The rail landscape in Asia is booming with the announcements and construction of new rail projects, lines and extensions. However in order to take the project from blueprint to scale, there are a lot of key considerations to be made – from project feasibility to identifying sustainable financing of railway projects.
On 22-23 March 2016, the 18th Annual Asia Pacific Rail conference will gather the top leaders and experts in the industry to ideate new strategies and solutions to overcome challenges faced in the funding and investment of railway projects. One such expert will be Oliver Redrup, who is the Director with PWC’s Capital Projects and Infrastructure Team. With this experience and expertise working with rail operators and authorities in Singapore, Indonesia, Philippines, Thailand and Vietnam, he and his team has put together a report on Delivering Rail Projects in Asia.
Before he shares his insights at the conference, we had the opportunity to pick his brains on some of the key questions and challenges faced in the industry:
With the expansion of rail project across the region, which are the key projects/regions to keep a look out on?
The gap in infrastructure in the region, particularly in the transport sector, is well documented and understood. This infrastructure gap is only going to increase in the coming years as demand increases and supply cannot keep pace.
Demand for rail infrastructure is driven by a number of megatrends:
- Increased urbanisation
- Reduction in fuel subsidies
- Increased focus on the environmental impact of transport and the need to reduce pollution
- Increased traffic congestion
To take the first megatrend as an example, in the period 2000 – 2010, World Bank data states that almost 200 million people moved to urban areas in East Asia, a figure that would be the world’s sixth-largest population for any single country. Further, East Asia’s urban areas included eight “megacities” with populations over 10 million, 123 large cities with one to 10 million people, and 738 medium and small cities with 100,000 to one million people.
PwC estimates that Asia-Pacific will remain the largest transport infrastructure market, with investments increasing from $557bn per year to nearly $900bn per year by 2025.
For rail specifically, it is estimated that spending on railways up to 2025 will be $2.4 trillion.
In terms of specific countries, all the countries in the region are planning to invest in railways. These investment plans not only include capital cities but are increasingly focused on second tier cities and intercity routes that will link up major cities and countries. To highlight a few of the larger opportunities:
- Construction is under way on Indonesia’s first rail mass transit project: the Jakarta MRT and there are numerous further LRT lines planned in Jakarta and other cities such as Bandung. Indonesia has also recently awarded its first HSR project to a joint Indonesian – Chinese consortium. There is hope that the President’s focus on galvanasing investment in infrastructure will lead to the rapid progression and implementation of these projects.
- The government has prioritised infrastructure investment and a large part of that investment is being directed at railway projects. There are new MRT lines opening this year and numerous ones in the planning and construction phases. Thailand’s plans for High Speed Rail are the most ambitious in South East Asia. With no existing high speed rail, Thailand is open to investment and leveraging foreign expertise; it is partnering with both Japan and China for lines to Chang Mai and Nong Khai and will look for assistance and funding to develop lines to the South and West in the coming years.
- The rate of growth of China’s HSR network has been unprecedented and naturally had to slow at some point. Attention is increasingly focusing on urban rail networks and China is looking to implement new procurement and operating models such as PPPs. This will present opportunities for new types of companies to enter the market and for international operators to take a small slice of the huge sector.
- The DOTC has awarded its first rail PPP in recent times – the LRT1 extension and has a number of rail PPP projects in the pipeline including the North South Railway Line and LRT Lines, 2, 4 and 6 and MRT Line 7. These are attracting a lot of interest from local and international companies.
- Large parts of the Indian railway network are facing capacity constraints and need investment. Recently, the cabinet approved Japan’s proposal to build the first high speed rail in India and the new rail budget has given top priority to building the Dedicated Freight Corridors across the country. Apart from the freight and high speed rail, India also has several city metro rail opportunities. India is looking to implement different commercial structures for real estate and station developments which present opportunities for real estate companies and infrastructure financiers.
What are the key challenges and priorities that rail leaders need to resolve to ensure successful development of rail projects?
Rail projects are complex and expensive and it is challenging to develop them successfully, especially when there can be limited experience and precedent projects to draw on. All projects face different challenges and project developers must ensure that local conditions, regulations and market factors are considered when developing a project. There are common themes and challenges which are often encountered on projects and must be overcome:
- Land Acquisition – Railway projects usually require acquisition of land used for business and homes. This can be especially problematic if there is a lack of public support for the project and if there are not transparent and tested land acquisition guidelines and legislation. Slow land acquisition and land clearance issues often cause project delays and budget overruns.
- Robust preparation of project – Projects must be robustly prepared before tendering and construction starts. This includes both the technical preparation of the project and an appropriate risk allocation and commercial structuring. This will help to mitigate the risk of failed procurement programmes and project financial failure.
- Integration – The success of new rail lines is dependent on how those new lines are integrated with the existing transport infrastructure and network. Integration must cover both ‘hard’ infrastructure such as interchanges which are co-located for bus, rail and cycle networks, and ‘soft’ infrastructure such as common ticketing systems and fare policies. This will make the lines user-friendly and encourage the shift of commuters from private to public transport.
How should rail leaders decide on which funding models to adopt?
All rail projects require some degree of government funding. The level of government funding required depends on the project’s financial viability and the amount of private sector funding that can be leveraged. There are a few innovative funding mechanisms that can be applied to a project to reduce funding gaps such as:
- Overseas Development Assistance – this can include direct grants and “soft” loans – loans that are provided on terms better than commercial loans with low interest rates, long tenors and upfront grace periods. This approach is often used by the Japanese and Chinese governments/companies to support the development of rail projects in other countries
- Rail-property development model – as most commonly employed by MTR – this approach transfers the increase in value of land resulting from the development of a rail line back into the project
- Private finance – government budgetary pressures incentivise transport authorities and finance ministries to seek to secure private financing into projects. This is only possible when the project is robustly prepared and the banks deem it to be bankable.
Rail leaders should decide on which funding models to adopt (it could be a combination of a few) based on their objectives for the project, the market’s appetite to fund, precedent transactions and their procurement/infrastructure laws and regulations.
What can attendees expect from your participation at the Asia Pacific Rail conference?
I am chairing the sessions on the second day and will bring my experience of developing rail projects in the UK and throughout Asia to the proceedings. I will share case studies of the structure and funding of recent projects to help government and transport agencies in developing their own projects. I will also provide insights to operators and suppliers who are looking to win work on the numerous projects that will come to tender in the coming years.
If you would like to learn more about rail financing, don’t miss out on Oliver’s panel with other key leaders from Auckland Transport, Mizuho Bank, Sumitomo Mitsui Banking Corporation, Japan International Cooperation Agency and Moody’s.
Find out more about the conference here.