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High Speed 2

International case studies on delivery and financing – a report for HS2

18 December 2009
Ernst & Young LLP
1 More London Place
London SE1 2AF

Tel: 020 7951 2000

Fax: 020 7951 1345

18 December 2009
Ian Jordan
High Speed Two
55 Victoria Street

Dear Ian,
Subject: International case studies on delivery and financing – a report for
In accordance with our contract dated 2 June 2009, I am pleased to enclose our Our work in connection with this assignment is of a different nature to that of an
phase 1 report which examines the lessons learned from a selection of audit. Our paper to you is based on publicly available information. We have not
international HSR case studies that we have previously discussed and agreed sought to verify the accuracy of the data or the information and explanations
upon with HS2. The report includes: provided.
► Advice on lessons learned from the review of these projects including the Our work has been limited in scope and time and we stress that a more detailed
commercial and contractual delivery structures, risk allocation, funding and review may reveal additional considerations that this review has not.
other relevant issues.
Should you have any questions please do not hesitate to contact me on + 44 207
► An indication of the potential sources of funding and finance for a new HSR
951 1702.
Your sincerely
Our report may not have considered issues relevant to any third parties. Any use
such third parties may choose to make of our report is entirely at their own risk
and we shall have no responsibility whatsoever in relation to any such use.

Manish Gupta
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 principal place of business and registered office.

Ref. DPD12725 High Speed 2: phase 1 report 2

Section 1 Introduction 4
Section 2 The shortlist of project has been identified together with HS2 5
Section 3 A number of lessons can be drawn from the HSR projects examined 6
Section 4 Key recommendations for HS2 7
Section 5 Lessons learned: commercial 8
Section 6 Lessons learned: risks 13
Section 7 Lessons learned: financing 16

Appendix A HS1, UK 24
Appendix B TGV, France 28
Appendix C HSL Zuid, Netherlands 32
Appendix D TAV, Italy 35
Appendix E RAVE, Portugal 38
Appendix F ICE, Germany 40
Appendix G AVE, Spain 41
Appendix H Shinkansen, Japan 43
Appendix I North-South HSR, Taiwan 46

Ref. DPD12725 High Speed 2: phase 1 report 3


► High Speed Two (HS2) is assessing the case for providing additional travelling capacity between London
and the West Midlands by building a high speed rail line (the Project).
► Globally, there is a large variety of high speed rail (HSR) projects that have been undertaken with varying
degrees of success.
► A common theme runs behind all the HSR projects reviewed: from Japan to Italy, developing an HSR
network requires a strong vision and cross party political support. HS2 appears to benefit from both:
► A strong champion of the project willing to invest into this vision;
► A cross party support from both the Government and the opposition.
► Despite notable successes, infrastructure projects of this size and complexity will face a variety of challenges
throughout their lifecycle, including:
► Varying degrees of political and stakeholder support
► Difficulties in revenue and traffic forecasting
► Ability to complete the construction on time and on budget
► Appetite of private sector for risk
► Meeting the affordability challenge whilst demonstrating VfM
► All of these issues will impact the ability to attract private sector financing in a meaningful and sustainable
manner and will require the Government to provide direct and indirect support.
► A variety of contractual delivery structures, risk allocation and funding models have been adopted to address
some of the issues outlined above. Whilst recognising that many of these structures and models are context
specific and, as such, may not be directly transferrable or applicable to the UK, nonetheless, a review of the
international experience will ensure that HS2 can, where possible, apply these lessons to the structuring and
implementation of the Project.
► With this in mind, this phase 1 report aims to address the following questions:
► What are the key lessons that can be drawn from the international experience and are they applicable to
► What are the potential sources of funding, taking into account the evolution of the economic, fiscal and
financial context in the medium term?

Ref. DPD12725 High Speed 2: phase 1 report 4

Shortlist of projects studied (agreed with HS2)
Projects Relevance to HS2 study Investment Length (km)
HS1, UK UK project with similar socio-economic
economic considerations. The delivery model has been tried and ►£5.2bn ►108
tested. Although slightly different in geography and passenger base, it should be a useful
TGV, France Successful HSR network that has been delivered with public funding and, more recently, with ►LGV Est €3.1bn ►300 (phase1)
both concessions and availability PPPs (respectively with and without transfer of revenue risk to ►Rhine-Rhone €2.5bn ►425
the private sector). The GSMR signalling contract covers the HSR network and is being delivered
as a PPP. ►Sud Atlantique €7bn ►300

►Brittany - Loire €3.4bn ►182

HSL Zuid, Holland Recently completed HSR not yet operational because of issues with the procurement of rolling ►€7.2bn ►100
stock and system integration between the sub-structure
structure and the superstructure. The sub-
structure works were delivered on a traditional D&B basis. Other elements of the project were
delivered on a PPP basis.
TAV, Italy Built and operated with State backed financing. Open access operator NTV due to start services ►€35bn ►900
on the Rome - Milan HSR route in 2011.
RAVE, Portugal Under procurement. Split into six separate PPPs. Vertically separated operation with vertical ►Lisbon-Madrid €2.5bn ►206
interfaces. Portuguese State aims to deliver it on a PPP basis, although financing and structure ►Porto-Vigo €2.2bn ►100
of the project are still evolving since only one project is currently under procurement.
►Lisbon-Porto €4.5bn ►290

ICE, Germany Similar socio-economic and demand environment and inter-connectivity

connectivity with airports. Mixed n/a n/a
traffic (passenger and freight) experience not particularly successful.
AVE, Spain Extensive HSR network developed with public funding. Successful case study of competition ►€53bn will deliver 10,000km ►1,570 in operation
against airlines especially on specific HSR routes (Madrid – Barcelona and Madrid – Seville). by 2020 ►1,319 under
Shinkansen HSL Pathfinder project that set the basis for high speed rail projects around the world. The initial HSR ►Unknown ►2,500
Network, Japan was funded almost entirely by government loans to JNR and later privatised. Redevelopment
potential around stations.
Taiwan North- First stage recently completed in 2007 and the remainder to be complete by 2010. BOT ►US$18bn ►345
South HSR consortium. Originally intended to be entirely privately financed but the government had to step in
owing to significant cost overruns driven by procurement issues.

Ref. DPD12725 High Speed 2: phase 1 report 5

A number of lessons can be drawn from the HSR projects examined
Projects Lessons learned
HS1, UK ► Importance of setting up a strong project organisation
► Importance of structuring an appropriate risk transfer: attempting to transfer too much risk may not result in VfM
TGV, France ► A phased approach to delivering the HSR network is a critical success factor
► HSR projects can extract substantial local funding
HSL Zuid, ► Importance of programme management and initial planning, especially if project is delivered on an unbundled basis
► Risk of underestimating system integration issues and time needed to solve them
TAV, Italy ► Ability to raise private finance from the debt capital markets using State guarantees
► Importance of allowing for open access operators
ICE, Germany ► A mixed HSR line is expensive to build and maintain and may not represent VfM
► Air-rail
rail collaboration has virtually eliminated the airline competition between Cologne and Frankfurt
AVE, Spain ► HSR projects have attracted substantial EU funding
► Low cost airlines and deregulation will have an impact on the ability to shift passengers to HSR

RAVE, Portugal ► Importance of cross party political support – the project has faced delays due to Government elections highlighting that political
politic buy in and
support is essential.
► Importance of unbundling to attract private sector participation
Shinkansen HSL ► Local communities are expected to contribute funding
Network, Japan
► Although HSR assets were sold to the private sector to relieve debt burden, the public sector is still significantly involved in procurement.
Taiwan North-South ► Importance of extensive market sounding in advance of structuring the project
► Importance of careful planning and procurement

Ref. DPD12725 High Speed 2: phase 1 report 6

Key recommendations for HS2
A review of the lessons learned from each project has led to the following recommendations:
1. It is critical to have a strong project organisation set up to manage the development,
procurement, delivery and funding of the Project.
components will facilitate the involvement of the private
2. Unbundling of the HSR into key sub-components
sector and maximise market appeal.
3. Risk allocation, budgetary considerations and availability of funding drive the selection of each
component’s delivery strategy.
4. The contract packages need to balance attracting market interest with an appropriate level of risk

Risk allocation
5. Construction and technical risks associated with post-construction
construction defects represent a significant
challenge for HSR projects.
6. Transferring revenue risk in greenfield rail projects is difficult and does not always represent VfM.
7. System integration risk is critical, especially in an unbundled delivery strategy.

8. Direct or indirect government support is crucial to HSR projects.
9. Despite the current market turmoil, capital markets are possibly the best source of funding in the
medium term.
10.Other sources of funding should be available to finance the Project.
A detailed description of each recommendation follows.

Ref. DPD12725 High Speed 2: phase 1 report 7

Lessons learned: commercial
1. It is critical to have a strong project organisation set up with the
objective of managing the development, procurement, delivery and
funding of the Project
► The project organisation should maintain an active involvement from inception to completion.
► Key roles for the project organisation should include:
► Reviewing progress and act as “project manager”, a role that could be supported by engaging an
independent entity.
► Making prompt decisions on project issues and, where appropriate, challenging and directing activities of
► Ensuring integration of different elements of the HSR.
► Managing interfaces with external parties.
► Managing the exposure to risk.
► The importance of a strong project organisation is supported by a number of successful examples:
► The HS1’s experience post restructuring.
► RAVE, the Portuguese HSR’s project organisation.
► A number of other infrastructure projects such as the delivery of Heathrow Terminal 5 and the
development of Crossrail.
► Asfinag in Austria, which has the sole responsibility to develop and maintain the highway network using
a range of structures, including PPPs to deliver new capacity.
► On the other hand, the Dutch HSR has, according to Netherlands Court of Audit, been negatively impacted
by the project being managed by two different government’s departments. This has created issues with the
procurement and the delivery of the project with the public sector having to pay availability charges
although trains have not yet started operation.

