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SFTP NCO – NATIONAL CARGO OPERATOR
DESTINATION MADRID
SETTING A PUBLIC PRIVATE PARTNERSHIP STRUCTURE AND FINANCE
2009-04-30
FRANCISCO FURTADO RAUL PIRES
Table of Contents
1. Introduction ...................................................................................................................................................................... 1
2. Project overview .............................................................................................................................................................. 1
2.1. Complexity and simplifications ............................................................................................................................. 1
2.2. Possible connections and alternatives ............................................................................................................... 1
2.2.1. Base case scenario .............................................................................................................................................. 2
2.2.2. Alternative 1: Sines-Elvas direct ................................................................................................................... 2
2.2.3. Alternative 2: Sines-Elvas phased ................................................................................................................ 2
2.3. General structure of the project ............................................................................................................................ 2
3. Project Operational Studies ........................................................................................................................................ 4
3.1. Demand ........................................................................................................................................................................... 4
3.2. Production, costs and revenues ............................................................................................................................ 6
3.3. Cash Flows and NPVs ................................................................................................................................................. 9
3.4. Flexibility ........................................................................................................................................................................ 9
4. Project Financial Studies ............................................................................................................................................12
4.1. Structured Finance ...................................................................................................................................................12
4.1.1. Rolling Stock ........................................................................................................................................................13
4.1.2. European Funds .................................................................................................................................................14
4.1.3. Equity .....................................................................................................................................................................14
4.1.4. Debt .........................................................................................................................................................................14
4.1.5. Return on Equity ...............................................................................................................................................15
5. Results Assessment ......................................................................................................................................................16
6. PPP design ........................................................................................................................................................................18
6.1. Agents involved ..........................................................................................................................................................18
6.2. Finance sources .........................................................................................................................................................18
6.2.1. Equity .....................................................................................................................................................................18
6.2.2. European grants ................................................................................................................................................19
6.2.3. EIB loans ...............................................................................................................................................................19
6.2.4. Fixed Rate Bonds ...............................................................................................................................................19
6.3. Major uncertainties ..................................................................................................................................................20
6.3.1. Total freight movement ..................................................................................................................................20
6.3.2. Share of the market and competition .......................................................................................................20
6.3.3. Oil Price .................................................................................................................................................................22
6.3.4. Availability of partners ...................................................................................................................................22
6.3.5. New infrastructure developments (future rail, highways, ports) .................................................22
6.3.6. Technical developments in rolling stock .................................................................................................22
6.3.7. Regulatory framework ....................................................................................................................................23
6.3.8. Social/Political unrest .....................................................................................................................................23
6.4. Risk Allocation ............................................................................................................................................................23
6.5. Performance targets and quality control ........................................................................................................24
6.6. Externalities ................................................................................................................................................................24
7. Conclusions ......................................................................................................................................................................25
8. ANNEX ...............................................................................................................................................................................26
9. References ........................................................................................................................................................................26
Page 1
1. Introduction
This project aim is to structure the implementation of a national cargo operator. It will be
the backbone of freight transport within the country main strategic points (ports, airports and
logistic platforms) and also a viable and efficient connection between Portugal, Spain and
consequently Europe.
2. Project overview
For this purpose, we propose the creation of the National Cargo Operator (NCO) which will
be responsible for all operations to implement the service, satisfy the demand and improve the
overall freight system transport performance. NCO is envisaged as a multi modal freight company,
providing the freight movement service using the railroad as the main axle and then providing the
complementary road transportation, achieving this way a door to door service to its customers. We
plan to use the already existing infrastructure (roads and rail) and, in case it is needed, to construct
and own the new links necessary to better integrate the supply chain.
2.1. Complexity and simplifications
Due to its dimension, complexity and time constraints, we opted to simplify the project. Our
initial idea was to simplify the project by just focusing on the freight rail transport between the
ports of Sines, Setúbal, and Lisboa with the Madrid region but we soon realize1 that this would still
be an impossible task to achieve in such a short period. Given these facts, we decided to orient the
project attention to the container freight movement between the port of Sines and the Madrid
region, which we considered as being the most promising connection due to the growing capacity
and demand of the Port of Sines.
2.2. Possible connections and alternatives
Figure 1 contains, besides the existing Portuguese rail network, the routes and alternatives
we have considered in our project and they represent the subject of our study and analysis.
1 With the help from our teachers
Page 2
2.2.1. Base case scenario
This corresponds to the option of not making any new investment and using the existing
infrastructure. Nowadays a freight train that goes from Sines to Madrid has to go to Entrocamento
and Abrantes and takes around 9 hours to get to Elvas in the border (Pereira, 2006). There is a new
service provided by IberianLink, a joint between CP and RENFE, which also uses the existing
infrastructure. For this service the trains depart from Lisbon, Sines or Leixões using a electric
locomotive until Entrocamento, then exchange to a diesel locomotive and in the border there is a
new exchange where a RENFE locomotive takes place(Moura, 2009).
This scenario will be used as our reference data to compare the viability of the alternatives
we propose.
2.2.2. Alternative 1: Sines-Elvas direct
It consists in building a direct link between Sines and the border at Elvas at once. Since the
link between Casa Branca-Évora has already been remodeled, this option corresponds in building
the following new links: Sines-Grândola; Grândola-Casa Branca; Évora-Elvas.
2.2.3. Alternative 2: Sines-Elvas phased
In this alternative, instead of building the complete connection between Sines and Elvas we
add the option of flexibility by dividing the construction in two phases:
• Phase 1 – We construct the Sines-Grândola and Évora-Elvas links. Therefore, trains have
to go from Grândola to Évora using the Grândola-Poceirão-Vendas Novas-Casa Branca-
Évora connections, which means an increase in travel time and lower train capacity
compared with the direct connection.
• Phase 2 – Based on our projections and studies, we assess if there is any point in time
that the demand growth justifies the investment in the new link between Grândola and
Casa Branca and if it does, we perform the construction.
2.3. General structure of the project2
Our project will be a Design, Build, Own and Operate for a period of 24 years and due to its
nature, we consider this undertaking as a national interest project. NCO will rent the existing rail
2 A more detailed analysis is given in other sections
Page 3
Figure 1 - Alternatives from port of Sines to the border at Elvas
Base Case
Sines-Elvas direct
Sines-Elvas phase 1
Sines-Elvas phase 2
Page 4
infrastructure required for its operations and every new line built will be owned and operated by
NCO with the possibility of renting it to other future companies. Being a national interest project,
the Government will have a fundamental role in the whole project and will be one of the sources of
finance of the project. This investment will be done directly and indirectly, through its rail owned
companies CP and REFER, and it will provide part of the required initial investment and possible
investments that will be required in the future (for instance, when applying the flexibility option).
Several logistic operators of Portugal will also be interested in the project and they will
participate in the set up of the company by investing a part of the required financial needs of the
project. The port of Sines is a major relevant and interested partner for the project and for that
reason it is also included as one of NCO investor shareholders. Besides these investors, we have also
included other possible private investors in the shareholders pool.
