National Cargo Operator-Destination Madrid by Francisco Furtado

SFTP

NCO – NATIONAL CARGO OPERATOR DESTINATION MADRID

SETTING A PUBLIC PRIVATE PARTNERSHIP STRUCTURE AND FINANCE

FRANCISCO FURTADO RAUL PIRES

2009-04-30

Table of Contents 1.

Introduction ...................................................................................................................................................................... 1

Project overview.............................................................................................................................................................. 1 2.1. Complexity and simplifications ............................................................................................................................. 1 2.2. Possible connections and alternatives ............................................................................................................... 1 2.2.1. Base case scenario .............................................................................................................................................. 2 2.2.2. Alternative 1: Sines-Elvas direct ................................................................................................................... 2 2.2.3. Alternative 2: Sines-Elvas phased ................................................................................................................ 2 2.3. General structure of the project ............................................................................................................................ 2

Project Operational Studies ........................................................................................................................................ 4 3.1. Demand ........................................................................................................................................................................... 4 3.2. Production, costs and revenues ............................................................................................................................ 6 3.3. Cash Flows and NPVs................................................................................................................................................. 9 3.4. Flexibility ........................................................................................................................................................................ 9

Project Financial Studies ............................................................................................................................................12 4.1. Structured Finance ...................................................................................................................................................12 4.1.1. Rolling Stock........................................................................................................................................................13 4.1.2. European Funds .................................................................................................................................................14 4.1.3. Equity .....................................................................................................................................................................14 4.1.4. Debt .........................................................................................................................................................................14 4.1.5. Return on Equity ...............................................................................................................................................15

Results Assessment ......................................................................................................................................................16

PPP design ........................................................................................................................................................................18 6.1. Agents involved..........................................................................................................................................................18 6.2. Finance sources .........................................................................................................................................................18

6.2.1. Equity .....................................................................................................................................................................18 6.2.2. European grants ................................................................................................................................................19 6.2.3. EIB loans ...............................................................................................................................................................19 6.2.4. Fixed Rate Bonds ...............................................................................................................................................19 6.3. Major uncertainties ..................................................................................................................................................20 6.3.1. Total freight movement ..................................................................................................................................20 6.3.2. Share of the market and competition .......................................................................................................20 6.3.3. Oil Price .................................................................................................................................................................22 6.3.4. Availability of partners ...................................................................................................................................22 6.3.5. New infrastructure developments (future rail, highways, ports).................................................22 6.3.6. Technical developments in rolling stock .................................................................................................22 6.3.7. Regulatory framework ....................................................................................................................................23 6.3.8. Social/Political unrest .....................................................................................................................................23 6.4. Risk Allocation ............................................................................................................................................................23 6.5. Performance targets and quality control ........................................................................................................24 6.6. Externalities ................................................................................................................................................................24 7.

Conclusions ......................................................................................................................................................................25

ANNEX ...............................................................................................................................................................................26

References ........................................................................................................................................................................26

1. Introduction This project aim is to structure the implementation of a national cargo operator. It will be the backbone of freight transport within the country main strategic points (ports, airports and logistic platforms) and also a viable and efficient connection between Portugal, Spain and consequently Europe.

2. Project overview For this purpose, we propose the creation of the National Cargo Operator (NCO) which will be responsible for all operations to implement the service, satisfy the demand and improve the overall freight system transport performance. NCO is envisaged as a multi modal freight company, providing the freight movement service using the railroad as the main axle and then providing the complementary road transportation, achieving this way a door to door service to its customers. We plan to use the already existing infrastructure (roads and rail) and, in case it is needed, to construct and own the new links necessary to better integrate the supply chain.

2.1. Complexity and simplifications Due to its dimension, complexity and time constraints, we opted to simplify the project. Our initial idea was to simplify the project by just focusing on the freight rail transport between the ports of Sines, SetĂşbal, and Lisboa with the Madrid region but we soon realize1 that this would still be an impossible task to achieve in such a short period. Given these facts, we decided to orient the project attention to the container freight movement between the port of Sines and the Madrid region, which we considered as being the most promising connection due to the growing capacity and demand of the Port of Sines.

2.2. Possible connections and alternatives Figure 1 contains, besides the existing Portuguese rail network, the routes and alternatives we have considered in our project and they represent the subject of our study and analysis.

With the help from our teachers

Page 1

2.2.1. Base case scenario This corresponds to the option of not making any new investment and using the existing infrastructure. Nowadays a freight train that goes from Sines to Madrid has to go to Entrocamento and Abrantes and takes around 9 hours to get to Elvas in the border (Pereira, 2006). There is a new service provided by IberianLink, a joint between CP and RENFE, which also uses the existing infrastructure. For this service the trains depart from Lisbon, Sines or Leixões using a electric locomotive until Entrocamento, then exchange to a diesel locomotive and in the border there is a new exchange where a RENFE locomotive takes place(Moura, 2009). This scenario will be used as our reference data to compare the viability of the alternatives we propose. 2.2.2. Alternative 1: Sines-Elvas direct It consists in building a direct link between Sines and the border at Elvas at once. Since the link between Casa Branca-Évora has already been remodeled, this option corresponds in building the following new links: Sines-Grândola; Grândola-Casa Branca; Évora-Elvas. 2.2.3. Alternative 2: Sines-Elvas phased In this alternative, instead of building the complete connection between Sines and Elvas we add the option of flexibility by dividing the construction in two phases: •

Phase 1 – We construct the Sines-Grândola and Évora-Elvas links. Therefore, trains have to go from Grândola to Évora using the Grândola-Poceirão-Vendas Novas-Casa BrancaÉvora connections, which means an increase in travel time and lower train capacity compared with the direct connection.

•

Phase 2 – Based on our projections and studies, we assess if there is any point in time that the demand growth justifies the investment in the new link between Grândola and Casa Branca and if it does, we perform the construction.

2.3. General structure of the project2 Our project will be a Design, Build, Own and Operate for a period of 24 years and due to its nature, we consider this undertaking as a national interest project. NCO will rent the existing rail

A more detailed analysis is given in other sections

Page 2

Base Case Sines-Elvas direct Sines-Elvas phase 1 Sines-Elvas phase 2

Figure 1 - Alternatives from port of Sines to the border at Elvas

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infrastructure required for its operations and every new line built will be owned and operated by NCO with the possibility of renting it to other future companies. Being a national interest project, the Government will have a fundamental role in the whole project and will be one of the sources of finance of the project. This investment will be done directly and indirectly, through its rail owned companies CP and REFER, and it will provide part of the required initial investment and possible investments that will be required in the future (for instance, when applying the flexibility option). Several logistic operators of Portugal will also be interested in the project and they will participate in the set up of the company by investing a part of the required financial needs of the project. The port of Sines is a major relevant and interested partner for the project and for that reason it is also included as one of NCO investor shareholders. Besides these investors, we have also included other possible private investors in the shareholders pool. Besides the described partners that will form the equity of NCO, the remaining financial needs of the project will be covered by the European Community funds, the issuing of fixed rated bonds and loans made by the European Investment Bank (EIB).

