings form both the grantor and the national railway should be obtained as well as practical and enforceable sanctions sufficient to provide incentive to operate the railway effectively and to compensate the project company for potential damages.  

    For freight rail, multimodal connections must be considered. The importance of well-functioning rail-port links, rail-inland container transfer facilities, and other logistic centers is critical to the success of a freight railway projects. 

  • Taking over existing rail services

    Taking over existing rail services can be a challenge if the private operator uses limited recourse financing (i.e. project finance model) to raise debt, since the existing service is often unprofitable. This is particularly true of routes which...

    Taking over existing rail services can be a challenge if the private operator uses limited recourse financing (i.e. project finance model) to raise debt, since the existing service is often unprofitable. This is particularly true of routes which are primarily passenger service oriented. Often even recovering operating costs can be difficult. Often, public sector subsidies are needed to support such projects for the benefit of the community

  • Land, resettlement and environment

    As with most transport PPPs, access to land or preservation of a railways existing right-of-way is important for projects to succeed, especially if they pass through highly populated and industrialized areas. Large tracts of land might have to...

    As with most transport PPPs, access to land or preservation of a railways existing right-of-way is important for projects to succeed, especially if they pass through highly populated and industrialized areas. Large tracts of land might have to be secured through expropriation for greenfield projects, requiring significant involvement of the relevant government authority to implement the expropriation, including the management of resettlement.

    Similarly, the construction of bridges and tunnels to accommodate geographical features raises issues of environmental damage, planning and other necessary legal requirements in relation to environmental impact. In these cases, the state must provide the private investor a clear right-of-way, while retaining the task of land reclamation and associated resettlement activities.  

  • Capital cost and subsidies

    Rail projects involve significant capital costs, especially when a network must be extended or where substantial parts of its infrastructure must be replaced. This investment may exceed the appetite of the private sector finance market, or the...

    Rail projects involve significant capital costs, especially when a network must be extended or where substantial parts of its infrastructure must be replaced. This investment may exceed the appetite of the private sector finance market, or the revenue potential of the project.

    Passenger rail: In the case of passenger rail, the investment necessary for capital improvements may exceed the willingness of passengers to incur fare increases and may require a long-term subsidy from government. Meaningful government subsidies will provide lenders with improved debt-coverage ratios, sponsors with enhanced equity returns and can encourage both parties to take usage risk.

    Freight rail: The challenges associated with financing freight railways are different from those that affect passenger railways. For freight railways, the main issue is the lack of alignment between the tenure of commercial debt, which rarely exceeds 15 to 18 years, and the normal amortization of the infrastructure, which is 40 years or more. Therefore, to be viable, the investment has to be underpinned by one or several offtake agreements that will secure the necessary transport volumes and revenues.  

  • Usage and revenue forecasts

    Delivering a project successfully relies on the accuracy of revenue forecasting. Long-term usage and revenue forecasts are inherently uncertain given the changing competitive context of other rail services or other transport alternatives such as...

    Delivering a project successfully relies on the accuracy of revenue forecasting. Long-term usage and revenue forecasts are inherently uncertain given the changing competitive context of other rail services or other transport alternatives such as roads or air transport. The potential for aggressive and sustained competition must be considered, particularly in deregulated markets. This uncertainty may result in lower credit quality for structures that pass volume risk to lenders.

    Depending on circumstances, freight forecasting can be even more problematic than passenger sector forecasting, especially if the traffic includes a high share of transit traffic or modal shift traffic between road and rail.  

  • Regulation and policy

    Given the monopolistic nature of public sector involvement in railways, and its important place in a nation’s infrastructure, railways tend to be heavily regulated. From an investor’s perspective, it is important that such regulation is...

    Given the monopolistic nature of public sector involvement in railways, and its important place in a nation’s infrastructure, railways tend to be heavily regulated. From an investor’s perspective, it is important that such regulation is fair, transparent, and predictable. Investors will look for assurances that regulatory risk is mitigated. In particular, investors prefer to see an independent regulator—or at least one that is shielded from government interference.

    Railways are highly sensitive to changes in government policy. Concession contracts must include robust change of law provisions and compensation mechanisms for the private investor who suffers as a result of government actions and policies that affect traffic. Examples of this could include construction of a parallel road, a new subsidy for bus routes, or a reduction in taxes for truck freight.

  • Early termination risk

    In order to secure lenders’ debt, a rail concession contract will need to rely on robust early termination compensation guarantees from host governments. This means that governments will have to demonstrate their ability to liquidate...

