Attracting Capital for Railway Development in China Acknowledgements: This report was prepared by a team from the World Bank, led by Martha Lawrence and co led by Gerald Ollivier, in collaboration with Beijing Jiaotong University. Team members include Mengke Chen, Xiaoming He, Joanna Moody, Dominic Patella, Jipeng Qi, Siddhartha Raja, Wenting Wei, Lei Wu and Qiusheng Zhang. The team would like to thank the following people for reviewing and commenting on the report: Daniel Alberto Benitez, Peter Bishop, Jordan Cartier, Vickram Cutaree, Andrei Evdokimov, Patrick B. Loftus, Dongbin Lu, Jin Murakami, Milena Pacia, Shuanguang Qi, Rajendra Singh, Serge Salat, Jukka-Pekka Strand, Hiroaki Suzuki, and John Winner. All errors are the responsibility of the authors. The team is grateful to Yuxiang Gao, Michel Kerf, Run Li, Yujie Wang, Dan Zhao for their guidance and support in preparing this report. Pictures on the cover were provided by Gerald Ollivier. The team would also like to acknowledge the excellent discussions with Staff from China Railway Corporation that deepened the analysis and informed the report. Any findings, interpretations, and conclusions expressed herein are those of the author and do not necessarily reflect the views of the World Bank. Neither the World Bank nor the author guarantee the accuracy of any data or other information contained in this document and accept no responsibility whatsoever for any consequence of their use. All rights reserved Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. ©2015 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: (202) 473-1000 Internet: www.worldbank.org E-mail: [email protected] Table of Contents Overview Chapter 1: Attracting Capital for Railway Development ………………………………………………………................................................................……1 Martha Lawrence and Gerald Ollivier Portfolio Management Cases Chapter 2: Burlington Northern Santa Fe Railroad-Berkshire Hathaway…………………………………………………………………………….……………………7 Martha Lawrence Chapter 3: China Cereals, Oils and Foodstuffs Corporation…………………………………………………………………………………………………………………..17 Jipeng Qi and Xiaoming He Chapter 4: Union Pacific—Focusing on the Core Railway Business………………………………………………………………………………………….…………….31 Dominic Patella Financial Leasing Cases Chapter 5: Russia: Private Investment in Rail Rolling Stock……………………………………………………………………………………………………………………45 Martha Lawrence Chapter 6: TTX Company—Rail Wagon Pooling ……………………………………………………………………………………………………………………………………57 Martha Lawrence Equity Floatation Cases Chapter 7: PKP Cargo: Successful Restructuring & IPO………………………………………………………………………………………………………………………….65 Martha Lawrence and Joanna Moody Chapter 8: IPO/Refinancing of Jinxi Axle………………………………………………….……………………………………………………………………….……………………75 Xiaoming He and Qiusheng Zhang PPP Cases Chapter 9: France HSR Public-Private Partnership……………………………………………………………………………………………….………..………………………87 Mengke Chen and Martha Lawrence Chapter 10: PPP for Primary Land Development in Shantou City…………………………………………………………………………………….…………………….99 Xiaoming He and Qiusheng Zhang Leveraging Real Estate and Land Asset Cases Chapter 11: Tokyu Corporation and Futakotamagawa Station Redevelopment Project………………………………………………………………………111 Gerald Ollivier and Wenting Wei Chapter 12: London King’s Cross Regeneration Program…………………………………………………………………………………………………………………….123 Gerald Ollivier and Wenting Wei Chapter 13: Hong Kong Rail Plus Property Program…………………………………………………………………………………………………………………………….139 Gerald Ollivier and Wenting Wei Chapter 14: Suning REIT…………………………………………………………………………………………………………………………………………………….………………..151 Xiaoming He and Qiusheng Zhang Chapter 15: RailTel Corporation of India Ltd. ……………………………………………………………………………………………………………………………………..161 Siddhartha Raja Chapter 16: Southern Pacific Leveraging Telecom Assets……………………………………………………………………………………………………………………169 Siddhartha Raja CRC is seeking to attract investment from Nonetheless some common principles for both the private sector and from public capital budgeting and portfolio management Attracting Capital for sources such as local governments and state are evident. owned enterprises. It refers to these sources Railway Development of capital as “Social Capital.” • Align the portfolio to the strategy. In many of the cases, the company Introduction This report examines how companies in acquired or developed subsidiaries that China and railways in seven other supported its strategy and divested China Railways Corporation (CRC) is countries—China, France, India, Japan, companies that did not. For example, in considering new ways to attract capital to Poland, Russia, United Kingdom, United the Union Pacific