Innovative financing models as vehicle for funding railway projects in the middle east andreas schwilling

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Published on March 17, 2016

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1. Middle East Rail Conference Dubai, March 9, 2016 Innovative financing models as vehicle for funding railway projects in the Middle East Andreas Schwilling

2. 2160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx Currently, various private financing projects are ongoing worldwide Alternative financing examples: High speed trains for East Coast Line/Super Express (UK) Thameslink Route (UK) 63 DMUs for Netinera (Germany) Electric locomotives for Loto Kolej (Poland) Double-track railway project (Indonesia) Investment backlog … … also due to decrease in oil price – mitigated by private financing Light Rail Vehicles for TAM Montpellier (France)

3. 3160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx The need for alternative financing methods will further increase due to a changing business environment Tighter regulatory capital requirements Increases financing needReduces available funds Increasing government debts Existing investment backlogs Traffic challenges through urbanization High expenses for new and existing railway systems Goal to reduce CO2-emissions Increased need for intercity mobility 3160303_ME_Rail_Speech_AndreasSchwilling.pptx

4. 4160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx However, private funding in railway projects is still low, for example in Western Europe > Whereas private financing accounts for about 12% (EUR 1.68 bn) of total market volume in Europe, 18% of all projects are related to private financing either to full extent or partly in Joint Ventures > Private financing is comparatively important in the United Kingdom (46%), the Netherlands (19%), Turkey (18%), Germany (9%) and Italy (9%) 67 (18%) 303 (82%) > Private financing has considerable importance in the purchase of locomotives (31% share), EMUs and DMUs (17%) as well as coaches and wagons (44%) > In Western Europe all product categories are partially privately financed – multiple units with the highest private financing portion > In Eastern Europe private financing is only relevant for locomo- tives, passenger coaches and freight cars By Volume [EUR m] By number of projects 1,684 (12%) 11,645 (88%) Private finance Public finance 4160303_ME_Rail_Speech_AndreasSchwilling.pptx

5. 5160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx In the Middle East two major rail projects are being realized with a private financing portion 1) For Phases 1 and 2 > High speed rail project linking the cities of Mecca and Medina (and Jeddah Airport) > 453 km of electrified double track and five stations > Two consortia provide know- how, supplies, and private- sector financing Source: Saudi Railways Organization, BACS, Roland Berger Research > Up to six lines, operating without driver > Total of 176 km across six lines, 87 stations integrating with an additional 85 km bus rapid transit system > Biggest infrastructure project to be undertaken in the Kingdom of Saudi Arabia by three consortia Location: Mecca - Medina, KSA Investment: USD 9.2 bn1) Initiation: March 2009 Completion: TBC – 2017 Location: Riyadh, KSA Investment: USD 23.1 bn Initiation: June 2013 Completion: TBC – early 2020s Haramain High Speed Project Riyadh Metro Network

6. 6160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx Public-private partnerships are a means of alternatively finan- cing a project with mutual governmental and private involvement Performance-based PPP Government-guaranteed model with private co-financing Govern- ment(s) Contractor Operating Company EU Lenders Infrastructure owner Investors Railways, terminal users Private Project Company Financial support 100% Support Guaran- teed loans Toll/track charges Contractual pay- ment/availability payment Equity Dividends Track fees Debt servicing Unguaran- teed loans Contractual payment Contractual payment Govern- ment(s) Contractors Railways and additional users of terminals EU Lenders Lenders Infrastructure owner Support State guarantees 100% ownership TEN support State guaran- teed loans Debt servicing Un- guaran- teed loans Debt servicing Contractual payments Track access charges 6160303_ME_Rail_Speech_AndreasSchwilling.pptx

7. 7160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx Islamic Financing can solve the need for alternative financing models as well Growth Perspectives1) 1) Islamic finance market volume in USD bn 794 CAGR +17% CAGR +9% 2,666 1,216 20122007 2017 What Islamic Financing is characterized by … > Avoidance of paying fixed, pre-deter- mined returns (interest) > The borrower and the depositor/lender share the profits and losses of the financial transaction according to a pre- decided ratio … and how it can be implemented > Majority of Islamic banking activities – Replication of conventional loans Murabaha > Financing of manufacturing or construction projects (items that do not exist at the time of sale) Istisnaa > Financing of expensive assets like aircraft – The bank leases assets to a third party for rent – Replication of conventional leasing Ijara > Replication of conventional bonds Sukuk 7160303_ME_Rail_Speech_AndreasSchwilling.pptx

8. 8160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx Alternative financing offers advantages, e.g. increased efficiency Higher affordability & larger liquidity pool Transferring of financing (at least partially) to the private sector and having access to a greater financing pool Increased efficiency Making use of efficiency of the private sector (construction, financing, operations) Reduced infrastructure investment backlog Investing into infrastructure despite the lack of public funding possibilities Regulated service quality Using pre-defined contracts to specify & regulate the level of service quality offered as well as the incurred costs Lower danger of insolvency Passing on fluctuations in the lender's income to the finan- ciers – however increasing the danger of insolvency for bank Increased financial intermediation Increasing active involvement of creating financial consortiums

9. 9160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx The advantages are partially offset by challenges, e.g. higher costs Higher costs Incurring typically higher costs than public financing due to higher risk premium, higher cost of capital, higher monitoring costs required and the cost-intensive tender processes Complicated tendering Following pre-defined rules in the tender process, negotiations prolong the introductory phase Long contractual period Taking all eventualities into consideration given the long contractual period is difficult Limited flexibility Limiting the flexibility of services and expenditures due to long-term periods and lower costs of rigid contracts Higher risk for depositors Applying strict profit and loss sharing principles in Islamic financing Large number of separate contracts Requiring separate contracts for different transactions in Islamic financing