Besides the described partners that will form the equity of NCO, the remaining financial
needs of the project will be covered by the European Community funds, the issuing of fixed rated
bonds and loans made by the European Investment Bank (EIB).
3. Project Operational Studies
3.1. Demand
The key parameter of our Project is the demand of containers (measured in TEUs) from the
port of Sines to Madrid, to be transported by Rail.
To be able to forecast this we looked at:
• historical rail freight movements3 from Portugal to Spain;
• historical container movements in the Ports of Setubal, Sines and Lisbon4, as well as these
ports maximum annual capacities;
• historical movements of containers from the ports mentioned to the hinterlands;
• prospects and capacity for the recent service Iberianlink, connecting the Ports of Leixões,
Sines, Lisbon and Setubal to the Spanish hinterland, namely Madrid;
• Luis Simões (major logistical Portuguese company) data on freight movement to Spain and
from Ports (all done by truck);
• Specialized press articles;
3 Of Containers, data supplied by CP 4 Data from the Ports Authorities, INE and Eurostat
Page 5
• Experts Insight.
From this several sources and after careful calibration we constructed three scenarios (most
likely, low demand and high demand) and selected the Inputs for the Lattice model, that gives an
extensive array of outcomes for each of the scenarios. Next we present the most relevant data
collected.
From the data presented, and the answers we got from Luis Simões5, we can see that most of
the containers that arrive in the Ports are moved to the hinterland by train, and that the direct
shipment of containers from Portuguese Ports to Spain is negligible.
Still, the recent Iberianlink is reported to be a success6, with a predicted growth rate of 30%
for the next two years. Furthermore, the Port of Sines container terminal will expand is capacity to 1
500 000 TEUs per year. This expansion will be made counting on the Port capability to expand is 5 See Annex 1 6See Annex 2 (magazine articles)
Movement (TEUs) Unloaded Maximum Capacity (TEU)Years Setubal Lisbon Sines Setubal Lisbon Sines
1997 666 160408 Unload 170000 442500 750000
1998 2031 166152 Total 340000 885000 1500000
1999 964 179942 source: Port Lisboa, Port Sines, Consulting Port Setubal
2000 2069 1937332001 2913 2163742002 4649 246213 Setubal Lisbon Sines
2003 5785 275387 v (growth rate) 22.28% 5.30% 59.93%2004 9699 255776 9802 σ (variance) 41.04% 7.22% 22.18%2005 6450 258124 25816
2006 8018 255414 621902007 5906 277662 731352008 9976 277854 116559
source: Eurostat, Porto Lisboa, Porto Setubal, Transportes em Revista
Variance and Growth rates (per year) from the data
Figure 2 - Data from Ports
Containers Moved From Ports (TEUs)-2008
Setubal Lisbon Sines Containers Moved to Spain 2007
Total 19952 555708 233118 tons TEUs Revenue Revenue/Teu
By Rail 8,030 346,533 209806 47,162 3144 411,878 € 131 €
Rail Share 40% 62% 90.00% source CP
Source CP
IberianLink Characteristics (now 3 trains per week, possibilitie of 5)
Train Capacity (Teus) Frequency/Week W TEUs Per Year
44 3 52 6,864
44 5 52 11,440
Predicted Growth Rate in the 2 next years - 30%source: Transportes em Revista
Figure 3 - Data from Rail (in Ports and to Spain)
Page 6
hinterland to Spain (Sines is at the same distance to Madrid as Barcelona, main Port that supplies
that city). So this port expansion7 depends on the construction of a new rail line to connect it to
Madrid. It´s importance is recognized by the European Union, and this line is on the TEN-T priority
projects. As for Rail as whole its share of total freight movement in Portugal as been slowly growing
in the last years and this seams a trend for the next years.
So the main factors to determine the parameters to input in the Lattice model were the Sines
Port historical and predicted growth rates as well as its capacity, and the Iberianlink record. We
calibrated8 these values for the Lattice so that in the most likely scenario, at the end of the 24 years
(24-27 because each period we consider are 3 years…) we got an average demand of about 440 000
TEUs, a bit more than half of Sines Capacity (of unloaded Containers) and a Probability Distribution
that allows for values as low as 5 000 TEUs and as high as 750 000 TEUs (the maximum capacity).
For the High scenario the final average is almost 700 000 TEUs, but the maximum value is still about
750 000 TEUs. In the low demand, average falls to 106 000 TEUs and the maximum value we can
obtain is about 280 000 TEUs moved. For all, we assumed that the starting point was a connection
like the Iberianlink function at maximum capacity, with 5 trains per week, each one carrying 44
TEUs, that gives a value of 11 440 TEUs per year.
3.2. Production, costs and revenues
But the fact that there is Demand doesn´t mean we can take advantage for it, since we might
be constrained by capacity of the lines we are using. Other crucial production factors are the price
we obtain per TEU shipped to Spain, our main source of revenues, the costs of operation and
maintenance, as well as the necessary initial investments. It’s not worth to match demand if the
costs to attain it are higher than the benefits.
7 Also Setubal port is well below is possible capacity, but we won´t focus on that… 8 See “Calibration1_LikelyScenario/Low and High” spread sheets in the respective files.
Parameters (per Year) Low Most Likely High S (start value) 11440 11440 11440v (Growth Rate) 5.99% 10.00% 12.48% σ (variance) 23.40% 21.11% 7.51%u (upside) 1.39 1.47 1.47 d (downside) 0.83 0.8 0.86 p (probability) 0.71 0.86 0.98
Parameters For Lattice Demand - TEUs From Sines to Spain By Rail
Figure 4 Parameters for the several Scenarios
Page 7
The approach we pursued was to determine for each alternative9, the capacity, the
maintenance costs, the operational costs and the necessary initial investment. We used the
parameters in Figure 5.
Figure 5 - Production Parameters
This parameters were calculated based on several sources (CP, Refer, Magazines…), each
value is justified in the spreadsheet “Table1-Parameters”, of the excel file. Then we applied these
values to each section of each alternative we considered to make the connection from Sines and
Madrid (this was made on a table that is also presented in the mentioned spreadsheet). Than we
combined the sections of each alternative and constructed a second table (in the “Table2-
Alternatives-Costs” spreadsheet) that as a synthesis of the operational, maintenance and investment
costs, as well as the critical capacity, for each alternative.
On the next page we present the two mentioned pages.
9 Base Case, Sines Elvas Direct and Sines Elvas phased
Value Unit
Discount Rate (8) 12% Percentage
Cost remodeling(1) 0.78 10^6€ p/km
Cost new line(2) 3.2 10^6€ p/km
Capacity old line(3) 2 trains p/day
Capacity remodeled and new line(3) 100 trains p/day
1 TEU ≈ X TON(4) 22 tons
Capacity Train New 66 TEUs/Train
Capacity Train old 44 TEUs/Train
Maint. costs old line 0.01 10^6€ p/km/year
Maint. costs new line(5) 0.01 10^6€ p/km/year
Cost TEU new lines (6) 0.30 euros
Cost TEU old lines (6) 0.40 euros
Price per TEU(7) 334.30 euros
Rolling Stock Aquisition(9) - 1 44000000.00 euros
Rolling Stock Aquisition(9) - 2 56000000.00 euros
Page 8
Figure 7 - Alternatives Costs and Capacities of each alternative
As can be seen, to fit the scope of this assignment we limited the amount of options we intended to explore…
We chose to approach it as an economical and financially viable project per se and that is why we selected a discount rate of 12%, a
common rate applied in developed countries for private projects, although for projects of such national (and European) strategic
importance sometimes the discount rates can go to 4-5%.