3. Project Operational Studies 3.1. Demand The key parameter of our Project is the demand of containers (measured in TEUs) from the port of Sines to Madrid, to be transported by Rail. To be able to forecast this we looked at: •

historical rail freight movements3 from Portugal to Spain;

•

historical container movements in the Ports of Setubal, Sines and Lisbon4, as well as these ports maximum annual capacities;

•

historical movements of containers from the ports mentioned to the hinterlands;

•

prospects and capacity for the recent service Iberianlink, connecting the Ports of Leixões, Sines, Lisbon and Setubal to the Spanish hinterland, namely Madrid;

•

Luis Simões (major logistical Portuguese company) data on freight movement to Spain and from Ports (all done by truck);

•

3 4

Specialized press articles;

Of Containers, data supplied by CP Data from the Ports Authorities, INE and Eurostat

Page 4

•

Experts Insight.

From this several sources and after careful calibration we constructed three scenarios (most likely, low demand and high demand) and selected the Inputs for the Lattice model, that gives an extensive array of outcomes for each of the scenarios. Next we present the most relevant data collected.

Movement (TEUs) Unloaded Years Setubal Lisbon Sines 1997 666 160408 1998 2031 166152 1999 964 179942 2000 2069 193733 2001 2913 216374 2002 4649 246213 2003 5785 275387 2004 9699 255776 9802 2005 6450 258124 25816 2006 8018 255414 62190 2007 5906 277662 73135 2008 9976 277854 116559

Unload Total

Maximum Capacity (TEU) Setubal Lisbon Sines 170000 442500 750000 340000 885000 1500000 source: Port Lisboa, Port Sines, Consulting Port Setubal

Variance and Growth rates (per year) from the data Setubal Lisbon Sines v (growth rate) 22.28% 5.30% 59.93% σ (variance) 41.04% 7.22% 22.18%

source: Eurostat, Porto Lisboa, Porto Setubal, Transportes em Revista

Figure 2 - Data from Ports

Containers Moved From Ports (TEUs)-2008 Setubal Lisbon Total By Rail Rail Share

19952 8,030 40%

Sines

555708 346,533 62%

Containers Moved to Spain 2007 233118 209806 90.00%

tons 47,162

TEUs Revenue Revenue/Teu 3144 411,878 € 131 €

source CP

Source CP

IberianLink Characteristics (now 3 trains per week, possibilitie of 5) Train Capacity (Teus) Frequency/Week W TEUs Per Year 44 3 44 5 Predicted Growth Rate in the 2 next years - 30%

52 52

6,864 11,440

source: Transportes em Revista

Figure 3 - Data from Rail (in Ports and to Spain)

From the data presented, and the answers we got from Luis Simões5, we can see that most of the containers that arrive in the Ports are moved to the hinterland by train, and that the direct shipment of containers from Portuguese Ports to Spain is negligible. Still, the recent Iberianlink is reported to be a success6, with a predicted growth rate of 30% for the next two years. Furthermore, the Port of Sines container terminal will expand is capacity to 1 500 000 TEUs per year. This expansion will be made counting on the Port capability to expand is See Annex 1 6See Annex 2 (magazine articles) 5

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hinterland to Spain (Sines is at the same distance to Madrid as Barcelona, main Port that supplies that city). So this port expansion7 depends on the construction of a new rail line to connect it to Madrid. It´s importance is recognized by the European Union, and this line is on the TEN-T priority projects. As for Rail as whole its share of total freight movement in Portugal as been slowly growing in the last years and this seams a trend for the next years. So the main factors to determine the parameters to input in the Lattice model were the Sines Port historical and predicted growth rates as well as its capacity, and the Iberianlink record. We calibrated8 these values for the Lattice so that in the most likely scenario, at the end of the 24 years (24-27 because each period we consider are 3 years…) we got an average demand of about 440 000 TEUs, a bit more than half of Sines Capacity (of unloaded Containers) and a Probability Distribution that allows for values as low as 5 000 TEUs and as high as 750 000 TEUs (the maximum capacity). For the High scenario the final average is almost 700 000 TEUs, but the maximum value is still about 750 000 TEUs. In the low demand, average falls to 106 000 TEUs and the maximum value we can obtain is about 280 000 TEUs moved. For all, we assumed that the starting point was a connection like the Iberianlink function at maximum capacity, with 5 trains per week, each one carrying 44 TEUs, that gives a value of 11 440 TEUs per year.

Parameters For Lattice Demand - TEUs From Sines to Spain By Rail Parameters (per Year) Low Most Likely S (start value) 11440 11440 v (Growth Rate) 5.99% 10.00% σ (variance) 23.40% 21.11% 1.47 u (upside) 1.39 d (downside) 0.83 0.8 p (probability) 0.71 0.86

High 11440 12.48% 7.51% 1.47 0.86 0.98

Figure 4 Parameters for the several Scenarios

3.2. Production, costs and revenues But the fact that there is Demand doesn´t mean we can take advantage for it, since we might be constrained by capacity of the lines we are using. Other crucial production factors are the price we obtain per TEU shipped to Spain, our main source of revenues, the costs of operation and maintenance, as well as the necessary initial investments. It’s not worth to match demand if the costs to attain it are higher than the benefits.

7 Also Setubal port is well below is possible capacity, but we won´t focus on that… 8 See “Calibration1_LikelyScenario/Low and High” spread sheets in the respective files.

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The approach we pursued was to determine for each alternative9, the capacity, the maintenance costs, the operational costs and the necessary initial investment. We used the parameters in Figure 5. Value Discount Rate (8) Cost remodeling(1) Cost new line(2) Capacity old line(3) Capacity remodeled and new line(3) 1 TEU ≈ X TON(4) Capacity Train New Capacity Train old Maint. costs old line Maint. costs new line(5) Cost TEU new lines (6) Cost TEU old lines (6) Price per TEU(7) Rolling Stock Aquisition(9) - 1 Rolling Stock Aquisition(9) - 2

12% 0.78 3.2 2 100 22 66 44 0.01 0.01 0.30 0.40 334.30 44000000.00 56000000.00

Unit Percentage 10^6€ p/km 10^6€ p/km trains p/day trains p/day tons TEUs/Train TEUs/Train 10^6€ p/km/year 10^6€ p/km/year euros euros euros euros euros

Figure 5 - Production Parameters

This parameters were calculated based on several sources (CP, Refer, Magazines…), each value is justified in the spreadsheet “Table1-Parameters”, of the excel file. Then we applied these values to each section of each alternative we considered to make the connection from Sines and Madrid (this was made on a table that is also presented in the mentioned spreadsheet). Than we combined the sections of each alternative and constructed a second table (in the “Table2Alternatives-Costs” spreadsheet) that as a synthesis of the operational, maintenance and investment costs, as well as the critical capacity, for each alternative. On the next page we present the two mentioned pages.