Ref. DPD12725 High Speed 2: phase 1 report 8

Lessons learned: commercial (cont’d)
2. Unbundling of the HSR into key sub-components will
facilitate the involvement of the private sector and
maximise market appeal
► A wide variety of packaging options exist to deliver HSR projects ranging from:
► A single contract for all the works
► Unbundling the project into multiple packages based on technical and risk Holland
► Permutations or combinations of the above Portugal
► International experience shows that unbundling elements of the HSR system can
help access additional funding and investors, resulting in better risk allocation and France

Level of unbundling
potentially better financing terms. However, unbundling will increase interface and
integration risk which needs to be actively monitored and managed.
► Each element can then be delivered using different models to maximise market Italy
appeal. For example:
► Design then construct - Traditional public sector procurement – Italian TAV, Germany
Spain Taiwan
Spanish AVE
► Design and Construct (D&C), with separate Operation and Maintenance (O&M)
France Japan
– HS1 (Early)

► Design Build Operate & Maintain (DBOM) – Portuguese HSR

► A combination of D&B for the civil works and DBFM for the rail systems – Dutch
HSR Private sector involvement
► However, unbundling requires a lot more input from the project organisation to
manage interface risks

Ref. DPD12725 High Speed 2: phase 1 report 9

Lessons learned: commercial (cont’d)
This table gives a broad overview of the role played by the public and the private
sector in the projects that we have examined:

Germany Spain France Italy UK Portugal France Netherlands France Japan Taiwan

HS1 post TGV (partner- TGV Taiwanese

ICE AVE TGV (original) TAV RAVE HSL Zuid Shinkansen
restructuring ship contract) (concession) HSR

Specification State State State State State State State State State State State

Design, build
Substructure State
Operate, maintain
Design, build
Superstructure PPP
Bahn (DB)
Operate, maintain

Supply NTV State

Maintain Trenitalia NS


Financing A mix of options involving private sector funding, bank debt and capital market financing raised directly by the project vehicle
vehi or IM with strong public sector support

Increasing involvement of the private sector

Ref. DPD12725 High Speed 2: phase 1 report 10

Lessons learned: commercial (cont’d)
3. Risk allocation, budgetary considerations and availability of funding
drive the selection of each component delivery strategy
► The planning and specification of HSR systems is generally carried out by the State as in all the case
studies reviewed in this report.
► There are a number of alternatives which can change the risk profile, for example, the pricing mechanism
adopted and the approach to design risk.
► Infrastructure
► Although a common approach does not exist, the review indicates that, initially, the tendency was for the
infrastructure to be delivered by the public sector using traditional procurement models and to be
operated and maintained by the legacy infrastructure manager. More recently, delivery models involving
the private sector have been adopted more widely.
► Signalling
► Traditionally delivered by the State using traditional procurement models in most European countries,
although a tendency exists to involve the private sector in the delivery of these elements.
► Both the Portuguese HSR and, more recently, the French TGV have opted for the signalling system to
be delivered through a separate PPP. This is to mitigate the interface risk that could arise from using
different signalling systems across different parts of the network. An alternative to this is to specify a
standard compatibility system in the contract.
► Rolling stock
► The procurement and financing of rolling stock tends to be consistent with the approach adopted on the
traditional rail network. Hence, HSR rolling stock has traditionally been purchased and held on balance
sheet by several state owned HSR operators such as Trenitalia, Renfe and SNCF.
► On the other hand, PPPs have been used for the Dutch HSR, the Intercity Express Programme
(underway) and in a rolling stock order in New South Wales, whereas the Pendolinos fleet in the UK
were financed by Angel Trains using a capital market structure.
► Given its relatively long economic life and its ability to attract stable cash flows, rolling stock is seen as
one element of HSR projects where the private sector will be increasingly involved.
► Operation
► Generally carried out by the legacy state operator although open access operators are now an
increasing threat to their dominance in many segments and will soon increase their involvement due to
EU legislation.
Ref. DPD12725 High Speed 2: phase 1 report 11
Lessons learned: commercial (cont’d)
4. The contract packages need to balance attracting market interest with
an appropriate level of risk transfer
► The capacity and competency of the construction market has a large bearing on the size and complexity of
individual contracts and different approaches have been adopted in this area:
► The Italian TAV opted for awarding larger contracts to minimise the number of interfaces.
► HSL Zuid opted for six geographical packages for the substructure (e.g. land, civils, tunnels, bridges,
viaducts) to increase market participation and to meet a tight delivery schedule. It also adopted
horizontal interfaces between civil works and superstructure (track, catenary, emergency systems and
signalling) and separate train operation.
► RAVE opted for five geographical packages with vertical interfaces, a network-wide
wide signalling PPP
contract and separate train operation.
► Whilst there is no “off the shelf” contractual solution that can be applied to HS2, the following principles
have been adopted with good results:
► A phased approach – due to the large financial commitment required by an HSR project, a phased
approach can aid affordability by spreading the commitment over a number of consecutive phases.
Phasing will also ensure that the capacity of the local construction market is not stretched with a
consequent negative impact on the price of resources.
► Packages of works – due to the scale and complexity of HSL projects and to the associated level of risk
smaller packages of works help to diversify the risk of exposure to a single contractor or consortium
► Delivery method – a balanced risk allocation is crucial in attracting interest of bidders and finance
► The Taiwan HSR was originally intended to be entirely financed, built and operated by the private sector
but this proved impossible as lenders demanded government guarantees on the debt provided
► The Dutch government carried out extensive market sounding before finalising the commercial structure
of the HSR project
► Attempts to transfer too much risk to the private sector will result in reduced market interest in the project
► Early engagement with the market is seen as crucial in ensuring a realistic risk allocation and in attracting
market interest

Ref. DPD12725 High Speed 2: phase 1 report 12

Lessons learned: risks
5. Construction and technical risks associated with post--construction
defects represent a significant challenge for HSR projects
► Cost and timetable overruns will largely be driven by the type of contract used and by the experience and
competency of the contractor
► Entering into a fixed-price, date-certain
certain turnkey contract with experienced contractors is the most
common way to mitigate the risk of cost or timetable overruns. However, these are not common in rail
► Whilst our analysis has highlighted that fixed price projects are not always possible, the UK railway
structure does allow for, and has delivered, projects to a fixed price. The issue can be one of timetable:
in order to set a fixed price, the project will need to be developed to at least GRIP 5 (or equivalent –
detailed design).
► Guarantees and warranties may also be required to mitigate construction risk. The link between design
and construction is an important factor here.
► It is important that the contractual structure protects the public sector from the financial consequence of
delays in the delivery of the infrastructure
► Cost overruns due to changes in law and other specified circumstances are generally retained by the State.
For instance
► the Dutch government asked the PPP partner to upgrade the signalling system which had originally
been specified. This led to greater costs retained by the state;
► HS1 successfully adopted target price contracting where cost risk was shared between LCR, Bechtel,
Rail Link Engineering, and through an insurance program placed by a group of insurers…
► …however, as mentioned above, a strong client body is required to manage these contracts if cost risk
is to be managed

Ref. DPD12725 High Speed 2: phase 1 report 13

Lessons learned: risks (cont’d)
6. Transferring revenue risk in greenfield rail projects is difficult and
does not always represent VfM
► Few projects have attempted to transfer traffic risk to the private sector. The LCR example in the UK
highlights the risk inherent in forecasting traffic in greenfield rail projects.
► In the rail sector, with the notable exception of airport rail links and other vertically integrated railway links
with limited intra-modal
modal competition, it is not common for infrastructure providers to take demand risk in a
greenfield railway such as the HS2. This is due to the fact that, although railways are not new to the use of
private financing, they are still seen as a complex environment: safety critical, operationally complex, with
several stakeholders and at risk of political and regulatory interference. Furthermore, given the large
investment and high operational gearing, with some notable exceptions such as Japan, it is not common for
passenger railways to cover the cost of the infrastructure investment and turn a profit within a timeframe
that can be attractive to the private sector.
► The requirement for State subsidies to rail operations is an accepted principle with operations in many
major countries still State owned. One solution to this is to split construction from operations and seek to
recover the construction bill over a number of concession periods, eg the approach proposed for HS1.
► Patronage is difficult to predict and so is consumer preference for substitute modes of transport. Longer
distance traffic projections, using new, high-quality
quality rail services, present specific challenges to forecasters.
This may result in lower credit quality for HSR schemes that are structured to pass patronage, and
therefore revenue, risk to lenders. There is evidence of a tendency to include overly optimistic revenue
forecast in transport PPP project.
► With the notable exception of some of the French HSR schemes (e.g. TGV Atlantique), most HSR projects
that we have examined include either a revenue guarantee (e.g. CTRL) or no revenue risk is passed on to
the infrastructure provider (e.g. Dutch HSR, Portuguese HSR)

Ref. DPD12725 High Speed 2: phase 1 report 14

Lessons learned: risks (cont’d)
HSL Zuid contracting structure
7. System integration risk is critical especially in an unbundled delivery
strategy Passenger transport: 1 concession agreement
► The experience of the Dutch HSR to date shows that underestimating the system integration challenge Railtechnical installations: 1 DBFM contract
associated with horizontal interfaces can lead to delays in the commissioning of the project. Furthermore,
the requirement to introduce a new ERTMS system caused considerable delay in the start of revenue
Civil-technical foundation: 6 D&C contracts
► Vertical vs. horizontal interfaces between packages of work – depending on the elements of work the
separation of elements will create different issues:
Connections with existing rail infrastructure: 1
► a vertical interface might create a technology lock in, where an authority is required to go to the same
D&C contract
system supplier to avoid interface issues between, for example, different signalling systems. This is the
reason why the French TGV and the Portuguese HSR have opted for a network approach to the
signalling and the GSMR that have been let as a separate PPP contract;
► a horizontal interface might create integration issues where a rolling stock and a signalling system RAVE contracting structure
provided under different contracts may not integrate seamlessly. Such an instance occurred in Taiwan
where the infrastructure was developed to European standard but Japanese Shinkansen technology was
adopted for the rolling stock. Capacity allocation and railway traffic
► The issue highlights the importance of clearly defined contractual specifications and of a single point of management: State/REFER
responsibility for managing the interfaces.
► Feedback from a rail system manufacturer active in the HSR arena indicates that an integrated approach to Signalling/Telecommunications (PPP)
the procurement of rolling stock and signalling is often the preferred route of the private sector, especially
where the manufacturer provides both systems and rolling stock.
Substructure/Super structure


Ref. DPD12725 High Speed 2: phase 1 report 15

Lessons learned: financing

► The current credit crisis – including such things as the collapse of the market for bond financing, whether or
not backed by monoline insurers, the dramatic increase in financing margins (cost of debt), and the difficulty
of syndicating large borrowing in the traditional way – has a direct impact on the ability to finance very large
public infrastructure programmes.
► Although the current issues may dissipate in the medium term, certain underlying changes may be more
lasting and more impactful given the planning horizon for the HSR programme.
► HSR funding must consider the underlying dynamics of HSR projects whose revenue often does not cover
operating costs. A high level of government support must therefore be allowed for.
► HSR funding must consider the longer term and its inherent uncertainties – it is simply not possible to
reliably predict the exogenous factors that will impact a project. The funding structure must be robust and
tested against a number of severe worst, but realistic, case scenarios
► The original CTRL deal had insufficient equity capital to reflect the risks in the project. As a result the
project was not robust in the face of lower than expected revenues and did not provide sufficient
incentives to tackle the issues where the investment at risk was relatively low.
► In the financing of Taiwan’s HSL, higher than normal use of equity reflected the high risk profile that debt
providers attached to this massive project.