TEUS TEUS TEUS 10^6 euros 10^6 euros euros euros euros Years
Sections Critical Capacity LX-Sines Critical Capacity Sines-Elvas Critical Capacity Poceirão-Elvas Inv. Maint. Cost TEU LX-Sines Cost TEU Sines-Elvas Cost TEU Poceirão-Elvas Construction Time
Base Case
Sines-Ermidas Sado
Ermidas Sado-Grândola
Grândola-Poceirão
Lisboa-Entrocamento-Elvas 27544 27544 0 5 51 0 108
Sines-Elvas
DIRECT
Poceirão-Grândola
Sines-Grândola
Grândola-Casa BrancaCasa Branca-ÉvoraÉvora-Elvas 495792 2065800 528 3 32 57 0 2
Sines-Elvas
Phase1
Sines-GrândolaGrândola-PoceirãoPoceirão-Casa BrancaCasa Branca-ÉvoraÉvora-Elvas 495792 27544 464 3 32 0 63 1
Sines-Elvas
Phase 2.1
Poceirão-Grândola
Sines-Grândola
Grândola-Casa Branca
Casa Branca-Évora
Évora-Elvas 495792 2065800 64 3 32 57 0 1
Sines-Lisboa-Elvas
Phase 2.2
Sines-Grândola
Grândola-Poceirão
Poceirão-Casa BrancaCasa Branca-ÉvoraÉvora-Elvas 495792 2065800 47 3 32 57 1
Sections distance(km)
Capacity (train
p/day)
TEU Cap Section
p/year
Maint.Cost
106€
Cost/TEU/pk
m €
Cost section
p/TEU €
Capacity (train
p/day)
TEU Cap Section
p/year
Maint.Cost
106€ Cost/TEU/pkm
Cost section
p/TEU Inv. 106€
Capacity (train
p/day)
TEU Cap Section
p/year
Maint.Cost
106€
Cost/TEU/p
km
Cost section
p/TEU Inv. 106€
Sines-Ermidas Sado 50.7 2 27544 0.6591 0.40 20.28
Ermidas Sado-Grândola 27.4 2 27544 0.3562 0.40 10.96
Grândola-Poceirão 65 24 495792 0.65 0.30 19.5
Sines-Grândola 40 100 2065800 0.4 0.30 12 128
Grândola-Casa Branca 20 100 2065800 0.2 0.30 6 64
Casa Branca-Évora 25 100 2065800 0.25 0.30 7.5
Poceirão-Casa Branca 60.1 2 27544 0.7813 0.40 24.04 100 2065800 0.601 0.30 18.03 46.878
Évora-Elvas 105 0 100 2065800 1.05 0.30 31.5 336Lisboa-Entrocamento-Elvas 271 2 27544 3.523 0.40 108.4
Existing line Remodelling line New line
Figure 6 - Calculation of Costs/Capacity for each section
Page 9
3.3. Cash Flows and NPVs
To compute the cash flows we first calculated the Production we were able to satisfy and
the demand that wasn´t constrained by capacity (that we assumed to be the lines capacities, given
by the number of trains they can take and the extent of those trains).
Then we calculated the costs, which are the investments in new lines, plus the maintenance
costs of the lines (they are our infrastructure) we manage and the operational costs that depend on
the production. As you can see in Figure 7 for each alternative there are different values. In the
excel spreadsheets there are comments on the cells that have an explanation on how the values are
computed.
The revenues are the production (TEUs moved to Spain), multiplied by the Price. In the
RENFE (Spanish main Rail Company) webpage the prices to move containers from the Ports of
Sines/Setubal and Lisbon are available10.
Using the Lattice model, for each period there are several possible Demands, each with a
probability, so for each period we get several possible Cash flows. We simply discount these cash
flows to the corresponded period they were made and multiply each of the period cash flow for its
probability, that way we get for each period an expected discounted cash flow, simply add them and
we have the expected Net Present Value. Or we can only discount after having the expected value of
each period cash flow like shown in the figure below.
Figure 8 - Expected NPV for the Sines-Elvas Direct Alternative
3.4. Flexibility
One of the main instruments to cope with uncertainty is to have a flexible design of the
project that will minimize the costs when there are down sides (in our case low demand from Sines
10 See “Table1-Parameters” Spreadsheet
Probability -528,000,000.00 5452310 9552043 14362632 20124007 27132190 35755136 46452617 59801237Weighted -5,103.17 852894 2734219 5889486 10683598 17628239 27425418 41025336Cash Flow -30,559.55 65917 479390 1458316 3343634 6614019 11946887
-7,620.99 -4,598.60 58435 273255 793425 1864787-1,441.32 -3,171.19 3296 40473 155221
-243.71 -850.81 -761.16 4322-38.82 -180.52 -352.24
-34.20Witout Initial Investment
0 1 2 3 4 5 6 7 8
E [Cash Flow] 0 5,447,207 10,374,377 17,155,147 26,486,844 39,329,124 57,002,671 81,325,011 114,797,403PV( E[Cash Flow]) 0 3,877,215 5,255,982 6,186,318 6,798,513 7,185,284 7,412,604 7,527,411 7,563,094ENPV over 18 years 36,715,916
ENPV over 24 years 51,806,422
With Investment0 1 2 3 4 5 6 7 8
Initial Investment 528,000,000.00 €Op Cash Flow 0 € 5,447,207 € 10,374,377 € 17,155,147 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,011 € 114,797,403 €PV( E[Cash Flow]) 528,000,000 3,877,215 5,255,982 6,186,318 6,798,513 7,185,284 7,412,604 7,527,411 7,563,094ENPV over 18 years 491,284,084
ENPV over 24 years 476,193,578
Page 10
to Madrid) and easily take advantage when opportunities emerge. Our flexible option consisted in
just building the Sines-Grândola (see Figure 1) and Évora-Elvas sections of the Sines-Elvas line (the
key sections to get a better connection to Spain), leaving for latter the option to add the Grândola-
Casa Branca section.
So the last section is only built if the increase in Production it allows can deliver cash flows
that support the costs of this extra investment. And of course due to this the initial investment is
also smaller. On Figure 9, Figure 10 and Figure 11 we present several comparisons between the
option with flexibility and without it.
