CCFB

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A presentation by
CCFB
On Beira Rail Concession Workshop on Large
Project Finance Feb 07, 2008, Maputo, Mozambique
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Mozambican Rail Network
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Topics
Background Beira Rail System
Steps before embarking on PPP
Concession features
Key Success Factors
Procurement, Monitoring and Evaluation
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Background Rail Port Systems Mozambique

• early 90s GOM decision to embark on
  concessioning rail port systems
• restructuring of state-owned operator CFM into
  lean holding company with minority stakes in
  concessions
• majority of ports already concessioned (e.g.
  Maputo, Beira, Quelimane, Nacala)
• currently two rail concessions in operation
  Beira and Nacala
• rehabilitation of Beira Railway System
  constituted national priority
• rich potential in mining, forestry, agriculture,
  animal husbandry, power generation
• social responsibility to re-open hinterland to
  Beira Maputo (catchment area comprises
  provinces of Tete, Zambezia, Sofala and Manica
  with approx. 30 of Mozambiques population)

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Beira Rail System (BRS)

• BRS comprises 2 Railway lines
• Machipanda Line (317km)
• domestic international freight (Zimbabwe)
• freight traffic 0.66mt in 05, 0.8mt in 06,
  0.54mt in 07 (peak in 1996 1.2mt)
• estimated rehabilitation cost 25m(revised 39m)
• Sena Line (670km)
• closed in 1983 due to civil war
• formerly carried sugar, cotton, limestone, coal
  (Moatize)
• carried domestic international freight (Malawi,
  Zambia)
• estimated rehabilitation cost 127.5m(revised
  158m)
• original estimated freight traffic 1.57mt in
  2010 2.29mt in 2023 (historic peak freight
  traffic 2mt in early 80s)

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Steps before embarking on PPP alternative
projectdesigns considered in light of
uncertainty of Coal Mining

• Five alternative structures for the design of
  project considered
• An integrated coal/mines/port facilities/railway
  concession
• Designing the project as a two-phase concession
• Rehabilitating the Sena Line to the ultimate
  standard in one phase
• Separating the rehabilitation program from
  concessioning
• Separating concessions for the Machipanda and
  Sena Lines
• Final design chosen as combination of
  alternatives 2 and 3.
• Track infrastructure to be constructed to
  ultimate axle load and speed design
  standards
• Limiting the design of other infrastructure such
  as signaling and telecommunications, passing
  loop lengths, and additional stations to the
  requirements of the essentially non-coal traffic

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Steps before embarking on PPP technical
operational performance standards

• study confirmed technical feasibility
  (reconstruction of bridges track)
• Infrastructure
• rehab to be undertaken with new materials
• min. capacity 18-ton axle loads and 60 km/h train
  speeds
• construction and renewal tolerance in line with
  UIC specifications
• Track to be maintained as per international (AAR)
  standards1
• installation of signaling and modernization of
  communication systems
• Operation
• less than 2 of track under speed restriction
• average kilometers between locomotive failure not
  less than 100,000
• Availability of locomotives 85 and wagons 90
• time between demand and supply of wagons less
  than 2 days
• working ratio (operating cost/revenue lt 70, etc.)

1) Track Safety Standards, Federal Railroad
Administration, Title 49, Part 213, February 1996
for Passenger Trains speeds 60mph
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Steps before embarking on PPP economic
viability

• major benefits of rehabilitating BRS comprise
  (in order of magnitude)
• reduced transport costs (shift from expensive
  road barge transport to rail)
• generated traffic (net value added first order)
• additional rail revenue (non-domestic traffic)
• generated traffic (net value added second order)
• poverty alleviation (e.g. increased economic
  activities employment) and increased
  mobility
• major costs of rehabilitating operating BRS
  comprise (in order of magnitude)
• maintenance operation
• infrastructure investment costs
• investment in feeder roads

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Steps before embarking on PPP economic
viability

• PV of total benefits 288 million
• PV of total costs 225 million
• NPV (benefits costs) 63 million
• ERR at 18, greater than opportunity cost
  of capital (12-15)
• Robust analysis ERR between 1023
  within confidence interval of 90 using Monte
  Carlo simulation

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Steps before embarking on PPP PPP structure

• GOM applied for IDA loan to be on-lent to
  concessionaire
• WB supported GOM through Technical Assistance
  (for structuring bidding process, preparation,
  negotiation and award of concession)
• 49 GOM share of which 16 to be offered to
  public