Ref. DPD12725 High Speed 2: phase 1 report 16

Lessons learned: financing - core funding
8. Direct or indirect government support is crucial to HSR projects
► Governments remain central to the planning, development and promotion of HSR services, and
appropriately focused support remains an important credit enhancement for related transactions.
► Despite notable successes, attracting substantial private sector financing to high speed rail projects has
encountered problems, partly owing to the scale of the investment required and partly due to a perception
among financiers that the complex, safety critical and multi-stakeholders
stakeholders environment of rail projects make
them a riskier investment than other simpler infrastructure projects such as highways.
► The public sector funded approach to constructing such projects has also to some degree been reasonably
consistent amongst the projects considered. This is to be expected of transportation projects, which display
a high initial capital expenditure and relatively low passenger income.
► Government support to HSR projects has been provided either directly through grants or indirectly through
minimum revenue guarantees or a revenue stream either guaranteed or paid directly by government. For
► The Dutch Government paid for the funding and construction of the civil works of the Dutch HSR.
► The UK government credit enhanced the CTRL project through a structure designed to create an
unconditional and irrevocable stream of payments of Track Access Charges due from Eurostar. They
are payable irrespective of usage, availability and / or performance.
► The Taiwanese HSR, which was originally tendered as a BOT where the private sector would build and
finance it without government assistance, eventually received wide ranging government support when
the Project Company could not meet their financial obligations.
► It is important that HS2 and the other public sector promoters approach the funding on a commercial basis
and recognise explicitly the different characteristics and uses of each tranche of funding. In other major
projects there has been a tendency for public sector funding to be treated as a homogenous source of
funds. This lack of definition has had an impact on the subsequent ability to manage risk and cost over-

Ref. DPD12725 High Speed 2: phase 1 report 17

Lessons learned: financing - core funding
8. Direct or indirect government support is crucial to HSR projects (cont’d)
► EU funding – Substantial funding of European HSR projects. Generally, EU funding for HSR comes in the following forms:
► Trans-European Transport Network (TEN-T) funding - The EU has tabled its proposals for funding TEN-TTEN projects for the period
2007-2013. In selecting the projects, the EU has given priority to cross-border
border projects and environmentally friendly modes such as
► Cohesion funds - The Cohesion Fund is a structural instrument that helps Member States to reduce economic and social disparities
and to stabilise their economies
► European Regional Development Funds (ERDF) - helps stimulate economic development and regeneration in the least prosperous
regions of the EU. Funding is targeted to meet three objectives set down by the EC: convergence; regional competitiveness;
European territorial cooperation
► EIB loans – the European Investment Bank is extremely active in providing debt finance for HSR projects both on a commercial basis
or under a so called “Structured Finance Facility”, where the EIB guarantees a portion of the bank debt until the project achieve
ach steady
state operation. On the first section of the Portuguese HSR the EIB provided all bidders with up to 50% of the capital costs estimated
by the bank.

Line Total EU funds Other funding

Barcelona-Figueras 3,460 8,915
90% Madrid- Levante 1,223 11,187
80% Lisbon-Porto 675 3,825
70% Antequera-Granada 600 755
F unding %

50% Lisbon- Madrid 486 1,314
40% Madrid- Frontera Portugesa 363 2,338
Porto - Vigo 350 1,050
10% Almeria- Murcia 348 2,171
0% Leon-Asturias 332 2,059
Barcelona- Madrid- Lisbon-Porto Antequera- Lisbon- Madrid- Porto - Vigo Almeria- Leon- TGV Est East Rhine TGV Est 320 2,805
Figueras Lev ante Granada Madrid Frontera Murcia Asturias Rhone East Rhine Rhone 200 2,304

% EU Funding % Other funding

Ref. DPD12725 High Speed 2: phase 1 report 18

Lessons learned: financing - core funding
8. Direct or indirect government support is crucial to HSR projects
► Regional funding – HSR services can bring many benefits to the regions which they serve, especially in
areas around stations. As such regional contributions can comprise a significant proportion of funding.
However regional buy-in in and funding is dependent on the political will at the local level for a new line, and
the local benefits it is expected to deliver. For example:
► A major driving force behind the development of the Shinkansen network was to bring economic benefits
to the regional, as well and national, economy. This was borne out post construction, with growth in the
local economies and development of new business areas. As such, local communities served by
Shinkansen lines were expected to contribute a proportion of matched funding to finance the new lines.
► Local and regional funding has also been a major source of finance in several French TGV lines which
have recently been built. TGV Est, East Rhine-Rhone and Brittany-Loire
Loire HSLs have benefited from local
funding amounting to 24%, 29% and 35% (respectively) of total funding requirements.
► Negotiations on the political concessions made in order to receive local funding have led to delays to
financing agreements in France. For example, for the Sud-Atlantique
Atlantique TGV, the local government in
Poitiers agreed to contribute funding only after the State agreed to guarantee further investment in the
road network in the area. Negotiations over the number of station stops in regions along the line,
especially in the centre of France, have also delayed finalisation of local funding.

Total funding by source TGV Est East Rhine Rhone Brittany- Loire
Regional 736 717 1,203
Other sources 2,389 1,787 2,197

TGV Est East Rhine Rhone Brittany - Loire

Regional Other sources

Ref. DPD12725 High Speed 2: phase 1 report 19

Lessons learned: financing - core funding
9. Despite the current market turmoil, it should be possible to access the
capital markets in the medium term
► It should be possible to attract significant core funding from the private sector which could be structured as
debt which is serviced from farebox revenue or revenue support from the DfT
► The capital markets still represent an obvious source of financing infrastructure assets with their stable
index linked cash flows which match the long term liabilities of pension funds
► Although the UK experience of floating Railtrack on the stock market has not been successful a number of
examples exist where stock markets have been used or are planned to be used to finance infrastructure.
► Canadian National Railway was floated in 1995 and has since traded on the New York Stock Exchange
and its market capitalization has increased from C$2 billion to more than C$18 billion today.
► Both Deutsche Bahn and, more recently, China Railways are looking into a possible equity offerings
► The international review shows that credit enhancements are often required to access the capital markets
► Italian HSR bond issues and CTRL notes issues have benefited from credit enhancements provided by
the Italian and UK governments. Recent bond issues for railway projects have been made by the
Chinese Ministry of Railways (US$6bn in Dec 2007).
► Securitisations of revenues or track access charges should also represent a source of funding in the
medium term
► The challenge for HS2 is to structure the project in a way which delivers the discipline and diligence which
the capital markets require.

Ref. DPD12725 High Speed 2: phase 1 report 20

Lessons learned: financing – other sources
10. Other sources of funding should be available to finance the Project
► Commercial bank loans – Commercial bank loans have been used extensively on HSR projects. For
example, CTRL, the Dutch HSR and the French TGV have all used commercial bank funding alone or in
combination with bond funding.
► Construction finance – could fund construction of some components and be re-financedfinanced on completion. This
is relatively under-utilised
utilised in major UK infrastructure projects but could tap into the market for construction
company credit and performance risk. This form of funding would straddle the core and equity tranches.
► Infrastructure funds - The dramatic growth of infrastructure funds (both private and publicly traded) is
focusing a very large supply of investor capital (mainly but not exclusively equity) on public works projects,
large and small, transport or otherwise. There is a strong attraction towards European infrastructure assets
due to the growing use of PPPs and the generally favourable regulatory systems for utilities and
transportation infrastructure. In recent months we have seen significant interest in the market for the
potential privatisation of HS1.

► Private placements and infrastructure funds – a number of investors such as pension funds and debt
infrastructure funds exist that are ready to provide debt, mezzanine or equity financing to infrastructure
► The infrastructure fund of Credit Agricole recently provided mezzanine as well as equity finance in a bid
to develop the first section of the Portuguese HSR.
► Rail transportation network operator RailAmerica will refinance its debt after recently selling US$740
million of 8-year senior secured notes in the private placement market.

Ref. DPD12725 High Speed 2: phase 1 report 21

Lessons learned: financing – other sources
10. Other sources of funding should be available to finance the Project
► Regulatory Asset Base financing – Applying the RAB model, used in the UK utilities and Network Rail,
would allow HS2 to develop the system using public funds, both equity and debt, benefiting from the implicit
or explicit guarantee of the Treasury with the consequent reduction in the cost of financing.
► The RAB model would allow the adoption of a rolling debt programme using short term funding until the
credit markets stabilise. The tenor of the short term funding could be the same as the interval between
periodic reviews. Extensions could be funded by additions to the RAB.
► Should HS2 provide a credit guarantee to raise any of the initial RAB financing, it is important to
structure it in such a way that it can be removed at a later date. To this end, future potential inter-
creditor issues will need to be examined in detail.
► Property – Mass transport and HSR improvements have a strong track record of delivering property and
economic benefits to the areas they serve. Property Development Funding comes from the following
► Where land has been acquired for the construction of the HSR a development opportunity may exist
after construction. This can be land adjacent the HSR corridor or above the stations.
► The new HSR could allow the redesignation of land from industrial to residential or the intensification of
current residential land, both leading to increases in land value through adding public transport capacity.
The capture of an element of this value could be achieved through S106 contributions.
► While it would clearly be a mistake for a funding plan to rely entirely on property values, capturing a share
of the benefits of increased property value, or asking for business contributions, is a tried and tested
method used in many other countries. A successful example in this area is the Hong Kong Metro (MTR)
whose revenues from real estate development in 2004-05 05 were in excess of 40% of its fare box income.
► Motor fuel taxes – In the US motor fuel taxes are the single largest sources of revenue for transportation at
both the federal and state levels. However, there is an emerging debate over whether fuel taxes are well-
suited to meet long-term revenue needs and other objectives.
► Other examples could include use of right of way for energy distribution, telecoms and other linear
infrastructure, sale of air rights (e.g., in urban/suburban locations). It may also be possible, depending on
the future evolution of emissions trading schemes (ETS), for the rail system to sell credits as it takes market
share from more polluting modes.

