[Article] Competition "fierce" between Metro North bidders

Amtmann

THE GOVERNMENT would have to underwrite the financing risks associated with the public-private partnership (PPP) project for Metro North if it is to be built, according to one of the consortiums bidding for the contract.

Stephane Kofman, who heads the specialist investment division of HSBC, told a lunch meeting in Dublin organised by the Ireland-France Chamber of Commerce that equity had become “very scarce” as a result of the recession.

The British government had set up a co-financing agency to underwrite private finance initiatives (PFIs) for public infrastructure projects in order to ensure that it had “solid partners” at a time when the volume of PFIs is in decline.

Mr Kofman said HSBC had invested €10 billion in PPP projects since 2001 and it was now a partner with Alstom, the French tramway builder, and SIAC in bidding for the Metro North contract, for which competition was “very fierce”.

Didier Traube, concessions director of Alstom, said the recession had meant there were now fewer lenders in the market – just seven to 10, compared to between 30 and 40 offering loans just two years ago. Lenders had also become “more risk averse”.

Consequently, project debt was now more expensive – “by a factor of two or three”. This meant that there would have to be “guarantees from the public side” to underwrite the financing or refinancing risks, according to Mr Traube.

Mr Kofman conceded that there was an “ideological reluctance” to accept PPPs because they were seen as more expensive, as privatisation in disguise, offering reduced levels of service and with the State awarding “secret” tenders.

“The PPP model faces intense scrutiny, but continues to spread,” he said. The main advantage was that it “spread costs over life of the asset”, although it was “unlikely to offer a rapid remedy” as an economic stimulus because of long lead times.

Without referring to the secrecy surrounding Metro North, for which the Railway Procurement Agency (RPA) has refused to divulge any estimated cost, he said PPP projects should be “implemented in a very transparent procurement process”.

One of the PPP projects in which HSBC is involved is the new high-speed rail link between Belgium and the Netherlands. Alstom, which built the Luas trams for Dublin, is currently delivering a single-line tramway in the northern French city of Reims.

This was also a PPP contract for design, construction, operation and maintenance of the new tramway, as well as all bus services in the Reims metropolitan area for a 35-year period – 10 years longer than the term quoted for Metro North by the RPA.

The €413 million project, due for completion in 2011, is receiving a 40 per cent public subsidy, with 50 per cent provided by bank debt and the rest by the project’s shareholders, including Alstom, French construction giant Bouygues and a number of banks.

Mr Traube said Reims Metropole, the public client, is covering part of the risk, including interest rate changes. The main advantage of controlling the buses is that it “provides revenue during construction as well as better control of tramline patronage”.

In Dublin, Luas and bus services operate entirely independently and are run by different agencies – Veolia, the French company that won the contract to operate Luas, and Dublin Bus, which is planning a 10 per cent cut in services to reduce its growing deficit.

In Reims, as in Bordeaux, bus services are being reorganised to “feed” passengers to the 11km tramway after it opens in two years’ time. Mr Traube said this will lead to a 40 per cent increase in public transport patronage in the metropolitan area.

Bidding for metro: four consortiums in the mix
DUBLIN EXPRESS Link, one of the four consortiums bidding for the Metro North contract, claims it is “uniquely placed” to deliver the 18km line linking Swords with St Stephen’s Green because of its “combination of experience, cohesion and scale”.

A brochure accompanying its detailed bid, which was among those submitted to the Railway Procurement Agency, notes that Alstom supplied and still maintains the Luas trams.

The Dublin Express Link consortium is led by Bouygues, working in a joint venture with Spanish contractor Acciona. Their experience includes the Sydney, Barcelona and Cairo metros and the Meteor line in Paris.

Also involved is Siac, one of Ireland’s largest civil engineering contractors. “Totally familiar with Dublin’s road and rail infrastructure, Siac will ensure that our approach is comprehensively planned and delivered at a local level, using local resources”, it says.

Alstom would build the “light metro vehicles” for the line, more than half of which would be installed underground. It would also provide the power and distribution, signalling, control and communications, as well as maintaining the system for the 25-year contract period.

Dublin Express Link’s principal architects are London-based Grimshaws, who would “focus on aesthetics, accessibility, ease of movement and the creation of signature designs” for the Metro North stations in association with Dublin-based architects RKD.

The line would be operated by Keolis, which manages integrated transport systems in the French cities of Lyon and Lille, while the financial investors in Dublin Express Link are HSBC and Meridiam, who are also involved in funding the Limerick Tunnel PPP project.

http://www.irishtimes.com/newspaper/ireland/2009/0414/1224244629058.html

AlekSmart

Mr Traube said Reims Metropole, the public client, is covering part of the risk, including interest rate changes. The main advantage of controlling the buses is that it “provides revenue during construction as well as better control of tramline patronage”.

In Dublin, Luas and bus services operate entirely independently and are run by different agencies – Veolia, the French company that won the contract to operate Luas, and Dublin Bus, which is planning a 10 per cent cut in services to reduce its growing deficit.