    In order to secure lenders’ debt, a rail concession contract will need to rely on robust early termination compensation guarantees from host governments. This means that governments will have to demonstrate their ability to liquidate outstanding commercial debt in an early termination event. While this matter can be trivial in developed nations with strong fiscal credentials, it is a key hurdle to raising sizeable commercial debt for rail project sponsors in frontier economies, especially for those in non-investment grade countries. 

Models

  • Rail PPPs typically operate within a concession framework, through which a private partner is granted permission to rehabilitate and/or build and operate a railway and collect revenues from the railway, for a fixed period of time, or until other...

    Rail PPPs typically operate within a concession framework, through which a private partner is granted permission to rehabilitate and/or build and operate a railway and collect revenues from the railway, for a fixed period of time, or until other conditions in the contract have been met. Concessionaires use the revenue stream from their operation of the rail network to pay off debts incurred in the rehabilitation/construction of the line, pay whatever applicable concession fees to the grantor and to pay for ongoing maintenance and operation of the below and above rail assets.

    Broadly speaking, rail concessions can be divided into four categories, defined based on what aspect of the railway is being financed:

    1. Private monopolistic vertically integrated railways: all of the rail infrastructure is owned, built, and maintained by a single operator that has the most time exclusive use of the rail.
    2. Privately shared use vertically integrated railways: the same as above but the operator has obligations to share the rail infrastructure with third party users, albeit it might granted an initial exclusivity period.
    3.  Below rail service providers: the operator of the rail provides rail infrastructure to rolling stock operators, similar to a toll road.
    4.  Above rail service providers: the operator provides rail transport services (passenger and/or freight) using rail infrastructure it does not own.

    Within these four categories, there are many different types of rail concessions that serve a variety of purposes. For example, because railways are often the most economical way for mining product to be transported to end users or ports for distribution, mining companies may invest in railway infrastructure and operations and enter into a special purpose railway concession. These companies are remunerated by providing transport to support their own operations and by selling services to other companies. In these concessions, the company pays a concession fee to government for the right to operate the railway over a long period (e.g., 30 years) and becomes responsible for investing in and maintaining the railway infrastructure and rolling stock.

    While less common, there have been PPPs in high-speed rail, like the Perpignan-Figueres Line between France and Spain that opened in 2011. Under a high-speed railway concession a private firm or consortium of private firms builds or restores a rail track and its associated facilities (such as the train station) under a long-term concession agreement, in which the concessionaire takes the financial risk in return for the right to charge a toll to passengers and freight trains that use the line.

Tools & Guidance

Projects & Case Studies

    • 2014
    • Martha Lawrence & Gerald Ollivier
    • World Bank Group (WBG)

    Private Capital for Railway Development

    China Transport Topics No. 10

    China is considering ways to attract additional capital to finance investment in railways. Worldwide, private capital has been attracted to the railway sector through a range of mechanisms including (i) private sector provision of specific rail services or assets such as rolling stock; (ii) public private partnerships, (iii) leveraging commercial value of rail assets and increased land value around stations; and (iv) debt and equity financing of railway companies. Private sector investors seek to earn a return on their investment that is commensurate with the risk of the investment. Therefore they will be attracted to profitable opportunities with manageable risk. Steps China could take to attract private capital for railway development...

    • 2006
    • World Bank Group (WBG)

    Review of selected railway concessions in Sub-Saharan Africa

    This report is in response to questions regarding perceived unrestrained monopolistic behavior by private sector operators in the port and rail sectors in Sub Saharan Africa (SSA). Indeed, prima facie, and for historical reasons, much of SSA's transport network is organized in multiple port/railway corridors that appear to favor potential monopolistic behavior. During the course of the analysis, it became evident that other equally important issues related to financial performance and attractiveness of concessions design needed to be addressed. Since the quantity and availability of data was found to be limited for port concessions, it was decided early in the process to concentrate the analysis on existing planned railway...

    • 2013
    • Vasile Nicolae Olievschi
    • African Development Bank (AfDB)

    Rail Transport

    Framework for Improving Rail Sector Performance in Sub-Saharan Africa

    The study analyzes existing railway concessions in Sub-Saharan Africa. It identifies issues and possible improvements at the level of government policies and regulatory frameworks required to restore competitiveness of the rail networks through PPPs. Included is a list of the most urgent recommendations to be implemented in the first stage.  

Lessons & Analysis

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