REPORT ON FINDINGS FROM CASE ANALYSES

Lessons learned from five case analyses validated in expert interviews and by the Advisory Board September 26, 2013

1 Content

Overview of how findings from case analyses guide future roll-out plan

Summary of lessons learned from case analyses

Defining features of the Scandinavian HSR project

Appendix: Case analyses

2 Findings from the case analyses are filtered by defining features to identify the most relevant hypotheses for roll-out plan

DEEP DIVE ON THE NEXT PAGE

Lessons learned from the Defining features of the Key questions for roll-out five case analyses Scandinavian HSR project plan 1. Coalition Building • Project characteristics 1. Coalition Building? 2. Business case ÷ • Unique contextual = 2. Business case? 3. Organizational model factors 3. Organizational model? 4. Financing model 4. Financing model?

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Summary of lessons learned from the case analyses (1/2)

1 Coalition Building 2 Business case Identifying the problem and key issues Getting the demand right • A clear burning platform from both public (e.g. job creation, free • Be extremely conservative on passenger forecasts (revenue) and capacity for freight and passengers, limited finances, use independent organizations to present the most realistic environment, crises) and private actors (market demand, core business case upfront industry interests) is extremely important to get decision-makers to feel urgency Getting the supply right • Environmental concerns can play a decisive role particularly • Conduct thorough competitor analyses – in terms of new regarding the construction entrants, technologies and competing alternatives including potential infrastructure projects that can jeopardize the business Mobilizing key players case, e.g. price wars • A broad political coalition with long-term commitment is • Business case can be strengthened by carefully considering necessary to create stability both: I) domestically across political connectivity to both existing and planned transport parties and II) internationally between states infrastructures, including conventional railway, metro, etc. `• One or two leading individuals per country with strong passion ` for the project as well as credibility across sectors and parties is Mitigating risk needed to mobilize a winning coalition • Be critical towards promises on construction time and costs from • Key industrial groups can be vital to lobby and push for actors with vested interests like banks, contractors, train government action, e.g. ERT, banks, etc. manufacturers etc. • Scope and mobilize the project inter-governmentally from the • Decrease operational risk by: I) considering price parity with beginning including sequencing needs from domestic alternatives , e.g. ferries, and II) using proven operators and infrastructures, e.g. Great Belt > Öresund technologies , e.g. trains, signal and communication systems • If state subsidy on tickets is given, it is important to have a clear Key activities plan of distribution between potential operators in place prior to • Conduct all necessary feasibility and viability analyses before operation political decision making to: I) avoid getting an early “No” due insufficient analytical foundation and II) not rush through design, tender and construction process – early Questions to the S8MC team: mistakes can become very expensive - Any questions to the findings? - Any findings you find misleading 4 or missing?

Summary of lessons learned from the case analyses (2/2)

3 Organizational model 4 Financing model The ownership structure Investment type and structure • Make one, cross-border organization in charge of the project from • Purely private finance is often too expensive - use state guarantees the beginning with joint and separately liability to increase creditworthiness and • Having the states as project owners is crucial: I) in dealing with decrease: I) risk for investors and II) interest on loans strong environmental concerns and II) to ensure that decisions on • Stipulated government loans can be a way to increase the infrastructure planning, construction and potential upgrades is attraction of private investors, e.g. by making repayment of loans contractually possible depend on operators profit

Governance Alternative funding sources • Ensure a strong, unified organization with the right competencies • To avoid use of “new tax-payer money”, consider: I) indirect state and arm’s length to run the project – in terms of handling investors, grants by bundling the financing with existing state-owned contractors, operators etc. companies, e.g. Sund & Bælt; II) ensuring revenues from other • Dispute Review Boards can settle contractual conflicts revenue streams, e.g. cars, ferries , etc. `• Close collaboration or ability to bypass affected cities `• Including “land grants” and property development around new stations (“New Town”) offers funding opportunities primarily in Contracts and negotiation urban areas • Acknowledge and dovetail diverse country interests in cross- • Consider state gurantees to: I) avoid competing infrastructures , II) border projects before entering any agreements, e.g. Fehmarn Belt, ensure alignment on existing public offerings, and III) to optimize land construction at Kastrup paid by OC access and reliabibility through perfomance payment to operators • When using PPPs, ensure contractual alignment on project objectives and incentives between key players – investors, Cost overruns contractors, operators e.g. through a BOT or DFBM model • If contractual arragements are not in place to ensure on budget and • If BOT model is chosen ensure that it meets state standards upon on time construction, the risk for higher financial costs and cost concession expiration and transfer to the public overruns is high • Crucial to get the contractual arrangement right from the beginning by using an proven lawyer to ) balance risk, II) avoid long term social ramifications of weak contracts; and Questions to the S8MC team: to manage the contractual complexity - Any questions to the findings? - Any findings you find misleading 5 or missing?

Defining features of the Scandinavian HSR project Defining features for the Scandinavian context HSR project characteristics • Cross-Border project with long distance, few stops, complications from archipelago north to Gothenburg • Small urban populations: Oslo (~1.5M), KBH-Malmö (~3M), Stockholm (~2M)

Current and planned transport offerings • Current transport infrastructure offers fair/good alternatives including train (slow); highways for car and bus; ferries (slow); cheap, fast and frequent flights

`• Incremental national transport plans to upgrade existing railway (e.g. DK one-hour plan; Götalandsbanan, Vestlänken, etc.) • However, increasing capacity challenges and congestions for road freight on Öresund Fixed Link

Political, economical and regulatory context • Slow, but positive economic growth with strong focus on job creation • Big governments with state ownership and regulatory power over railway and environment • Long tradition with public finance, however, budget constrains and low interest rates has led to growing interests for PPP models • Diverting national interests and needs for HSR (e.g. DK intersted in getting traffic on Fehmarn)

6 Based on the learnings from case analyses filtered by the project context, the key questions guiding the roll-out plan are identified Key questions for roll-out plan 1. Coalition Building 3. Organizational model • Where is the “burning platform”? • What should the cross-border org. look like? • What are the environmental constrains? • What would it take to get the states as project • Who could be the key leading individuals? owners and the affected cities to collaborate? • Who should be included in an industry-led • What would it take to dovetail nat. interests? lobby coalition? • What is the optimal contractual PPP • What analyses must be done prior to political structure? lobbying and decision making? • What lawyers have proven track-record?

` 2. Business Case 4. Financing model • What are conservative estimates of passenger • What does it take to get state-guaranteed and forecasts, construction costs and time? stipulated government loans? • What are the current and future alternatives? • What indirect state grants is worth pursuing? • What links to other infrastructures are needed? • What state guarantees is needed in terms of • What should be done to mitigate operational competing alternatives and access/reliability? risk in terms of price wars, new entrants and • What contractual arrangement is needed to new technologies? avoid cost overruns as well as on budget and • What are the possible funding sources from the on time construction? states in terms of grants and subsidies?

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Appendix

8 The five case analyses

. Øresund Fixed Link . Eurotunnel . Arlandabanan . HSL Zuid . Copenhagen Metro

9 Each case analysis is structured in four dimensions

1 Coalition Building

2 Business Case

3 Organizational model 4 Financial model

10 A brief project overview of the Öresund Link

Project infrastructure Project facts Characteristics • Project: 16 km fixed link with two tracks rail and four-lane motorway via tunnel and bridge between Denmark and Sweden • Max train speed: 200km/h

Key events • Government agreement: March 1991 • Total duration: 8 years • Construction time: 5 years incl. railway • On time: Yes, 9 months ahead • Opened to traffic: July 2000

Key financials • Construction cost: ~ DKK 30.1B* • Cost overrun: Not from time of contract Yearly result (2012): ~ DKK 78.8M • Daily vehicles (2012): 18,486 • Train passengers p.a. (2012): 11M • User forecasts: Underestimated

* Construction cost includes land works and coast-to-coast. Construction cost for coast-to-coast alone amounted to approximately DKK 15B 11 SOURCE: Orestad.dk, Expert Interview; UCL Omega, 2010 The coalition behind the Öresund Link was characterized by top industry leaders and Social Democrats both in DK and Sweden (1/2) DEEP DIVE ON THE NEXT PAGE

Key stakeholder interests Timeline with key coalition-building events Outputs

Major events and initiatives Year 1 Politically Danish Government: 1. Broad political coalition including . Great Belt Link first priority First reports in Sweden and DK on potential benefits 1950s both Social Democrats in . Social Democrats in opposition Commitment by Danish and Swedish government to government (Sweden) and in promoter of fixed link, but opposition (DK) collaborate on Øresund link at Nordic Council. 3 1953 reluctant of including road years later, Malmö decides to reserve land for link 2. Bilateral Agreement with key Swedish Government: Bilateral agreement to build fixed link was signed, 1973 preconditions including: ▪ In favor, but key preconditions: but the plans came to a halt due to the energy and I. First Great Belt Link in DK I) toll-financed, not tax-payer; economy crisis, as well as DK’s membership of EC II. Toll-financed, no state grants1 II) acceptable environment 1984 III. Environmentally acceptable costs; III) Fehmarn Belt Link ERT presented the ‘Missing Links’ report IV. Swedish guarantee to ▪ Minister of Environment Olof transport railway goods via DK 1986 Johansson: strong opponent, DK Parliament decides to build Great Belt Fixed Link, V. DK to actively work with left position as consequence Germany on Fehmarn Link which had been a precondition for the Oresund Link 2 Government entities 1991 . Appointed DK-S Oresund Bilateral Agreement to build a Oresund Fixed Link 3. Led by Volvo’s CEO, Pehr Delegation: promoters Gyllenhammar, the European . DSB & SJ: promoters Øresund Consortium Agreement 1992 Roundtable of Industrialists 3 Interest groups mobilized strong lobby efforts to Construction of land connection of 9km highway build ‘missing links’ between ▪ ERT, ScanLink, and Chamber of 1993 Commerce in South Sweden: very and 18km railway begins and Öresundskomiteen is Scandinavia and Central Europe active promoters formed