Base Case, Sines Elvas Direct and Sines Elvas phased

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Capacity (train distance(km) p/day)

Sections Sines-Ermidas Sado Ermidas Sado-Grândola Grândola-Poceirão Sines-Grândola Grândola-Casa Branca Casa Branca-Évora Poceirão-Casa Branca Évora-Elvas Lisboa-Entrocamento-Elvas

50.7 27.4 65 40 20 25 60.1 105 271

TEU Cap Section p/year

2 2 24

27544 27544 495792

Existing line Maint.Cost 6 10 €

Cost/TEU/pk m€

0.6591 0.3562 0.65

0.40 0.40 0.30

100 2

2065800 27544

0.25 0.7813

0.30 0.40

27544

3.523

0.40

Cost section p/TEU €

Remodelling line Maint.Cost 6 10 €

Capacity (train TEU Cap Section p/day) p/year

Cost section p/TEU

Cost/TEU/pkm

Inv. 10 €

Capacity (train p/day)

TEU Cap Section p/year

New line Maint.Cost 6 10 €

Cost/TEU/p km

Cost section p/TEU

7.5 24.04 0 108.4

100

2065800

0.601

0.30

18.03

100 100

2065800 2065800

0.4 0.2

0.30 0.30

12 6

128 64

100

2065800

1.05

0.30

31.5

336

46.878

Figure 6 - Calculation of Costs/Capacity for each section

Sections

Base Case

Sines-Elvas DIRECT

Sines-Ermidas Sado Ermidas Sado-Grândola Grândola-Poceirão Lisboa-Entrocamento-Elvas Poceirão-Grândola Sines-Grândola Grândola-Casa Branca

TEUS Critical Capacity Sines-Elvas

TEUS Critical Capacity Poceirão-Elvas

27544

10^6 euros Inv.

10^6 euros Maint.

euros Cost TEU LX-Sines

euros Cost TEU Sines-Elvas

euros Cost TEU Poceirão-Elvas

Years Construction Time

108

528

464

Casa Branca-Évora

Évora-Elvas Sines-Grândola Sines-Elvas Phase1

TEUS Critical Capacity LX-Sines

495792

2065800

Grândola-Poceirão Poceirão-Casa Branca Casa Branca-Évora

Évora-Elvas Poceirão-Grândola Sines-Grândola Sines-Elvas Grândola-Casa Branca Phase 2.1 Casa Branca-Évora Évora-Elvas Sines-Grândola Grândola-Poceirão Sines-Lisboa-Elvas Poceirão-Casa Branca Phase 2.2

495792

27544

2065800

Casa Branca-Évora

Évora-Elvas

Inv. 10 €

20.28 10.96 19.5

495792

2065800

Figure 7 - Alternatives Costs and Capacities of each alternative

As can be seen, to fit the scope of this assignment we limited the amount of options we intended to explore… We chose to approach it as an economical and financially viable project per se and that is why we selected a discount rate of 12%, a common rate applied in developed countries for private projects, although for projects of such national (and European) strategic importance sometimes the discount rates can go to 4-5%.

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3.3. Cash Flows and NPVs To compute the cash flows we first calculated the Production we were able to satisfy and the demand that wasn´t constrained by capacity (that we assumed to be the lines capacities, given by the number of trains they can take and the extent of those trains). Then we calculated the costs, which are the investments in new lines, plus the maintenance costs of the lines (they are our infrastructure) we manage and the operational costs that depend on the production. As you can see in Figure 7 for each alternative there are different values. In the excel spreadsheets there are comments on the cells that have an explanation on how the values are computed. The revenues are the production (TEUs moved to Spain), multiplied by the Price. In the RENFE (Spanish main Rail Company) webpage the prices to move containers from the Ports of Sines/Setubal and Lisbon are available10. Using the Lattice model, for each period there are several possible Demands, each with a probability, so for each period we get several possible Cash flows. We simply discount these cash flows to the corresponded period they were made and multiply each of the period cash flow for its probability, that way we get for each period an expected discounted cash flow, simply add them and we have the expected Net Present Value. Or we can only discount after having the expected value of each period cash flow like shown in the figure below. -528,000,000.00

Probability Weighted Cash Flow

5452310 -5,103.17

9552043 852894 -30,559.55

14362632 2734219 65917 -7,620.99

20124007 5889486 479390 -4,598.60 -1,441.32

27132190 10683598 1458316 58435 -3,171.19 -243.71

35755136 17628239 3343634 273255 3296 -850.81 -38.82

46452617 27425418 6614019 793425 40473 -761.16 -180.52

59801237 41025336 11946887 1864787 155221 4322 -352.24 -34.20

Witout Initial Investment 0 0 0 36,715,916 51,806,422

E [Cash Flow] PV( E[Cash Flow]) ENPV over 18 years ENPV over 24 years

1 5,447,207 3,877,215

2 10,374,377 5,255,982

3 17,155,147 6,186,318

4 26,486,844 6,798,513

5 39,329,124 7,185,284

6 57,002,671 7,412,604

7 81,325,011 7,527,411

8 114,797,403 7,563,094

With Investment Initial Investment Op Cash Flow PV( E[Cash Flow]) ENPV over 18 years ENPV over 24 years

0 528,000,000.00 € 0€ 528,000,000 491,284,084 476,193,578

5,447,207 € 3,877,215

10,374,377 € 5,255,982

17,155,147 € 6,186,318

26,486,844 € 6,798,513

39,329,124 € 7,185,284

57,002,671 € 7,412,604

81,325,011 € 7,527,411

114,797,403 € 7,563,094

Figure 8 - Expected NPV for the Sines-Elvas Direct Alternative

3.4. Flexibility One of the main instruments to cope with uncertainty is to have a flexible design of the project that will minimize the costs when there are down sides (in our case low demand from Sines 10

See “Table1-Parameters” Spreadsheet

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to Madrid) and easily take advantage when opportunities emerge. Our flexible option consisted in just building the Sines-Grândola (see Figure 1) and Évora-Elvas sections of the Sines-Elvas line (the key sections to get a better connection to Spain), leaving for latter the option to add the GrândolaCasa Branca section. So the last section is only built if the increase in Production it allows can deliver cash flows that support the costs of this extra investment. And of course due to this the initial investment is also smaller. On Figure 9, Figure 10 and Figure 11 we present several comparisons between the option with flexibility and without it. Value Of Flexibility High Demand