Figure 9 - Value of flexibility for the several scenarios
Figure 10 - Comparison of the several Alternatives in the “most likely” scenario
Figure 11 - VARG curve, Phased and Direct Alternatives in the "most likely" scenario
High Demand Most Likely Low Demand
Project with Option OFF $446,811,439 Project with Option OFF $449,400,397 Project with Option OFF $454,651,901Project Flexible (option in) $439,145,569 Project Flexible (option in) $442,919,784 Project Flexible (option in) $454,651,901Value of Flexibility $7,665,870 Value of Flexibility $6,480,613 Value of Flexibility $0
Project Direct (Sines-Elvas) $455,420,014 Project Direct (Sines-Elvas) $476,193,578 Project Direct (Sines-Elvas) $502,151,150Project Flexible (option in) $439,145,569 Project Flexible (option in) $442,919,784 Project Flexible (option in) $454,652,041Value of Flexibility $16,274,445 Value of Flexibility $33,273,794 Value of Flexibility $47,499,110
Value Of Flexibility
Alternatives Inititial Investment Max NPV Min NPV Expected NPV(Euros) (Euros) (Euros) (Euros)
Base Case (Iberian Link) 0 € 16,834,278 € 37,597,520 € 18,962,012 €SinesElvasDirect 528,000,000 € 451,803,646 € 533,200,824 € 476,193,578 €SinesElvasPhased (flexible) 464,000,000 € 422,817,358 € 482,975,573 € 442,919,784 €
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
-540.00 € -520.00 € -500.00 € -480.00 € -460.00 € -440.00 € -420.00 € -400.00 €
Cumulative Probability
NPV (€)
Millions
VARG curves - Comparison Direct vs Phased
SinesElvasPhased NPV (SinesElvasDirect)
Page 11
As presented on Figure 9, in this case, flexibility has always a high value. Performing a
sensitivity analysis on the discount rate the flexible solution maintains a higher expected NPV,
when compared with the “built all at once” solution.
Figure 12 - Sensitivity analysis for NPVs in the "most likely" scenario
Here we should add that through the Lattice model, for each period and for the several
possible outcomes of each period, an evaluation is made if it’s worth to call in the flexible option.
This involves evaluating, from the state we are in, given the future range of option if we gain more
by investing and increasing our capacity (and decreasing maintenance and operational costs per
TEU), or if we are better without making the investment and using the initial infrastructure. The
“technicality” can be appreciated in “LatticeSinesElvasPhased” spreadsheet of the files.
Figure 13 - When is the Option called in the most likely scenario
To calculate the expected NPV we need to evaluate every possible path of the Lattice, in this
case 256 (in the spreadsheet example given to us, there were only 6 periods, what is equivalent to
600,000,000
500,000,000
400,000,000
300,000,000
200,000,000
100,000,000
0
20
%
19
%
18
%
17
%
16
%
15
%
14
%
13
%
12
%
11
%
10
%
9%
8%
7%
6%
5%
4%
3%
NP
Vs
(eu
ros)
NPVs varing with Discount Rate
Sines Elvas Phased
Sines Elvas Direct
0 1 2 3 4 5 6 7 8
Excercise CALL NO NO YES YES YES YES YES YESOPTION ? NO NO NO NO NO NO NO2.6 NO NO NO NO NO NO
NO NO NO NO NONO NO NO NO
NO NO NONO NO
NO
Page 12
64 different paths…) different possible NPVs, and for each we have to judge if along the path the
option in is considered or not.
4. Project Financial Studies
As can be seen in the excel files and Figure 10, Figure 11 our “economical” NPVs are
negative, and the Base Case (Iberian Link) presents the higher value (even though it’s still
negative…). But this can be misleading because there are inputs that we still didn´t accounted for,
such as the European Union funds that cover 50% to 70% of the construction costs of the new
lines. Second, we should also analyze the cash flows the alternatives generate in each period and, in
the option seen in Figure 14, each period generates considerable returns, which does not happen
for the base case where all periods give negative cash flows.
Figure 14 - Cash Flows of Phased Alternative, most likely scenario.
So, although the Base case as an apparently better value of NPV, in fact, the other options
have lower values due to the very high initial investment and the fact that the higher returns only
come further in the future, and their weight is greatly reduced due to the discount rate effect.
4.1. Structured Finance
So, to proper set up our PPP and its financial structure (and even institutional structure…)
we started by the concept, moved to analyze the project economics/engineering and then on top of
that designed the best financial arrangements to support the project. In Figure 14 we present the
structured finance for the Phased alternative, the one that provided the best economical solution, in
the “most likely” scenario. For the other scenarios we tested also our financial arrangements, the
results and analysis are in the Results Assessment. The consequences on the PPP institutional
setting, financial sources and the risk allocation are discussed in further detail on chapter 6 (PPP
design).
Without Investment acounted For0 1 2 3 4 5 6 7 8
E [Op Cash Flow] 0 € 1,930,249 € 6,190,393 € 8,029,278 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PV E [Op Cash Flow] 0 € 1,373,913 € 3,136,246 € 2,895,438 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €ENPV over 18 years 28,801,998 €
ENPV over 24 years 43,892,503 €
With Investment0 1 2 3 4 5 6 7 8
Initial Investment 464,000,000 € 64,000,000 €E [Op Cash Flow] 0 € 1,930,249 € 6,190,393 € 8,029,278 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €E [Cash Flow] 464,000,000 € 1,930,249 € 6,190,393 € 55,970,722 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PV( E[Cash Flow]) 464,000,000 € 1,373,913 € 3,136,246 € 20,183,604 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €ENPV over 18 years 458,277,044 €
ENPV over 24 years 443,186,539 €
Page 13
Figure 15 - Phased Alternative, most likely scenario, cash flow with financial arrangements
We started with the cash flows generated from the project, than added the infrastructure
investments; we selected period 3 to call in option because it gave the better expected NPV11.
4.1.1. Rolling Stock
Then we add the rolling stock acquisition costs (based on the recent CP fleet renewal
numbers), this wasn´t included in the economical analysis for a reason, and it’s also a consequence
of the Project concept and institutional setting. CP is one of the stakeholders of this company, so it
will support these costs. Actually the equity investment is exactly 95% of the costs of the rolling
11 This doesn´t mean we will do it in that year, it means it is the most likely option we will make. The value of flexibility is exactly to have the capacity to make decisions in the future and don´t compromise everything at the beginning. As you will see in the other scenarios the years we choose are different.