▪ Stoppabron: 30 environment and 1995 Construction of coast-to-coast connection begins labor organizations against bridge

1 The Öresund Link is toll-financed in principle, however the states have contributed to the funding via state-guaranteed loans and feasibili ty studies 12 SOURCE: Expert Interviews; Oresundsbron website; Oresundstid 2009; UCL Omega, 2011 The coalition behind the Öresund Link was characterized by top industry leaders and Social Democrats both in DK and Sweden (1/2)

Key players in the coalition building process Takeaways

• Political: End of Cold War and Sweden’s negotiation for membership of EC implied a new regional balance Key Success Factors Context • Economic: Industrial sector in Copenhagen and Malmo was challenged by increasing globalization • Public opinion: increasing environmental concerns and fear of loosing jobs 1. Broad political coalition across borders was enabled by reaching alignment between the Social Phases Year Key players Key activities Output Democrats in government in Sweden and in opposition in DK 1950 • DK and Swedish government • Reports in Sweden and DK • Bilateral commitment to • Nordic Council investigating potential benefits collaborate on a 2. Differences in national interests were • Malmö City • First efforts to create bilateral potential Oresund Link overcome by : I) waiting till Danish governmental collaboration via Nordic Council Great Belt Link was in place, II) DK • Malmö prepared areas for future • Bilateral agreement commitment to build Fehmarn Link, fixed link came to halt due to the III) Swedish guarantee of annual 1973 energy and amount of railway goods through DK

Conceptualization economic crisis 3. Coordinated project advocacy by top industry leaders in ERT in across 1983 • European Roundtable of • ERT established by initiative of PG • Heavy industry focus on national borders put high pressure on Industrialists (ERS) Gyllenhammar, CEO of Volvo integrating European • Oresund Delegation (OD) • ERT publish ‘Missing Links’ report transport sector government indicating strong demand appointed by Ministries of Finance, • OD reviewed earlier reports and • Decision to build Great Communication and Transport in began focus on what became a Belt Fixed Link removed Problems to avoid

study and and study both DK & Sweden critical issue : the effects of the DK policy lock - 1. Pay attention to key priorities in each feasibility • Railway companies DSB and SJ Sound’s water flow Pre • Lobby by railway companies country’s domestic transport priorities to include potential preconditions such as building a “Great Belt Link” 1987 • Oresund Delegation (OD) • OD recommended combined road and • Bilateral Agreement to 2. Impossible to mobilize support • Social Democrats in Sweden and DK, rail link with two key premises: I) build the Oresund link without one or two leading individuals in particularly Sven Auken in DK economically profitable without direct including : I) toll-

• The two governments state grants; II) no impact on water financed, no state grants; 3. The project became controversial in flow II) Environmentally Sweden because test of EIA and • Swedish Social Democrats voted acceptable; III) DK to compliance with environmental internally in favor of combined road build Fehmarn Link; II) and rail link after long conflict period domestic legislation was not

and and negotiation Swedish guarantee to Project advocacy advocacy Project conducted before bilateral agreement • Swedish delegation put pressure on transport a yearly amount and became challenging in Sweden 1991 DK by threatening to use ferries for of railway freight via DK rail freight bypassing DK/Great Belt 13 SOURCE: Expert Interview; Oresundsbron website; UCL Omega, 2011

The business case of the Öresund Link depends on user revenues, mainly road toll, due to decision to keep the project out of state budget

Road Rail Revenue Cost Daily Road and Operational Financial Train Work- Key characteristics of business case* Avg. toll passing rail/total cost and Financial cost/ Yearly rer car vehicles Pass. force revenue revenue cost revenue result Major events and initiatives Year Euro ‘000 M pers. Staff M Euro M Euro ‘000 Euro In % M Euro . User fee structure instead of direct state grant Inauguration of the Öresund Bridge N/A N/A . Fixed yearly rail fee 2000 N/A N/A N/A N/A N/A N/A N/A Unique N/A N/A . Price parity between toll and the features 2001 22,4 N/A 4,9 152 56 122 109 89 -75 Helsingør-Helsinborg ferries 42 41

21,4 N/A 5,4 163 57 130 102 78 -136 2002 41 38 . Most of revenues come from cars The initial prognoses for passing vehicles were too optimistic and 2003 20,8 10,4 5,7 170 59 137 105 76 0 . Rail revenue is a yearly fee settled 39 38 Business with the two national railway disappointed in the first years 2004 20,3 11,8 6,2 168 61 146 91 62 -84 rationale administrations that in turn 38 36 charge the train operators Previous traffic growth of 10-17% fell to 2005 19,5 13,6 6,6 163 63 155 99 64 -73 5% due to changes in housing prices and 36 37 . Construction risk shared between labor markets in Malmö and CPH 66 168 102 61 76 construction companies and 2006 18,8 15,8 7,8 173 34 38 owner 68 185 . Operation risk shared by owner 2007 18,5 18,4 9,7 181 117 63 70 Risk Opening of the Citytunnel in Malmö 31 41 and national rail admins: The two 68 194 118 61 -136 rail admins could not agree on one 2008 19,2 19,4 10,7 177 31 38 shared risk structure, so OC made 68 194 two contracts with more risk to OC Passing vehicles decreased by 3%. 2009 102 53 -44 19,5 19,5 9,5 178 31 36 . Operation contracts with two separate agreements with the Freight transport reached more than 69 204 99 49 -8 2010 20,8 19,4 9,7 178 30 38 national rail admins, since 50% of DK-S freight transport market. Rewards 68 208 Banverket and Banedanmark 2011 21,0 19,1 10,4 181 97 47 -143 could not agree Daily train passengers reached 30K and 30 39 was not influenced by the economiic 69 215 91 42 11 crisis 2012 21,8 18,5 11,0 180 30 39 Socio . Increased access to cheaper 2013 economic housing and labor markets for Future Fehmarn Link is expected to lead Sum up benefits commuters; freight to Germany to a 5.5% traffic growth on Øresund ▪ The link depends heavily on road toll revenues, while the fixed rail fee only Takeaways amount to a lower and decreasing share of total revenues • The decision to finance the project outside the state budget by user fee structure required a viable business economic model, rather than socio-economic. 14 *The yearly financial results have been converted with constant currency, Euro = DKK 7.44 SOURCE: Expert Interviews; Oresundsbron website; UCL Omega, 2011 Öresund Consortium is a unique bi-national state-owned company with responsibility for design, construction, operation, and financing

Organizational characteristics, ownership, and operation structures Key characteristics

Phases Design Build Own Operate 1. OC is a unique and Parameters successful cross-border organization Actors • The Øresundsbro • Öresund Tunnel • 50-50% DK- • OC Consortium (OC) Contractors Swedish state • Banverket/Trafik 2. The secret to OC’s success was responsible for • Öresund Marine via Sund & Bælt verket lies in the choice of planning, building, Joint Venture and SVEDAB • DSB/Banedanm organizational model: operating and • Sundlink ark 100% state-owned single financing • NRA and Peab legal entity run as a Public private company in all aspects (law, board Private* management) and with high competence and Ownership model upon construction DK state-owned responsibility for design, Sund & Bælt Swedish state-own construction, operation Vägverket Banverket Holding A/S % Ownership and financing 50% 50% 3. Having the state as sole A/S Øresund SVEDAB AB shareholder was critical to 50% 50% ensure environmental Oresund concerns were met Consortium

Operations & Marketing & Finance Treasury Infrastructure Service Sales

* OC’s organizational model is unique, since it both state-owned and funded via state-guaranteed loans, however run as a private company 15 SOURCE: Øreund Consortium 2008; UCL Omega 2011; expert interview The choice of a single and competent organizational model enabled OC to manage contracts effectively with alignment on key objectives

Structure of main contracts Key contractual characteristics and challenges

Public Characteristics Swedish and Private • Danish Lucrative mix of: I) state-ownership that enabled high guarantees Governments and low capital costs, and II) staffed, organized and operated as a commercial enterprise made it effective and less bureaucratic • OC’s contract management strategy focused on aligning owner and contractors on key objectives, e.g. via: I) Milestone Concept with financial reward if goal is met; II) Dispute Review Boards Öresundsbridge Consortium