Most Likely

Low Demand

Project with Option OFF Project Flexible (option in) Value of Flexibility

$446,811,439 $439,145,569 $7,665,870

Project with Option OFF Project Flexible (option in) Value of Flexibility

$449,400,397 $442,919,784 $6,480,613

Project with Option OFF Project Flexible (option in) Value of Flexibility

$454,651,901 $454,651,901 $0

Project Direct (Sines-Elvas) Project Flexible (option in) Value of Flexibility

$455,420,014 $439,145,569 $16,274,445

Project Direct (Sines-Elvas) Project Flexible (option in) Value of Flexibility

$476,193,578 $442,919,784 $33,273,794

Project Direct (Sines-Elvas) Project Flexible (option in) Value of Flexibility

$502,151,150 $454,652,041 $47,499,110

Figure 9 - Value of flexibility for the several scenarios

Alternatives

Inititial Investment Max NPV

Min NPV

Expected NPV

(Euros)

Base Case (Iberian Link) SinesElvasDirect SinesElvasPhased (flexible)

(Euros)

0€ 528,000,000 € 464,000,000 €

16,834,278 € 37,597,520 € 451,803,646 € 533,200,824 € 422,817,358 € 482,975,573 €

18,962,012 € 476,193,578 € 442,919,784 €

Figure 10 - Comparison of the several Alternatives in the “most likely” scenario

VARG curves - Comparison Direct vs Phased

100.0% 90.0%

Cumulative Probability

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -540.00 €

-520.00 €

-500.00 €

-480.00 €

-460.00 €

-440.00 €

-420.00 €

-400.00 € Millions

NPV (€) SinesElvasPhased

NPV (SinesElvasDirect)

Figure 11 - VARG curve, Phased and Direct Alternatives in the "most likely" scenario

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As presented on Figure 9, in this case, flexibility has always a high value. Performing a sensitivity analysis on the discount rate the flexible solution maintains a higher expected NPV, when compared with the “built all at once” solution.

NPVs varing with Discount Rate 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3%

100,000,000

NPVs (euros)

200,000,000

Sines Elvas Phased 300,000,000 Sines Elvas Direct

400,000,000

500,000,000

600,000,000

Figure 12 - Sensitivity analysis for NPVs in the "most likely" scenario

Here we should add that through the Lattice model, for each period and for the several possible outcomes of each period, an evaluation is made if it’s worth to call in the flexible option. This involves evaluating, from the state we are in, given the future range of option if we gain more by investing and increasing our capacity (and decreasing maintenance and operational costs per TEU), or if we are better without making the investment and using the initial infrastructure. The “technicality” can be appreciated in “LatticeSinesElvasPhased” spreadsheet of the files. Excercise CALL OPTION ? 2.6

0 NO

1 NO NO

2 YES NO NO

3 YES NO NO NO

4 YES NO NO NO NO

5 YES NO NO NO NO NO

6 YES NO NO NO NO NO NO

7 YES NO NO NO NO NO NO NO

Figure 13 - When is the Option called in the most likely scenario

To calculate the expected NPV we need to evaluate every possible path of the Lattice, in this case 256 (in the spreadsheet example given to us, there were only 6 periods, what is equivalent to

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64 different paths…) different possible NPVs, and for each we have to judge if along the path the option in is considered or not.

4. Project Financial Studies As can be seen in the excel files and Figure 10, Figure 11 our “economical” NPVs are negative, and the Base Case (Iberian Link) presents the higher value (even though it’s still negative…). But this can be misleading because there are inputs that we still didn´t accounted for, such as the European Union funds that cover 50% to 70% of the construction costs of the new lines. Second, we should also analyze the cash flows the alternatives generate in each period and, in the option seen in Figure 14, each period generates considerable returns, which does not happen for the base case where all periods give negative cash flows. Without Investment acounted For E [Op Cash Flow] PV E [Op Cash Flow] ENPV over 18 years ENPV over 24 years

0 0€ 0€ 28,801,998 € 43,892,503 €

1 1,930,249 € 1,373,913 €

2 6,190,393 € 3,136,246 €

3 8,029,278 € 2,895,438 €

4 26,486,844 € 6,798,513 €

5 39,329,124 € 7,185,284 €

6 57,002,671 € 7,412,604 €

7 81,325,005 € 7,527,411 €

8 114,797,403 € 7,563,094 €

With Investment Initial Investment E [Op Cash Flow] E [Cash Flow] PV( E[Cash Flow]) ENPV over 18 years ENPV over 24 years

0 464,000,000 € 0€ 464,000,000 € 464,000,000 € 458,277,044 € 443,186,539 €

1 1,930,249 € 1,930,249 € 1,373,913 €

2 3 64,000,000 € 6,190,393 € 8,029,278 € 6,190,393 € 55,970,722 € 3,136,246 € 20,183,604 €

4 26,486,844 € 26,486,844 € 6,798,513 €

5 39,329,124 € 39,329,124 € 7,185,284 €

6 57,002,671 € 57,002,671 € 7,412,604 €

7 81,325,005 € 81,325,005 € 7,527,411 €

8 114,797,403 € 114,797,403 € 7,563,094 €

Figure 14 - Cash Flows of Phased Alternative, most likely scenario.

So, although the Base case as an apparently better value of NPV, in fact, the other options have lower values due to the very high initial investment and the fact that the higher returns only come further in the future, and their weight is greatly reduced due to the discount rate effect.

4.1. Structured Finance So, to proper set up our PPP and its financial structure (and even institutional structure…) we started by the concept, moved to analyze the project economics/engineering and then on top of that designed the best financial arrangements to support the project. In Figure 14 we present the structured finance for the Phased alternative, the one that provided the best economical solution, in the “most likely” scenario. For the other scenarios we tested also our financial arrangements, the results and analysis are in the Results Assessment. The consequences on the PPP institutional setting, financial sources and the risk allocation are discussed in further detail on chapter 6 (PPP design).

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t=0 0 0

Period Years

t=1 1 3

t=2 2 6

t=3 3 9

t=4 4 12

t=5 5 15

t=6 6 18

t=7 7 21

t=8 8 24

E [Operational Cash Flow] (without initial Investment )

Value PresentV

0€ 0€

1,930,249 € 1,373,913 €

6,190,393 € 3,136,246 €

8,029,278 € 2,895,438 €

26,486,844 € 6,798,513 €

39,329,124 € 7,185,284 €

57,002,671 € 7,412,604 €

81,325,005 € 7,527,411 €

114,797,403 € 7,563,094 €

Initial Investment (New Lines)

Value PresentV

464,000,000 € 464,000,000 €

0€ 0€

64,000,000 € 23,079,042 €

0€ 0€

Rolling Stock Aquisition

Value PresentV

44,000,000 € 44,000,000 €

0€ 0€

56,000,000 € 0€

0€ 0€

European Union Funds (outwright grant)

