BUSINESS CASE OSLO-STHLM 2.55 THE MOST PROFITABLE RAILWAY PROJECT IN SCANDINAVIA BUSINESS CASE OSLO-STHLM 2.55 THE MOST PROFITABLE RAILWAY PROJECT IN SCANDINAVIA Two capital cities in Scandinavia, just 400 km apart, running through by Sweden´s most populated region. A route between two of the fastest growing cities in Europe, uniquely linked by trade, business and culture. One might assume that there would already be an efficient transportation infrastructure in place, given the circumstances. But, as of yet, there isn’t. Oslo-Sthlm 2.55’s mission is to create a better link between the capital cities, thereby enabling better regional accessibility. The Business Case that you are now reading shows that the project would provide benefits with regards to both growth and sustainability as well as socio-economic benefits, and that the project would be, to a large extent, financially profitable. In fact, we claim that it would become Scandinavia’s most profitable railway project. CONTENT PREFACE SUMMARY 1 BACKGROUND 12 1.1 Request for Information (RFI) process 13 2 THE OSLO-STOCKHOLM LINE 14 2.1 Railway and travelling today 14 2.2 Air travel and the role of the railway 15 2.3 Summary of the Swedish Transport Administration’s Study of Proposed Measures (SPM) 15 3 PROJECT DESCRIPTION 17 3.1 The scope of the project 17 3.2 Under three hours 18 3.3 Allocation of capacity on the railroad 18 3.4 Travel forcast 19 3.5 Socio-economics values 20 3.6 Significant benefits are an incentive for rapid completion 20 3.7 Time schedule 21 4 PROPOSED IMPLEMENTATION MODEL FOR OSLO-STHLM 2.55 - CONCSSION MODEL INCLUDING REVENUE RISKS 22 4.1 The concession model - conclutions 22 4.2 The concession model’s organisation 22 4.3 The owners shall form a project company-Special Purpose Vehicle (SPV) 23 4.3.1 Risk-sharing between stakeholders 23 4.3.2 Profit-sharing with the State/region/municipality during running operations 26 4.4 Efficiency benefits of the concession model compared to traditional models 26 5 FINANCIAL ANALYSIS OF THE PROJECT 28 5.1 General information about the revenue model for railways 28 5.1.1 Description of the revenue model (railway fee and a special track fee to SPV) for Oslo-Sthlm 2.55 28 5.1.2 Encouraging airplane travelers to travel by train promises a powerful, potential market which would make the project economically viable 29 5.1.3 The train operator’s possibility to pay a special track fee to the SPV 31 5.1.4 Regional traffic services will also pay for the use of the new lines 32 5.2 Profitability of the project 32 5.2.1 Investments, reinvestments, running costs and residual value 34 5.2.2 The lender’s perspective 35 5.2.3 Weighted average capital costs 37 5.2.4 Discounted cash flows and internal rate of return 37 5.2.5 Sensitivity analysis 38 5.3 Financing structure 39 6 LEGAL CONCIDERATIONS 40 7 CONCLUSION 42 7.1.1 Benefits that have not been studied in detail by the project group 43 7.1.2 Revision of EU’s core network corridors 43 7.1 Next stage of the project 44 REFERENCES AND SOURCES 46 BIBLIOGRAPHY 47 APPENDIX Appendix 1 – Alternative implementation models Appendix 2 – Letter of intents Appendix 3 – Sweco’s Cost-Benefit Analysis Appendix 4 – The Swedish Transport Administration’s SPM Appendix 5 – An English translation of the foreword and summary of the report “Åtgärdsvalsstudie - Förbättrad tillgänglighet inom stråket Stockholm-Oslo, TRV 2017/14854” Appendix 6 – First planning stage - Improved Availability on the Stockholm - Oslo Line Appendix 7 – Service Economy, KTH Appendix 8 – Analysis Gränsbanan track, Ramböll Appendix 9 – Capacity in the Oslo - Stockholm line 2040, Sweco. LIST OF FIGURES Figure 1 – The Respondents’ operative areas based on which parts of the DBFOM model they have contributed to 13 Figure 2 – The existing railway between Oslo and Stockholm 14 Figure 3 – Current travel times affect train competitiveness in comparison to air travel 15 Figure 4 – The existing railway, and future capacity developments and expansions 17 Figure 5 – Travel forecast 19 Figure 6 – Traffic goals for the line with a fully developed railway 19 Figure 7 – Overall time schedule 21 Figure 8 – Concession model and revenue risks 23 Figure 9 – The proposed project allows for completion at least 10 years earlier than current plans 26 (The Swedish Transport Administration’s SPM) Figure 10 – The concession model with shared risks 27 Figure 11 – The train operator’s estimates to sufficiently cover a special track fee to the Concessioner – example Oslo-Sthlm 2.55 29 Figure 12 – Time it takes for a two-way trip between Oslo – Stockholm on weekdays. 