RITES/IRCON(India)
CFM (GOM sole shareholder)
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Joint Venture
49
CCFB(Concessionaire)
CFM share will eventually diminish to 33 (IPO
for remaining 16 envisaged
on-lending, 105m of IDA credit
IDA credit
WB
GOM
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Steps before embarking on PPP financial
viability
Project Financing Project Financing Amount (USD m)
EQUITY FINANCING EQUITY FINANCING Equity RITES IRCON (51) 10.07
EQUITY FINANCING EQUITY FINANCING Equity CFM (49) 9.67
EQUITY FINANCING EQUITY FINANCING Sub Total Equity 19.74
DEBT FINANCING DEBT FINANCING IDA 104.5
DEBT FINANCING DEBT FINANCING Government of India LOC 22.62
DEBT FINANCING DEBT FINANCING Commercial Loan 2.82
DEBT FINANCING DEBT FINANCING Loan from Promoters 0
DEBT FINANCING DEBT FINANCING Sub Total Debt 129.94
INTERNAL CASH GENERATION INTERNAL CASH GENERATION Machipanda Cash Flow 2.78
Total 152.46
1) Debt Service Cover Ratio (net operating
income over annual debt service)
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Concession Features selection of concessionaire

• award method International Competitive Bidding
  (ICB)
• first pre-qualification repeated to adjust for
  changed conditions, final pre-qualification in
  April 2003 (5 applicants)
• past railway operation or management experience
  mandatory
• final set of bidding documents released to
  pre-qualified bidders in October 2003
• receipt of 3 bids in December 2003
• Rites/Ircon declared successful bidder early
  2004
• Concession agreement signed in August 2004
• Machipanda Line taken over in Dec. 2004, Sena
  Line in March 2005
• award criteria bid substantially responsive to
  bidding document and requiring the lowest
  government (IDA) support for rehabilitation of
  Sena Line (in terms of present value _at_ 10
  discount rate)

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Concession Features key contract features

• concession fee
• 2 million entry fee
• 1 million fixed fee per annum from year 11 to
  25 (indexed from take over date to USA CPI)
• variable fee from year 6 onwards 3 of turnover
  for traffic up to 300 million ntkms, 5 for
  traffic in between 300 million and 1 billion
  ntkms and 7.5 for traffic above 1 billion
  ntkms
• tariff setting
• Concessionaire free to set tariffs
• dispute resolution
• by parties in good faith
• referral to technical expert if parties unable to
  resolve tech. dispute
• arbitration in accordance with Rules of
  Conciliation Arbitration of International
  Chamber of Commerce as last resort

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Concession Features key contract features

• termination clauses covered Company
  Conceding Authority Defaults
• risk management
• De-mining risk
• commercial risk (traffic risk)
• construction risk
• VAT risk
• force Majeure
• political risks
• foreign exchange
• economic situation of neighboring countries

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Concession Features key contract features

• regulatory framework
• no economic regulation
• regulation of Safety/Health/Environmental issues
  (SHE)
• resort to unfair competition commission for user
  complaints

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Procurement during Implementation

• IDA funds on-lent to concessionaire for Sena
  Line rehabilitation
• as the concessionaire was selected through ICB,
  in compliance with WB procurement rules, he
  is generally free to choose his own procurement
  methods for goods, works and services
• obligation of IDA is to ensure the agreed
  procurement plan is fully complied with and
  there is efficiency, transparency and fairness in
  the adopted procedures.

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Monitoring Evaluation

• concession agreement stipulates that
  concessionaire shall achieve recognized
  international performance norms for railway
  services agreed between conceding authority and
  concessionaire
• failure to achieve such will result in
  financial penalties to be drawn from the
  Performance Security for Maintenance
• additionally, WB, CCFB and the Borrower have
  agreed on Project Development Objectives,
  outcomes end of project results which would
  be monitored through agreed performance
  indicators and intermediate output targets
  during project implementation (five years)

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Implementation Status

• Sena Line
• De-mining bush clearing 100 completed
• Formation preparation 30
• Track laying 25
• Sleeper Plant at Dondo capacity 25,000 sleepers
  per month
• Another Sleeper plant at Sena has started
  production from Nov, 2007 15,000 sleepers per
  month
• Rehabilitation work on two major bridges
  commenced
• Supply of ballast key constraint
• About 3000 personnel working
• Interim freight operation expected by April, 2008
  - Beira-Marromeu

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Key Success Factors

• Invest considerable time and effort in
  conceptualizing and finalizing project design
• Socio-economic justification essential before
  structuring PPP and finalizing financing
  arrangements
• Beira Railway Project is a unique case of
  accommodating uncertainty of coal concession
• Full involvement of key Government officials
  and decision makers essential every step of
  the way to concession award and implementation
• No negotiations allowed on any of the terms and
  conditions of concession agreement clauses
  after bidding
• All elements of procurement, including domestic
  preference and local industry involvement,
  agreed up-front
• Flexibility during implementation essential to
  overcome unforeseen difficulties
• Aggressive marketing and optimum utilisation of
  resources to make Machipanda Line profitable

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CCFB expresses its gratitude to GOM, WB and
above all to the generous people of Mozambique
for their help and support. THANK YOU