case, the strategy was support the strategic development of the States—have attracted capital and made to extend the geographic reach of the railway sector. Currently, government is the capital budgeting decisions to support their Union Pacific (UP) railway to remain RAILWAY DEVELOPMENT RAILWAY predominant equity financier, with debt strategic development. competitive with other USA railways that being supplied by domestic bank credits and had expanded geographically. In pursuit limited amounts borrowed from Portfolio Management of this strategy, UP divested non-railway International Financial Institutions such as properties (including natural resources, CAPITAL FOR CAPITAL the World Bank and Asian Development CRC’s structure includes eighteen local solid waste and trucking businesses) and Bank. Considering its high level of railway bureaus (within which are some used the funds generated to acquire accumulated debt and liabilities (RMB 3.7 1500 non-transport entities), six subsidiary railways that extended UP’s line and 1 trillion on an asset base of 5.7 trillion), CRC companies, and interests in numerous High provided access to key markets such as ATTRACTING wishes to explore equity investment Speed Railway (HSR) joint ventures. CRC is : Chicago. 1 mechanisms, to increase cash flow from its considering how it should organize and core and non-core activities, and to use manage these entities to maximize their In the COFCO case, COFCO realized that different financing channels as a way to value and generation of cash flow to CRC. to compete effectively with integrated CHAPTER leverage the value of its assets and introduce The cases in the following chapters international competitors, it needed to market-based business models to the sector. represent a broad range of situations. control its full value chain. It acquired 1 As of March 31, 2015. 1 upstream and downstream companies to • Require each entity to be financially World Bank has provided CRC with a pursue this strategy. In the Jinxi Axle self-supporting. In the COFCO case, the separate note on applying these concepts to case, Jinxi Axle focused its portfolio parent company created an internal CRC’s portfolio. management activities on its strategy of capital market to channel its investment strengthening its technological base and capital to the most worthy projects. In Public Private Partnerships production capacity. the Burlington Northern Santa Fe- Berkshire Hathaway (BNSF) case, the The case studies of Shantou land • Use capital transactions to finance parent company, Berkshire Hathaway, development and French high speed rail execution of the strategy. In the COFCO, carries out this function using a capital PPPs illustrate a number of broadly Jinxi Axle and Russia cases, Initial Public allocation approach focused on creating applicable features of public private Offering (IPO) of shares in profitable long term value. partnerships (PPPs). subsidiaries provided funding for RAILWAY DEVELOPMENT RAILWAY • investments that supported the • Combine management autonomy with PPPs can attract significant social capital. In the France High Speed Rail company’s strategy. accountability for results. In the BNSF Public Private Partnership case, the case, Berkshire Hathaway made the introduction of PPP enabled HSR projects • Rationalize the portfolio to improve managers of subsidiaries such as BNSF to be undertaken sooner than possible efficiency. The COFCO case responsible for all operational decisions. with a traditional financing approach, demonstrates that rationalizing the Berkshire Hathaway aligns the because financing was mobilized from structure and relationships between the managers’ interests with those of its the private sector, local and national companies in the portfolio—grouping shareholders, by providing Berkshire government and the railway. In the ATTRACTING CAPITAL FOR CAPITAL ATTRACTING Shantou case, the local government companies in similar markets and Hathaway stock as incentive transferred responsibility for financing separating them from companies in compensation for exceeding targets on the redevelopment of an urban area unrelated markets—can be necessary to return on capital invested. In the COFCO (estimated at US$ 8.3 billion over 20 CHAPTER 1: 1: CHAPTER improve efficiency. As the UP case case, COFCO creates strong incentives years) from government to a private shows, this rationalization can be for performance through performance company through a PPP. disruptive in the short term, but yields contracts with its manager, which • PPPs often involve many public and positive results in the medium to long combine personal responsibility with private