Value PresentV

232,000,000 € 232,000,000 €

0€ 0€

32,000,000 € 11,539,521 €

0€ 0€

Cash Flow with Investments, Value Operations and EU Grant PresentV

276,000,000 € 276,000,000 €

1,930,249 € 1,373,913 €

6,190,393 € 3,136,246 €

79,970,722 € 8,644,083 €

26,486,844 € 6,798,513 €

39,329,124 € 7,185,284 €

57,002,671 € 7,412,604 €

81,325,005 € 7,527,411 €

114,797,403 € 7,563,094 €

41,800,000 € 13,800,000 € 13,800,000 € 41,400,000 € 13,800,000 € 12,460,000 €

0€ 0€ 0€ 0€ 0€ 0€

50,400,000 € 1,599,414 € 1,599,414 € 5,597,951 € 1,599,414 € 1,215,924 €

0€ 0€ 0€ 0€ 0€ 0€

Equity CP Port of Sines Private Logistic Operators Government Refer Private Investors

Value

Total Equity

Value PresentV

137,060,000 € 137,060,000 €

0€ 0€

62,012,118 € 22,362,191 €

0€ 0€

Fixed Rate Bonds Issued

Value PresentV

55,200,000 € 55,200,000 €

0€ 0€

0€

16,560,000 €

71,760,000 €

Total Payment

Value PresentV

0€ 0€

16,560,000 € 3,025,450 €

16,560,000 € 2,153,456 €

16,560,000 € 1,532,787 €

71,760,000 € 4,727,700 €

European Investment Bank Loan - 1st Loan

Value PresentV

100,488,000 € 100,488,000 €

10,101,790 € 7,190,255 €

10,101,790 € 5,117,881 €

10,101,790 € 3,642,807 €

10,101,790 € 2,592,878 €

30,305,370 € 5,536,678 €

30,305,370 € 3,940,898 €

30,305,370 € 2,805,053 €

30,305,370 € 1,996,582 €

European Investment Bank Loan - 2nd Loan

Value PresentV

0€ 0€

24,244,116 € 8,742,671 €

0€ 0€

Payment

Value PresentV

0€ 0€

3,262,939 € 837,515 €

3,262,939 € 596,127 €

8,701,170 € 1,131,497 €

8,701,170 € 805,377 €

8,701,170 € 573,251 €

Final Cash Flow

Value PresentV

16,748,000 € 16,748,000 €

8,171,541 € 5,816,342 €

3,911,397 € 1,981,635 €

3,816,279 € 18,817,973 €

13,122,115 € 3,368,120 €

10,799,185 € 1,972,971 €

1,436,130 € 186,754 €

25,758,465 € 2,384,194 €

4,030,862 € 265,562 €

Acumulated

Value PresentV

16,748,000 € 16,748,000 €

8,576,459 € 10,931,658 €

4,665,062 € 8,950,023 €

848,783 € 27,767,996 €

13,970,898 € 31,136,116 €

3,171,713 € 29,163,145 €

4,607,843 € 29,349,899 €

30,366,308 € 31,734,093 €

34,397,170 € 31,999,654 €

Payment of Bonds 24 Year Maturity

FINAL NPV

31,999,654 €

Figure 15 - Phased Alternative, most likely scenario, cash flow with financial arrangements

We started with the cash flows generated from the project, than added the infrastructure investments; we selected period 3 to call in option because it gave the better expected NPV11. 4.1.1. Rolling Stock Then we add the rolling stock acquisition costs (based on the recent CP fleet renewal numbers), this wasn´t included in the economical analysis for a reason, and it’s also a consequence of the Project concept and institutional setting. CP is one of the stakeholders of this company, so it will support these costs. Actually the equity investment is exactly 95% of the costs of the rolling

This doesn´t mean we will do it in that year, it means it is the most likely option we will make. The value of flexibility is exactly to have the capacity to make decisions in the future and don´t compromise everything at the beginning. As you will see in the other scenarios the years we choose are different.

Page 13

stock acquisition. This can be seen as CP conceding part of their Rolling Stock, personnel and knowhow to the new company, more than as a financial transaction. 4.1.2. European Funds Although the European Funds can cover up to 70% of the project new infrastructure costs, we used some caution and just considered a cover of 50%. 4.1.3. Equity We defined the Equity contributions as being determined by what will foster the project dynamic more than the pure financial gains. So, finance was structured as a tool to provide a sound economical project, and maximize its performance and not as an end to maximize itself. In the end it will be the cash flows generated and the services provided that will be determinant to evaluate the value of the project. CP contribution to the equity was 95% of the rolling stock costs (for the 1st Phase and 90% for the second phase, if the option is called in). The Port of Sines will come up with 5% of the investment necessary to cover the initial costs of the project (after discounting the European Union Funds). Several private logistical operators (like Luis Simões, or a foreign company like Fedex) should also contribute in the same measure as Port of Sines, as well as Refer. The Government will enter with 15% of the required investment of the initial cost coverage. Then there will be room for other Private investors (like other Rail companies, why not Railex or Deutsche Bahn?) that should put a value equivalent to 10% of the sum of the above mentioned. In the end each actor share is resumed in Figure 16. For the Phased option, in the most likely scenario, the Equity/Debt ratio is 0.97, which is almost one (half debt, half equity). 4.1.4. Debt There will be two forms of Debt, first are Bonds issued by the company with a fixed 5% year rate12. This is a very appealing rate since maturity will be reached in 24 years, so every year the investor will get 5% of his initial investment for a 24 year period (this gives a 120% return, plus the initial investment…). The catch is that NCO will only start to pay the returns on the 5th period (15th year). For the project is good the diversify the sources of finance, to involve investors that don´t want to be shareholders (it´s less risky…) and it allows NCO to receive money at the start of the

In the Excel file there are detailed explanations and comments on this and the Loans

Page 14

project that it will only have to pay back 15 years from now. They will be issued in a value correspondent to 20% of the initial necessary investment. We will also go to the European Investment Bank for a Loan, given the scope of the Project it will be granted, and it as very favorable conditions. We can start to pay after the end of construction; the interest rate is indexed to Libor and it´s 2% per year; we also intend to negotiate the payment and in the first periods (first 4 periods, 12 years) have a lighter burden and pay more latter on. This loan will be paid on a 24 years period. If we call in the option we will make o second loan to the EIB, in similar conditions but with a shorter payment time. 4.1.5. Return on Equity This combination of sources gives a constant positive cash flow, and a positive NPV for the project (in the most likely scenario). Still we didn´t counted the return on equity. This is shown in Figure 16.

