Contents National Cargo Operator ............................................................................................................................... 2 Alternatives in study, including “in” and “on” options ................................................................................. 2 Base case scenario .................................................................................................................................... 2 Alternative 1: Sines-Elvas .......................................................................................................................... 3 New line ................................................................................................................................................ 3 Phased new line .................................................................................................................................... 3 Alternative 2: Poceirão-Elvas .................................................................................................................... 3 Parameters, assumptions and uncertainty ................................................................................................... 3 PPP structure ................................................................................................................................................ 6 Agents involved ......................................................................................................................................... 6 Finance sources ............................................................................................................................................. 8 Equity ........................................................................................................................................................ 8 European Funds ........................................................................................................................................ 9 Debt........................................................................................................................................................... 9 Risks .......................................................................................................................................................... 9 Set performance targets and quality control.............................................................................................. 10 Other Issues ................................................................................................................................................ 10 References .................................................................................................................................................. 11
Francisco Furtado Raul Pires HA4
Page 1
National Cargo Operator The project is to create a National Cargo Operator (NCO) whose function is to provide a cargo service, i.e., move cargo from point A to point B at customer request, like a postal service (or FedEx, etc) but for cargo/freight. In order to provide this service, we are planning to use the already existing infrastructure (Ports, Airports, Logistic Platforms, Rail, Roads, etc) and construct new links necessary to integrate all the existing infrastructures in a single chain. In figure 1 we can see the existing infrastructure (Ports, Airports, Logistic Platforms, Rail, Roads), in red we can see the new planned logistic platforms, new airport, and our proposed new rail lines (also, in orange we can see the new IC8 that will connect Sines to Spain). In purple are the existing rail lines to be remodeled (to allow more efficient operations). Although this is a national project, we selected a phased approach where we will first concentrate our efforts in Lisbon Metropolitan Area and South, namely in the new freight Rail line between Sines and Elvas. In Figure 2, we can see the set of alternatives we are considering for the mentioned freight line considering the option that this line can also serve the Lisbon and Setúbal regions.
Alternatives in study, including “in” and “on” options These are the several alternatives we intend to study to assess the feasibility and best financial structure for this project.
Base case scenario This is the option of not making any new investment which means using the existing infrastructure. Nowadays a freight train from Sines to Madrid has to go to Entrocamento and Abrantes and takes around 9 hours to get to Caceres in the border(Pereira, 2006). There is a new service provided by Iberlink, a joint between CP and RENFE, which also uses the existing infrastructure. For this service the trains depart from Lisbon, Sines or Leixões using a electric locomotive until Entrocamento, then exchange to a diesel locomotive and in the border there is a new exchange where a RENFE locomotive takes place(Moura, 2009). This scenario will be used as our reference data to compare the viability of the alternatives we propose.
Francisco Furtado Raul Pires HA4
Page 2
Alternative 1: Sines-Elvas New line This consists in building a direct link between Sines and Elvas at once. This means building the SinesGrândola-Casa Branca section plus the Évora-Elvas section and using the Casa Branca-Évora section that has already been remodeled with the intention of being a part of this direct connection. Phased new line This is a flexible approach to the same path. We start by building the Évora-Elvas connection, then if demand justifies we do the Sines-Grândola connection, then we assess the Grândola-Casa Branca and finally (to have a better connection with the Lisbon region) the Grândola-Poceirão remodeling.
Alternative 2: Poceirão-Elvas We consider this alternative so that the Lisbon region is better served from the start while still addressing Sines port. In this alternative we also start by building the Évora-Elvas section. Then we assess the Casa BrancaPoceirão remodeling, then the building of Sines-Grândola section and finally the Grândola-Poceirão remodeling.
Parameters, assumptions and uncertainty Our economic financial feasibility study will focus on the container market segment. We will study the evolution of the container movement demand between the port of Sines and Madrid, between Lisbon/Setúbal and Madrid and between Madrid and the Lisbon region. These demands, as we already spoke in previous reports, is the main source of uncertainty. The evolution of the container movement in the Lisbon, Setúbal and Sines ports is paramount for the success of the project. Other parameters we need to assess are, for each section, depending on the intervention we will make (new/remodeled or do nothing): • • • •
Investment cost; Maintenance cost; Capacity (TEU’s per year); Cost for TEU moved - this depends on the alternative path and phase the section belongs (Sines-Elvas or Poceirão-Elvas).
Depending on how demand varies in each of the ports/regions and according to the given parameters, we will recommend a course of action to follow.