Challenges Railway Construction operation & • Meeting the legislative requirements of two states is highly complex maintenance and very time consuming • Environmental issues is particularly important and costly in terms of EIA investigations as well as regulatory and political requirements National • Technical challenging and costly that the two countries use two Bridge Tunnel railway different signal, communication and train systems - instead of one contractors contractors admins unified system, parts of these systems have been duplicated • The National Railway Administrations have been perceived as very Dumez, Pihl & Søn, COWI, Hochtief conservative when it comes to investing in new technologies for rail John Laing, NCC, Banverket Skanska, Højgaard infrastructures. However, today, DK is among the first-movers when it Royal Boskalis Banedanmark & Schultz, VBB* comes to investing in ERTMS-based modern signal technology. Westminster* Takeaways ▪ A state-owned, single legal entity with competent staff has many benefits ▪ Using incentive structures and Dispute Review Boards can be an effective in aligning owner and contractor objectives in the construction process * Only names on co-contracters are listed 16 SOURCE: Oresundsbron website; Expert Interviews; UCL Omega, 2011 The Öresund Link financing model combines state-guaranteed loans to be paid by collection of road tolls and a yearly fixed fee for train operations

Investment Investment structure Investment type Break down Percentage Million DKK ▪ State-guranteed loans Public ▪ Repayment period: ~25 years Private ▪ Currency of loans: DKK, SEK, EUR. Total Debt Government EU Total

loan

▪ No direct state subsidy apart from seed capial of DKK 50M for OC from 50 Equity Øresund A/S. However, this amount came from the original seed capital Construction from Great Belt via Sund & Bælt* State seed funding Total ▪ All debt is state-guaranteed by the Govern two states jointly and separately ment benefits DK Sweden Total State –guaranteed loans Total ▪ State-guranteed loans financed construction costs, which is to be repaid by revenues from road tolls and yearly fix fee from railway National ▪ The bonds issued by the Øresund Consortium highest creditworthiness (AAA) due to Rail governmental guaranteed loans with joint liability by the Danish and Swedish state Admins ▪ Up to 25% construction cost overrun Compared to the original project proposals, Total however upon timing of the initial contract, the construction budget was kept from the Key bridge, but the land became more expensive leading to lack of capacity at Kastrup St. issues ▪ Agreement between the municipality of Malmö and Euroc regarding land use and connecting infrastructure provides an indirectly funding source. It is difficult to characte Operation estimate what the deal meant for the funding of the project, however it must have ristics meant a substantially lower cost for land acquisitions.

Takeaways • A strong financial position was possible due to state-guaranteed loans with joint and separately. This minimized the capital DK Sweden costs for loans on the credit markets significantly. *The reuse of seed capital from the Great Belt Bridge to the Öresund bridge meant that no new capital was necessary in DK 17 SOURCE: Expert interviews, Oresundsbron website 2013; www.logistikkforeningen.no/file.php?id=601 A brief overview of the Eurotunnel project

Project facts Project infrastructure Characteristics • Project: 50.5km rail in the two tunnels plus a separate safety tunnel. Cars and trucks are carried on railway carriages. • Operating train speed: 160km/h

Key events • Bi-lateral treaty : 1986 • Total duration: 14 years • Construction time: 8 years • On time: No, 12 months delay • Opened to traffic: 1994

Key financials • Construction cost: ~ £9.35B* • Cost overrun: ~ £4.35B (87%) • Turnover (2012): ~ €993M • Passengers p.a. (2012): ~18M • Passenger forecast: Overestimated

* 1994 prices 18 SOURCE: UCL Omega, 2008 An early bilateral attempt by the two governments failed due to public spending concerns of the new UK government … (1/2) DEEP DIVE ON THE NEXT PAGE

Key stakeholder interests Timeline with key coalition-building events Outputs

Major events and initiatives Year 1 Politically ▪ The British Government 1. Thatcher creates a new – Shifting UK governments both France & UK signs tunnel treaty, but it was coalition with Mitterand and Labour (Wilson)and abandoned by the New Labour Government lead by 1973 the private bank sector Conservatives (Thatcher) had Wilson in UK in 1975 an interest in a tunnel link, but worried about the cost Thatcher becomes Prime Minister and brings the 1979 2. Private finance becomes a ▪ The French Government fixed link idea back on the table with Mitterrand publicly viable opportunity – President Francois Mitterrand through the banks’ report, was keen on a fixed link in the 1982 Anglo-French Report recommends rail link which is also used to tone form of a bridge down critics

Report by 5 banks suggest complete private 1984 Government entities 2 financing model for fixed link because Mrs. Thatcher ▪ British Rail (BR): Less in favor was adamant that no public finance should be used 3. The fixed link project becomes ▪ SNCF (French railways): More in an ideological prestige project favor of the Tunnel than BR 1985 French & UK governments invite for a concession to under Thatcher and Mitterrand in regard to applying private 3 Private sector bid 1986 finance ▪ Banks: Most were interested in Anglo-French consortium CTG-FM is granted investing 1987 ▪ Ferries: Heavily against the concession to operate the Eurotunnel

channel link and publicly A passenger and freight ferry capsized and sank complained about the potential between FR and UK with the loss of 197 lives, which loss of 6000 jobs and safety questioned the safety of ferry transport issues with tunnel fire

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SOURCE: UCL Omega, 2008; Expert interviews; The Institute of Economic Affairs, 2007 … However the needed political momentum was created by 5 banks presenting a viable private finance model (2/2)

Key players in the coalition building process Takeaways

• Political: Focus on deregulation and privatization Key Success Factors Context • Economic: Ongoing economic recession • Public opinion: Skeptical after the first attempt came to nothing and focused on jobs 1. Strong coalition with banks that saw a financial interest in moving the project forward and were willing to invest in a Phases Year Key players Key activities Output pre-study to preserve political momentum and indicate to the equity 1973 • The first plans for a cross- • An Anglo-French treaty signed in 1973 to • UK and France again on market that the debt financing was English Channel link dates back construct a twin-bore rail tunnel was lapsed track in terms of a fixed “locked up” to 1753 without ratification by the British link either a bridge or a • Prime Minister Harold Wilson, Parliament, when the Conservative tunnel if private finance 2. Aligned heads of state were Labour government lost elections in 1974 can be used instrumental in moving the project • Prime Minister Margaret • Thatcher brings the idea back in the early forward with high speed Thatcher, Conservatives 1980s, but only if possible with private • 3. The private tunnel-project matched the Conceptualization President Francois Mitterand, finance Socialist party overall public opinion for privatization

1982 • Prime Minister, Margaret • In 1982 the two governments commissioned • Political momentum Problems to avoid Thatcher, Conservatives a report recommending a Channel rail link given l) the governments’

• President Francois Mitterrand • In 1984 an Anglo-French coalition of five report and ll) the private

• The “Arranging banks” banks presented a report on how a twin- financing proposal for a • The channel ferry operators bore rail tunnel could be entirely privately 1. Political risk increases significantly with tunnel lll) the fact the narrow political coalitions

study and and study financed - banks constructed a feasibility • The banks formed an Anglo- French consortium to carry out Pre 2. Important to be critical towards consortium, CTG-FM, together with the the project largest construction companies in UK and FR information from actors like e.g. banks that have a vested interest in the

1985 project, as it later showed out that the • • The “Arranging banks” In 1985, the governments issued an • A treaty was signed projections on l) construction cost and ll) invitation for bids for financing,

• The CTG-FM • The five banks won the traffic volume were highly optimistic

• The UK Government construction, and operation of a fixed link bid by l) pro-actively • The French Government without access to government funds or issuing a report on the • Alistair Morton, Co-Chairman in guarantees private financing Eurotunnel • The CTG-FM’s Eurotunnel Project won out of opportunity and ll) 10 proposals due to low risk and low cost presenting the proposal

and and negotiation • A bilateral treaty authorized the Project advocacy advocacy Project with lowest cost and risk construction of the Eurotunnel and granted 1987 CTG-FM the concession to operate 20 SOURCE: UCL Omega, 2008; Expert interviews; The Institute of Economic Affairs, 2007 After significant financial and organizational restructurings and expansion into new business areas Eurotunnel eventually became profitable