t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 t = 7 t = 8
Period 0 1 2 3 4 5 6 7 8
Years 0 3 6 9 12 15 18 21 24
Value 0 € 1,930,249 € 6,190,393 € 8,029,278 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PresentV 0 € 1,373,913 € 3,136,246 € 2,895,438 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €
Value 464,000,000 € 0 € 0 € 64,000,000 € 0 € 0 € 0 € 0 € 0 €
PresentV 464,000,000 € 0 € 0 € 23,079,042 € 0 € 0 € 0 € 0 € 0 €
Value 44,000,000 € 0 € 0 € 56,000,000 € 0 € 0 € 0 € 0 € 0 €PresentV 44,000,000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Value 232,000,000 € 0 € 0 € 32,000,000 € 0 € 0 € 0 € 0 € 0 €PresentV 232,000,000 € 0 € 0 € 11,539,521 € 0 € 0 € 0 € 0 € 0 €
Value 276,000,000 € 1,930,249 € 6,190,393 € 79,970,722 € 26,486,844 € 39,329,124 € 57,002,671 € 81,325,005 € 114,797,403 €PresentV 276,000,000 € 1,373,913 € 3,136,246 € 8,644,083 € 6,798,513 € 7,185,284 € 7,412,604 € 7,527,411 € 7,563,094 €
Equity
CP 41,800,000 € 0 € 0 € 50,400,000 € 0 € 0 € 0 € 0 € 0 € Port of Sines 13,800,000 € 0 € 0 € 1,599,414 € 0 € 0 € 0 € 0 € 0 € Private Logistic Operators 13,800,000 € 0 € 0 € 1,599,414 € 0 € 0 € 0 € 0 € 0 € Government 41,400,000 € 0 € 0 € 5,597,951 € 0 € 0 € 0 € 0 € 0 € Refer 13,800,000 € 0 € 0 € 1,599,414 € 0 € 0 € 0 € 0 € 0 € Private Investors 12,460,000 € 0 € 0 € 1,215,924 € 0 € 0 € 0 € 0 € 0 €
Total Equity Value 137,060,000 € 0 € 0 € 62,012,118 € 0 € 0 € 0 € 0 € 0 €PresentV 137,060,000 € 0 € 0 € 22,362,191 € 0 € 0 € 0 € 0 € 0 €
Fixed Rate Bonds Issued Value 55,200,000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 55,200,000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Payment of Bonds
24 Year Maturity 0 € 0 € 0 € 0 € 0 € 16,560,000 € 16,560,000 € 16,560,000 € 71,760,000 €
Total Payment Value 0 € 0 € 0 € 0 € 0 € 16,560,000 € 16,560,000 € 16,560,000 € 71,760,000 €PresentV 0 € 0 € 0 € 0 € 0 € 3,025,450 € 2,153,456 € 1,532,787 € 4,727,700 €
European Investment Bank Value 100,488,000 € 10,101,790 € 10,101,790 € 10,101,790 € 10,101,790 € 30,305,370 € 30,305,370 € 30,305,370 € 30,305,370 €Loan - 1st Loan PresentV 100,488,000 € 7,190,255 € 5,117,881 € 3,642,807 € 2,592,878 € 5,536,678 € 3,940,898 € 2,805,053 € 1,996,582 €
European Investment Bank Value 0 € 0 € 0 € 24,244,116 € 0 € 0 € 0 € 0 € 0 €Loan - 2nd Loan PresentV 0 € 0 € 0 € 8,742,671 € 0 € 0 € 0 € 0 € 0 €
Payment Value 0 € 0 € 0 € 0 € 3,262,939 € 3,262,939 € 8,701,170 € 8,701,170 € 8,701,170 €PresentV 0 € 0 € 0 € 0 € 837,515 € 596,127 € 1,131,497 € 805,377 € 573,251 €
Value 16,748,000 € 8,171,541 € 3,911,397 € 3,816,279 € 13,122,115 € 10,799,185 € 1,436,130 € 25,758,465 € 4,030,862 €PresentV 16,748,000 € 5,816,342 € 1,981,635 € 18,817,973 € 3,368,120 € 1,972,971 € 186,754 € 2,384,194 € 265,562 €
Value 16,748,000 € 8,576,459 € 4,665,062 € 848,783 € 13,970,898 € 3,171,713 € 4,607,843 € 30,366,308 € 34,397,170 €PresentV 16,748,000 € 10,931,658 € 8,950,023 € 27,767,996 € 31,136,116 € 29,163,145 € 29,349,899 € 31,734,093 € 31,999,654 €
FINAL NPV 31,999,654 €
Acumulated
Final Cash Flow
Value
E [Operational Cash Flow]
(without initial Investment )
Initial Investment
(New Lines)
Rolling Stock Aquisition
European Union
Funds (outwright grant)
Cash Flow with Investments,
Operations and EU Grant
Page 14
stock acquisition. This can be seen as CP conceding part of their Rolling Stock, personnel and
knowhow to the new company, more than as a financial transaction.
4.1.2. European Funds
Although the European Funds can cover up to 70% of the project new infrastructure costs,
we used some caution and just considered a cover of 50%.
4.1.3. Equity
We defined the Equity contributions as being determined by what will foster the project
dynamic more than the pure financial gains. So, finance was structured as a tool to provide a sound
economical project, and maximize its performance and not as an end to maximize itself. In the end it
will be the cash flows generated and the services provided that will be determinant to evaluate the
value of the project.
CP contribution to the equity was 95% of the rolling stock costs (for the 1st Phase and 90%
for the second phase, if the option is called in).
The Port of Sines will come up with 5% of the investment necessary to cover the initial costs
of the project (after discounting the European Union Funds). Several private logistical operators
(like Luis Simões, or a foreign company like Fedex) should also contribute in the same measure as
Port of Sines, as well as Refer. The Government will enter with 15% of the required investment of
the initial cost coverage. Then there will be room for other Private investors (like other Rail
companies, why not Railex or Deutsche Bahn?) that should put a value equivalent to 10% of the
sum of the above mentioned. In the end each actor share is resumed in Figure 16.
For the Phased option, in the most likely scenario, the Equity/Debt ratio is 0.97, which is
almost one (half debt, half equity).
4.1.4. Debt
There will be two forms of Debt, first are Bonds issued by the company with a fixed 5% year
rate12. This is a very appealing rate since maturity will be reached in 24 years, so every year the
investor will get 5% of his initial investment for a 24 year period (this gives a 120% return, plus the
initial investment…). The catch is that NCO will only start to pay the returns on the 5th period (15th
year). For the project is good the diversify the sources of finance, to involve investors that don´t
want to be shareholders (it´s less risky…) and it allows NCO to receive money at the start of the
12 In the Excel file there are detailed explanations and comments on this and the Loans
Page 15
project that it will only have to pay back 15 years from now. They will be issued in a value
correspondent to 20% of the initial necessary investment.
We will also go to the European Investment Bank for a Loan, given the scope of the Project it
will be granted, and it as very favorable conditions. We can start to pay after the end of
construction; the interest rate is indexed to Libor and it´s 2% per year; we also intend to negotiate
the payment and in the first periods (first 4 periods, 12 years) have a lighter burden and pay more
latter on. This loan will be paid on a 24 years period.
If we call in the option we will make o second loan to the EIB, in similar conditions but with
a shorter payment time.
4.1.5. Return on Equity
This combination of sources gives a constant positive cash flow, and a positive NPV for the
project (in the most likely scenario). Still we didn´t counted the return on equity. This is shown in
Figure 16.