CP Port of Sines Private Logistic Operators Government Refer Private Investors

initial invest. 41,800,000 € 13,800,000 € 13,800,000 € 41,400,000 € 13,800,000 € 12,460,000 €

Return by end of project (PV) (% of share) With Gov Comp. Without Gov. Comp 30.5% 9,759,124 € 10.1% 3,221,912 € 11,023,346 € 10.1% 3,221,912 € 11,023,346 € 30.2% 9,665,735 € 10.1% 3,221,912 € 9.1% 2,909,059 € 9,952,963 €

Figure 16 - Return on equity at the end of the project and share of equity of each stakeholder

The cash flow provides the Private partners with a present value in the end of the project (24 years) very close to the initial investment they made (let us remind that discount rate is 12%), if we extended the period in analysis than this would be covered… But the Privates will be able to do this because we assume the state (and public companies) won´t receive their share of return on equity. But some comments are required: First the State can and should buy bonds to invest in the project, and this was a way to get returns; the sunk investment taken is not so extraordinary that couldn´t be justified by other sources of income, like increase in taxes due to growing economic development, the best example is the Port of Sines expansion, this link is key for its continuous expansion, so even if the Port of Sines won´t gain win millions with this, it will have to do it to be able to gain millions on the Port activities (or at least cover the ongoing infrastructure and service investments)…

Page 15

In combination with the Ports of Setubal, Lisbon and other sources of cargo (that´s why it´s important to bring a nice logistical operator on board) the results could be even more positive.

5. Results Assessment In order to assess the global results we obtained we present the following graphs (in the excel files more information is available, for instance VARG graphics for every alternative in every scenario are presented):

Financial NPVs of Phased Option in all scenarios 180,000,000 €

160,000,000 €

140,000,000 €

NPVs (euros)

120,000,000 €

100,000,000 € Most Likely 80,000,000 €

High Low

60,000,000 €

40,000,000 €

20,000,000 €

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

0€

Discount Rates

Figure 17 - Financial NPVs

The “High demand” scenario doesn´t provoke great changes in the financial structure of the project, but it greatly improves its performance. In the low scenario case there is a greater impact, the second option is not called in (and a second loan with EIB is not pursued) and the government is forced to pay a share of the debt service. The private Investors (shareholders, not the bond buyers) will also be hurt because there are less returns of the cash flow. We made the option that half the cash flow generated would go to pay the debt and the rest would stay in the company.

Page 16

Most Likely

CP Port of Sines Private Logistic Operators Government Refer Private Investors

initial invest. 41,800,000 € 13,800,000 € 13,800,000 € 41,400,000 € 13,800,000 € 12,460,000 €

(% of share) 30.5% 10.1% 10.1% 30.2% 10.1% 9.1%

Return by end of project (PV) With Gov Comp. Without Gov. Comp 9,759,124 € 3,221,912 € 11,023,346 € 3,221,912 € 11,023,346 € 9,665,735 € 3,221,912 € 2,909,059 € 9,952,963 €

(% of share) 30.5% 10.1% 10.1% 30.2% 10.1% 9.1%

Return by end of project (PV) With Gov Comp. Without Gov. Comp 15,563,361 € 5,138,143 € 17,579,478 € 5,138,143 € 17,579,478 € 15,414,429 € 5,138,143 € 4,639,222 € 15,872,485 €

(% of share) 39.3% 8.6% 8.6% 25.8% 8.6% 9.1%

Return by end of project (PV) With Gov Comp. Without Gov. Comp 2,579,192 € 565,201 € 1,000,627 € 565,201 € 1,000,627 € 1,695,603 € 565,201 € 597,040 € 1,056,995 €

High

CP Port of Sines Private Logistic Operators Government Refer Private Investors

initial invest. 41,800,000 € 13,800,000 € 13,800,000 € 41,400,000 € 13,800,000 € 12,460,000 € Low

CP Port of Sines Private Logistic Operators Government Refer Private Investors

initial invest. 41,800,000 € 9,160,000 € 9,160,000 € 27,480,000 € 9,160,000 € 9,676,000 €

Figure 18 - Return on Equity for Phased Option E [Operational Cash Flow] (without initial Investment )

Value PresentV

0€ 0€

707.484 € 503.573 €

3.006.559 € 1.523.216 €

5.010.384 € 1.806.795 €

6.522.352 € 1.674.125 €

7.323.671 € 1.338.007 €

8.365.174 € 1.087.804 €

8.760.663 € 810.884 €

9.163.251 € 603.694 €

Initial Investment (New Lines)

Value PresentV

464.000.000 € 464.000.000 €

0€ 0€

Rolling Stock Aquisition

Value PresentV

44.000.000 € 44.000.000 €

0€ 0€

European Union Funds (outwright grant)

Value PresentV

324.800.000 € 324.800.000 €

0€ 0€

Cash Flow with Investments, Value Operations and EU Grant PresentV

183.200.000 € 183.200.000 €

707.484 € 503.573 €

3.006.559 € 1.523.216 €

5.010.384 € 1.806.795 €

6.522.352 € 1.674.125 €

7.323.671 € 1.338.007 €

8.365.174 € 1.087.804 €

8.760.663 € 810.884 €

9.163.251 € 603.694 €

41.800.000 € 9.160.000 € 9.160.000 € 27.480.000 € 9.160.000 € 9.676.000 €

0€ 0€ 0€ 0€ 0€ 0€

Equity CP Port of Sines Private Logistic Operators Government Refer Private Investors

Value

Total Equity

Value PresentV

106.436.000 € 106.436.000 €

0€ 0€

Fixed Rate Bonds Issued

Value PresentV

36.640.000 € 36.640.000 €

0€ 0€

0€

10.992.000 €

47.632.000 €

Total Payment

Value PresentV

0€ 0€

10.992.000 € 2.008.197 €

10.992.000 € 1.429.395 €

10.992.000 € 1.017.415 €

47.632.000 € 3.138.096 €

European Investment Bank Loan - 1st Loan

Value PresentV

48.148.800 € 48.148.800 €

4.840.270 € 3.445.209 €

4.840.270 € 2.452.232 €

4.840.270 € 1.745.450 €

4.840.270 € 1.242.377 €

14.520.811 € 2.652.898 €

14.520.811 € 1.888.280 €

14.520.811 € 1.344.041 €

14.520.811 € 956.662 €

European Investment Bank Loan - 2nd Loan

Value PresentV

0€ 0€

Payment

Value PresentV

0€ 0€

21.850.975 € 3.992.091 €

21.330.224 € 2.773.774 €

21.132.479 € 1.956.014 €

57.571.185 € 3.792.911 €

Payment of Bonds 24 Year Maturity

Value Government Debt Service (payment of Bonds and Debt) PresentV Final Cash Flow

Value PresentV

8.024.800 € 8.024.800 €

4.132.786 € 2.941.635 €

1.833.711 € 929.015 €

170.113 € 61.345 €

1.682.082 € 431.749 €

3.661.835 € 669.004 €

4.182.587 € 543.902 €

4.380.331 € 405.442 €

4.581.625 € 301.847 €

Acumulated

Value PresentV

8.024.800 € 8.024.800 €

3.892.014 € 5.083.165 €

2.058.303 € 4.154.149 €

2.228.416 € 4.215.494 €

3.910.498 € 4.647.243 €

7.572.334 € 5.316.246 €

11.754.921 € 5.860.148 €

16.135.252 € 6.265.590 €

20.716.878 € 6.567.437 €

FINAL NPV

6.567.437 €

Equity/Debt Ratio

1,26

Figure 19 - Cash flow for the low scenario (phased alternative)

Page 17

6. PPP design This will be a Design, Build, Own and Operate for a period of 24 years. Nevertheless, a performance evaluation after 10 years should be done and assessed if the NCO should continue as it is, i.e., private (mixed capital) operator or whether it should be transferred to the State or other solutions. The scheme in Figure 21 describes the structure, the agents involved and their relations and the financial mechanisms that together set up the PPP we are proposing.

