(a)        Demand based

Freight rail projects are dependent on having sufficient users. Greenfield freight rail projects may only be financeable if there are anchor customers (e.g. mines or industrial users) who will benefit from cheaper transportation costs. These users may also co-invest in the rail business.

Lenders may expect the anchor customers to provide minimum traffic guarantees, to ensure that the infrastructure funding can be paid off over the life of the loan. In the longer term, the concessionaire may be able to take on more demand risk.

(b)        Project structure  

Is the project based on a complete logistics service (procurement of rail system, rolling stock and operations, charging a fee to transport goods from point to point) or separation of the infrastructure service and operations (where an infrastructure owner charges a track access fee to an operator)? In the latter case, are there single or multiple operators? How long will the concession(s) be?

The structure will depend on a number of factors, such as the status of the existing network and what parties are already in place to own and operate that network. For a freight rail project that will have a mine as anchor customer, the mining company may want to have suitable control over the operator so that it can guarantee that its mine products can reach the market. If there are to be multiple operators with strong businesses, it may be possible to separate out the infrastructure component of the project and finance this on the basis of the expected track access fees. Another structure might involve the government opening up an existing network to new operators by letting out concessions for specific train paths for specific goods, with the concessions being used to finance new rolling stock.

(c)        Third Party Use / Connections to wider network   

Will third parties have the right to operate their own rolling stock on the railway? Can third parties build a spur line to connect with the railway and then run services on the existing railway? Does the new line interact with an existing network and existing services? How will train paths be allocated? Can infrastructure charges recognise the “first-mover” risk that the investors took?

Although a new greenfield railway may viably be constructed to serve a new mine or industrial development, if the development is supported by the government through the grant of a concession, it raises valid questions as to whether the new railway should form part of a broader public infrastructure network, and therefore be open to third party use. In many cases concessions are therefore let on terms which mandate that third party usage must be tolerated, and even that third party spur lines may be connected. This is to avoid a situation where a developer can refuse access to the others, which may lead to the inefficient construction of a parallel or separate railway, or simply leave other developments unaffordable. That said, the initial developer will have been taking significant development risk with the original project and in calculating track access charges for subsequent users it is legitimate for a “first mover” risk component to be included in the price.

(d)        Passenger Use / Public Service requirement        

Does the project involve a passenger service? Is a minimum service level mandated by the government in the concession agreement? Is this use compatible with the intended freight use?

Similarly, the creation of a new or upgraded railway creates the possibility of a new or increased passenger service. In many cases, a public service requirement is therefore built into the concession terms, however in most cases the obligations are not particularly strict. This reflects the fact that a passenger railway service in developing countries are unlikely to be viable except on a subsidised basis. In addition, there can be a stark difference between passenger services and freight services – for example, mine-product trains can be very long, which may make it difficult to schedule in a frequent stopping service for passengers without additional capital expenditure for passing loops.

(e)        Modal competition

How is competition from competing modes of transport for the freight addressed? Do the rail operations have to cover the below-rail infrastructure cost in addition to the cost of rolling stock and operations? How does this compare with road freight’s contribution to roads through taxes/fuel levies?

One of the practical difficulties in financing a greenfield freight rail project is that the logistics cost to the end-user has to cover the cost of delivering and financing the new infrastructure, whereas in most countries road hauliers do not have to meet the full cost of their own “infrastructure” (the road network), even though heavy trucks can cause a significant and costly amount of damage to road surfaces. If this imbalance remains, it may be difficult to predict the demand uptake for the new railway.

(f)         Political Support

What steps can government take to encourage modal shift to railways? What other political support may be required for the project to be successful? Is retrenchment required of existing railway staff? How will this be managed politically?

The modal shift from road to rail may be a key driver for government, either due to the high cost of road maintenance or the indirect costs of road congestion (such as delays, pollution and accidents). To address the imbalance discussed above, the government may want to consider whether it needs to intervene in some way to encourage a modal shift. For example, by mandating a minimum use of railway infrastructure or incentivising rail usage through suitable tax breaks. In each scenario, the government’s desire to achieve a shift from road to rail is likely to come up against some political resistance from established interests, such as trucking companies.

(g)        Tariff regulation   

Are prices for use of the infrastructure or haulage regulated by statute or contract? What certainty will an investor have that prices can be raised to cover inflation/project costs over the life of the project?

A balance needs to be struck between the concessionaire’s desire to increase (or decrease) track access charges / haulage charges to meet unforeseen changes in costs over time (such as changes in law or external market changes such as forex movements and fuel costs) or to keep itself afloat as a consequence of reduced demand. Some regulation may be required – either by statute or contract – to ensure that the concessionaire does not abuse a market position, particularly where the government has put in place other incentives to encourage rail usage.

(h)        Management of supervening events

What supervening events may occur over the network? Are there security issues? Risks of vandalism and/or theft of assets? Risk of disruption of services at crossing places? Does the concessionaire need assistance from government agencies to manage these risks?

In an emerging market context, many such issues may present themselves. There needs to be a realistic discussion as to whether the concessionaire can fully protect itself from these risks or whether the assistance of government security forces (police or army) may be required from time to time to ensure that the concession remains workable.

(i)         Contractual fallback         

To what extent will the investors and lenders have recourse to the government on a project termination? Will debt be guaranteed? What risks does that leave with government in terms of the quality of the investors’ delivery methodology?

In most emerging market infrastructure projects, there is usually a significant underpin of the project debt by the government in order to raise finance. In a default termination scenario, equity will be lost, but the government will still be faced with a liability to pay out the debt. The government may therefore need to do a material amount of technical due diligence of the concessionaire’s proposals, and suitable monitoring of its implementation, to ensure that the value of the assets returned in such a situation is at least the value of senior debt.

(j)         Rehabilitation issues        

Does the system involve any transfer and rehabilitation of existing assets? Are they capable of meaningful due diligence in a competitive bid situation and how should such existing assets be valued? Should there be an obligation to maintain / increase their value?

Some concessions have been structured on the basis of the transfer of an existing railway network, with a view that it will be upgraded by the concessionaire. The government’s interest will be to ensure that the concessionaire not only makes any new investments promised but also that the value of the existing assets are maintained at all times throughout the concession. To do this analysis, this may require a detailed due diligence of the existing railway components, and termination compensation can then be made contingent on a re-assessment of the network value at the date of handback. This is likely to be a significant endeavor on a large network.