Francisco Furtado Raul Pires HA4
Page 3
To understand the demand, we will use historical (from ports and rail freight) data as well as different forecasts that have been: • • • •
EU studies for European container movement; Forecasts for the Iberlink service; Studies made by the Setúbal, Lisbon and Sines port authorities; RAVE studies for the TGV project that also includes freight movement.
Roads Railway Remodeling Railway New Railway
Planned Logistic Platform
Figure 1 - Logistical infrastructure (existing, planned for near future and new)
Francisco Furtado Raul Pires HA4
Page 4
Figure 2 – Alternatives for freight line
Francisco Furtado Raul Pires HA4
Page 5
PPP structure This will be a Design, Build, Own and Operate (like a PPA) for a period of 40 years. Nevertheless, a performance evaluation after 20 years should be done and assessed if the NCO should continue as it is, i.e., private (mixed capital) operator or whether it should be transferred to the State or other solutions. The scheme in figure 3 describes the structure, the agents involved and their relations and the financial mechanisms that together structure the PPP we are proposing. In the remaining sections there is a detailed description of the components described in the scheme.
Agents involved We intend this project to be not a introduction of competition, although this will be somehow inevitable, but as a structuring project to the freight movement in Portugal. So, we understand that all the main freight/logistic operators in Portugal should be willing to be involved in the project as shareholders. Although the State will not subsidize the project directly, we feel that it should provide the conditions to support and promote the project. In order to do so it should, not only by some of the issued bonds but also, through its national bank CGD, be a shareholder and provide loans at a lower then market interest rate to companies (ideally freight/logistic) that will be shareholders. These are the main agents we foreseen: • • • • • •
State and CGD CP REFER Ports of Lisbon, Sines and Setúbal Freight/logistic operators Other investors
Francisco Furtado Raul Pires HA4
Page 6
CGD
European Investment Bank
State
Buys
Loans?
Debt • Issue Bonds • Long term loans
Equity/Shareholders • CP • REFER • Logistic Operators (ex: Luís Simões) • Ports • CGD • Other investors that might join
Buys
European Funds
NCO Special purpose vehicle
Design the alternative paths and phases for the service it will provide
Build new lines Remodel existing lines
Owns the new remodeled lines
and
Receives payment for owned infrastructure rented to other possible operators.
Investors
Operates container freight cargo between Lisbon/Sines and Madrid as well as possible intermediate services
Other costs: • Maintenance costs • Operational costs • Outsourcing services Other revenues • Other services (inventory manage, administrative, etc)
Figure 3 – PPP Scheme
Receives for ton/km moved
Possible payments to CP for use of its rolling stock
Pays fees to REFER owned infrastructure that NCO might use in its routes.
Finance sources Next we present a list of possible sources of financing: •
•
•
Equity o
CP, Refer, Port of Sines, Setúbal and Lisbon, ANA
o
Private Logistical Companies (like Luis Simões, or smaller ones)
o
CGD
o
Central Government
o
Private investors
Europe funds o
Marco Polo program, 35% to 50% (studies)
o
European Regional Development Fund (ERDF), 0% to 75%
o
Motorways of the Sea
o
TEN-T priority project (number 8 and 16)
Issue Bonds
Equity This project aims to be the backbone of the cargo/freight distribution system in Portugal and for the land freight movements with Spain. So it is of strategic importance for the country as a whole. The main source of financing should come from a pool of assets/funds assembled by the main stakeholders of this project, who should be the main players in the Portuguese logistics system. Namely CP, Refer, Ports of Sines, Setúbal and Lisbon concessionaires, private logistic operators and owners of the already operating logistical platforms (this will also be referred as the “consortium”). This pool of funds/assets that will form the company equity can be other than financial. For instance, REFER can give some of the infrastructure it currently owns (for instance, the ones that will be remodeled) to the new NCO. CP could give some rolling stock and other companies, besides funding, could also come in with services or other goods they currently own/manage. The Caixa Geral de Depósitos, and the State could also deliver part of the equity, although we feel that their main contribution could be in the form of beneficial loans (below market interest rates), buying of bonds issued by NCO, and other incentives like giving tax breaks to Private companies that invest (and become shareholders). It´s also possible to have a public offering of shares, so that any private investor (individuals, banks, funds…) can also make a contribution and receive the profits from this project. This public offering
Francisco Furtado Raul Pires HA4
Page 8
should account for a 10 to 20% part of the equity, so that the main shareholders would be the “consortium” that assembled the initial pool of funds.