In Reims, as in Bordeaux, bus services are being reorganised to “feed” passengers to the 11km tramway after it opens in two years’ time. Mr Traube said this will lead to a 40 per cent increase in public transport patronage in the metropolitan area.

M.Traube might as well have come down from the planet Uranus for all the good he`ll do.
This kind of ideology is EXACTLY what has allowed the more civilized regions of Europe to devise,construct,fund and maintain the sort of Public Transport systems that sends ignorant Irish folk back home to moan and bitch about it all......
Back here in Celtic Wonderland just about the only thing getting "Fed" is the 50 Fianna Fàil party cronies who need some €90 Billion from the rest of us to keep them in clover for the rest of their (and Our) days. :mad:

I wonder why we persist in bringing these foreigners over here to talk sense at us when we`ll just ignore it in favour of Irish Solutions to Irish Problems....look at what we did with Senòr Melis of the Madrid Metro......:p

lostexpectation

you can't have deals done on guaranteed passenger number to private operators, forcing you to alter buses not to make transition better but to avoid financial penalties

AlekSmart

you can't have deals done on guaranteed passenger number to private operators, forcing you to alter buses not to make transition batter but to avoid financial penalties

An interesting and very valid point,particularly in the light of whatever arrangements exist between The Department of Transport (Noel Dempsey) and the various Private Toll Road construction consortia.

Its worth remembering that most of the current PPP Toll Schemes were signed up for when Private Car useage was on a strong upward slant.....that has now effectively collapsed,much to Minister Dempsey`s chagrin...after all it was HIS Department that supplied all the traffic flow projections upon which much of the PPP tender process was based.....Data which ain`t worth a hill o` beans at the moment.

So where would a Transport Minister look in order to find a few more Cars to stuff through his PPP Toll Facilities......Hmmmmm....them oul Buses might be a good place to start methinks...

Sponge Bob

I am quite sure Noel Dempsey insisted on contractually allowed for downward tolls as well when inflation turns into deflation over the next few years

Victor

"One of the PPP projects in which HSBC is involved is the new high-speed rail link between Belgium and the Netherlands." - I'm wondering if this is open to the public yet after quite a few years.

antoinolachtnai

If the government underwrites, does that mean that the debt gets added to the national debt and national borrowing figures?

murphaph

That would negate the whole point of the PPP system (keeping what is essentially state debt off balance sheet). I believe the article mentioned Reims where the city must guarantee any increases in repayments due to fluctuating interest rates, so a relatively small amount in comparison to the actual cost, millions or tens of millions rather than billions. I suppose they can leave it off balance sheet too unless and until rates actually exceed the agreed trigger point.

antoinolachtnai

Well, it could be hundreds of millions. The interest on 2bn would be 40m/year at 2 percent. If interest rates went to 5 percent (which they could) then the interest would increase to 100m/year - a 60m/year difference. This could amount to hundreds of millions over the course of the contract easily enough.

Victor

So go sell some 5 / 15 / 25 year bonds at a fixed rate.

antoinolachtnai

But that would increase the cost, no?

Victor

They're banks, let them work it out. Instead they want their hands held.

Now, I realise raising funding may be difficult, so I don't have a particular problem with the government giving the contractor, say, €500-1,000m a few months after the system opens so as to reduce their longterm funding requirement.

murphaph

Victor wrote: »

They're banks, let them work it out. Instead they want their hands held.

Now, I realise raising funding may be difficult, so I don't have a particular problem with the government giving the contractor, say, €500-1,000m a few months after the system opens so as to reduce their longterm funding requirement.

Totally agree. They want the best of both worlds with no real risk. They want the ordinay citizen to take all the risk from them yet they say competition is fierce to invest in MN. It's one or the other for me...if nobody's interested then sure, sweeteners are required but if 6 tendering consortia are out there then let their respective financial sections work out their risk and tender basd upon it. We've insured enough effing banks as it is.

armada104

To put my conspiracy theory hat on for just a minute, it seems very convenient for the government for one of the consortia to come out with a statement like this. The only thing keeping Metro North on life support at the moment is that it's a PPP and thus would be off balance sheet if built. Now they've been handed a new reason not to build it. Interesting.

Sponge Bob

The consortia must reckon that the governments desire to build is greater than its finances would tend to indicate.

My theory is that PPP projects are very broken on a 'design build operate' basis and that these guys only want to ' operate' in effect .

I explained this financing problem months ago apropos the 3 big PPP schemes the NRA is trying to interest the market in , see ( fixed)

http://www.boards.ie/vbulletin/showthread.php?t=2055411846 or Link

"Projects that were recently costed at near the cost of direct government borrowing are now as much as 3% above government funding costs on a design build handover basis and this gap is not reducing.

Add in the 30 year maintenance windows and you are looking at Euribor + 5% . 5% of a lot is a lot, especially over 30 years ."

I regret to say that there has been no improvement since I wrote that either ...possibly the opposite.