Revenue Cost Operational Financial Profit Financial cost/ (yearly Key characteristics of business case cost and Passengers revenue cost revenue result) Major events and initiatives Year M persons M Euro ‘000 Euro In % in M Euro . Finance-build-operate-transfer Officially opened by Queen Elisabeth II model with 99-years concession 1994 and President Francois Mitterrand on Unique period 2000 N/A N/A N/A N/A 0 May 6 1994 – 1 year delay N/A features . No Government role in tunnel Critical shareholder group takes over project – only the connecting lines 2001 N/A 862,0 64,5 64,5 132 in UK and FR the Board in April 2004 and appoint 593,0 new CEO and Chairman 874,0 . Manage and operate the tunnel, 2002 N/A 61,6 61,6 443 . Revenue from: Shareholders voted for a deal to half 588,0 the debt in exchange for 85% equity – – Vehicle shuttle service, 2003 N/A 838,0 55,1 55,1 -1,956 Eurostar, BR, SNCF and other but failed in August 375,3 Business traffic August 2 2006 the company was placed rationale 2004 N/A 789,0 55,4 55,4 -836 . Business expanded to include rail into bankruptcy protection by a French 378,2 freight and ferries to remain court for six months 2005 15,7 790,9 63,9 63,9 -323 competitive, gain market shares Financial and organizational restruc- 353,8 and increase revenue turing. CitiGroup, Deutsche Bank and 15,7 830,4 58,0 58,0 -209 . Both financial, construction, and Goldman Sachs provides £2.8bn of 2006 340,6 long-term funding operational risk resides with 775,0 operator 2007 16,2 35,9 35,9 1 Risk Eurotunnel announces first ever net 336,0 . UK government failed to deliver profit of €1M in 2007 748,0 2008 16,1 33,3 33,3 40 the promised HSR link to London Eurotunnel issues first ever dividend of 327,0 causing low demand €0,4 per share following a €40M profit 653,0 . Right to build and operate the 2009 16,1 29,4 29,4 7 Eurotunnel plans to issue 119.4M new 321,0 system for 99 years from 1987 shares to gain capital and reduce debt 737,0 with a 59% tax from year 2052- 17,0 27,8 27,8 -58 2010 397,0 2068 Eurotunnel acquires Veolia Cargo with Rewards . Free to determine commercial SCNF 875,0 31,8 31,8 11 2011 17,5 462,0 policy/strategy incl. tariffs Eurotunnel gains 7-years contract for . No competing fixed link before the operations of Port of Dunkerque’s 993,0 2012 18,3 27,4 27,4 34 2020 200km rail . Connectivity gains between UK, 562,0 Socio Eurotunnel acquires British rail freight 2013 France and Continental Europe company, FIRST GBRf Sum up economic . Environmental benefits from ▪ Eurotunnel continuously faced bankruptcy until 2007 due to high benefits decreased ferry and air transport Eurotunnel takes over responsibility of competition, overestimated demand particularly for car trains, three channel ferries from SeaFrance ineffective organization, delayed links to Amsterdam and Cologne Takeaways ▪ Expansion into new business areas along with organizational and ▪ The operating success depended heavily on l) construction costs, ll) traffic volume and lll) price level - all financial restructuring have made Eurotunnel profitable since 2007 of which fell out negatively 21 ▪ Expansion of business to include freight and ferries together with restructurings allowed profit creation SOURCE: UCL Omega, 2008; www.Eurotunnel.com; The Institute of Economic Affairs, 2007; Expert interviews Eurotunnel was organized as a complex bi-national BOT project that was restructured into a more simple and efficient French company

Organizational characteristics, ownership, and operation structures Key characteristics

Phases Design Build Own Operate 1. Eurotunnel was restructu- Parameters red to one French company, in 2006 due to the Actors • Eurotunnel (at that • Eurotunnel • Eurotunnel (ow- • Eurotunnel time called CTG-FM) • TML nership for 99 years • Until 2006 a bi-na- inefficiency of being a bi- • TransManche Link • Atkins thereafter owned by tional company, but national company (TML) (Translink, UK • Société d’Etudes the French and UK it was highly ineffec- and Transmanche Techniques et government) tive due to bureau- 2. Private ownership and Construction, FR) Economiques (SETE) cracy, duplication operation has been • Inter-Governmental • Louis Berger and complexity and extended in 1997 to 99 Commission (ICG)* Associates was united in one years due to high Public construction costs and debt

Private 3. Complex design and building phases due to lack Ownership model upon construction** Public ownership The Channel of trust between Eurotunnel Private ownership Tunnel and TML made Eurotunnel hire first Atkins and SETE to oversee the process, but Eurotunnel found that the two were too 100% 100% close to TML and hired Louis Berger Associates as a third Infrastructure Operations ‘maîtres d’oeures’

Purchase & Management Train & maintenan- & shuttle ce of rolling Maintenance service stock

• The ICG was setup by the two governments to oversee and supervise on all matters concerning construction and operation of the fixed link 22 ** Detailed ownership structures in appendix SOURCE: UCL Omega, 2008; The Institute of Economic Affairs, 2007; Expert interviews Complexity of the organizational setting was further challenged by misalignment of contractual obligations and objectives

Structure of main contracts Key contractual characteristics and challenges

Characteristics Treaty of French • UK government The three main contracts were l) The Treaty of Canterbury (Bilateral), Canterbury government ll) the Concession Agreement and lll) the Railway Usage Contract that links to EU law on fare prices

• Upon winning CTG-FM spun out into three organizations with The Channel individual roles, responsibilities and contractual obligations to each tunnel project other and Eurotunnel had to negotiate terms with the banks and TML Concession again, e.g. TML was liable to pay damages of £0.33M per day the Agreement project ran overdue (£0.5M per day after 6 months)

CTG-FM Consortium Challenges • Lack of trust appeared due to l) lack of alignment of objectives and incentives between the consortium players ll) the unequal power Eurotunnel balance between Eurotunnel vis-à-vis especially the banks

• In return for not providing any public funding or guarantee, the French and British governments promised to deliver HSR Banks The Railway Usage TML connection to their respective ends of the tunnel, but the British Contract HSR connection was not ready until 2004

Financing Operation • The French government has prolonged the permission to let Lending money Once construc- Construction German trains (DB) connect to the tunnel through France, which to construction tion is done has made it difficult for Eurotunnel to expand their connections from London and hauled a potential revenue stream

Takeaways ▪ Alignment and clarity on all contract objectives and obligations is crucial investments to avoid any changes in the promised business case 23 SOURCE: UCL Omega, 2008; expert interviews; The Institute of Economic Affairs, 2007 The private financing of the Eurotunnel had a huge budget overrun due to exploding construction costs, delay and high capital costs

Investment Investment structure Investment type Break down Percentage Million £ (1994 prices) Public vs. private ▪ Five arranging banks Expected Overrun ▪ Loan from 50 banks (syndicated Public 2.793,0 +56% Private globally) Total ▪ 200+ underwriting banks Debt 7.793,0 100 100 ▪ European Investment bank 5.000,0

Loan Total Debt vs. equity

▪ Shareholders invested upfront in 3 Construction Debt 24 installments, including: 1.379,0 +125% Equity – Institutional investors 2.479,0 Total Equity Private investors 100 – 1.100,0 76 – General public Shareholder Total equity

Eurotunnel ▪ The construction turned out to demand a much larger investment than originally expected leaving the budget with a 87% overrun, excluding capital cost Total ▪ The investment case was jeopardized mainly by overly optimistic: – Construction cost estimates – Construction time schedule due to pressure from banks – 1 year delay

Key – Passenger estimates - the actual demand was less than half mainly due to issues missing HSR link to London and 100 100 ▪ The one year delay had a cost of approx. £500M net for Eurotunnel – half of the characte

Operation original equity invested – as Interest on borrowed money was roughly £1M/day and ristics lost revenue was £1M/day

▪ Due to an act of the British Parliament the construction project could not gain either state loans, grants, or guarantee, leaving the entire financial risk on the equity shareholders and banks. The lack of gov. involvement led to chaos and higher costs Takeaways • The Eurotunnel was a 100% privately financed project with a high financial gearing and high risk profile leaving it extremely vulnerable to l) delays in construction, ll) traffic volume and lll) tariff level and competition • A public financial role e.g. a state guarantee could have decreased financial risk and thereby financial costs 24

SOURCE: UCL Omega, 2008; The Institute of Economic Affairs, 2007; Expert interviews A brief project overview of Arlandabanan

Project infrastructure Project facts Characteristics • Project: 20km rail connecting Uppsala A – four-track section Arlanda Airport and Stockholm B – Arlanda extension, • Max train speed: 200km/h including underground stations Key events C –north-bend • Contract signed: July 1995 extension C • Total duration: 13 years • Construction time: 4 years and 4 Arlanda Airport months after contract award B • On time: Yes, 12 months ahead • Opened to traffic: November 1999 A

Key financials • Construction cost: ~ €688M* Stockholm C • Cost overrun: No, ~ €20M under budget • Turnover (2012): ~ €72M • Passengers p.a. (2012): 3.3M • Passenger forecast: Overestimated

* 1990 prices 25 SOURCE: Arlanda Express website; www.arlandabanen.se The coalition behind the realization of Arlandabanan was character- ized by strong Government leadership and private sector focus (1/2) DEEP DIVE ON THE NEXT PAGE

Key stakeholder interests Timeline with key coalition-building events Outputs

1 Politically Major events and initiatives Year Conservative-Liberal Government: 1. The initiative to Arlandabanan . Strongly in favor of increased Arlandabanan developed as a solution to decrease 1986 was taken by the Social privatization emissions from an expansion of Arlanda Airport. Democrats. It survived the . Severe national budget The Social Democratic Government asked National change in government due to constraints Railways Administration to examine the possible 1989 an interest in exploring use of private finance to build Arlanda-Stockholm privatization Social Democrats: rail link . In favor of Arlandabanan 2. A lean coalition of politicians 1990 focusing on environment National Railway Administration released their and private executives drove study - the only feasibility study prior to the the process forward 2 Government entities decision– recommending it to be a public project. National Railway Administration: 3. The National Railway . Strong advocate and initiator of The Liberal-Conservatives came into power with a 1991 Administration was sidetracked Arlandabanan, but for a public desire to promote privatization – a process in which by the coalition construction with a private Arlandabanan became a spearhead project. operator Government commissioned a working group 1991 chaired by senior executives from SAAB Scania to 3 Private sector explore how the Arlanda project could proceed. ▪ In favor of increased Neither the Swedish Railway nor the National privatization Railway Administration were included. ▪ Interest in potential 1993 construction opportunities A sub-group of the working group with minimal public sector representation officially formed the Arlanda Banan Project