Ref. DPD12725 High Speed 2: phase 1 report 22

Appendix A HS1, UK 24
Appendix B TGV, France 28
Appendix C HSL Zuid, Netherlands 32
Appendix D TAV, Italy 35
Appendix E RAVE, Portugal 38
Appendix F ICE, Germany 40
Appendix G AVE, Spain 41
Appendix H Shinkansen, Japan 43
Appendix I North-South HSR, Taiwan 46

Ref. DPD12725 High Speed 2: phase 1 report 23

Appendix A: HS1, UK
Overview of project Map of the project
► High Speed 1 (HS1), formally known as the Channel Tunnel Rail Link (CTRL), is a
108 km high-speed railway line running from London through Kent to the British end of
the Channel Tunnel.
► It is a greenfield project that interfaces with the existing heavy rail network at major
stations and terminals.
► The original contract was awarded in 1996 to London & Continental Railways Limited
(LCR) and was later restructured in 1998 into two distinct phases.
► The first phase runs from the Channel Tunnel portal to north Kent and was opened to
passenger traffic on 28 September 2003.
► The second and final section of the line, travelling across the River Thames and into
London St Pancras, opened on 14 November 2007.
► Built at a cost of £5.2bn, the new link allows trains to travel at speeds of 300 kilometres
per hour (190mph), cutting journey times by 40 minutes and increasing service
► In addition to the international Eurostar services, the route will be used for high-speed
‘CTRL-DS’ domestic commuter services between Ashford International in Kent and
London with intermediate stations at Ebbsfleet and Stratford. This service was
inaugurated in June 2009.
► The rolling stock owner is HSBC Source: HS1 website
Diagram of the original project organisation
Lessons learned for HS2
► The project is unlikely to fully transfer project risk without some recourse back
UK Government
to the Government. Any HSR projects should therefore be based on an Direct
appropriate transfer of project risks to the private sector. agreements Development Direct grants
► The ability of the private sector to withstand the financial impact of project agreement
risks is crucial. The original CTRL deal had insufficient equity capital to Equity
Funders LCR Shareholders
absorb the project risks, resulting in most of the risk being transferred back.
► Over-optimism should be discouraged, specifically with respect to demand 100% ownership Management agreement
risk and system delivery. Such risks can prove to be unsustainable and result
in all of the risks reverting to the Government. A more balanced approach
could have resulted in the Government transferring more long term risk than
Eurostar UK URL Rail link engineering
they achieved in the restructured project.
► The success of HS1 after the restructurings shows the importance of project Construction contracts
organisation to the successful outcome of a HSR project. Contractors

Ref. DPD12725 High Speed 2: phase 1 report 24

Detailed information: HS1, UK
Commercial ► According to its website, HS1 Ltd is the owner of the high-speed railway
infrastructure and stations along the route. Through its technology and design
► The design, build, finance, and operate concession contract for the CTRL, the it is in essence a stand alone HSR. The use of the high-speed route by both
largest of the UK's private finance initiative (PFI) projects at the time, was international and domestic traffic, produces technical boundaries, interfaces
awarded to LCR in 1996 and was originally supposed to last until 2086. The and contractual interdependencies to manage. For example:
brand name HS1 was adopted in 2006. ► Network Rail (CTRL) is the maintainer and operator of the railway
► The line was originally planned to be constructed as a single project, however infrastructure, train operating companies offer services to passengers on
after running into financial difficulties in 1998, the CTRL project was the railway.
restructured and divided into two sections: ► HS1 Ltd’s railway infrastructure has physical connections with Eurotunnel,
► Section 1 runs 46 miles from the Channel Tunnel portal to Fawkham the DBS freight depot at Dollands Moor and the Network Rail classic
Junction (near Southfleet in north Kent) and cost £1.9bn. Section 1 was railway at Ashford, Ebbsfleet, Ripple Lane and domestic lines north of
opened to passenger traffic on time in 2003 and on budget. London.
► Section 2 completed the rail link, feeding a 24-mile HSR from Southfleet ► Each of these boundaries is defined through a contractual relationship and
into central London's St. Pancras Station. It was opened on time and on implemented through working practice agreements. Much of the contractual
budget in 2007 at a cost of £3.3bn. framework and working practices are evolving, reflecting the new nature of the
► As part of the 1998 rescue plan it was agreed that, following completion,
section 1 would be purchased by Railtrack, along with an option to purchase ► The experience of HS1 shows the importance of project organisation to the
section 2. In return, Railtrack committed to operate the whole route as well as successful outcome of a HSR project.
St Pancras railway station which, unlike all other former British Rail stations, ► In terms of contracting for the projects, target price contracting has worked
was transferred to LCR/Union Railways in 1996. successfully:
► In 2001, Railtrack announced that, due to financial problems, it would not ► Contracts are tendered on a design and build basis
purchase section 2 once it was complete. This triggered a second
► 30% to 50% design complete
restructuring. The 2002 restructuring plan agreed that the two sections would
have different infrastructure owners (Railtrack for section 1, LCR for section 2) ► Contractor bids rates for labour, materials, overhead, etc., and a target cost,
but with common management by Railtrack. and gets paid all his costs
► Following yet further financial problems at Railtrack, its interest in the CTRL ► Pain/gain-share mechanism comes into place against target
was sold back to LCR, who then sold the operating rights for the completed ► The benefits of the target price contracting model are:
line to Network Rail, Railtrack's successor. Under this arrangement LCR
► Alignment of interests between principle and agent
became the sole owner of both sections of the CTRL and the St Pancras
property, as per the original 1996 plan. ► More effective partnering
► Open book/transparent and better handling of variations
► Alliancing of awarded contracts to deal with size

Ref. DPD12725 High Speed 2: phase 1 report 25

Detailed information: HS1, UK (cont’d)
Risk Financing
► CTRL achieved more risk transfer than in previous PPP/PFI programmes in ► The project was originally planned to be privately financed, however, these
the UK. plans were abandoned in 1997 after projected Eurostar revenues were found
► Despite the change in financing following the restructuring in 1998, the project to be overly optimistic.
construction risk was retained by the private sector although additional parties ► The £5.2bn total cost for the CTRL consists of £1.9bn for section 1 and £3.3bn
were brought on board to make the project more deliverable. for section 2.
► The operation of Eurostar UK was also outsourced with some sharing of the ► Two stages of financing for the project: one to fund the first two years of the
revenue and operating cost risks. project and another which secured the bulk of funds required for LCR to fulfil
► Overall, in the restructured deal, the UK Government had reassumed some of its obligations.
the project risks, although the view was taken at the time that the occurrence ► Funding for the construction of the first stage was from bank loans (£430m
of these risks was negligible. The Government would secure some upside from a syndicate of banks) secured against Eurostar UK. Equity of £60m was
risks should the project be successful. provided by the shareholders.
► According to a report by NAO, prior to the start of major construction activities ► Funding for the construction of the second phase was proposed through a
for section 2, LCR arranged a risk transfer agreement, known as the Cost flotation of the business and bank debt. However, following the restructuring at
Overrun Protection Programme. the end of 1998 (splitting the construction in two sections), in order to ensure
► Under the programme, LCR paid £87m to Bechtel and a group of insurers to that financing construction was not based on Eurostar’s performance, the
bear £315m of the first £600m of any cost overruns including a contractually following structure was used:
determined and capped risk for inflation. ► Direct grants payable by the UK Government
► For the taxpayer, the cost overrun on section 2 that is not absorbed by the ► Debt, which was a combination of:
Cost Overrun Protection Programme would, under current arrangements, Commercial bonds and bank debt secured against LCR’s revenue from
ultimately flow through to the Department’s future loans to LCR. track access charges and from government payments for domestic access
to section 1 (both of which were guaranteed by the government)
Bank debt secured against payments of Government grants for the
construction of section 2.

Ref. DPD12725 High Speed 2: phase 1 report 26

Detailed information: HS1, UK (cont’d)
Financing (cont’d) Other
► The DfT decided not to increase further direct Government grants for the ► The line enabled regeneration around stations on route, particularly with the
project, it agreed to guarantee £3.75bn of publicly raised debt to reduce LCR's opening of high speed commuter services between Kent and London St
overall cost of financing. Pancras.
► In addition, the DfT also agreed to lend public money directly to LCR up to a ► Key interface with domestic rail network which accounted for:
specified limit if it ran out of cash. ► 12.5% of construction activity
► In 2004 the project raised £1.25bn in loan notes for section 1 of the ► £400m cost of work
construction. The transaction involved securitization of government-paid or
guaranteed track access charges (TACs) from section 1. ► Plus £150m new assets
► The credit ratings (AAA/Stable/A-1+) assigned to the loan notes issued reflect ► The government has recently taken formal control of LCR and its financial
the credit enhancement provided by the government, through a structure subsidiaries as the next step towards the restructuring and sale of the
designed to create an unconditional and irrevocable stream of payments of operating concession HS1. In May the EC provided LCR with a £5bn grant of
two types of TACs, domestic capacity charges payable by the government and state aid to write off its debt and bring about the unbundling of the HS1
TACs payable by Eurostar (UK) Ltd. which were guaranteed by the infrastructure and Eurostar operations.
government to directly repay the rated notes. Neither TAC streams are ► The restructuring means that each of LCR’s businesses will be established on
affected by deductions for actual asset availability, usage or performance. a commercial basis, ending long term guarantees and removing the need for
► The HS1 example highlights the importance of government involvement in ongoing public support. The infrastructure activities will be consolidated into a
financing and risk transfer in an HSR project. single entity and then sold. Debt cancellation and a more sustainable financial
structure are expected to lead to a reduction in track access charges. The
concession period will be shortened, all guarantees to the company will be
cancelled and infrastructure use will be on a commercial basis at market rates.

Source: NAO report on CTRL progress 2005, HS1 website, Press search, internal presentations

Ref. DPD12725 High Speed 2: phase 1 report 27

Appendix B: TGV, France
Overview of project Map of TGV network in France
► The first line of the TGV network was first opened in 1981 between Paris and
Lyon and the network now extends throughout the country, with eight new
lines either under construction or in the pipeline, including extensions within
France and to surrounding countries.
► The network is currently operated by VFE, the long-distance rail branch of
SNCF, the French national rail operator. Whereas, Réseau Ferré de France
(RFF), also state owned, owns and manages the network, and is responsible
for upgrading, developing, and enhancing it and ensuring its overall

Lessons learned for HS2

► The success of the TGV network has in part been due to the development of
the network in phases on the basis of the lines which were expected to be
more successful being developed initially. This has been critical due to costs
and capacity for mobilising engineering and construction capacity.
► There are benefits from relying on local authority funding to bear some of the Organisation diagram
project costs, requiring that local regions that benefit from the TGV in terms of
the regeneration and growth. Local funding has been significant in several French state
TGV lines, comprising approximately 25-35% of total funding, however the
number of stakeholders involved requires that negotiations be carefully
managed to avoid delays.
► More recently, TGV lines have been procured on a PPP basis, with either
demand or availability risk, which has allowed more lines to be built with the RFF
help of private financing and expertise. (Infrastructure
► The TGV experience successfully demonstrates the ability to develop the
HSR infrastructure through the national railway infrastructure manager who
will also be responsible for ongoing maintenance of the classic rail network.