PPP projects are the economics of the madhouse. The inbuilt premium is insane where some time back there was no premium or only a tiny one.

antoinolachtnai

Link doesn't work for me.

All borrowing is more expensive, that's the issue there.

The advantage of the PPP, surely, is that the vendor takes some of the project risk off the government? Inevitably there is going to be some risk premium, because there is a financial risk that the project won't achieve what's in the agreements, the government won't pay and the bank won't get its return.

Sponge Bob

It is dramatically cheaper to finance it off GGD , the differences between PPP and GGD financing models was much less pronounced a year back . Even after bad banks are added it is still dramatically cheaper .

The economics forum has become much better on Boards in recent times too. From here .

http://www-srv-3.boards.ie/vbulletin/showthread.php?p=59843845

Metrobest

armada104 wrote: »

To put my conspiracy theory hat on for just a minute, it seems very convenient for the government for one of the consortia to come out with a statement like this. The only thing keeping Metro North on life support at the moment is that it's a PPP and thus would be off balance sheet if built. Now they've been handed a new reason not to build it. Interesting.

This article is written by Frank McDonald. Every single article he writes about Metro North is negative, irrational and biased.
Perhaps Frank McDonald is a government 'plant'?

Sponge Bob

Frank added nothing much to what I said last November, PPP financing is the economics of the madhouse right now .

Adding what looks another 1% to the projected GGD to build Metro North will make no difference to us whereas adding at 5% to the GGD in late 2007 probably merited looking at alternatives .

Metrobest

Sponge Bob wrote: »

Frank added nothing much to what I said last November, PPP financing is the economics of the madhouse right now .

Adding what looks another 1% to the projected GGD to build Metro North will make no difference to us whereas adding at 5% to the GGD in late 2007 probably merited looking at alternatives .

Huh? Can you translate that to english.

I think the idea of PPPs in general is that the private sector bears most (but not all) of the risk, and delivers the project in a more timely and capable fashion than the public sector could.

It's not a perfect model, but in the economic climate Ireland is currently in, it seems the wisest.

PPS have worked very well in recent years in building Ireland's efficient new motorways which are important pieces of national infrastructure.

There is very little evidence to suggest that the public sector in Ireland would be capable of delivering a project on Metro North's scale.

One benefit to bear in mind is that when something does go horribly wrong (as on the Channel Tunnel or the Cross City Tunnel in Sydney), it's the private sector that takes the hit. No bailouts for delays or shoddy workmanship!

Slice

If the argument is for the public sector to take on most of the risk then isn't that essentially an argument against the entire concept of PPPs? Where's the line between this point and the point that perhaps the public sector should just assume responsibility for the entire project itself?

armada104

Metrobest wrote: »

Huh? Can you translate that to english.

I don't understand either but ignorance doesn't score you points. Your arguments about the advantages of PPPs have all been heard before and are all well understood and appreciated. Maybe you should try a little harder to understand the disadvantages, especially given the change of circumstances.

Sponge Bob

Metrobest , read my link 4 or 5 posts back and read what the banker said in post 1 and then tell me what you don't understand and I will explain it for you . OK.

antoinolachtnai

The point the company was making was that whilst it made sense for them to take on the project risk (the risk of the project screwing up) it might not make sense for them to take on the financial risk (which is the extra cost that might be incurred in financing that is involved because of economic volatility generally and the weakness of the Irish economy).

Slice

antoinolachtnai wrote: »

The point the company was making was that whilst it made sense for them to take on the project risk (the risk of the project screwing up) it might not make sense for them to take on the financial risk.

What risk is left from the project screwing up if not a financial one? If that's the case the RPA might as well get a contractor to build Metro North and manage the project themselves.

antoinolachtnai

By financial risk, they mean the possibility of interest rates going up or down or whatever durning the course of the project.

Another kind of risk is project risk, which is things like a tunnel collapsing, buildings being damaged by work building underground stations, cost overruns, that sort of thing.

murphaph

According to wiki the cost of financing the channel tunnel (ie, interest and associated financial fees, not the cost of construction itself) went over budget by 140%. That sort of risk is too much for the public sector to bear and really negates the slim benefits PPPs have.

I really think governments around Europe should sit down and discuss this 3% rule and work out exemptions for large scale capital projects which will in the long run make Europe stronger. Why hamstring ourselves with a rule that ultimately means the taxpayers pay more (often to foreign firms like Nishimatsu on the Port Tunnel).

antoinolachtnai

1. If the public sector can't bear the financial risk, then it is unrealistic to expect the private sector to do so. The public sector's ability to absorb risk is far greater than that of a private company.

When it comes to it, I don't think there is a problem with the private sector taking on the financial risk, because they can lay it off in the financial markets, but the cost is likely to become very very high.

2. It doesn't have much to do with PPP's and MetroNorth, and it has nothing to do with the borrowing restrictions, that I can see, but can you really argue strongly that Nishimatsu were paid over the odds on the Port Tunnel? Just because there were extras does not mean that the extras were not justified.