29 Figure 13 – International experiences of air travel and train travel market shares as a function of travelling time by train 30 Figure 14 – Comparison of current ticket prices 31 Figure 15 – Estimated revenues from use- fees 33 Figure 16 – Estimated investments, reinvestments and running costs 34 Figure 17 – Distribution of the National Debt Office’s credit guarantees 36 Figure 18 – Weighted average cost of capital 37 Figure 19 – Profitability – discounted cash flow sum in SEK billions 37 Figure 20 – Profitability – returns based on accumulated and discounted cashflows after taxes 38 Figure 21 – Sensitivity analysis of profitability 38 Figure 22 – Proposals for the financing structure 39 LIST OF TABLES Table 1 – Socio-economic benefits 20 Table 2 – Estimated basis for profitability calculations – train operator 31 Table 3 – Investments, depreciation periods and reinvestments 34 Oslo - Stockholm 2.55 AB Owners Adress The work to achieve a rapid and effective rail link Region of Värmland Oslo-Sthlm 2.55 between Oslo and Stockholm has been going on for Municipality of Karlstad Klostergatan 23 a long time. In 2015, the company Oslo-Stockholm Region of Västmanland 703 61 Örebro 2.55 AB was formed with the main task to gather Municipality of Västerås Sweden momentum behind the project. The company is Region of Örebro län owned by the regions and major cities between Municipality of Örebro Oslo and Stockholm. [email protected] | www.oslo-sthlm.se | @oslo_sthlm | facebook.com/oslo-sthlm | +46-70-631 13 63 INTRODUCTION OSLO-STHLM 2.55 HOW WE CAN ACHIEVE SCANDINAVIA’S MOST PROFITABLE RAILWAY PROJECT Two capital cities in Scandinavia, just 400 km apart, Where do we find the resources required for the running through by Sweden´s most populated infrastructure we need? How do we create a trans- region. A route between two of the fastest growing port system that fulfils the needs and possibilities at cities in Europe, uniquely linked by trade, business both regional and national level? In order to ac- and culture. One might assume that there would complish this, Oslo-Sthlm 2.55 has approached this already be an efficient transportation infrastructure project from a non traditional perspective compared in place, given the circumstances. But, as of yet, there to most other Swedish and Norwegian infrastruc- isn’t. The Oslo-Sthlm 2.55 company has worked ture projects. We have dug deeper to find out more hard to prove that it is possible to create a link that about the possibilities and conditions, We have ex- should have been constructed a long time ago. amined the entire process from A-Z, or rather, from railway planning to financing, realization and railway Although both the Swedish and Norwegian govern- traffic, and we have collaborated closeley with the ments report that they have increased their invest- business sector and authorities from the very start. ments in railway, several challenges remain. Needs and requests for infrastructure investments are In order to understand the results, we are now growing at an increasingly rapid pace. Essentially this presenting, some context is needed. In early 2015, is about creating conditions that will enable re- a privately initiated project known as the Infrastruk- gional growth and growth in general, about business turkommissionen (the Infrastructure Commission), projects’ and residents’ needs, but it is also about led by, among others, Allan Larsson, Stefan Attefall laying the foundation for a new, sustainable transport and Maria Wetterstrand, presented their report on system. For the cities and regions, this infrastructure, several, important Swedish infrastructure invest- at its core, is about survival and ment to develop. ments. However, one of the projects stood out from the others. The Infrastructure Commission The Oslo-Sthlm 2.55 company was formed just over concluded that although further study was needed, two years ago, based on two, important conclu- there were indications that a railway link between sions. The first conclusion concerns competitiveness Oslo and Stockholm would not only provide socio- related to resources. It’s not enough standing in line economic benefits, but also commercial benefits. and wait for needed investments. There are too many competing needs, and there is a clear risk of In the spring of 2017, the Oslo-Sthlm 2.55 carried not receiving any investments at all. Also, to claim out a complete cost-benefit analysis of the project. that the Oslo – Stockholm route is the only impor- The results show positive results and great benefits tant railway investment in Sweden would be deeply with regards to regional growth and residential dishonest. The Oslo – Stockholm route has uniquely construction. But the socio-economic estimate also potent possibilities, but there are many other impor- indicated a surplus. This is an aspect that is almost tant railway investments to compete with in both unique when it comes to large railway investments. Sweden and Norway. In studying the figures in greater detail, it was obvi- ous that travelers would reap great benefits, but it The second conclusion is that just demanding things was also obvious that future train operators would is not sufficient.