26 Source: Arlanda Express website; Colverson&Perera, 2012; UCL Omega 2012 The coalition behind the realization of Arlandabanan was characte- rized by strong Government leadership and private sector focus (2/2)

Key players in the coalition building process Takeaways

• Political: Center-right government focused on privatization and PPPs Key Success Factors Context • Economic: Severe Swedish budget crises and lack of public funds • Public opinion: Environmental concern about emissions 1. Strong Government ownership and public declared political aim lead by a centrally placed Minister, Mats Odell Phases Year Key players Key activities Output and his Secretary of state Urban Karlström 1986 • The National Railway • Arlanda connection mentioned in • Arlandabanen was Administration (founded in 1989) Committee report framed as a solution to 2. Key players Mats Odell and Urban • General discussions mostly around an environmental Karlström succeeded in creating a environment concerns problem and planted in powerful and dedicated coalition that the political and public bridged the public and private sector sphere 3. Arlandabanan was promoted as a

clearly defined solution to an Conceptualization environmental challenge

1989 • The NRA • NRA launched 10-year investment • Study by NRA showed

• The Social Democrats plan with Arlanda connection as top that public finance was • The Civil Aviation Administration priority required as ticket sales Problems to avoid • Social Democrats ordered a study alone could not cover exploring the opportunity of using construction and 1. Too strong a focus on privatization outbalanced the focus on decreasing

study and and study private finance to build the operation - emissions feasibility Arlandabanan

Pre 2. The most crucial phase in PPPs, the planning process was rushed through 1991 to provide the Government political • Conservative-Liberal Government • New Government in 1991 led by Carl • Strong political results • Mats Odell, Minister of Bildt ownership and

Communications • Planning commission led by SAAB ideological mission 3. Lack of public entity involvement in • Urban Karlström, Secretary of state , Scania executives • Process rushed through initial planning process Ministry of Communication • Sub-group formed to handle by private oriented • Georg Karnsund & Sivert Nordgren, procurement led by Georg Karnsund planning commission to SAAB Scania with external advisory partners ensure a political deal

• Solomon Brothers (investment bank) • Project moved forward politically by and and negotiation Project advocacy advocacy Project • Manheimer Swartling (legal advisory) Mats Odell and Urban Karlström 1993

27 Source: Arlanda Express website; UCL Omega, 2011; Colverson&Perera, 2012 Arlandabanen was the first PPP and BOT in Sweden that granted high degrees of freedom and risk to the private operator

Revenue Cost Operational Financial Profit Ticket Financial cost/ (Yearly Key characteristics of business case cost and price Passengers revenue cost revenue Result) Major events and initiatives Year Euro M persons M Euro ‘000 Euro In % in M Euro . Life cycle contract with A-TRAIN started operating on the 1999 entrepreneur (builds and 27,0 maintains infrastructure and Arlandabanan 2000 N/A 2,1 7,0 140,3 -18 Unique 38,0 operates services ,BOT) features 22 2,9 35,8 6,6 104,8 . A-TRAIN carries responsibility for 2001 37,5 -8 management of everything from A-TRAIN close to bankrupt and the ALC 38,8 tracks to stations 2002 18 2,8 9,8 89,4 -6 Consortium lost nearly Euro23M 34,7 . Revenues from: 40,8 2003 21 2,6 11,4 86,4 -6 . Ticket sales 35,2 Business . Station access for intercity 2004 45,7 17,6 78,4 -8 rationale . Income from infrastructure The ALC Consortium sold A-Train to N/A 2,9 35,8 . Revenues pay for project build Macquarie Bank in 2004 for Euro46M costs 50,0 15,2 67,7 1 including its debt of Euro46M 2005 N/A 3,0 33,9 . Private ownership of the 53,3 14,4 72,1 1 operator, A-Train 2006 N/A 2,7 38,4 . The private consortium bears 58 . Full cost risk of construction Profitable for the first year since the 2007 N/A 2,7 13,4 70,7 18 Risk 40,2 . Full market risk of operation first trip 60,9 12,7 69,4 e.g. change in traffic flows 2008 25 3,2 42,3 4 . Government could end contract after 15 years in 2010, but did not 59,2 14,7 66,4 4 Best ever financial performance with 2009 29 2,9 39,3

. A-Train has 40 years exclusive Euro62,5M revenue and Euro6,4M pre- concession to operate services 62,0 1,7 67,0 5 tax profit 2010 29 2,9 41,6 and set prices after construction + Rewards option to operate 10 years more 71,1 12,5 61,7 11 2011 29 3,3 43,9 . A-Train have exclusive rights to operate the shuttle if interested 73,0 11,7 61,7 12 Refinancing of A-Train in process 2012 29 3,3 45,0 Sum up Socio . Reduction of emissions 2013 economic . Time reductions for business ▪ Initially not profitable due to low passenger numbers and cheaper benefits people alternatives (bus and taxi) but since the transition to Macquarie Bank Takeaways profitability has increased starting from 2005 ▪ Too much risks carried by private operator led to: l) low transparency regarding cost ▪ Numbers are difficult to find and will be confirmed in interviews efficiency; ll) very high ticket prices, and lll) high vulnerability to external changes , i.e. 9-11, €-exchange rate used is 8,8 financial crisis, and construction of two competing airports jeopardized profitability ▪ Operator rights to decide on rental of tracks , stations and ticket prices made these expensive 28 SOURCE: Arlanda Express MTC Stiftelsen website; Colverson&Perera, 2012; OECD 2007; VTI, 2003, UCL Omega, 2011 Arlandabanan’s organizational model is based on public ownership of infrastructure and private operator with a 40-year contract

Organizational characteristics, ownership, and operation structures Key characteristics

Phases Design Build Own Operate 1. Unique feature is that Parameters construction consortium gained right to operate by Actors • The NRA • NCC • A-BANAN • A-Train building the infrastructure • The Civil Aviation • Siab and then handing it over Administration • Alstom to the state • Georg Karnsund and • Mowlem Sivert Nordgren • Kraftbyggarna 2. Construction consortium Public * carried construction risk against a 40-year exclusive Private right to operate

Ownership model upon construction Public ownership Arlanda-Stockholm Private ownership 3. Within the 40-year connection contract there is a clear division of roles and A-BANEN A-TRAIN responsibility between public (infrastructure) and 100% 100% private (operations)

Infrastructure Operations

Purchase & Maintenance Train & maintenan- of new Ownership Management shuttle ce of rolling infrastruc- service stock ture

*The government entities, NRA and Civil Aviation Administration, were only loosely affiliated and not an integrated part of the process 29 SOURCE: Arlanda Express website; UCL Omega 2011 The contractual negotiations of Arlandabanan were complex and have brought a number of undesirable societal outcomes

Structure of main contracts Key contractual characteristics and challenges

Characteristics Government • Arlandabanan consists of about 40 sub-agreements involving more than 20 parties • Government is directly involved in ten of the agreements including Project Sponsors the overall Arlandabanan Project Agreement, Arlandabanan Agreement A-BANAN Project Sponsor Agreement, Government commitment to Projekt AB constructors and a Subordinated Loan Agreement • Riksgälds- The remaining 30 primarily involve the private construction and Arlandabanan operating unit A-Train AB Project Agreement kontoret

A-Train AB Challenges Government subordinated loan agreement • A fast planning and design phase and limited involvement of the NRA and Civil Aviation Administration meant that key public considerations were not duly represented in the contracts., i.e.: GEC Government commitment • Trains used are not fully compatible with Swedish standards for size, capacity and systems meaning that it will be difficult for the Government to integrate the link after the 40+ years • Exclusivity rights granted to A-train have restricted public transport services as operators have to lease trains from A- Train, which is too expensive as prices are kept high NCC Siab JMC Kraftbyggarna • Decisions made by A-Train regarding segments and strategy have hindered passenger flows and the following impact on road traffic and emissions Takeaways ▪ Getting the initial planning and negotiation contractual phases right through use of experienced lawyer is critical for successful PPPs due to the long term societal ramifications of weak contracts 30 Source: Arlanda Express website; UCL Omega, 2011; expert interview The financial model of Arlandabanan is based on a BOT model that attracted 45% private finance

Investment Investment structure Investment type Break down Percentage Million Euros ▪ Union Bank of Schwitzerland, 114,7 Public Bayerische Landesbank and Bank Private 34,4 263,8 of Tokyo (Bank consortium) Total Debt 114,7 ▪ Nordic Investment Bank (NIB) Government subordinated loan 55 ▪ Bank NIB Government Total

consortium loan ▪ Project sponsors 117,6 100 ▪ Nordbanken Finans (lease of rolling 186,4