Figure 16 - Return on equity at the end of the project and share of equity of each stakeholder
The cash flow provides the Private partners with a present value in the end of the project
(24 years) very close to the initial investment they made (let us remind that discount rate is 12%),
if we extended the period in analysis than this would be covered… But the Privates will be able to
do this because we assume the state (and public companies) won´t receive their share of return on
equity. But some comments are required:
First the State can and should buy bonds to invest in the project, and this was a way to get
returns; the sunk investment taken is not so extraordinary that couldn´t be justified by other
sources of income, like increase in taxes due to growing economic development, the best example is
the Port of Sines expansion, this link is key for its continuous expansion, so even if the Port of Sines
won´t gain win millions with this, it will have to do it to be able to gain millions on the Port
activities (or at least cover the ongoing infrastructure and service investments)…
initial invest. (% of share) With Gov Comp. Without Gov. Comp CP 41,800,000 € 30.5% 9,759,124 € Port of Sines 13,800,000 € 10.1% 3,221,912 € 11,023,346 € Private Logistic Operators 13,800,000 € 10.1% 3,221,912 € 11,023,346 € Government 41,400,000 € 30.2% 9,665,735 € Refer 13,800,000 € 10.1% 3,221,912 € Private Investors 12,460,000 € 9.1% 2,909,059 € 9,952,963 €
Return by end of project (PV)
Page 16
In combination with the Ports of Setubal, Lisbon and other sources of cargo (that´s why it´s
important to bring a nice logistical operator on board) the results could be even more positive.
5. Results Assessment
In order to assess the global results we obtained we present the following graphs (in the
excel files more information is available, for instance VARG graphics for every alternative in every
scenario are presented):
Figure 17 - Financial NPVs
The “High demand” scenario doesn´t provoke great changes in the financial structure of the project,
but it greatly improves its performance. In the low scenario case there is a greater impact, the
second option is not called in (and a second loan with EIB is not pursued) and the government is
forced to pay a share of the debt service. The private Investors (shareholders, not the bond buyers)
will also be hurt because there are less returns of the cash flow. We made the option that half the
cash flow generated would go to pay the debt and the rest would stay in the company.
0 €
20,000,000 €
40,000,000 €
60,000,000 €
80,000,000 €
100,000,000 €
120,000,000 €
140,000,000 €
160,000,000 €
180,000,000 €
20
%
19
%
18
%
17
%
16
%
15
%
14
%
13
%
12
%
11
%
10
%
9%
8%
7%
6%
5%
4%
3%
NP
Vs
(eu
ros)
Discount Rates
Financial NPVs of Phased Option in all scenarios
Most Likely
High
Low
Page 17
Figure 18 - Return on Equity for Phased Option
Figure 19 - Cash flow for the low scenario (phased alternative)
Most Likely
initial invest. (% of share) With Gov Comp. Without Gov. Comp CP 41,800,000 € 30.5% 9,759,124 € Port of Sines 13,800,000 € 10.1% 3,221,912 € 11,023,346 € Private Logistic Operators 13,800,000 € 10.1% 3,221,912 € 11,023,346 € Government 41,400,000 € 30.2% 9,665,735 € Refer 13,800,000 € 10.1% 3,221,912 € Private Investors 12,460,000 € 9.1% 2,909,059 € 9,952,963 €
High
initial invest. (% of share) With Gov Comp. Without Gov. Comp CP 41,800,000 € 30.5% 15,563,361 € Port of Sines 13,800,000 € 10.1% 5,138,143 € 17,579,478 € Private Logistic Operators 13,800,000 € 10.1% 5,138,143 € 17,579,478 € Government 41,400,000 € 30.2% 15,414,429 € Refer 13,800,000 € 10.1% 5,138,143 € Private Investors 12,460,000 € 9.1% 4,639,222 € 15,872,485 €
Low
initial invest. (% of share) With Gov Comp. Without Gov. Comp CP 41,800,000 € 39.3% 2,579,192 € Port of Sines 9,160,000 € 8.6% 565,201 € 1,000,627 € Private Logistic Operators 9,160,000 € 8.6% 565,201 € 1,000,627 € Government 27,480,000 € 25.8% 1,695,603 € Refer 9,160,000 € 8.6% 565,201 € Private Investors 9,676,000 € 9.1% 597,040 € 1,056,995 €
Return by end of project (PV)
Return by end of project (PV)
Return by end of project (PV)
Value 0 € 707.484 € 3.006.559 € 5.010.384 € 6.522.352 € 7.323.671 € 8.365.174 € 8.760.663 € 9.163.251 €PresentV 0 € 503.573 € 1.523.216 € 1.806.795 € 1.674.125 € 1.338.007 € 1.087.804 € 810.884 € 603.694 €
Value 464.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
PresentV 464.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Value 44.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 44.000.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Value 324.800.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 324.800.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Value 183.200.000 € 707.484 € 3.006.559 € 5.010.384 € 6.522.352 € 7.323.671 € 8.365.174 € 8.760.663 € 9.163.251 €PresentV 183.200.000 € 503.573 € 1.523.216 € 1.806.795 € 1.674.125 € 1.338.007 € 1.087.804 € 810.884 € 603.694 €
Equity
CP 41.800.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Port of Sines 9.160.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Private Logistic Operators 9.160.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Government 27.480.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Refer 9.160.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € Private Investors 9.676.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Total Equity Value 106.436.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 106.436.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Fixed Rate Bonds Issued Value 36.640.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €PresentV 36.640.000 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Payment of Bonds
24 Year Maturity 0 € 0 € 0 € 0 € 0 € 10.992.000 € 10.992.000 € 10.992.000 € 47.632.000 €
Total Payment Value 0 € 0 € 0 € 0 € 0 € 10.992.000 € 10.992.000 € 10.992.000 € 47.632.000 €PresentV 0 € 0 € 0 € 0 € 0 € 2.008.197 € 1.429.395 € 1.017.415 € 3.138.096 €
European Investment Bank Value 48.148.800 € 4.840.270 € 4.840.270 € 4.840.270 € 4.840.270 € 14.520.811 € 14.520.811 € 14.520.811 € 14.520.811 €Loan - 1st Loan PresentV 48.148.800 € 3.445.209 € 2.452.232 € 1.745.450 € 1.242.377 € 2.652.898 € 1.888.280 € 1.344.041 € 956.662 €
European Investment Bank Value 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €Loan - 2nd Loan PresentV 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 €
Payment Value 0 € 0 € 0 € 0 € 0 €PresentV 0 € 0 € 0 € 0 € 0 €
Government Debt Service Value 21.850.975 € 21.330.224 € 21.132.479 € 57.571.185 €(payment of Bonds and Debt) PresentV 3.992.091 € 2.773.774 € 1.956.014 € 3.792.911 €
Value 8.024.800 € 4.132.786 € 1.833.711 € 170.113 € 1.682.082 € 3.661.835 € 4.182.587 € 4.380.331 € 4.581.625 €PresentV 8.024.800 € 2.941.635 € 929.015 € 61.345 € 431.749 € 669.004 € 543.902 € 405.442 € 301.847 €
Value 8.024.800 € 3.892.014 € 2.058.303 € 2.228.416 € 3.910.498 € 7.572.334 € 11.754.921 € 16.135.252 € 20.716.878 €PresentV 8.024.800 € 5.083.165 € 4.154.149 € 4.215.494 € 4.647.243 € 5.316.246 € 5.860.148 € 6.265.590 € 6.567.437 €
FINAL NPV 6.567.437 € Equity/Debt Ratio 1,26
Value
E [Operational Cash Flow]
(without initial Investment )
Initial Investment
(New Lines)
Rolling Stock Aquisition
European Union
Funds (outwright grant)
Cash Flow with Investments,
Operations and EU Grant
Acumulated
Final Cash Flow
Page 18
6. PPP design
This will be a Design, Build, Own and Operate for a period of 24 years. Nevertheless, a
performance evaluation after 10 years should be done and assessed if the NCO should continue as it
is, i.e., private (mixed capital) operator or whether it should be transferred to the State or other
solutions. The scheme in Figure 21 describes the structure, the agents involved and their relations
and the financial mechanisms that together set up the PPP we are proposing.
