Jernbaneverket Norwegian High Speed Railway project Contract 6, Subject 3: Funding and operation of the infrastructure Final 18 February 2011 Contents Ernst & Young LLP 1 More London Place London SE1 2AF T el: 020 7951 2000 Fax: 020 7951 1345 www.ey.com/uk Private and confidential 18 February 2011 Warwick Lowe Rail Development Director Atkins Euston Tower 286 Euston Road London NW1 3AT Dear Warwick, Jernbaneverket Norwegian High Speed Railway project – Contract 6, Subject 3: Funding and operation of the infrastructure In accordance with our contract, we have prepared this report. As requested, the report includes: ► A qualitative evaluation of the funding options available to the Norwegian HSR project from examination of HSR projects in other countries and of other infrastructure projects in Norway; ► Detail regarding the development of our high level financial model that enables the quantitative assessment of the commercial and contractual structures, to be assessed in Phase 3. Our report is prepared solely for the use of our client and may not have considered issues relevant to any third parties who may be recipients of this report, if this report is made public. Any such third parties which choose to make use of our report do so entirely at their own risk and we shall have no responsibility whatsoever in relation to any such use. Furthermore, the report was concluded on 18 February 2011, any material events that have occurred since this date therefore will not be reflected in the report. Our work in connection with this assignment is of a different nature to that of an audit. Our report to you is based on publicly available information and on discussions with you and your other advisors. We have not sought to verify the accuracy of the data or the information and explanations provided. Our work has been limited in scope and time and a more detailed review may reveal additional considerations that this review has not. Please do not hesitate to contact myself, Gianluca Favaloro or John Haworth if you have any questions. Yours sincerely Manish Gupta Partner Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. A list of members’ names is available for inspection at 1 More London Place, London SE1 2AF, the firm’s prErincnipsatl p&la Yceo ouf nbugs i÷ne i ss and registered office. Contents Contents Executive Summary ................................................................................................... 1 Background .................................................................................................................................................... 1 Financing the Norwegian HSR project.......................................................................................................... 1 Delivering the Norwegian HSR project ......................................................................................................... 3 Financial modelling ........................................................................................................................................ 4 Conclusions ................................................................................................................................................... 5 1. Introduction ................................................................................................................ 6 1.1 Background .................................................................................................................................................... 6 1.2 Overall context of the Financial and Economic contract .............................................................................. 7 1.3 Purpose of Subject 3 (Funding and operation of the infrastructure) report ................................................. 8 1.4 Organisation of the report.............................................................................................................................. 8 1.5 Scope of work ................................................................................................................................................ 9 2. Methodology............................................................................................................. 10 2.1 Approach ...................................................................................................................................................... 10 2.1.1 Qualitative assessment of funding options .................................................................................... 10 2.1.2 Quantitative assessment of funding options .................................................................................. 10 2.2 Assumptions ................................................................................................................................................ 12 3. Financing the Norwegian HSR project .................................................................... 13 3.1 Overview ...................................................................................................................................................... 13 3.2 International HSR comparisons .................................................................................................................. 13 3.3 Norwegian infrastructure projects ............................................................................................................... 15 3.4 Sources of financing .................................................................................................................................... 16 3.4.1 Public vs private sector funding ..................................................................................................... 16 3.4.2 Types of financing .......................................................................................................................... 19 4. Delivering the Norwegian HSR project .................................................................... 23 4.1 Commercial structures................................................................................................................................. 23 4.2 Context and evaluation of options............................................................................................................... 29 5. Financial modelling .................................................................................................. 30 6. Conclusions ............................................................................................................. 31 Appendix A International HSR comparisons ............................................................. 33 Appendix B Recent Norwegian infrastructure projects ............................................. 40 Appendix C Financial modelling test run ................................................................... 42 Ernst & Young ÷ i Executive summary Executive summary 1. Background Norway’s low population density has resulted in a relatively low level of public transport compared with other European countries. In addition to the low population density, the geography is dominated by mountains and water, making road and rail infrastructure hard to install and maintain. Aviation is therefore a common mode of transport on longer distances although road transport remains Norway’s dominant mode of transport. WS Atkins International Ltd (Atkins) has been tasked by the Norwegian National Rail Administration (Jernbaneverket) with undertaking an assessment of the Financial and Economic implications of a High Speed Rail (HSR) network in Norway. This report, Funding and Operation of the Infrastructure, has been prepared for Atkins, and provides an overview of the funding options available to the project. 2. Financing the Norwegian HSR project In evaluating a HSR investment it is imperative that the project has due regard for the long- term operational priorities and complexities associated with what will ultimately become a perpetual operational asset, rather than allowing short term funding or affordability considerations to drive the contractual and financial delivery structure. For the same reasons, financing priorities should not drive the delivery structure choice. Financing issues are important and the ability to finance the project in a sustainable manner is a crucial consideration in determining the most appropriate delivery structure. However, the financial structure should only be considered once the operational and construction characteristics are properly understood from the Commercial and Contract Strategies Contract. This long term operational based approach is a key foundation of our analysis. The selection of an optimal delivery, funding and contractual structure for the Norwegian HSR project will be an iterative process and consideration of all these elements will be required in Phase 3 to arrive at the appropriate structure. Given its scale, the Norwegian HSR represents a funding challenge for both the public and the private sector. It is widely accepted that rail projects are typically not commercially viable without Government support. In some cases, rail revenues may be sufficient to cover the cost of operating the service, however, they are rarely sufficient to service the capital cost required to construct the asset. This factor remains true for HSR services and the majority of projects examined in section 3.2 benefitted from