Equity stock) 68,8 Construction Sponsors equity NF Total 45 Govern ▪ Grant 97,5 97,5 ment benefits Grant Total ▪ The construction cost of Arlandabanan was 3% under budget 7 Mowlem Vattenfall ▪ The players in the construction consortium A-Train gained ownership of the Alstom operations in return for the infrastructure NCC/+Siab 29

Total

Key ▪ The subordinate state loan given to the construction consortium was a stipulated

issues loan meaning that the refund is dependent on the profits of the operating company 20 and 100 characte ▪ The size of the stipulated loan was decided in a bargaining process were the high

Operation ristics degrees of freedom given to the operator served as a trade-off - e.g. the loan would have been lower if a reduction of bus service to Arlanda from Stockholm had become reality 44 Takeaways • BOT model can be a way to avoid to finance projects with government budgets • Stipulated governmental loans is worth considering for attracting private investors

Note: No previous evaluations have been able to present the total cost of the project as A-train will not provide access to the relevant material 31 SOURCE: Arlanda Express website; Expert interview A brief overview of the HSL-Zuid project

Project facts Project infrastructure Characteristics • Project: A 125km (85km is HSR tracks) high speed train line linking the Netherlands to the Trans European Network of High Speed Lines through Belgium • Max train speed: 300km/h

Key events • Contract signed: 1997 • Total duration: 12 years • Construction time: 9 years • Opened to traffic: 2009 • On time: No, 2 years delayed

Key financials • Construction cost: €6.9B* • Cost overrun: €3.1B* • Turnover (2012): N/A • Passengers p.a. (2012): N/A Passenger forecast: Overestimated * In 2006 prices. Others state the cost to be €7.2B (www.nshispeed.nl) 32 SOURCE: UCL Omega, 2011; http://www.railway-technology.com Early leadership by the Ministry of Transport with support from diverse interest groups paved the way for a decision (1/2) DEEP DIVE ON THE NEXT PAGE

Key stakeholder interests Timeline with key coalition-building events Outputs

Major events and initiatives Year 1 Politically ▪ The Dutch government: keen on Lobbying effort by informal coalition of interest project groups for an HSR connection 1. Political ownership of the idea at the highest level ▪ Belgian/Flemmish government: Agreement between the Netherlands, Belgium, Reluctant about the connection France and Germany on HSR collaboration 2. Bureaucratic support to the 2 Government entities 1989 idea in key ministries ▪ Ministry of Transport, promotor First HSL Green Paper sent to parliament 1991 ▪ Ministry of VROM, promotor Decision to produce new HSL Green Paper as the 1993 3. A broad coalition of diverse 3 Private sector first was insufficient to drive decision making 1994 players that support the HSL- ▪ Belgian railroad companies: Zuid for different reasons Interested in the line suggested The Trace Act is introduced in 1994 to speed up 1996 by the Dutch into Belgium decision-making allowing for top-down approach ▪ KLM & Schipphol Airport: pro New HSL Green Paper presented to parliament 4 Interest groups 1997 ▪ Stichting Natuur en Miilieu, Conflict between the Dutch and the Belgium/ environmental concerns Flemish government about the best cross-border 1998 ▪ ANWB, a union for users of route – the Dutch government pays €400M in 1999 transport on wheels compensation ▪ LTO Nederland, Agri- and horticultural entrepreneurs and Agreement with Belgium ratified in Dutch employers, business concerns parliament ▪ Chambers of Commerce of the 2000 region of the Hague, business Final decision on precise route concerns Construction HSL‐Zuid started in Breda‐Prinsenbeek ▪ WWF, environmental concerns 33 SOURCE: UCL Omega, 2011; Expert interview Strong ownership in key ministries and the ability to centralize decision making at national level via the Trace Act speeded up HSL-Zuid (2/2)

Key players in the coalition building process Takeaways

• Political: Focus on connecting the Netherlands to Europe and mitigate road traffic bottlenecks Context • Economic: Need to boost economic development in the Netherlands through better connectivity • Public opinion: Focus on sustainability and better transport opportunities Key Success Factors

1. Government willing to push the Phases Year Key players Key activities Output project in new ways l) the Trace Act and ll) the compensation to Belgium 1973 • Ministry of Transportation • The coalition of interest groups actively • A HSR line is framed as • Stichting Natuur en Miilieu engage in the public debate around the key the solution to l) 2. Early buy-in from key ministries • ANWB benefits of HSR environmental concerns • LTO Nederland • The SVV-2 (Tweede Structuurschema and ll) road traffic 3. Clearly defined problem and solution • Chambers of Commerce of the Verkeer en Vervoer) is the first to mention congestion and lll) promoted from early on by a broad region of the Haque the HSL in 1990 and focus is on sustainability connectivity to Europe and very internally different coalition • WWF and alternatives to cars

Conceptualization • First take on design is started

1990 • Ministry of Transportation • First HSL Green Paper sent to parliament in • Feasibility studies showed • Rijkswaterstaat (Ministry of 1991 by the Ministry of Transport that it could be done Problems to avoid Transportation’s implementation • Several feasibility studies made between • Strong commitment to unit) 1992-1994, e.g. by McKinsey, VROM project from key 1. Ensure that policy proposal is well- • Ministry of Housing, Spatial highlights the environmental and economic ministries planned before presenting it to parliament to l) save time and ll)

study and and study Planning and the Environment rationale of HSR -

feasibility (VROM) • Decision to produce new HSL green Paper avoid conflicts in parliament – this Pre since the first was insufficient to pass the cost two years in the HSL-Zuid case. decision-making process in 1993 2. Focus on solving environmental 1994 • Ministry of Transportation • The Trace Act is introduced in 1994 to speed • The Trace Act tipped the disputes early in the process

• The Dutch Government and up decision-making by creating l) national power balance in favor of

Parliament coordination and ll) time limit on the the government and the 3. Focus strongly on solving conflicts of • The Belgium/Flemmish different phases lll) giving the state the project national interest early on to limit Government power to overrule localities • Negotiations settled the l)cost and ll) too many vested interests • Rijkswaterstaat (Ministry of • Presentation of new HSL Green Paper 1994 dispute between the Transportation’s implementation • The Belgian and Dutch states reach Netherlands and Belgium

unit) agreement on route and the Dutch state and and negotiation Project advocacy advocacy Project • Ministry of Housing, Spatial pays €400M in compensation in 1996 1998 Planning and the Environment • Definite decision is taken and tender strategy is determined 34 SOURCE: UCL Omega, 2011; Expert interview The business case of HSL-Zuid is built around the state and two private providers and it has not been successful so far

Revenue Cost Operational Financial Ticket Ticket Financial cost/ Profit Profitability Key characteristics of business case cost and sales/ price Passengers revenue cost revenue Revenue EBITDA EBITDA / Major events and initiatives Year Euro M persons M Euro ‘000 Euro In % In % in M Euro Revenue in % . Design, Build, Finance, Southern section finished in 2006 and 2007 Maintenance (DBFM) contract N/A 2009 N/A N/A N/A N/A N/A N/A N/A Unique . Combined air (KLM) and rail (NS) the Northern section was finished in N/A features operating consortium 2007 N/A N/A N/A N/A N/A N/A N/A N/A 2010 N/A Italian train manufacturer unable to . NS Hispeed (NS & KLM*) pay a flat deliver in time and ERMTS security 2011 N/A N/A N/A N/A N/A N/A rate of €148M/year to the state to systems also heavily delayed operate the infrastructure given N/A N/A The HSL-Zuid started operations in 2012 N/A 0,0 N/A Business that it is available 99% of the time 2009 – 2 years delayed – with Thalys’ rationale . Infraspeed receives €106M/year 2013 N/A 0,0 N/A N/A N/A from the state for maintaining the trains infrastructure if it is available 99% The new train to operate Amsterdam- N/A N/A 30,5 N/A N/A of the time Bruxelles, FYRA is presented on July 6. However, due to malfunctioning trains, . Risk is divided on two private speed level is still not high-speed N/A N/A 27,1 N/A N/A companies: N/A N/A N/A N/A N/A Risk . Construction risk sits with KLM left NS Hispeed due to failure of N/A N/A Infraspeed business case . Operation risk sits with NS N/A N/A N/A N/A N/A N/A N/A Hispeed NS Hispeed Airrail booking up and N/A N/A N/A N/A N/A N/A N/A . NS Hispeed has exclusive rights running reaching 100,000 airrail to the operation in 15 years bookings (Combined flight+rail ticket) Rewards N/A N/A N/A N/A N/A . Infraspeed has a 25 years right to N/A N/A NS Hispeed collaborate and connect maintain the tracks N/A N/A with TGV, Eurostar, ICE International, N/A N/A N/A N/A N/A . Environmentally, less air traffic and Thalys Socio . Freed capacity on Amsterdam- N/A N/A N/A N/A N/A N/A N/A economic Rotterdam railway, improving benefits train connectivity and local supply Sum up Takeaways ▪ Combined air and rail tickets enable a larger hinterland to KLM in Amsterdam ▪ The operator has experienced strong competition and dumping of market prizes due to and Air France in Paris budget airlines, which have put the business case under pressure ▪ The operator NS Hispeed has been close to bankrupt almost since the ▪ The 99% availability criteria for state payment related to both maintenance and operator beginning due to l) very expensively bought rights to operate and ll) increased ensures a strong incentive for reliability and availability competition from budget airplane companies