6.1. Agents involved
As previously stated, we intend this project to be regarded not as an introduction of
competition, although somehow inevitable, but as a structuring of the freight cargo movement. The
agents involved in our project are those who participate in the equity of NCO, the European
Investment Bank through its loans, the European Community through its grants and the private
investors that acquire the issued bonds. Besides them, the principal agent in the whole process is
the State, which is involved directly and indirectly (through CP and REFER) in the equity as well as
the proposed main bond buyer.
6.2. Finance sources
NCO funds will be raised by 4 different sources: equity; EC grants; EIB loans and finally by
issuing fixed rated bonds.
6.2.1. Equity
A part of the financing will come from a pool of assets/funds assembled by the main
stakeholders of this project. Figure 20 states the distribution of equity of NCO and as we can see the
private sector is represented with a around 30% of the total shares whereas the State has directly
30% plus 40% through its public companies CP and REFER.
Figure 20 - Equity distribution
(% of share) CP 30% Port of Sines 10% Private Logistic Operators 10% Government 30% Refer 10% Private Investors 9%
Equity
Page 19
The private investors can be either national or international players. We consider that this
can be an attractive strategic investment for foreign rail companies and logistic operators because
of the potential the Sines port can bring to their supply chains in a European scale.
6.2.2. European grants
The European grants we are foreseen to obtain will come from the following different EC
programs:
• Marco Polo program (shift of freight movement from roads to rail/sea)
• European Regional Development Fund (ERDF)
• TEN-T European program
• Motorways of the Sea program
Due to the fact that the Sines-Madrid-Paris railway link is one of the TEN-T priority links,
this project can receive funds up to 70% of the required investment on infrastructure but, to reflect
possible problems that can occur and to make it less dependent on those grants, we have
considered only 50%. This grant will be used in the start of the project for the Sines-Elvas direct
alternative but for the Sines-Elvas phased option, the fund will be used in the start of the project
and also when the flexibility option of constructing the Grândola-Casa Branca section is given the
“green light”.
6.2.3. EIB loans
The European Investment Bank provides loans at very good interest rates for projects that
are in the scope of the EC objectives and NCO falls in this category. These loans will be required
when investments are needed, i.e., at the start of the project for both alternatives and, for the
phased alternative, when it is decided to construct the new link. They will start to be repaid 3 years
after they are granted, taking advantage of the possibility given by the EIB to start the payment of
the loans only after construction and at beginning of operations, the so called grace period (EIB,
2009).
6.2.4. Fixed Rate Bonds
The final funding mechanism for our project will be the issue of bonds with a maturity of 24
years, paying an annual fixed interest rate of 5%, with the coupons repayment to start after 15
years from the start of the project. This would enable us to receive cash when issuing the bonds and
only cash-out after at least 15 years, when the projections in the most likely scenario provide good
operational cash flows that can cover these repayments.
Page 20
These bonds can represent a good investment to the State as they can receive the interest
on their investment and at the same time send a strong message that this project is backed by the
Government. Also, the State can foster the acquisition of these bonds by the private sector by
providing accessible loans through its national bank CGD.
6.3. Major uncertainties
The project contains several uncertainties associated which can affect its performance. The
following subsections describe the ones we considered relevant.
6.3.1. Total freight movement
Given this is the major uncertainty of the project, we have dedicated our attention to its study
and considered several scenarios for different types of growth to understand the strengths and
weaknesses of the project (see Project Operational Studies). We consider this risk to be very important
due to the fact that, even if we capture a substantial share of the market, if there is a significant
reduction in total freight movement we will not be able to generate enough returns to cover the
financial needs of the project. Also, it is important that not only the Sines port continues to expand but
also that the container movement, which is market segment we are addressing, also expands. This is
partially mitigated by having a flexible design.
6.3.2. Share of the market and competition
The viability of this project depends on, not only having a growing demand, but on the ability of
this growth to be captured by NCO. In Figure 3 we can see that currently 90% of the total containers
moved in Sines where using the rail mode which leads us to conclude that there is a considerable
probability that the containers that come to Sines to go to Madrid will in fact use the rail mode13.
13 We have also inquired Luís Simões to assess how many containers they move to Madrid from Sines by road and the answer was that only Tons were moved, not containers. See Annex A, Luís Simões. (2009)
Page 21
NCO
Special purpose vehicle
Build new lines Remodel existing lines
Design the alternative paths and phases for the service it will provide
Owns the new and
remodeled lines
Operates container freight cargo between Lisbon/Sines and Madrid as well as possible intermediate services
Receives payment for owned
infrastructure rented to other
possible operators.
Pays fees to REFER owned infrastructure that NCO might use in its routes.
Possible payments to CP for use of its rolling stock
State
Debt
European
Funds
European Investment Bank
Equity/Shareholders
• CP • REFER • Government • Logistic Operators (ex: Luís
Simões) • Port of Sines • Other investors
Investors Buy
BuyLoans
Receives for ton/km
Other costs:
• Maintenance costs • Operational costs • Outsourcing services Other revenues • Other services
(inventory manage, administrative, etc)
Figure 21 - PPP Scheme
Bonds
• Issue Fixed rated Bonds
Page 22
To make sure that this growth is captured, and since the main goal is to connect Sines to Madrid,
the connection from the border to Madrid as to be reliable and efficient, otherwise this can hinder the
success of the project.
6.3.3. Oil Price
This is significant part of our operational costs but we also consider that high oil prices can be an
advantage to us because it will increase much more the price/costs road transportation. Either way, it’s a
significant factor to take into account in terms of uncertainty.
6.3.4. Availability of partners
As seen in Figure 20, the private sector (port of Sines, private logistic operators and other
private investors) represent around 30% of the total equity of our project which means it is
important to attract them to invest in the project to cover the required NCO financial needs. By
having the Government involved in the project with around 70% of equity (direct and indirect) as
well as the probable main bond buyer this represents a strong incentive for privates to invest in the
project.
6.3.5. New infrastructure developments (future rail, highways, ports)
From a national perspective, this is a risk that can be somehow mitigated since the State is
directly involved in the project and it will, in principle, not build other infrastructure that can cause
instability in NCO but this can in fact happen. There is also the possibility that Spain can build new
infrastructure, for instance, a new or expanded port, or can create the conditions to have very
competitive prices in existing ports, which can cause the Sines demand to reduce substantially and
shift to other ports.