6.1. Agents involved As previously stated, we intend this project to be regarded not as an introduction of competition, although somehow inevitable, but as a structuring of the freight cargo movement. The agents involved in our project are those who participate in the equity of NCO, the European Investment Bank through its loans, the European Community through its grants and the private investors that acquire the issued bonds. Besides them, the principal agent in the whole process is the State, which is involved directly and indirectly (through CP and REFER) in the equity as well as the proposed main bond buyer.

6.2. Finance sources NCO funds will be raised by 4 different sources: equity; EC grants; EIB loans and finally by issuing fixed rated bonds. 6.2.1. Equity A part of the financing will come from a pool of assets/funds assembled by the main stakeholders of this project. Figure 20 states the distribution of equity of NCO and as we can see the private sector is represented with a around 30% of the total shares whereas the State has directly 30% plus 40% through its public companies CP and REFER. Equity CP Port of Sines Private Logistic Operators Government Refer Private Investors

(% of share) 30% 10% 10% 30% 10% 9%

Figure 20 - Equity distribution

Page 18

The private investors can be either national or international players. We consider that this can be an attractive strategic investment for foreign rail companies and logistic operators because of the potential the Sines port can bring to their supply chains in a European scale. 6.2.2. European grants The European grants we are foreseen to obtain will come from the following different EC programs: •

Marco Polo program (shift of freight movement from roads to rail/sea)

•

European Regional Development Fund (ERDF)

•

TEN-T European program

•

Motorways of the Sea program

Due to the fact that the Sines-Madrid-Paris railway link is one of the TEN-T priority links, this project can receive funds up to 70% of the required investment on infrastructure but, to reflect possible problems that can occur and to make it less dependent on those grants, we have considered only 50%. This grant will be used in the start of the project for the Sines-Elvas direct alternative but for the Sines-Elvas phased option, the fund will be used in the start of the project and also when the flexibility option of constructing the Grândola-Casa Branca section is given the “green light”. 6.2.3. EIB loans The European Investment Bank provides loans at very good interest rates for projects that are in the scope of the EC objectives and NCO falls in this category. These loans will be required when investments are needed, i.e., at the start of the project for both alternatives and, for the phased alternative, when it is decided to construct the new link. They will start to be repaid 3 years after they are granted, taking advantage of the possibility given by the EIB to start the payment of the loans only after construction and at beginning of operations, the so called grace period (EIB, 2009). 6.2.4. Fixed Rate Bonds The final funding mechanism for our project will be the issue of bonds with a maturity of 24 years, paying an annual fixed interest rate of 5%, with the coupons repayment to start after 15 years from the start of the project. This would enable us to receive cash when issuing the bonds and only cash-out after at least 15 years, when the projections in the most likely scenario provide good operational cash flows that can cover these repayments.

Page 19

These bonds can represent a good investment to the State as they can receive the interest on their investment and at the same time send a strong message that this project is backed by the Government. Also, the State can foster the acquisition of these bonds by the private sector by providing accessible loans through its national bank CGD.

6.3. Major uncertainties The project contains several uncertainties associated which can affect its performance. The following subsections describe the ones we considered relevant. 6.3.1. Total freight movement Given this is the major uncertainty of the project, we have dedicated our attention to its study and considered several scenarios for different types of growth to understand the strengths and weaknesses of the project (see Project Operational Studies). We consider this risk to be very important due to the fact that, even if we capture a substantial share of the market, if there is a significant reduction in total freight movement we will not be able to generate enough returns to cover the financial needs of the project. Also, it is important that not only the Sines port continues to expand but also that the container movement, which is market segment we are addressing, also expands. This is partially mitigated by having a flexible design. 6.3.2. Share of the market and competition The viability of this project depends on, not only having a growing demand, but on the ability of this growth to be captured by NCO. In Figure 3 we can see that currently 90% of the total containers moved in Sines where using the rail mode which leads us to conclude that there is a considerable probability that the containers that come to Sines to go to Madrid will in fact use the rail mode13.

We have also inquired Luís Simões to assess how many containers they move to Madrid from Sines by road and the answer was that only Tons were moved, not containers. See Annex A, Luís Simões. (2009)

Page 20

State European Investment Bank Loans

Equity/Shareholders • CP • REFER • Government • Logistic Operators Simões) • Port of Sines • Other investors

Buy

Debt

(ex:

Bonds • Issue Fixed rated Bonds

Owns

Build new lines Remodel existing lines

the

new

Investors

Luís European Funds

NCO Special purpose vehicle

Design the alternative paths and phases for the service it will provide

Buy

and

remodeled lines

Receives payment for owned

Operates container freight cargo between Lisbon/Sines and Madrid as well as possible intermediate services

Other costs: • Maintenance costs • Operational costs • Outsourcing services Other revenues • Other services (inventory manage, administrative, etc)

infrastructure rented to other possible operators. Figure 21 - PPP Scheme

Page 21

Receives ton/km

for

Possible payments to CP for use of its rolling stock

Pays fees to REFER owned infrastructure that NCO might use in its routes.

To make sure that this growth is captured, and since the main goal is to connect Sines to Madrid, the connection from the border to Madrid as to be reliable and efficient, otherwise this can hinder the success of the project. 6.3.3. Oil Price This is significant part of our operational costs but we also consider that high oil prices can be an advantage to us because it will increase much more the price/costs road transportation. Either way, itâ&#x20AC;&#x2122;s a significant factor to take into account in terms of uncertainty. 6.3.4. Availability of partners As seen in Figure 20, the private sector (port of Sines, private logistic operators and other private investors) represent around 30% of the total equity of our project which means it is important to attract them to invest in the project to cover the required NCO financial needs. By having the Government involved in the project with around 70% of equity (direct and indirect) as well as the probable main bond buyer this represents a strong incentive for privates to invest in the project. 6.3.5. New infrastructure developments (future rail, highways, ports) From a national perspective, this is a risk that can be somehow mitigated since the State is directly involved in the project and it will, in principle, not build other infrastructure that can cause instability in NCO but this can in fact happen. There is also the possibility that Spain can build new infrastructure, for instance, a new or expanded port, or can create the conditions to have very competitive prices in existing ports, which can cause the Sines demand to reduce substantially and shift to other ports. 6.3.6. Technical developments in rolling stock These developments can be either an advantage as well as a disadvantage. An advantage due to the fact that there are some advances that can facilitate the movement of cargo by container (like refrigerated containers or fast loading and unloading mechanisms for rail container cars) and a disadvantage if new developments arise in the road haulage sector that can shift the container cargo movement to trucks.