* Since the merger with AirFrance KLM has had a strong position on the travel market between Amsterdam and Paris 35 SOURCE: Expert interview; UCL Omega, 2011; www.railway-technology.com; www.nshispeed.nl; http://www.hsr.ca.gov

The HSL-Zuid infrastructure is state owned while maintenance and operations are split between two different private providers

Organizational characteristics, ownership, and operation structures Characteristics

Phases Design Build Own Operate Parameters 1. The state owns the infrastructure, but are not Actors • Infraspeed • Sub-structure • Ministry of • NS Hispeed obliged to handle • Spatial Core contractors Transport Alliance (Air plane maintenance Decision (PKB) • Infraspeed company KLM and procedure of three the national rail 2. The PKB process allowed steps are required operator, NS) the state to follow the for planning in the design and planning Netherlands* closely Public

Private 3. Operations and Ownership model upon construction Public ownership maintenance are split HSL Zuid Private ownership between two different private providers Ministry of NS Hispeed Transport

100% Infraspeed 100%

Infrastructure Operations Infrastructure maintenance Purchase & maintenan- Ownership Train service ce of rolling stock

* This means that the state was closely involved in the planning and sequencing of the project e.g. to conduct environmental impact assessments. The PKB is a part of 36 the Trace Act SOURCE: UCL Omega, 2011; Expert interview The contractual structure was designed with smaller contracts given to a number of different providers causing coordination challenges

Structure of main contracts Key contractual characteristics and challenges

Characteristics • Construction of civil works was divided into six tenders of about €400M done by different consortia – the overall coordinating responsibility (the Ministry of seventh tender)was won by the consortium Infraspeed (Flour Infrastruc- Initiator, owner and Transport Government principal financier ture; Siemens Nederland; Koninklijke BAM Groep; Innisfree Ltd.; and HSBC Supervision role Infrastructure) • Design, Build, Finance and Maintenance (DBFM) contract with a clause HSL Zuid Project that the tracks should be available 99% of the time for 25 years (2031) Team • The Dutch state pays a fee to the infrastructure provider dependent on Project owners DBFM whether the 99% is achieved Exploitation Concession • Contract on Exploitation (HSA) of the tracks was won by NS Hispeed (NS Contract (HSA) contract and KLM) to operate the line

Infraspeed Exploitation of Challenges/learnings consortium tracks • The government sold the operating rights to NS Hispeed for 2 times the actual price (NS Hispeed overbid to keep competitors out) Turnkey Contract on contract maintenance • The government has faced difficulties in improving the infrastructure after the construction because Infraspeed resisted due to contractual terms

NS Hispeed • Managing the interface between Infraspeed and the seven sub-contracters Construction Infraspeed (NS and KLM) has been challenging and ended with delays

• The main delays happened primarily due to decision to use the European Systems Trackwork Project man. standard ERMTS security system at a time when ERMTS was not specified Siemens NBM Flour Daniel yet – these specifications were known very late meaning that the trains were ordered late Takeaways ▪ Creating seven tenders rather than one big can be beneficial but also challenging in terms of managing the interface ▪ Important create very strict contracts to avoid loopholes ▪ Use proven technology to avoid problems similar to the ERMTS system 37 SOURCE: Expert interview; UCL Omega, 2011; http://www.hsr.ca.gov HSL-Zuid is considered a financial failure due to cost overruns and time delay

Investment Investment structure Investment type Break down Percentage Million Euros Public vs. private ▪ Consortium of 24 banks, incl. ING, 1.000,0 Rabobank, KBC, KfW, Dexia and Public 14 Hypovereinsbank (Banks) 1.700,0 Private ▪ Government (Gov.) 7.000,0 Total Debt 2.600,0 86 100 ▪ Fonds Economische

Structuurversterkning (FES) 1.700,0 ▪ Ministry of Transport (MoT) Gov. MoT FES Banks Total Debt vs. equity Debt ▪ Project sponsors

Construction 1 Equity – Flour Total 100 99 – Siemens 67,8 67,8 Equity – BAM

Sponsors equity Total

Netherlands Railways(NS) ▪ Predicted financing prior to the decision was €3.9B – this number increased KML continuously through the construction period to a final €7B due to construction Total delays, train delivery delays and system delivery delay

▪ Revenues from gas exports was essential to finance the HSL-Zuid connection through a

Key fund to strengthen the economic structure of the Netherlands (Fonds Economische issues 90 Structuurversterkning) and 100 characte

Operation ▪ Due to rejected Ansalto trains the line is still not running with high-speed, which limits ristics the revenue streams

Takeaways • The project overran its budget with 79% due to construction delays and adjustments to existing 10 infrastructure • The HSL-Zuid connection was a PPP with 14% private finance and most of the financial risk placed with the public sector 38 SOURCE: Expert interviews, UCL Omega, 2011; www.railwaypeople.com; http://www.hsr.ca.gov; http://www.railway-technology.com; www.nshispeed.nl ; http://www.railwaygazette.com A brief overview of the Copenhagen Metro project (Phases 1, 2 & 3)

Project facts Project infrastructure Characteristics • Project: Line through the old City Centre, to the Airport and the new development area in Ørestad • Max train speed: 80km/h

Key events • Ørestadsselskabet created: March 1993 • Contract signed: October 1996 • First section opened: October 2002 • On time: No, 2 year delay • Y shaped alignment • Project complete: September 2007 • 21 km double track 10 km in tunnel Key financials • 22 stations • Construction cost: ~€ 1.6B • 34 trains • Cost overruns: ~€ 540M • Turnover (2012): € 47.5M • Passengers p.a. (2012): 54.3M • Passenger forecast: Overestimated

39 SOURCE: Metroselskabet I/S Annual Report 2012; The CPH Metro was part of a larger coalition and plan to revitalize Copenhagen through Ørestaden, expanded airport and the Øresund link… DEEP DIVE ON THE NEXT PAGE

Key stakeholder interests Timeline with key coalition-building events Outputs

1 Politically Major events and initiatives Year ▪ The Schlüter Government: 1. The Metro coalition was built on the momentum created by Interested in giving Copenhagen A law for a Metro line was passed through Parlia- 1960 an economic boost ment, but was cancelled before it was implemented the Government working group ▪ Municipality of Copenhagen: DSB presented an underground S-train link between 1980 High interest in improving the Vanløse and CPH Airport, but it was too expensive infrastructure in CPH 2. The Metro was a part of a larger ▪ Municipality of Frederiksberg: infrastructure plan High interest in improving the Copenhagen experienced and economic crises connectivity to CPH 1989 A Governmental and municipal working group 3. Economic crises in Copenhagen 2 Government entities came up with the idea of Ørestaden and the Metro served as a “burning platform” ▪ Ministry of Finance: Interested together with the idea of the Øresund Link in improving infrastructure and create jobs 1991 ▪ “The Würtzen Committee”: Ørestaden and the Metro were presented together Focus on future transport with the Øresund link in the DK Parliament in May investments in CPH The Danish Parliament passed the Ørestad Law including a light rail in Copenhagen 3 Private sector 1992 ▪ CPH Airport: Interested in a fast Ørestad Development Corporation connection to the city center (Ørestadssselskabet I/S) is created t o handle the 1993

development of the Metro 2009 Due to early success, decision on new lines is made

40 Note: Ministry of Transport was not included in the original coalition Source: www.m.dk; CPH Metro Inauguration Seminar, 2002; Financing and Organizing the Metro, Olsen 2001; Expert Interview; www.ørestad.dk And strong determined government and municipal ownership secured a short decision-making process

Key players in the coalition building process Takeaways

• Political: Focus on making an economic turnaround for CPH Context • Economic: Severe economic crises Key Success Factors • Public opinion: In favor of changing CPH to a more attractive capital 1. Short government led process

Phases Year Key players Key activities Output 2. International best practice used to select alternative financial and 1989 • The Schlüter Government • As a reaction to the economic crises • A new financing organizational model • The “Würtzen Committee” Schlüter appointed the “Würtz opportunity was planted • City of Copenhagen Committee” to suggest actions • The plans were positively 3. Close collaboration between • Lord Mayor Jens Kramer Mikkelsen • The Würtz Committee presented “What received by the parliament and City of Copenhagen • Ministry of Finance do we want with our Capital?” a plan for Government • Minister of Finance Henning future transport investments in CPH Problems to avoid Dyremose and untraditional financing methods, 1. Slim majority decisions are Conceptualization incl. using development of Ørestaden to finance infrastructure undesirable for long term and large scale infrastructure projects as it may 1991 • Parliament • Parliament passed a number of traffic cause instability around the project • City of Copenhagen investments in line with the • The Act on Ørestad act of • Lord Mayor Jens Kramer Mikkelsen recommendations 1992, provided political • Ministry of Finance • The bill on Ørestaden was put forward buy-in in the project • Minister of Finance Henning at the same time as the Øresund Link in

study and and study Dyremose 1991 -

feasibility • It came through with a slim majority of Pre the Conservatives, the Liberals and the Social Democrats 1992 • Parliament • City of Copenhagen and the Parliament • The New town principle*

