Financing models: New options for railway projects

Railway projects forge their path throughout the world with new financing and management models. therein, private public partnerships gather momentum with the aim of taking forward public transportation networks whilst making these efficient and feasible.

he railway is bolstered in countries around the world thanks to its numerous economic and environmental advantages. Data published indicate that investments in this type of infrastructure will continue to rise until 2021, according to the study on “World Rail Market” that Roland Berger has drafted for UNIFE (European Railway Industry Association). The progress of these types of projects has also undergone a change in financing models. With the aim of making them viable, administrations are increasingly seeking the collaboration of the private sector to carry out socially and economically profitable transport systems. Evolution over time of how transport networks come into being has gone from the completely public contribution to shared and even wholly private models.
This experience has resulted in various models in the construction, management and maintenance of infrastructure and commercial operation, with a diverse public-private combination.

The choice of the legal-financial scheme that best fits each railway project depends on elements as diverse as the technical complexity and / or implementation, the financial endeavours that the administration is willing to carry out, or the risks that each of them is willing to assume the parties involved, amongst other factors.

In all cases, what is sought is that there is a balance in the cost / benefit equation and that a railway project featuring a positive socio-economic impact can be put into place.

Benefits
he new financing formulae that have been established over time, beyond 100% public funds, present a series of advantages for transport administrations. If the private partner is particularly versed in the design, implementation, operation and maintenance of railway systems, it increases the efficiency of strategic projects with regard to delivery terms and implementation costs, based, among other aspects, on their market criteria in the assessment and correct allocation of the necessary resources.

PPPs
The public-private partnership or PPSs in transport seeks, through a contract between two sectors, public and private, to undertake a railway project.
The best-known legal-financial schemes are concessions and turnkey projects. The PPP framework in a broad sense, and concessions more specifically, represents a formula used in Spain for a long time. It has gone from public funds (of European origin) to having several concessions in urban transport. Although, in high-speed, medium distances and commuter rail networks, State management of projects continues to be a feature in most cases.

The concessional framework has allowed the development of railway infrastructure of great complexity in record time (project, expropriations, works, service start-up) even with advanced deliveries on the scheduled deadlines.

Examples in Spain

This model first came into use in the nineties, on the line of the Arganda del Rey Metro in the Community of Madrid. Later it was applied in the tramways of Barcelona. Other flagship examples are the Metropolitan Railways of Malaga, Sanchinarro, Seville or the tramways of Parla, Alicante, Murcia, Tenerife and Saragossa, along with the extension of the Madrid Metropolitan Railway between Vicálvaro-Arganda and Line 8 to the airport.
Similarly worthy of special mention are the commuter rail stretches between Móstoles-Navalcarnero, yet it was in 2010 with the Extraordinary Infrastructure Plan (PEI) when there was a turning point in the model used so far over long distances and opened the gateway to PPP formulae.

An example of this was the approach to track assembly and installation and maintenance contracts for the Madrid-Galicia High Speed Line; comprehensive construction and maintenance of the installations on the Albacete-Alicante section of the HSL Madrid-Castile La Mancha- Valencian Community-Region of Murcia; the high-speed North-Northwest Corridor track assembly (Olmedo-Pedralba Section); the Antequera ring or the intermodal logistics centre at Aranjuez. The consolidation of this financing model in Spain is due to the fact that here is a good regulatory framework due to the need not to compute a series of metropolitan rail and urban tramway projects in de fi cit. And faced with the lack of access to direct financing in the markets.

 

“The Spanish railway industry has launched numerous collaborative projects with the public sector worldwide”.

TURNKEY PROJECTS

The “turnkey” scheme (EPC) is a modality in which the corresponding administration or transport body recruits another company to undertake all the work associated with a project in exchange for a closed price. This process encompasses the entire construction, which can range from conceptual engineering,
both basic and detailed, the drafting of the project until the final testing processes on the installation and infrastructure commissioning. The company assumes the commitment to grant a project fully equipped and in perfect working order. This contracting mechanism, where the design and construction of the works is a single joint process provides several benefits. On the one hand, a streamlined and effective development of the project is achieved, alongside a reduction of risks and disagreements that can generate unforeseen costs and lengthen handover terms, as well as great savings in terms time and resources, through the concentrating of all processes in a single company.

Furthermore, for the consortium entrusted with the project there are lower risks than in the concession as they assume operating obligations, although support can be provided in the implementation of the rail system.

PPPs

PPPs are formulae for private sector participation in the development of a public service that can be carried out in many different ways, with the most widespread being construction and operational tenders or concessions.
In these cases, the private partner plays part of the role that the administration previously carried out. On the one hand, it can take over the commissioning and / or provide the subsequent service and maintenance assuming part of the financial, technical or operational risks.
This term is the one used in Spain. In Europe it is known as PPP (Public-Private Partnership) and in Latin America as APP (Public Private Alliance). PPPs help boost innovation, best practices and optimal value for money within the project. Their instrumentation allows to promote and manage new infrastructure developments.

From the perspective of the planner and contracting body, it is a complex process in which numerous aspects have to be detailed for the most suitable management of the decision-making and contracting processes.
In the cycle of definition of the contract and its tender, a PPP unit is often enabled for pre-analysis work to study socio-economic viability, the reasoned forecast of its implementation and drafting of the mandatory reports.
This task is especially important when the project is based on budget payments (partial, regular or total) to the private party, since future resources will be consumed.
It is for this reason it is necessary to define the “affordability” of these charges, through proper long-term financial planning. The financial contribution is usually provided by from Financial Institutions (Banks, Investment Funds, etc.), concessionary companies or the administration itself.

That said, those who ultimately pay the cost are citizens through taxes, the passengers, through the use of the service, either in the form of full payment or co-payment or the direct beneficiaries of an investment.
In Europe, the driving force behind the promotion of PPPs has been the European Commission in order to alleviate the limitations of the Member States to finance the necessary implementation of infrastructure, equipment and services.
In this way, the absorption of the Funds that the European Union provides for the development of the member countries is facilitated, without losing sight of the limits imposed in relation to its public deficits.

TENDERS / CONCESSIONS

Concessions are increasingly common in public transport. It is the well-known BOT (Build, Operate, Transfer) model that is increasingly applied, since it is the least complex figure from an administrative point of view and the easiest to manage (as a form of contracting).
The main stakeholders involved in this type of initiatives are, on the one hand, the Public Administration, and, on the other, the concessionary companies, also known as Project Vehicle Enterprises (SVP) or Specific Purpose Enterprises (SPE) alongside the promoters. Also included are the funders who provide resources from outside the company. In this case, the company or consortium assumes all responsibility, steering and management of the project, from construction to concession.

This scheme fosters competition in mass transport, where they are usually large volume contracts. The high requirements of technical knowledge and managers to the awardees also require having well-prepared and trained administrations to start the entire process.

However, this figure is the least institutionalised and the most difficult to control on the part of the Administration. Still, by including certain clauses in the contract, proper functioning can be monitored.

DEVELOPMENT COOPERATION AGENCIES

A figure that also has certain clout in this field is that of the Development Cooperation Agencies.
Currently, there are a large number of railway projects around the world that have been successfully carried out thanks to the financing of these companies. Such is the case of Japan (JICA), in Panama, Vietnam and the Philippines or the French AFD (Agence Française de Développement) in Colombia (Ayacucho Tram) and Ecuador (Cuenca Tram).

The aim is to grant credits to accompany public policies that promote sustainable mobility.