Ref. DPD12725 High Speed 2: phase 1 report 28

TGV, France: overview of lines examined
East European (LGV Est) ► The experience of LGV Est and Rhine-Rhone show that a phased approach to
building new lines is a workable model. This approach has been used
► In planning since 1996, the LGV Est européenne (often shortened to LGV Est) previously on all other TGV lines, and has been critical to their success. The
is an extension to the French HSR network, connecting Paris and Strasbourg first stage is built to full capacity before other sections are commenced, this
and other major cities in eastern France. In March 2007 the RFF opened the eases the financing burden and also makes best use of the market capacity for
300km line between Vaires-sur-Marne near Paris to Baudrecourt in the engineering and construction companies.
Moselle (phase 1). Phase 2 of the construction, from Baudrecourt to
Vendenheim (Bas-Rhin) near Strasbourg, is expected to be completed by Sud Atlantique
► The project involves the construction of approximately 300km of high speed
► As well as the line, the project also involved: railway line between Tours and Bordeaux.
► Construction of three TGV stations ► Currently in negotiations with competing bidders for the PPP concession and
► Upgrades and improvements to terminal lines and facilities financial close is expected to be achieved in the first half of 2010. The line is
expected to be in operation in 2016.
► Modernisation of city centre stations
► Electrification of lines through the Vosges valleys to permit seamless TGV Brittany-Loire Valley
► The line will link Connerré to the east of Le Mans and is expected to cut travel
Rhine Rhone times between Paris and Rennes by 37 minutes, shortening it to one hour and
27 minutes.
► The Rhine-Rhone HSR will be 425km long and comprise three branches made
► The project involves the construction of approximately 182 km of new line and
up of three complementary lines.
approximately 32 km of connections (at Le Mans, Sablé-sur-Sarthe and Laval).
► This new project, which has been in the planning stage since 1992, is the No new stations will be built. The section to the north of Le Mans is intended to
biggest railway engineering project in France following completion of the first be used for transporting both passengers and freight.
part of TGV Est in 2007.
► Currently in negotiations with competing bidders for the PPP concession.
► The first section of the three-line TGV Rhine-Rhone project to be approved is
the eastern branch, linking Dijon and Mulhouse – a distance of 140km (87.5
miles). It will eventually be joined by the western branch towards Paris and the
southern spur towards the Lyon/Rhone-Alps region (see diagram on slide 28).
Work began on the eastern branch in 2006 and the project is planned to be
complete in 2011.

Ref. DPD12725 High Speed 2: phase 1 report 29

Detailed information: TGV, France
Commercial Risk
► One of the roles of RFF, as infrastructure manager, is the provision of new rail ► RFF charges access fees to SNCF for usage of the rail infrastructure but does
infrastructure. For example, in the development of new HSR lines, RFF not take any usage risk associated with it.
contracts out the engineering works and the ongoing maintenance of the new ► The interface risk between the different infrastructure works is retained by RFF
and existing infrastructure. RFF charges access fees to SNCF (the national and hence by the French State.
rail operator) for the use of the rail infrastructure.
► Sud Atlantique LGV is a concession model and therefore the concessionare
► The new HSR lines are delivered through RFF who then provides the takes the demand risk.
infrastructure to SNCF on an availability basis. RFF acts as project manager
and allocates contracts for the development of the infrastructure on a section ► However, Brittany-Loire Valley HSL is a partnership contract, as such demand
by section basis bringing in specialist contractors to work on the civil works in risk remains with RFF.
order to mitigate against the default risk of a single contractor and to counter ► The reason Sud Atlantique was chosen to have a concession model and
any resource constraints in the market. Brittany-Loire was chosen to have a partnership contract was that the French
► In 2007, RFF was allowed to enter into PPPs to finance and deliver projects, Government wanted to test these models. The demand forecasts for the Sud
after safety and development legislation came into effect. This has allowed Atlantique line were more certain, therefore it made sense to have demand
France to build more projects beyond the capacity of the state budget, as well risk model tested on this line.
as share risks with project partners. ► There remains confusion about the two different types of contract, especially
► The two forms of involving the private sector are: the concession contract as the concessionaire does not mange operations,
and its only client is SNCF, so taking revenue risk does not make sense
► Concession model, whereby rail operators pay an access charge based on entirely.
their actual use of the infrastructure. As a result demand risk lies with the
concessionaire. Financing
► Partnership contract (contrat de partenariat public-privé), whereby RFF
► The initial TGV projects were developed and funded by SNCF on a corporate
pays a rental or availability fee over the life of the agreement based on the basis and guaranteed by the State.
performance of the private sector partner, regardless of actual use of the
assets, as such demand risk remains with RFF. ► More recent TGV projects have been developed and funded by RFF. RFF can
borrow money in the international markets to enable it to undertake major
► The use of PPPs to finance and build the line has several objectives:
projects but not on a particular project basis. This funding is supported by
► Accelerate the development of a national rail network by carrying out more government guarantee and is restricted to the amount that RFF can repay
projects concurrently in a budget constrained environment. from the access fees.
► Maximise the use of public funds by mobilising financial resources from the ► The rolling stock for the TGV lines is procured by SNCF and is funded through
private sector. lease commitments.
► Reducing project costs by integrating the design, construction, maintenance ► In addition to borrowings, the TGV lines have also been developed with grant
and so on. funding from local sources. This funding is dependent on the political will at the
► SNCF maintains the operation of track and control of maintenance of safety local level for a new TGV line, and the local benefits it is expected to deliver.
systems including signals and pointwork. ► Local entities which contribute to financing include, the city and county
council, district council and regional council.
Ref. DPD12725 High Speed 2: phase 1 report 30
Detailed information: TGV, France (cont’d)
Financing (cont’d) ► A total of three consortia led by France's big three developers – Bouygues, Eiffage and
Vinci – have been pre-qualified.
► Owing to the number of stakeholders involved, it is essential that the
► In terms of funding, RFF is providing the largest share: €1.02bn. The contribution from
negotiations be properly managed, RFF is responsible for this. Financing the State is €990m, with an equal amount to be provided by local authorities. Of this
negotiations have caused delays on the Sud Atlantique line, with local €990m, the Brittany region and other bodies are providing €896m, with the Loire region
stakeholders demanding political gains for their contribution. making its largest-ever rail investment of €94m.
► Local authorities can raise finance to contribute by borrowing (issuing ► The project had been re-tendered on OJEU to take advantage of recent changes to
bonds) to specialised commercial banks. French law, which allows the state to guarantee up to 80% of the private sector
► Local involvement is highlighted by the following projects. financing required for PPPs and concessions, be it senior debt or bonds, up to a
maximum of €10bn. It is understood that the guarantee can be used for projects in
East European HSL phase 1 addition to any regional or local subsidies. The amended tender also gives candidates
► The total cost of completing phase 1 was €3.1bn, backed by a unique financing the opportunity to submit BAFOs without committed bank letters, permitted under a
structure uniting 22 partners including the French state, 17 local authorities served by revision to France's PPP framework law.
the line, Luxembourg, the EU, SNCF and the RFF. ► Recently, the president of Caisse des Dépôts et Consignations (CDC) pledged to
► It was the first TGV construction in which local communities participated in funding provide a total of €500m to help the regional authorities finance their part of the project.
together with the state government and European Union. Their input was fixed This loan, which covers approximately half of the regions' total funding requirements,
following negotiations with the local communities and contributions depended on travel would be made at a significant discount to current market prices and would be long-
time decrease benefits to Paris. term, perhaps as long as 40 years.
► Local funding amounted to approximately €736m, in addition RFF secured €755m in
borrowing from the EIB.

East Rhine-Rhone Line

► The total cost of the project is estimated at €2.5bn. Whilst the majority of funding has Table: % funding by source
come from the state and RFF borrowings, the TGV line has also been developed with TGV Est East Rhine Rhone Brittany-Loire
grant funding from local sources amounting to approximately €717m. In addition, the French State 39% 31% 32%
project has €66m in financing from the Swiss government, as the line will bring Regional funding 24% 29% 35%
economic benefits there.
RFF 22% 26% 33%
► RFF has secured €625m in borrowing from the EIB to finance the line. SNCF 2% 4% n/a
EU 10% 8% n/a
Brittany-Loire Valley
Luxembourg 4% n/a n/a
► RFF is seeking a private partner to design, build, finance, operate and maintain the
Switzerland n/a 3% n/a
182km of rail line for a period of 45 years. The invitation to tender for the so-called
'partnership contract' to build LGV Bretagne – Pays de la Loire was published in
Source: RFF website, press search, S&P report on SNCF, EY colleagues in Paris office
December 2008 and bids were submitted in May. The contract is currently priced at €3-

Ref. DPD12725 High Speed 2: phase 1 report 31

Appendix C: Hogesnelheidslijn Zuid or High-Speed
High Line South,
Overview of project Map of the project
► 100 km line under construction between the Netherlands and Belgium. Originally scheduled for completion
in 2007, it is now expected to open before the end of 2009. It will be served by newly renovated Thalys
trains from Amsterdam to Paris and Brussels.
► The line will also be used by domestic V250 trains exclusively operated by NS Hispeed, a joint venture
between Nederlandse Spoorwegen and KLM.
► The project has been procured on the basis of a PPP contract between Rijkswaterstaat, an agency of the
Dutch Ministry of Transport, Public Works and Water Management, and the Fluor--led consortium
Infraspeed until 2030. It is responsible for design, construction, financing and maintenance.
► The main challenges of the project are the delays to the construction timetables caused by late delivery of
the trains as well as issues with the European Rail Traffic Management System.
► Approximately €1bn
1bn funding was provided by Infraspeed, a commercial bank financing consortium and the


Diagram of commercial structure

Lessons learned for HS2
► Missed programme management opportunity. The Dutch Government underestimated the time required for Passenger transport: 1 concession agreement
system integration.
► Following market consultation undertaken by the Dutch Government, it became apparent that the private Railtechnical installations: 1 DBFM contract
sector were not in favour of retaining demand risk. This risk is retained by the Dutch Government.
► The Dutch Government have retained considerable risks relating to the provision of the sub-surface
sub works Civil-technical foundation: 6 D&C contracts
in the project. The procurement of any HSL will need to consider the retention of key risks so that overall
best value for money is achieved.
► The Dutch HSR has, according to the Dutch Audit Commission, been negatively impacted by the project
being managed by two different government departments. This has created issues with the procurement Connections with existing rail infrastructure: 1 D&C contract
and the delivery of the project, with the public sector having to pay availability charges although trains have
not yet started operation. This highlights the need for joined up government for project management and Source: Ministerie van Vekeeren Waterstaat presentation
proper planning in the procurement stages.