Page 22

6.3.7. Regulatory framework Again, depending on the framework implemented, it can either be an advantage (more EU or national restrictions on the road haulage sector) or disadvantage (for instance, if it is allowed that huge articulated road vehicles are allowed to operate) for NCO operations. . 6.3.8. Social/Political unrest It has to be considered but both Portugal and Spain have had for the last decades a stable period of stability.

6.4. Risk Allocation Over leverage and decoupling between shareholder and stakeholders interests as been a source of many problems in todayâ&#x20AC;&#x2122;s financial (and the restâ&#x20AC;Ś) world. So, when setting up the financial structure one main concern is that the risk of the project should be mainly assigned to the shareholders/stakeholders that will pool their resources and form the bulk of the equity cake. The objective is to have an integrated approach to Financing, Designing, Building and Operating. This implies that the design, construction, and operational risk will be shared by the shareholders and it is in their best interest to turn the project a successful operation. Since they are equity holders and share the risk, they will have an important role in mitigating this risk, which they can accomplish by making use of the NCO services as well, adjusting their supply chains and operations to take full advantage of NCO. In many PPP arrangements the risk of the project is split in Design, Construction, Commercial and availability with different partners coping with different risks. This is not our approach, each partner is accountable according to its share of equity. So in this case the private sector represents 30% of the total equity which, according to some experts14, is considered a good allocation of the risk. Since this project is of strategic national interest, it is paramount that the State supports it. The State will have a part of the equity share (that will only be repaid if there are available funds after all other private investors are paid), and also be one of the main bond buyers. Nevertheless, the intention is that, at least the bonds will be repaid at the end of the project with a large amount of money coming from the earned interests. This considerations plus the fact that the EIB is giving a considerable loan (that should be paid in the project lifecycle) that, in case of default the State can be called in to assume the debt, implies that a substantial part of the financing and commercial risks Professor Werner Rothengatter, which gave a session about financing of PPP projects, stated that 30% of equity and 70% of Government fund was not only a good proportion as it was the one being used in the Stuttgart 21 project.

Page 23

are within the State side, so in fact the private risk is not exactly 30% as their share indicates. Still as the results of return on equity in the “low demand” scenario show they still bare a considerable commercial risk. As well, the State will also assume the “Bureaucratic Risk”, that is getting environmental (and other required) licenses for the possible new links to be constructed.

6.5. Performance targets and quality control This will be a DBOO with a possibility of transfer at the final of the 24 year concession period. What we propose is to devise a performance mechanism and metrics that can evaluate how is the project running. If after the 24 year period the project is performing well according to the defined metrics then it should not be transferred to the state but instead a new concession period should be awarded. This is another measure that creates the incentive for NCO to be focus, productive and efficient. The performance indicators and quality measures we will use are: •

Share of the market –Setting different targets for freight movement to Spain, above and below 400km in Portugal;

•

Availability of infrastructure we own and services we provide, with the exception of third parties causing the lack of availability (this applies to the services since we will use infrastructure we don’t own).

•

Capacity to cover the debt obligations to EIB and bond holders and provide profits to the private shareholders, with the government being awarded its part of the profit if and only enough funds are available.

•

Ability to reduce total CO2 emissions due to freight traffic movement.

•

Reduction of travel time between certain established points, (ex: Sines-Madrid)

6.6.Externalities In our assessment, we have no considered the externalities explicitly but, with the considerable involvement of the State in the whole project, it is implicit that, although it may not get direct profit from the project itself, there are substantial positive externalities that will be realized: •

CO2 emission reduction

•

Less energy consumption

•

Economic development of the region of Sines and its hinterland

Page 24

•

More tax revenues from operations, land developments, contracts with major logistic players, etc.

•

More efficient logistic operations inside Portugal and better connection to Europe through Spain.

•

Attraction of industries that rely on the reliable and efficient logistic operations, which can be provided by Sines and NCO.

7. Conclusions Even though this report tackles all the main issues necessary to set up this PPP there were some important items that weren´t considered like the Cost of Capital, namely the weighted average capital cost or the impact of taxes in the financial structure. The fact that with our results the project cannot be sustained without some form of subsidization is a result of the infrastructure costs being internalized, that is not the case of most Rail projects, in fact with the outcomes we obtained even part of those investments could be covered. This vertical approach allows a complete accountability of the project benefits and costs, and this is also the business model employed in countries with the most efficient and effective rail freight sectors (USA, China or Germany are examples). For instance, in the base case scenario if the costs of maintenance with the lines are not accounted (as we did) the project would give a very positive result, and not the numbers we achieved. We also focused our attention exclusively in the Port of Sines, and the movements from that Port to Madrid, but there are other Ports that would benefit from this line, other destinations besides Madrid and other sources of demand besides the Ports. If this is considered we would have more stakeholders (the Ports of Lisbon and Setubal…) and more sources of revenues. Exactly because of the importance of this infrastructure to the Ports maybe there share in the Project should be higher, and if some shipping lines were included it would be even better, this way the project would be more than a rail line it would be a part of a transatlantic supply chain from Madrid (and even France…) to the Americas and Africa. Although care was taken, it is necessary to tune better some of the parameters we used, namely the capacity we considered for the lines and the associated costs. Further alternatives have

Page 25

also to be considered, namely construction of the line through Poceirão and not directly to Casa Branca. Additional modeling and optimizing tools should also be employed. Our main conclusion is that this is a Project worth studying more, that with the proper engineering, institutional and financial framework can deliver great returns per se, even financial, not to mention the externalities and direct benefits for the Maritime and Logistical sector. And if this work can in any way help to deliver this project it will already be very useful.

8. ANNEX Annex 1- Luís Simões. (2009.). QuestõesLuísSimoes - MIT Portugal.doc. Annex 2 – Magazine articles Annex 3 – Data from CP

9. References EC.

(2009,

04).

Transport

Priority

Retrieved

Projects.

from

Transport:

Retrieved

from

http://ec.europa.eu/ten/transport/maps/doc/axes/pp16.pdf EIB.

(2009,

04).

Individual

Loans.

http://www.eib.org/products/loans/individual/index.htm Luís Simões. (n.d.). QuestõesLuísSimoes - MIT Portugal.doc. Moura,

(2009,

March

23).

Transportes

Revista.

Retrieved

from

www.transportesemrevista.com Pereira, P. (2006, January). Transportes em Revista. Retrieved from www.transportesemrevista.com

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