6.3.6. Technical developments in rolling stock
These developments can be either an advantage as well as a disadvantage. An advantage due
to the fact that there are some advances that can facilitate the movement of cargo by container (like
refrigerated containers or fast loading and unloading mechanisms for rail container cars) and a
disadvantage if new developments arise in the road haulage sector that can shift the container cargo
movement to trucks.
Page 23
6.3.7. Regulatory framework
Again, depending on the framework implemented, it can either be an advantage (more EU or
national restrictions on the road haulage sector) or disadvantage (for instance, if it is allowed that
huge articulated road vehicles are allowed to operate) for NCO operations. .
6.3.8. Social/Political unrest
It has to be considered but both Portugal and Spain have had for the last decades a stable
period of stability.
6.4. Risk Allocation
Over leverage and decoupling between shareholder and stakeholders interests as been a
source of many problems in today’s financial (and the rest…) world. So, when setting up the
financial structure one main concern is that the risk of the project should be mainly assigned to the
shareholders/stakeholders that will pool their resources and form the bulk of the equity cake. The
objective is to have an integrated approach to Financing, Designing, Building and Operating. This
implies that the design, construction, and operational risk will be shared by the shareholders and it
is in their best interest to turn the project a successful operation. Since they are equity holders and
share the risk, they will have an important role in mitigating this risk, which they can accomplish by
making use of the NCO services as well, adjusting their supply chains and operations to take full
advantage of NCO.
In many PPP arrangements the risk of the project is split in Design, Construction,
Commercial and availability with different partners coping with different risks. This is not our
approach, each partner is accountable according to its share of equity. So in this case the private
sector represents 30% of the total equity which, according to some experts14, is considered a good
allocation of the risk.
Since this project is of strategic national interest, it is paramount that the State supports it.
The State will have a part of the equity share (that will only be repaid if there are available funds
after all other private investors are paid), and also be one of the main bond buyers. Nevertheless,
the intention is that, at least the bonds will be repaid at the end of the project with a large amount of
money coming from the earned interests. This considerations plus the fact that the EIB is giving a
considerable loan (that should be paid in the project lifecycle) that, in case of default the State can
be called in to assume the debt, implies that a substantial part of the financing and commercial risks 14 Professor Werner Rothengatter, which gave a session about financing of PPP projects, stated that 30% of equity and 70% of Government fund was not only a good proportion as it was the one being used in the Stuttgart 21 project.
Page 24
are within the State side, so in fact the private risk is not exactly 30% as their share indicates. Still as
the results of return on equity in the “low demand” scenario show they still bare a considerable
commercial risk.
As well, the State will also assume the “Bureaucratic Risk”, that is getting environmental
(and other required) licenses for the possible new links to be constructed.
6.5. Performance targets and quality control
This will be a DBOO with a possibility of transfer at the final of the 24 year concession
period. What we propose is to devise a performance mechanism and metrics that can evaluate how
is the project running. If after the 24 year period the project is performing well according to the
defined metrics then it should not be transferred to the state but instead a new concession period
should be awarded. This is another measure that creates the incentive for NCO to be focus,
productive and efficient.
The performance indicators and quality measures we will use are:
• Share of the market –Setting different targets for freight movement to Spain, above and
below 400km in Portugal;
• Availability of infrastructure we own and services we provide, with the exception of third
parties causing the lack of availability (this applies to the services since we will use
infrastructure we don’t own).
• Capacity to cover the debt obligations to EIB and bond holders and provide profits to the
private shareholders, with the government being awarded its part of the profit if and only
enough funds are available.
• Ability to reduce total CO2 emissions due to freight traffic movement.
• Reduction of travel time between certain established points, (ex: Sines-Madrid)
6.6.Externalities
In our assessment, we have no considered the externalities explicitly but, with the
considerable involvement of the State in the whole project, it is implicit that, although it may not get
direct profit from the project itself, there are substantial positive externalities that will be realized:
• CO2 emission reduction
• Less energy consumption
• Economic development of the region of Sines and its hinterland
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• More tax revenues from operations, land developments, contracts with major
logistic players, etc.
• More efficient logistic operations inside Portugal and better connection to Europe
through Spain.
• Attraction of industries that rely on the reliable and efficient logistic operations,
which can be provided by Sines and NCO.
7. Conclusions
Even though this report tackles all the main issues necessary to set up this PPP there were
some important items that weren´t considered like the Cost of Capital, namely the weighted average
capital cost or the impact of taxes in the financial structure.
The fact that with our results the project cannot be sustained without some form of
subsidization is a result of the infrastructure costs being internalized, that is not the case of most
Rail projects, in fact with the outcomes we obtained even part of those investments could be
covered. This vertical approach allows a complete accountability of the project benefits and costs,
and this is also the business model employed in countries with the most efficient and effective rail
freight sectors (USA, China or Germany are examples). For instance, in the base case scenario if the
costs of maintenance with the lines are not accounted (as we did) the project would give a very
positive result, and not the numbers we achieved.
We also focused our attention exclusively in the Port of Sines, and the movements from that
Port to Madrid, but there are other Ports that would benefit from this line, other destinations
besides Madrid and other sources of demand besides the Ports. If this is considered we would have
more stakeholders (the Ports of Lisbon and Setubal…) and more sources of revenues. Exactly
because of the importance of this infrastructure to the Ports maybe there share in the Project should
be higher, and if some shipping lines were included it would be even better, this way the project
would be more than a rail line it would be a part of a transatlantic supply chain from Madrid (and
even France…) to the Americas and Africa.
Although care was taken, it is necessary to tune better some of the parameters we used,
namely the capacity we considered for the lines and the associated costs. Further alternatives have
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also to be considered, namely construction of the line through Poceirão and not directly to Casa
Branca. Additional modeling and optimizing tools should also be employed.
Our main conclusion is that this is a Project worth studying more, that with the proper
engineering, institutional and financial framework can deliver great returns per se, even financial,
not to mention the externalities and direct benefits for the Maritime and Logistical sector. And if this
work can in any way help to deliver this project it will already be very useful.
8. ANNEX
Annex 1- Luís Simões. (2009.). QuestõesLuísSimoes - MIT Portugal.doc.
Annex 2 – Magazine articles
Annex 3 – Data from CP
9. References
EC. (2009, 04). Transport - Priority Projects. Retrieved from EC Transport:
http://ec.europa.eu/ten/transport/maps/doc/axes/pp16.pdf
EIB. (2009, 04). Individual Loans. Retrieved from
http://www.eib.org/products/loans/individual/index.htm
Luís Simões. (n.d.). QuestõesLuísSimoes - MIT Portugal.doc.
Moura, C. (2009, March 23). Transportes Em Revista. Retrieved from
www.transportesemrevista.com
Pereira, P. (2006, January). Transportes em Revista. Retrieved from www.transportesemrevista.com