Ref. DPD12725 High Speed 2: phase 1 report 32

Detailed information: HSL Zuid, Netherlands
Commercial Risk
► The public sector is the contract manager with responsibility for ensuring the contractual ► The Dutch Government took the view that it would be unable to
matrix delivers the required outputs. In addition, it is responsible for safety, access and successfully transfer the risks related to the sub-structure works and
system integration. ground conditions, and decided that this aspect of the project would be
► The construction has been divided into four workstreams contracted out: best delivered by the Dutch government on a traditional basis, with
► technical foundation) delivered by the Dutch Government on a
Substructure: (civil-technical other aspects being delivered on a PPP basis.
traditional basis (to allow Dutch Government to retain the risk) and contracted out to ► The PPP did not include the transfer of any demand risk. Infraspeed is
six D&C contractors remunerated on an availability basis, subject to deductions for
► Superstructure (rail systems): awarded to a contractor (Infraspeed) on a DBFM basis unavailability of the infrastructure.
► Network connections: awarded to one D&C contractor ► Infraspeed guarantees 99.46% availability of the line over the 25 year
concession period from 2006 to 2031. As of 2006, the Dutch
► Passenger transport: one concession-agreement (HSA)
government will pay Infraspeed an annual fee for making the HSL
► A competition was held to secure a private sector partner for the delivery of the infrastructure available, which allows Infraspeed to cover its expenses
infrastructure from the track level upwards on a PPP basis. and recover its investments. The sum paid depends on the actual
► A concession for 30 years was awarded to the successful consortium (the Infraspeed availability: if Infraspeed fail to realise 99.46% availability, the fee is
consortium consisting of: Fluor Daniel BV, Koninklijke BAM/NBM Amstelland NV, reduced.
Siemens Nederland NV, Siemens Transportation Systems, Innisfree Limited and ► Although the private sector consortium did not take revenue risk, the
Charterhouse Project Equity Investment Limited). Dutch Government developed a payment mechanism based on
► The PPP contract includes the provision and maintenance of the track, safety systems, penalties (deductions) for disruption caused by non-availability.
power supply systems, sound barriers and communications systems. ► The payment mechanism and the supporting transport model are used
► Siemens Nederland has successfully delivered the power supply system, the ERTMS to quantify the impact of infrastructure failures on the passenger and on
signalling system, the GSM-RR communication systems and the ancillary equipment. the operating company. The same model is also used in the
BAM Rail has successfully supplied the track system and noise barriers and Fluor management of the operating company to quantify the impact of an
Infrastructure has successfully provided program management services. operating failure on passengers.
► The government has sold the right to run trains on the HSL to the consortium High ► According to a report by the Dutch Audit Commission, whilst the
Speed Alliance (HSA), a JV between Dutch Railways (NS) and Royal Dutch Airlines construction contracts made the contractor responsible for the risks
(KLM). HSA will pay the Dutch government for the exclusive right to domestic transport associated with the construction, maintenance and operation of the
on the high speed line for a 15-year period. railway line, the major financial risks remain with the State. If there are
► Network connection work was contracted out to other building firms. In late January delays in completing the substructure or superstructure, for example,
2001, the HSL Project Organization signed the contract for this with a consortium the State will bear the resulting loss. Its dependence on third parties
established for this purpose, which included Ballast Nedam, BAM NBM and HBG Civiel. prevents the State from managing many of the risks effectively.

Ref. DPD12725 High Speed 2: phase 1 report 33

Detailed information: HSL Zuid, Netherlands (cont’d)
Financing Other
The Dutch government finances: ► Delays to the construction timetables and cost overruns were caused by several factors:
► The substructure of the HSL ► Late delivery of the train sets from the HSA joint venture contractor.
► The PPP infrastructure payments to Infraspeed ► The ERTMS (European Rail Traffic Management System) modifications due to a change in protocol were
► These are partly financed by revenue from HSA underestimated.

Total costs: €7.2bn. ► Upgrading of the signalling system.

The value of the PPP element of the project was ► The equipment for testing the upgraded safety system was not delivered on time as the specification was
approximately £1bn. The funding for this element of changed
the project was achieved through 90% gearing. ► Lack of coordinated leadership from the Dutch Government.
Financial close reached on 30 October 2001. ► According to the report from the Dutch Audit Commission, these delays will result in a loss of income to the
The £1bn project financing for the PPP includes: government from access charges totalling around €222m.

► Loan facilities provided through an international ► Furthermore, capital costs rose from a projected €3-5bn in the mid-1990s to over €6bn in 2006. The report
commercial banking consortium with the lead also predicts that the whole HSL-Zuid
HSL project will only achieve break even about 2022.
arranging banks being Bayerische Hypo-und ► The report blamed the Dutch transport ministry for a lack of co-ordinated
co leadership of the various
Vereinsbank, ING, KBC, Kreditanstalt für contractors during the construction period. Operational risks and uncertainties were not well managed, and
Wiederaufbau, Dexia Credit Local and Rabobank: the ministry’s understanding of the risk was incomplete. In particular:
► €605m syndicated term loan (comprised of two ► The ministry wanted train operations to start whilst the European Train Control System equipment was
Senior loans with a term of approximately 27 still being tested. At the same time, the Passenger Transport Directorate required that full access tariffs
years) be paid as soon as the trains started running. HSA has now decided not to run any trains until the
► €119m subordinated debt bridge facility European Train Control System has been fully tested and passed 'fit for purpose'.

► €15m working capital facility ► There are concerns that passenger numbers may have been significantly overestimated.

► The project’s ‘TEN’ status made it eligible for a loan ► There are also doubts about the punctuality of the high speed trains, which risk being delayed where they
from the EIB with a principal value of approximately have to share tracks with 140 km/h services on the conventional network between Amsterdam and
€400m. Hoofddorp and through Rotterdam. HSA has demanded a reduction of €16m a year in its premium
payments to compensate for an under-estimation
under of the running times through Belgium, which it believes
will reduce its potential revenue.
► Belgian infrastructure manager Infrabel may pursue its own claim against the Dutch transport ministry for
the delay to the start of services. Until HSL-Zuid
HSL opens, Infrabel expects to lose track access income on
LGV4 estimated to be worth around €9m a year.
Source: Dutch Audit office report, press search, HSL Zuid Website, EY colleagues in Dutch office
Ref. DPD12725 High Speed 2: phase 1 report 34
Appendix D: TAV, Italy
Overview of project Map and diagram of the project
► The project involved the design, construction and operation of principle lines of
a HSR connecting the north and south of Italy through the cities of Turin,
Milan, Bologna, Florence, Rome and Naples, totalling more than 900km.
► The project started in 1991, but went through a complex authorization process.
► In accordance with EU directives, Italy has split railway operations from
railway ownership. The Italian railway group (Ferrovie dello Stato, ‘FS’)
manages the infrastructure and performs all maintenance and repairs through
the rail infrastructure company Rete Ferrovaria Italiana (RFI). FS is charged
with managing the HSL project.

Lessons learned for HS2 Italian State

► Private financing was well received, but it was well backed by the state Treasury
indicate that much depends on the willingness of the state to offer support. Direct Monitor
► The size and competencies of the local construction market have a large funding Role
bearing on the size and complexity of the individual contracts let as part of the
HSR projects. TAV believe that minimising the number of interfaces through Italian State
Railway Holdco
awarding larger contracts is preferable to awarding smaller contracts. 100% (FS) 100%
ownership ownership
► City centre stations have been chosen in preference to parkway stations, as
TAV believe these provide a better opportunity to create a multi-modal
transport interchange with existing rail services. Rail infrastructure 100% Train operating
company ownership company
► The Italian experience has demonstrated the ability of public-private
participation in developing an HSR as well as the use of Not for Profit
structures in structuring the project. HSL Company
► The Italian experience, with the withdrawal of private sector parties from the (TAV)
project, highlights the frustrations that can develop and can jeopardise HSL. A
true partnership approach is required to deliver a successful project. Source:

Ref. DPD12725 High Speed 2: phase 1 report 35

Detailed information: TAV, Italy
Commercial Risk
► In 1991 FS awarded a 50-year concession to TAV to develop, design, finance ► The state meets any shortfalls between debt service payable to Infrastrutture
and construct HSL projects throughout Italy. and net forecast TACs. Net TACs are forecast after deducting operating,
► Originally TAV was 40% privately owned, but in 1997 the Italian State Railway financing and tax expenses. However, operating expenses are subject to a
Holding Company bought out the private shareholders. cap, leaving operating risk with RFI. Net forecast TACs are recalculated every
five years, and adjusted for inflation. Ultimately, non-payment risk rests with
► FS also awarded construction contracts to construct non-urban sections of the government.
infrastructure, however owing to delays in the purchase of land for
construction, these contractors withdrew. ► Demand risk is borne in the first instance by the train operators. However,
given the very high capital costs of the project, the train operators would be
► Upon completion of the HSL projects, ownership is transferred to RFI although likely to keep trains running with lower load factors. The breakeven point is
TAV retains the right to charge a usage fee. estimated at a load factor of 50%, the load factor embedded in Ferrovie dello
► RFI in turn charge Trenitalia or other train operating companies who use the Stato's forecasts is 70%. Nevertheless, if traffic was so low as to lead train
HSL infrastructure. operators to reduce booked capacity, TACs would fall below expectations and
the shortfall would have to be covered by the state. RFI expects to allocate
► NTV (Nuovo Trasporto Viaggiatori) was granted the licence and authorisation train paths mainly through contracts lasting for maximum of 12 months, but
to perform the passenger services on the high speed network and will start operators would also be able to enter into long-term agreements. If a train
these services in the first half of 2011. operator decides to cancel booked capacity, it would be subject to a penalty
► NTV was created in December 2006 by Italian businessmen Luca Cordero di payment, represented by the booking fee or the full usage charge, depending
Montezemolo, Diego Della Valle, Gianni Punzo and Giuseppe Sciarrone. on the time of cancellation.
► NTV has ordered from Alstom 25 of its ultra high speed AGV1 trains at a cost ► The concession with RFI is subject to termination in the event of continuing
of €650m. The contract covers the maintenance of these trains (not included in material breaches by RFI in its undertakings. Credit risk resulting from a
the above amount) for a 30-year period, and an option for a further 10 trains. termination is mitigated by a law which provides that the new concessionaire
The AGV train, having a capacity of around 500 seats in 11 coaches, will will be jointly liable for debt with RFI and Infrastrutture. In addition, any sums
operate on the Italian high speed network at a speed of 300kph. due from the state to RFI will be allocated to repay Infrastrutture’s debt, and
► The bond offerings were issued by Infrastrutture SpA, a subsidiary of the the state will be responsible for servicing Infrastrutture’s debt until a new
financial intermediary responsible for the funding of major infrastructure concession is granted.
projects in Italy.

Ref. DPD12725 High Speed 2: phase 1 report 36

Detailed information: TAV, Italy (cont’d)
Financing Other
► TAV is 60% funded through interest free loans from FS and 40% through ► The Italian Government transferred planning and consent risk to TAV in 1991.
capital market issues underwritten by explicit government guarantees. However, land expropriation and compensation issues have taken
► These guarantees relate to the credit worthiness of the usage payments from considerably longer than anticipated to resolve given the multitude of public
RFI and hence TAV does not carry any usage risk. and private stakeholders affected by the individual HSL projects. The inability
of the private sector partners in TAV to effectively manage this risk was a
► Project costs are estimated at €35bn of which, according to a report by contributory factor to their withdrawal from TAV in 1997.
Standard and Poor, in 2004 €18bn had been financed. Of this, €5bn was made
up of state funding, including equity, €8bn was state guaranteed debt, and ► To avoid further planning consent difficulties, the government introduced a
€6.5bn came from the issuance of loan notes. In addition €140m of EU funding majority rule for stakeholders which has led to the process speeding up
was made available as the projects are trans-European transport projects. considerably, although on certain lines there have still been significant delays.