• City of Copenhagen decided to establish Ørestad was chosen and the

Development Corporation – a vehicle to Government created plan, develop, construct and sell Ørestad Development Ørestaden incl. the Metro corporation to led the

project

and and negotiation Project advocacy advocacy Project

1993

41 * The New Town Principle: Inspired by the way Docklands and London were developed – using land ownership and property development in funding SOURCE: www.m.dk; CPH Metro Inauguration Seminar, 2002; Financing and Organizing the Metro, Olsen 2001; Expert Interview The CPH Metro has become profitable but started out facing lower passenger numbers than expected due to competition from existing options

Revenue Cost Operational Net Profit Ticket financial (yearly Key characteristics of business case cost and Net Financial price Passengers revenue cost cost/revenue result) Major events and initiatives Year Euro M persons M Euro M Euro In % in M Euro . The Metro was financed using the The Metro opened first leg on October “New Town” principle (Metro is N/A 2002 N/A 63,5 N/A 48,9 established prior to the city to 19 N/A N/A make the land value increase) Unique 66,2 . Operational revenue pays for Preparations for the third leg began 2003 N/A 20,0 -67,4 102 -113 features 111,4 expansion of the system (2 & 3 leg) The second leg to Frederiksberg 2 34,0 77,7 -153,4 197 -206 2004 129,9 . Metro Service are provided a fee openened in October 141,4 for the operation of the Metro 2005 2 35,0 -137,4 97 2 Estimated passenger number 61M – 120,5 . Operating profit and land actual number was 34M 366,8 development revenue is 2006 3 37,0 19,6 5 207 Business The metro faced competition from the 143,2 expected to pay for: 64,3 rationale dense bus and S-train system in CPH . l) expansion costs and ll) loans 2007 3 40,0 7,1 4,2 4,2 during the first 3-5 years of existence 61,3 . Construction and financial risk 89,8 2008 3 47,0 32,4 7,6 7,6 was carried by Ørestad The third leg to CPH Airport opened in 75,7 Development Corporation late September 96,8 2009 3 50,0 15,1 8,9 8,9 Operating risk is carried by 81,0 Risk operator Ørestad Development Corporation was 115,8 3 52,0 -6,0 14,9 14,9 . Operator cannot set fare prices split into Metroselskabet and By & 2010 100,9 these are decided collectively by Havn in 2007 131,4 -61,2 25,6 25,6 transport companies in CPH 2011 3 54,3 105,8 . Insufficient increase in land value The €389M metro connection to 147,5 is a key risk Nordhavnen approved 2012 3 54,0 -16,49 31,5 31,5 . Operations are expected to 116,0 provide a profit and there is no Rewards 54M passengers used the Metro - 2013 subvention granted expectations were 72+M . 5 year contract for Metro Service Sum up ▪ Given the income from land tax the financial costs of the Metro is balanced Socio . Increased connectivity in 400M passengers used the Metro by a financial income economic Copenhagen during it’s first 10 years of existence ▪ Passenger numbers and revenue have increased steadily with the expansion benefits . Environmental benefits of the metro Takeaways ▪ The business case was challenged by l) overestimated passenger numbers, ll) competition from the existing dense bus and S-train system and lll) inability to set fare prices * The €-exchange rate used is 7,46 ▪ Extension of network has increased the passenger numbers 42 * This makes it possible to build 3.1M sqm Source: www.m.dk; CPH Metro Inauguration Seminar, 2002; Financing and Organizing the Metro, Olsen 2001; Expert Interview, Metroselskabet Annual Reports The organizational model is based on public ownership through Metro- selskabet and a private operator, Metro Service with a 5 year contract

Organizational characteristics, ownership, and operation structures Key characteristics

Phases Design Build Own Operate 1. The infrastructure is owned Parameters by Metroselskabet (the state) and operations and Actors • Ørestad • COMET (Copen- • Metroselskabet** • Metro Service AS maintenance done the Development Cor- hagen Metro Con- (Publicly owned) private operator, Metro poration struction Group*) Service • Frederiksbergbanes • Ansaldo STS

elskabet I/S • Hoffmann-Arkil- 2. The model is a Develop – • Østamagerbanesels Novejfa tender – build – tender- kabet I/S • INTABB v/ABB operate model, which

Public allows Ørestad

Development Corporation Private /Metroselskabet to optimize during the process Ownership model upon construction Public ownership Private ownership 3. Incentive based contract between Metroselskabet CPH Metro and Metro Service based on e.g. customer satisfaction and passenger numbers Metroselskabet Metro Service AS

100% 100%

Infrastructure Operations Maintenance

*COMET consisted of Astaldi, Bachy, SAE, Ilbau, NCC Rasmussen & Schiøtz Anlæg and Tarmac Construction 43 **Ørestad Development Corporation was split into Metroselskabet and By & Havn in 2007 Source: www.m.dk; CPH Metro Inauguration Seminar, 2002; Financing and Organizing the Metro, Olsen 2001; Expert Interview

CPH Metro is build around three state and municipality owned devel- opment corporations, most importantly the Ørestad Dev. Corporation

Structure of main contracts and ownership Key contractual characteristics and challenges

Characteristics CPH Frederiksberg Capital Government • Ørestad Development Corporation, Frederiksbergbaneselskabet I/S Municipality Municipality Region* and Østamagerbaneselskabet I/S have the responsibility to build and operate the Metro - Ørestad Development Corporation takes on the 45% 30% 45% 55%** entire responsibility • Ørestadsselskabet is obliged to develop and sell Ørestaden along Ørestad Developmen with developing its infrastructure – in 2007 Ørestad Development t Corp. Corporation was split into Metroselskabet (responsible for 1) Responsibility 2) Develop and operations and construction of the new line) and By & Havn 70% 55% to build and sell Ørestaden (responsible for the development of Ørestaden) operate • Metro Service AS is owned by International Metro Service (ATM (Aziende Transporti Milanese) and AnsaldoSTS) Frederiksbergba- Østamagerba- Construction By & Havn neselskabet I/S neselskabet I/S & operation Challenges • The revenue-sharing system between the transport companies in Construct the Metro CPH was not fully agreed in advance and ongoing disputes have been Operate the Metro and construct settled by the Ministry of transport new line, Cityringen • Metroselska COMET had until recently a 268M€ unsettled claim on COMET Metroselskabet, which posed a financial risk to the balance in bet Daily operations Metroselskabet 8,3% 41,7% • Two year delay due to general construction problems and especially two stations were more complicated to build than expected Metro 50% • The decision to use untried technology has implied challenges Service AS Takeaways ▪ Be clear about l) what technology to use and ll) the potential limitations and challenges following this technology early in the process ▪ Contracts describing the financial relationships between public and private are crucial to get right to avoid financial disputes and instability *At that time Københavns Amt 44 ** Resembles the previous division of land ownership between the two Source: www.m.dk; CPH Metro Inauguration Seminar, 2002; Financing and Organizing the Metro, Olsen 2001; Expert Interview; www.eltis.org

The CPH Metro was financed using the “New Town” principle and has been financed purely with public finances

Investment Investment structure Investment type Break down Percentage Million Euros Private vs. public ▪ Loans by the owners of Ørestad 80,0 Public Development Corporation (state 1.520,0 1.600,0 Private Debt and City of Copenhagen) financed Total the entire construction 100 100

▪ 5% will remain government loan Loan Remaining loan Total

▪ Operational revenue (Operation) 240,0 Sources ▪ Land sale (Land) 624,0 Debt vs. equity of re- ▪ Property tax (Tax) 1.520,0 656,0

Construction payment Debt Equity Operation Land Tax Total Total 100 100 Govern ▪ 310 ha of land in Ørestaden from ment the state and the City of benefits Copenhagen

▪ The Metro experienced significant cost overruns as the expected cost was 1065M€ and the actual cost was close to 1600M€ Metro ▪ The cost overruns have been mitigated by the fact that land has been sold more easily Service and expensively than expected and borrowing has been done at a lower interest rate Total than planned ▪ Ørestad Dev. Corporation had access to full financing through re-lending of Key government loans, which financed the cost of construction issues ▪ A 25-30 years repayment period made it possible to develop the land over a longer time and 100 period (30-40 years) to increase the ultimate revenue characte Operation ▪ Loans are paid for by income from l) sale of land, ll) operations and lll) reversal of land ristics tax from sold land

Takeaways • The cost of construction was underestimated, but the land was sold more expensively than expected and the interest on the loans were lower than foreseen • The New Town principle is a useful model but it depends on having the sufficient size of right land 45 Note: The company Metro Service is owned partly by Metro International and Ansaldo STS Source: www.m.dk; CPH Metro Inauguration Seminar, 2002; Financing and Organizing the Metro, Olsen 2001; Expert Interview; www.eltis.org