European Funds At least for the initial investment European Funds can be the source of a great part, even the majority, of the funding. Still, this only amounts to the initial investment in Infra-structure (and maybe some rolling stock acquisition). And for this project the operational/maintenance costs maybe more determinant than the initial investment, so the ability to generate cash flows to cover these costs, as well the debt requirements, will be determinant to assess this project financing alternatives, and choose the best options.
Debt We are considering two kinds of debt, issuing bonds, and long term loan from banks. We would prefer the issue bonds alternative, because this would enable us to receive cash when issuing the bonds and only cash-out after some years. Besides that this avoids prolonged, and sometimes costly, negotiation process with banks to get the loans. The State or/and CGD could finance debt in two ways, they could either give low interest loans to companies that want to become shareholders in the initial “consortium” (and in a way finance and incentivize them to join the project as main players), or by assuming to buy a minimum amount of bonds issued. If the return on investment of this project is not very high, or can only be paid in long term, maybe CGD could give a direct long term loan to NCO, although this is a last case option. To better assess this alternatives, and the kind of return and payment periods of the bonds, we need a better understanding of the return this project can generate (we need some figures…).
Risks Over leverage and decoupling between shareholder and stakeholders interests as been a source of many problems in today’s financial (and the rest…) world. So when setting up the financial structure one main concern is that the risk of the project should be mainly assigned to the shareholders/stakeholders that will pool their resources and form the bulk of the equity cake. The objective is to have an integrated approach to Financing, Designing, Building and Operating. This implies that the design, construction, and operational risk will be shared by the shareholders1. Here the State could assume the “Bureaucratic Risk”, that is getting environmental (and other required) licenses. Since this project is of Strategic National Interest, it is mandatory that the State should support it (what is different from subsidizing). The State and CGD, should have a symbolical equity share, but can also share some of the project risk by buying large amounts of bonds.
1
The design of the logistic supply chain (how many trains per day from Poceirão to Tunes? Should some trains go from Valença to Tunes directly? To what extend should cross docking be applied?) is also a major risk…
Francisco Furtado Raul Pires HA4
Page 9
The State also plays another important role in giving an incentive for companies to work together and integrate their supply chain management. This Project should be perceived not as a competitor to existing companies operations, but as a way to structure and provide the back-bone for the Portuguese Freight movement distribution system. Maybe some companies could have their business compromised, to several extents, by the setting up of this initiative. But that is why it´s important that some of the Private key players in this market become “consortium” members (main shareholders). Since the share of the market captured by NCO will be key in its success, the measures mentioned in the last paragraph, are very important. Some degree of mandatory measures/policies could also be applied2 combined with incentives (already mentioned tax breaks and beneficial loans…).
Set performance targets and quality control This will be a DBOO with a possibility of transfer at the final of the 40 year concession period. What we propose is to devise a performance mechanism and metrics that can evaluate how is the project running. If after the 40 year period the project is performing well according to the defined metrics then it should not be transferred to the state but instead a new concession period should be awarded. This is another measure that creates the incentive for NCO to be focus, productive and efficient. But we need to define which metrics and performance measurement we will use: •
Share of the market – We can set different targets for freight movement to Spain, above and below 400km in Portugal;
•
Availability of infrastructure we own and services we provide, with the exception of third parties causing the lack of availability (this applies to the services since we will use infrastructure we don’t own). This needs further analysis. An example of availability of services is establishing a connection between Viana do Castelo and Lisbon servicing all major cities in between with a required frequency, like one or two per day. The idea is to take in consideration national equity.
•
Capacity to cover debt requirements and provide profits to the shareholders. This means that the revenues will have to cover both initial investment, debt obligations and operational costs.
•
Ability to reduce total CO2 emissions due to freight traffic movement
•
Reduction of travel time between certain established points, (ex: Sines-Madrid)
Other Issues How will be the Board of NCO? It should be appointed by the “consortium” member plus government and CGD. But what role for the private investors? And should places in the board be directly proportional to the amount of shares owned? Should government hold special powers? Should shares 2
For instance movements above 300 Km must have a leg made by train.
Francisco Furtado Raul Pires HA4
Page 10
from the initial “consortium� be available to trade in open market, when and how could new companies join this one? These are some of the questions that still need to be addressed. A project like this would be important not only for economical reasons, but also because of Sustainability issues.
References Moura, C. (2009, March 23). Transportes Em Revista. Retrieved from www.transportesemrevista.com Pereira, P. (2006, January). Transportes em Revista. Retrieved from www.transportesemrevista.com
Francisco Furtado Raul Pires HA4
Page 11