Background and Challenge
The government of a European country was planning to construct a high-speed rail line that would form part of the trans-European high-speed network. This major investment had the potential to provide significant social and economic advantages for the country and its neighbors, and it was therefore important to ensure that the line quickly became both a commercial success and achieved the Government's policy objective of stimulating rail transport. Essential elements in the high-speed line project were the development of a robust business plan and the creation of the optimal organizational, contractual and risk structure, both of which were necessary to secure private sector investors to fund infrastructure development and operate commercial services.
L.E.K. Consulting was commissioned to undertake a detailed and wide-ranging study, determining the most advantageous structure for the transport system, preparing the overall commercial proposition and developing proposals for privatization that illustrated the full commercial value to private sector investors.
Approach and Recommendations
The L.E.K. team, operating from London and at the client in mainland Europe, drew on its extensive rail experience to address the varied project challenges, which included:
- Assessing the economic viability of private-sector participation in each of the project’s different areas, such as infrastructure, station's passenger and freight operations, and real estate development
- Determining the appropriate role of private and public sector organizations in the privatization model, regulatory arrangements, and contract structures. This aspect also included advising on alternative Public Private Partnership structures, including the ability of transport operations to support elements of infrastructure and rolling stock investment
- Forecasting passenger demand and revenue, including an assessment of the operator’s ability to pay a given level of concession charges
- Analyzing additional revenue opportunities, such as telecommunications services, power transmission, and property development along the rail corridor
- Assessing the role of new station development in the project, including the requirements for modal interchange between air and surface transportation at all stations
- Undertaking financial modeling of the new transport system
- Preparation of privatization ITT documents and the evaluation of bidder proposals
L.E.K.’s analysis showed that train operations on the high-speed line were economically viable, i.e., it could make a positive contribution towards the cost of infrastructure, before financing and tax costs. The government developed the high-speed link as planned and carried out its plans for private sector engagement with the use of L.E.K.’s structural recommendations. The high-speed line was officially launched with passenger services in 2009.