► The bond offerings were issued by Infrastrutture SpA, with funding then ► Minimising land take and environmental costs by constructing lines next to
advanced to RFI via a loan agreement. The notes benefited from indirect existing motorways has led to high costs. On some projects highway works
recourse to the Italian government, which covered interest during construction accounted for 30% of the project costs.
and repayment of the principle once the railway was operating.
► All tranches were rated Aa2, which is the sovereign rating of the Republic of
► The bonds carry a zero risk rating and were marketed to the traditional buyers
of sovereign bonds.
► The key sources of cash flow for the project are:
► Track access charges
► Rental of commercial space in stations
► State transfers covering any shortfall in debt service

Source: S&P report, press search

Ref. DPD12725 High Speed 2: phase 1 report 37

Appendix E: RAVE, Portugal
Overview of project Map of the project
► The Portuguese HSR network plan comprises five main lines:
► Lisbon - Madrid 206km, expected to be completed in two phases by 2015
► Porto - Vigo 100km, expected to be completed in two phases by 2013
► Lisbon - Porto 290km, expected to be complete in 2015
► Aveiro - Salamanca
► Evora – Faro - Huelva
► The main objectives are economic growth, better connections to the rest of
Europe, regional development, enabling a more sustainable transport system,
and increasing competitiveness in port, airport and logistics systems.


Lessons learned for HS2

Project organisation:
► The project is planned to be built using a phased approach with operating
revenues contributing a significant portion of funding (42% on the Lisbon-
Madrid line and 52% on the Lisbon-Porto line). Capacity allocation and railway traffic management: State/REFER
► The project has faced delays owing to elections, highlighting that political buy
in and cross party support is essential. Signalling/telecommunications (PPP)
► So far the project organisation model (see table adjacent) has proved
successful. Substructure/superstructure

► In the current financing environment the procurement process must allow for PPP PPP PPP PPP PPP
the capacity of the banking market .

Ref. DPD12725 High Speed 2: phase 1 report 38

► Funding for the construction of Portugal's high-speed rail line will be provided
by several sources, in addition to the commercial banks backing the PPP
Detailed information: RAVE, Portugal ► The Lisbon-Madrid line is being completed in two sections, the first covering
the crossing of the Tagus river, and the second to the Spanish border. The
total investment will be €2.5bn, €600m for the first section and €2.4bn for the
Commercial second section.
► REFER is the manager of Portugal's rail infrastructure and is responsible for ► The Lisbon-Porto line involves a total investment of €4.5bn.
two distinct activities:
► The Porto-Vigo line is also being completed in two sections, the total
► Infrastructure construction and renewal investment is €2.2bn, €845m for the first section and €1.4 for the second.
► Infrastructure management, including maintenance, capacity management,
route allocation and traffic control Funding sources Lisbon-Madrid Porto-Vigo Lisbon-Porto
► The high-speed network is being developed by Rede Ferroviaria de Alta Operational Cash flows 1,050 - 2,340
Velocidade, S.A. (RAVE), which is 40% owned by REFER, with the remainder EU funding 675 550 675
being directly owned by the state. Public funding (during construction) 325 352 990
► The Portuguese government is retaining control of the capacity allocation and Public funding (during operations) 450 1,298 495
traffic management on the HSR project, but is contracting out the construction 5,000
of the substructure and superstructure to five PPPs. In addition, the signalling
and telecommunication are contracted out to a PPP. 4,000

► Progress so far: for the second phase of the Lisbon-Madrid HSR two consortia 3,000

have been shortlisted for the final stage. The bidders need to submit final 2,000
offers backed by commercial bank letters.

Risk Risk: Public Private

Lisbon-Madrid Porto-Vigo Lisbon-Porto
► The matrix shows the risk Planning
allocation for the project: Financing Operational C ash flow s EU funding
Project Public funding (during construction) Public funding (during operations)
Land expropriation
Construction Other
Archealogical ► Finalising the PPP for the construction of the second phase of the Lisbon-
Madrid line has been delayed, pending the outcome of the country's elections
in September. In addition, the tender for the construction of the Tagus river
crossing section has also been pushed back.
Traffic ► According to a source close to the deal, as reported in Infra News the project
Force Majeur depends largely on the outcome of the elections. There is an ongoing debate
on whether there should be a mixture of public and private funding of
Source: press search, RAVE presentations, S&P report Portuguese infrastructure, which is causing significant delay. This debate will
Ref. DPD12725 High Speed 2: phase 1 report also determine the way forward for the rail project. 39
Appendix F: ICE, Germany
Overview of project Map of the project
► ICE (Intercity Express) is the German network of high speed trains. The first
ICE trains came into service in 1989, and were running a regular service by
1991. The network now extends throughout the country and connects most
major cities, and also cities in neighbouring countries.
► 90% of Germany’s rail network is owned and managed by Deutsche Bahn AG
(DB), including the ICE services.
► It was intended that DB would go to IPO in late 2008 but this was postponed
due to market conditions, it remains under state control.
► The train sets used on the network have been through several generations of
improvements. There have been several accidents and derailments of ICE
trains, including the worst ever accident involving a high speed train in 1998,
killing 101 and injuring 88.
► The planning of the ICE network involved extensive debates over the issue of
using the lines for mixed traffic, or solely for passenger services.
► Although freight traffic brings significant revenues, mixed use of tracks is difficult
as there are large speed differences between passenger and freight traffic. In
addition, required night time slots for freight traffic could not be allocated as the
HSL requires high levels of maintenance that can only be done at night.
► Problems can be avoided by harmonising timetabling as well as building
switches and loop tracks to allow trains to pass each other.
► To avoid additional costs the DB strategy has been to create separate priority
networks for both fast and slow trains, and investment has been made
according to the designated status of each line, which essentially means that
ICE trains will run on their special lines and freight will run on the original slow
Lessons learned for HS2
► ICE demonstrates the difficulties of mixed use lines, and that proper planning
is essential.
► ICE has successfully competed against air travel, with Lufthansa cancelling its Source:
domestic route between Frankfurt and Cologne. Press search, DB website, journal articles

Ref. DPD12725 High Speed 2: phase 1 report 40

Appendix G: Alta Velocidad Española (AVE), Spain
Overview of project Map of the project
► The first AVE line was inaugurated in 1992 between Madrid and Seville and
paved the way for the expansion of the network around the country.
► The entry into service in 2010 of 438km of HSR between Madrid and Valencia
will make Spain the country with the most HSR in service in the world with
► The investment of €53bn will deliver 10,000km by 2020.
► The investment committed to the HSR up to 2008 is about €24bn, excluding
Madrid-Seville. This investment has delivered:
► 1,570km of HSR in operation
► 1,319km under construction
► The Spanish HSR network has been delivered with State and European

Lessons learned for HS2

► AVE has benefited from significant EU funding, especially on its cross border
lines. Furthermore, as AVE links regions which are relatively economically
deprived, it has benefited from special EU regional development funds.
► Significant market share was taken from airlines through a competition Source:
agreement with Iberia when it was still in state hands, however now that the
airlines have been deregulated the AVE may face increased competition.

Ref. DPD12725 High Speed 2: phase 1 report 41

Detailed information: AVE, Spain ► The Spanish government is highly committed to long
term plans for the network and estimates that the cost
will be met from allocating 1.5% of GDP to national
Financing infrastructure until 2020. It forecast that, with additional
revenue from concessions, it will generate a cumulative
► The lines constructed have received a high percentage of EU funding which comes from various sources: investment budget of €250bn of which half will go to rail.
Spain will be spending € 10bn on rail infrastructure
► Trans-European Transport Network (TEN-T) funding – the EU has tabled its proposals for funding TEN- TEN
investment this year alone, € 6bn of it on new high-
T projects for the period 2007-2013.
2013. In selecting the projects, the EU has given priority to cross-border
speed lines.
projects and environmentally friendly modes such as rail.
► EIB granted a €200bn loan to help construct the line
► Cohesion funds – the Cohesion Fund is a structural instrument that helps Member States to reduce
between Madrid and Barcelona.
economic and social disparities and to stabilise their economies.
► European Regional Development Funds (ERDF) – helps stimulate economic development and Other
regeneration in the least prosperous regions of the EU. Funding is targeted to meet three objectives set
down by the EU: convergence, regional competitiveness, European territorial cooperation. ► When the Madrid-Seville line was built, Iberia (Spain’s
airline) was under state control. One of the reasons the
► Cross-borders projects receive a larger percentage of total investment. line was so successful is that the government of Spain
did not allow the airline to be competitive over the route.
100% ► AVE has taken a significant market share in domestic
travel from airlines. Domestic airlines have lost a fifth of
80% their passengers in the space of a year, long-distance
trains have gained almost a third. Although airlines can
% total costs

beat the AVE in terms of speed, passengers are better
40% able to use their time on the train, especially for
business travel.
► The opening of the Barcelona-Madrid line highlighted
the fall in airlines’ dominance. In its first ten months it
Barcelona-Figueras Madrid- Lev ante Antequera-Granada Madrid- Frontera Almeria- Murcia Leon-Asturias
carried 2m passengers, in 2008 its share of the total
market rose from 28% to 38%.
Total EU funds Other funding ► However, now that airlines have been deregulated, AVE
% EU Total EU may face increased competition from low cost
Line Total cost €m investment funds operators.
Madrid- Levante 12410 10% 1223.2 ► Many believed that the decision to build the first HSR
Barcelona-Figueras 12375 28% 3459.7 between Madrid and Seville (rather than to Barcelona)
Madrid- Frontera Portugesa 2700 13% 362.5 was a politically motivated decision. Seville is the home
Almeria- Murcia 2519 14% 348.3 town of the then prime minister, Felipe González.
Leon-Asturias 2391 14% 331.7
Antequera-Granada 1355 44% 600 ► The network connects small provincial cities like
Valladolid and Segovia, as well as major cities.
Ref. DPD12725 High Speed 2: phase 1 report 42
Source: press search, internal reports
Appendix H: Shinkansen, Japan
Overview of project Map of the project
► The world’s first HSR entered into service in Japan in 1964.
► The Japanese Shinkansen network has been developed since the introduction
of the first service with performance levels that are seen as a benchmark for
railway performance in terms of reliability and punctuality.
► Now there is nearly 2,500km of high speed line in service, more than any other
country in the world.