10. 10160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx International best practice (PPP): Brittany-Loire Valley High- Speed Line (France) > Réseau Ferré de France (RFF) > Eiffage Rail Express (ERE) Project partner > ~4.4bn USD > Financing partner: EFR, RFF, state, regional authorities, EU subsidies, EIB, 12 commercial banks Project value & financing > 2008: Request for Proposal > 2011: Financial closure > 2016: Start of operations Project Timeline > Development of an approach how to integrate regional trains on high- speed tracks > Reaching Brittany and Loire region in less time while providing an alternative to road transport > Only 2nd high-speed rail PPP in France Challenges > RFF and ERE being closely related to the territory authorities > Inclusion of environmental preservation in ERE's proposal > Creation of a mutual aid fund to help support environmental actions led by the lands crossed by the new high-speed line Success factors > 182km new high speed line between Conerré and Rennes, 32km connections to existing lines Project content

11. 11160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx International best practice (PPP): Thameslink (UK) > UK Department for Transport > Siemens Consortium > 2008: Project brought to market > 2013: Financial closure > 2016: Start of operations > Disagreement between authority, sponsors and lenders about ownership of asset > Financial crisis hitting the project during financial closure > Very high complexity and number of involved parties > Siemens Consortium providing equity to the deal > Siemens leveraging its good relationships with banks > Siemens providing legal & financial advisory during deal, thereby securing financial closure in turbulent times Project partner > ~2.5bn USD > Financing partner: Siemens Consortium, European Investment Bank, group of 20 international and local banks > 1,140 new train vehicles > 2 depots Project content Project Timeline Challenges Success factors Project value & financing

12. 12160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx International best practice (PPP): Denver FasTracks Eagle P3 Light Rail (USA) > Regional Transportation District of Denver (RTD) > Denver Transit Partners (DTP) > 2009: Request for proposal > 2011: Federal grants awarded > 2016: Start of operations > One of the first P3 public-private partnerships (build, finance & operate) in the US that draws on a mix of federal loans and grants and private investments > Development of approach how to construct the project during heavy traffic and relocating utilities > Denver Transit Partners developing various alternative concepts that improved the projects' cost effec- tiveness Project partner > ~2.2bn USD > Financing partner: DTP, city contributions, RTD bonds, govtl. support Project value & financing > 3 lines, 54 commuter rail cars > Commuter rail maintenance facility Project content Project Timeline Challenges Success factors

13. 13160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx International best practice (PPP): São Paulo Metro Line 4 > City and State govt. of São Paulo > ViaQuatro > 2005: Request for proposal > 2006: Financial closure > 2010: Start of first operations > First PPP in Brazil > Integration of a privately operated line with a network which is state- owned > Integration with inter-municipal busses and other modes > Timely construction was a must > Dividing the projects into 2 phases to apply lessons learned > Getting involved with union-wor- kers at an early stage > Making risk mitigation key aspect of the project (e.g. revenue sharing, guaranteeing availability payment scheme) Project partner > ~2bn USD > Financing partner: State, World Bank, JBIC, ViaQuatro, Inter American Development Bank Project value & financing > 12.8km of tunnels & permanent way, 11 stations, depot, operating systems, 29 trains Project content Project Timeline Challenges Success factors

14. 14160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx International best practice (PPP): Intercity Express Program Phase 2 (UK) > UK Department for Transport > Agility Trains Consortium > 2007: Launch of IEP > 2014: Financial closure of phase 2 > 2018: Start of operations > Phase 1 is one of the largest & complex PPP  Phase 2 was dependent on success of Phase 1 > No precedent for PPPs in heavy rail in the UK > Need for novel contractual structure > Agility structuring the deal to reflect the collapse in the banking market and a change in govt. while maintaining value for money > Introduction of a train-availability based structure "no train no pay" > Closure of two packages simul- taneously Project partner > ~1.7bn USD > Financing partner: Agility Trains Consortium, EIB, group of various international and local banks Project value & financing > 30 nine-car electric trains for East Coast Mainline Project content Project Timeline Challenges Success factors

15. 15160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx Given experiences with alternatively financed rail projects, les- sons learned for financing, regulatory & legal framework … How to optimally privately finance a rail project Maintain a proper balance between private and public funding for PPPs Consider bankability for the project (e.g. creditworthiness, legal viability, etc.) Consult with banks to ensure adequate due diligence, project transparency & quality Demonstrate how private investors will recover normal returns throughout the project development and its implementation How to set up the right regulatory & legal framework Transfer public sector responsibilities to private sector to grant required security to developers Ensure that the existing legal & regulatory framework provides adequate legal protection for all parties Ensure that the concession contract contains scope for refinancing opportunities that are of interest for both the public & private sector 160303_ME_Rail_Speech_AndreasSchwilling.pptx 15

16. 16160303_ME_Rail_Speech_AndreasSchwilling4_3.pptx … as well as the project model set-up should be considered when installing a new alternatively financed rail project How to set up the right project model Allocate the risk to the party best able to manage and control it Find the right balance between higher costs of capital of the private investor and increased efficiency Consider reliability of potential revenue streams to compensate the private party Hire an experienced transaction/financial & legal advisor to assist in developing tender documentation and marketing & financing of project Ensure government commitment and financial support and determine the level of involvement of the government as basis of attracting private investors Hire a "project integrator" to resolve details of integration between public and private infrastructure, equipment, rolling stock & systems Choose a private partner based on experience and financial strength (esp. important when publicly fund debt is involved) 160303_ME_Rail_Speech_AndreasSchwilling.pptx 16

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