Lessons learned for HS2

► Although the Japanese government effectively sold HSR assets to help
relieve the historic JNR debt burden, its current procurement policy
recognises the benefits to retaining public ownership of future HSR assets
and levying track access charges to HSR Operators.
► Since the introduction of the first service the Japanese government has
subsequently introduced more private sector involvement and finance to
facilitate further network development. This has been as a consequence of
the privatisation of JNR in 1987 and the scaling back of state involvement in
► Recent HSRs have had a lower cost/benefit ratio than older lines and are
partly driven by political motives rather than economic cases.
► Local communities served by a new HSL are expected to contribute a
proportion of matched funding.
► New HSR lines have reduced revenues on the existing lines that in some
cases have resulted in reduced investment in the existing system affecting
freight operations.

Ref. DPD12725 High Speed 2: phase 1 report 43

Detailed information: Shinkansen, Japan
Commercial Risk
► Following the successful introduction of the High Speed Rail service in 1964, ► It has been argued that prior to privatisation in 1987, some lines were built for
the Japan Railway Construction Public Corporation (JRCC) was established to political reasons, rather than capacity shortage and demand for railway travel.
procure future HSLs and classic rail services on behalf of the State. Investment could not be met by increasing fares as JNR was initially forced to
► Subsequent lines were constructed by JRCC, with JNR (the state railway keep fares low as part of national policy. A boom in motor car ownership
body) responsible for service operation and infrastructure maintenance. The contributed to lower demand. Although some lines were profitable, it was not
network is run on a vertically segregated basis. enough to offset the loss-making routes. In 1976, to amend losses caused by
the previous price control policy, fares were increased, but this led to a fall in
► Upon privatisation of the heavily indebted JNR in 1987, the new entity, demand.
Japanese Railways (JR), bought the existing HSL infrastructure from the
government for a sum of approximately £46bn. ► Coupled with a period of low growth in the 1970s, a growing deficit in JNR led
to the government deciding to freeze all Shinkansen projects except those
► JRCC remains the government funding conduit, infrastructure provider and already under construction in 1982.
ultimate owner of HSLs.
► This freeze was lifted shortly before privatisation of the JNR in 1987.
► JRCC levies track access charges on JR, the operator of the HSL services.

Ref. DPD12725 High Speed 2: phase 1 report 44

Detailed information: Shinkansen, Japan (cont’d)
Financing Other
► Historically, the funding sources for lines under construction had been: ► A major driving force behind the development of the Shinkansen network was
► State Loans 66.7% the benefits it brought to the regional and national economy.

► Local government 33.3% ► Direct impacts of the Shinkansen include reduced travel time, increased transit
capacity, job creation during the construction and operation, and
► Local communities served by a new HSL are expected to contribute a environmental benefits.
proportion of matching funding.
► Indirect impacts included reduction in congestion of other transport modes and
► The initial HSL was funded almost entirely by government loans to JNR – significant regional development. For example, the growth in population
although the World Bank contributed a small proportion of the total funding between 1975 and 1991 in the area around the line was approximately 18%
requirement. higher than growth in the rest of the country. Furthermore, over the same time
► In March 1987, JNR was privatised party as a result of losses incurred due to period, the growth in the number of companies in the area along the line was
huge investment not counterbalanced by increasing farebox revenues. 21% higher than the rest of the country.
► Following the privatisation of JNR in 1987, the state has progressively scaled ► A key feature of the Shinkansen was the development/redevelopment of
back its funding contribution to the organisation with the introduction of more stations along the route and urban development of the surrounding area. This
private funding in successive projects. brought major economic and cultural benefits to the local economy. For
► The 1987 privatisation sum is payable to the government over a 30-year term
with interest of 5.2%. Part of this payment is however allocated to JRCC to ► The area around Shin-Yokohama St. station created a new business area
assist in the funding of new HSLs. in Yokohama, and led to growth in businesses and employment as well as
the construction of an event and sports arena which was a venue during the
► The new HSL lines have had a financial impact on the existing network in 2002 Fifa World Cup.
terms of revenue decrease, which has resulted in reduced investment and
asset degradation. This affected the ability of freight operators to efficiently run ► The railway company also encourages non-transport business inside the
along the existing lines that they rely on. railway station, for example, shopping centres and office buildings.
Approximately 15% of revenues derive from this channel.

Source: journal articles, press search

Ref. DPD12725 High Speed 2: phase 1 report 45

Appendix I: North-South
South HSR, Taiwan
Overview of project Map of the project
► The line will link Taipei to Kaohsiung at a total length of 345km with a 90 minute journey time. During the first
stage of the operation, eight stations of the HSR will be in operation by 2010.
► The Taiwan HSR is based on Japan's Shinkansen system and its Taiwan High Speed 700T train is a variant
of the 700 Series Shinkansen.
► An express train capable of running at up to 300kmh (186mph) will travel from Taipei City to Kaohsiung City
in about 90 minutes, in comparison to 4.5 hours on the conventional western trunk line.
► Initially the operating company looked at German and French high-speed
speed technology, which went as far as a
test train being assembled using German ICE power cars and French TGV Duplex intermediate trailers for
demonstration test runs in northern Germany. However, after much deliberation Japanese technology was
► By 2033, 336,000 passengers are expected to be carried, which will see the high-speed
speed line account for
5.5% of the transportation market in Taiwan.
► Actual construction began in March 2000 and running tests started in January 2005. In late October 2005,
Taiwan High Speed Rail passed its targeted speed of 300kmh (186mph) to 315kmh (197mph) during testing
. Operation began in 2007.

Lessons learned for HS2

► The project was originally tendered as a BOT where the private sector would build and finance it without
any government support. The THSRC consortium was selected based on its proposal that did not include
any request for government assistance. However, lenders to THSRC demanded and eventually received
wide ranging government support in the event that THSRC could not meet its financial obligations.
► The eventual structure used for the project was dictated by the private sector and the funders. This
suggests that any project structure should be considered taking into account a realistic evaluation of what
the private sector can deliver, perhaps through a consultation process.
► Procurement has been surrounded by political controversy. The line was first specified to use European
train sets, but then the decision was changed to use Shinkansen trains instead. Many believed this was a
political move, and the subsequent disruption to the rail superstructure specification has contributed to the
cost overruns. This example highlights how important planning is in the procurement stages.

Ref. DPD12725 High Speed 2: phase 1 report 46

South HSR, Taiwan
Detailed information: North-South
Commercial Risk
► The original concept was to be entirely publicly procured, however, the ► Design and build contract with a franchise being let to a private sector operator
government decided to withdraw the funding and instead have the HSR Project to operate and maintain the system.
built by a private sector venture with a Build-Operate-Transfer (BOT) model. ► The State intended to transfer demand risk to the private sector operator who
► The government granted THSRC (a consortium led by Alstom Transport SA of would also be responsible for the operation and maintenance of the system.
France and Siemens AG of Germany) a concession to finance, construct, and ► The project has been surrounded by political controversy, particularly in
operate the High Speed Rail System for a period of 35 years and a concession relation to THRSC’s awarding of the rolling stock contracts to the Taiwan
for HSR station area development for a period of 50 years. Shinkansen Consortium instead of the Eurotrain. Shortly after Eurotrain had
► The trainset is built by a consortium of Japanese rolling stock builders, most won the bid, THSRC declared the tender re-open to TSC, who finally won it.
notably Kawasaki Heavy Industries. The Japanese government had offered soft loans to finance the project and
► To share the benefits with government, the THSRC promises to appropriate the leader of the bid promised funds if TSC was chosen.
parts of yearly earnings to government for HSR further development and ► Allegations were made that the decision was largely political, paving the way
construction. This amount is 10% of earnings before tax every year during the for President Lee Teng-hui's visit to Japan. Although this was strongly denied,
HSR operating concession period regardless of the performance of the after a lengthy arbitration process, the court ruled in March 2004 that THSRC
concession company. The accumulated amount cannot be less than should pay compensation of US$32m to Eurotrain. In November 2004, THSRC
US$3.4bn. agreed to pay US$65m (US$89m with interest) to Eurotrain.
► Earthquakes are a significant consideration in Taiwan and one of the benefits
of the Shinkansen trains is they are built for protection against earthquakes.

Ref. DPD12725 High Speed 2: phase 1 report 47

South HSR, Taiwan (cont’d)
Detailed information: North-South
Financing Other
► The project has a construction value of approximately US$18bn. ► The project has been subject to delays mainly due to:
► By March 2009 THSRC had accumulated losses of US$2.13bn, amounting to ► Financing and contractual issues.
over 65 percent of the firm’s capital.
► Safety testing and certification. For instance there were three derailments
► THSRC expects that restructuring will be complete by the end of 2009, which
during the tests in early November 2006.
has entailed re-negotiating terms of bank debt (with government assistance).
► Financial institutions are now considering a new package of syndicated loans ► Problems with adjusting the Japanese Shinkansen bullet train system to
to the rail firm to retire current borrowings. In addition, the government hopes European specifications caused by procurement controversy as the
to encourage insurance firms to inject funds into the HSR company. infrastructure was built to European specifications. These included
► The project was initially planned to be entirely privately funded through the sale electrification and signalling, as well as training drivers.
of preferred shares to institutional investors. However, due to massive cost ► Cost overruns have been incurred, mainly due to:
overruns THSRC failed to raise the required capital.
► Delays
► THSRC focused on covering the funding gap through bank debt. This in turn
created significant delays as the private sector demanded and received overt ► An insufficient number of passengers. For the first five months of 2009,
financial support from the Taiwanese Government in the event of default of daily ridership amounted to only 87,000 passengers – 30 percent of the
THSRC. number predicted
► A government guaranteed debt facility for the first part of the project was raised ► A heavy interest burden on the debt raised
in 2000 totalling US$10bn. It was split into three 15-year tranches, priced at ► Unreasonable amortisation requirements
around 90bp over Taiwan's one-year post office savings rate.
► In March 2005, the Taiwanese government stepped in to buy securities worth ► In its present state, the company does not meet the terms for a mandatory
US$237m. government takeover and, despite the firm’s financial troubles, the government
at present has no plan to take over THSRC.
► In addition, in 2007 THSRC raised US$300m from the sale of pre-IPO
convertible bonds in the international market. ► The project’s cost overruns have incited high public controversy, with critics
► Overall, public financing will account for approximately 20.6% of the total cost pointing out that THSRC failed to meet its funding targets on time and
including land acquisition, planning, design, supervision and civil work for under- breached its promise to finance the project entirely from private funds.
structures in Taipei sections. Source: THSRC website, press search, journal articles
► Private investment accounts for 79.4% of the total cost and includes civil works,
stations, track work, electrical and mechanical system, maintenance bases, and
financial cost.
► Higher than normal use of equity reflects the high risk profile that debt providers
attached to this project.

Ref. DPD12725 High Speed 2: phase 1 report 48

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Ref. DPD12725 High Speed 2: phase 1 report 49

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