1

On

Beira Rail Concession Workshop on Large Project Finance

May 31, 2007, Maputo, Mozambique

2

Mozambican Rail Network

3

Topics

Background Beira Rail System

Steps before embarking on PPP

Concession features

Key Success Factors

Procurement, Monitoring and Evaluation

4

Background: Rail & Port Systems Mozambique

early 90s: GOM decision to embark on concessioning rail & port systemsearly 90s: GOM decision to embark on concessioning rail & port systems restructuring of state-owned operator CFM into lean holding company restructuring of state-owned operator CFM into lean holding company

with minority stakes in concessions with minority stakes in concessions majority of ports already concessioned (e.g. Maputo, Beira, Quelimane, majority of ports already concessioned (e.g. Maputo, Beira, Quelimane,

Nacala) Nacala) currently two rail concessions in operation: Beira and Nacalacurrently two rail concessions in operation: Beira and Nacala rehabilitation of Beira Railway System constituted national priority:rehabilitation of Beira Railway System constituted national priority:

rich potential in mining, forestry, agriculture, animal husbandry, power rich potential in mining, forestry, agriculture, animal husbandry, power generationgeneration

social responsibility to re-open hinterland to Beira & Maputo social responsibility to re-open hinterland to Beira & Maputo (catchment area comprises provinces of Tete, Zambezia, Sofala and (catchment area comprises provinces of Tete, Zambezia, Sofala and

Manica with approx. 30% of Mozambique’s population) Manica with approx. 30% of Mozambique’s population)

5

Beira Rail System (BRS)

BRS comprises 2 Railway lines :BRS comprises 2 Railway lines : Machipanda Line (317km): Machipanda Line (317km):

domestic & international freight (Zimbabwe) domestic & international freight (Zimbabwe) freight traffic: 0.66mt in ’05, 0.8mt in ‘06 (peak in 1996: 1.2mt) freight traffic: 0.66mt in ’05, 0.8mt in ‘06 (peak in 1996: 1.2mt) estimated rehabilitation cost: $25m(revised $39m)estimated rehabilitation cost: $25m(revised $39m)

Sena Line (670km): Sena Line (670km): closed in 1983 due to civil warclosed in 1983 due to civil warformerly carried sugar, cotton, limestone, coal (Moatize) formerly carried sugar, cotton, limestone, coal (Moatize) carried domestic & international freight (Malawi, Zambia) carried domestic & international freight (Malawi, Zambia) estimated rehabilitation cost: $127.5m(revised $158m)estimated rehabilitation cost: $127.5m(revised $158m)original estimated freight traffic: 1.57mt in 2010; 2.29mt in 2023 original estimated freight traffic: 1.57mt in 2010; 2.29mt in 2023

(historic peak freight traffic 2mt in early 80s)(historic peak freight traffic 2mt in early 80s)

6

Map of Senaline

DONDOKm 0.0

BORDER

SANKULANIBEIRA - MOATIZE LINHA DE SENA

SAVANEKm 26.2

SEMACUEZAKm 48.5

DERUNDEKm 69.7

MUANZAKm 90.8CONDUE

Km 112.9

MAZAMBAKm 138.1

INHAMINGAKm 157.5

BENCATAKm 166.8

INHAMITANGAKm 183.7

LAVOSKm 199.0 MARROMEU

Km 265.5

NANGUEKm 223.2

CAIAKM 233.3

MURRACAKm 250.7

MAGAGADEKm 266.8

S ENA Km 286.3

VILA NOVAKm 44.0

CHARRE

DONA ANA Km 0.0

MUTARARAKm 4.7

CHAVUNDIRAKm 20.3S INJ AL

Km 48.5

ZEMIRAKm 66.7

MAPANGALIKm 78.0

DOAKm 100.0

CHUEZAKm121.9

MECITOKm 148.0

NECUNGASKm173.4

CAMBULATS ISSEKm 195.9

CATEMEKm 222.5

MOATIZEKm 254.0

SANDAMACHIPO

THEKERANIMAKHANGA

CHIROMOBANGULA

TENGANI INSANJ E

7

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

Five alternative structures for the design of project considered: Five alternative structures for the design of project considered:

1.1.An integrated coal/mines/port facilities/railway concession An integrated coal/mines/port facilities/railway concession

2.2.Designing the project as a two-phase concessionDesigning the project as a two-phase concession

3.3.Rehabilitating the Sena Line to the ultimate standard in one phaseRehabilitating the Sena Line to the ultimate standard in one phase

4.4.Separating the rehabilitation program from concessioning Separating the rehabilitation program from concessioning

5.5.Separating concessions for the Machipanda and Sena LinesSeparating concessions for the Machipanda and Sena Lines

Final design chosen as combination of alternatives 2 and 3. Final design chosen as combination of alternatives 2 and 3. Track infrastructure to be constructed to ultimate axle load and Track infrastructure to be constructed to ultimate axle load and

speed design standardsspeed design standardsLimiting the design of other infrastructure such as signaling and Limiting the design of other infrastructure such as signaling and

telecommunications, passing loop lengths, and additional stations to telecommunications, passing loop lengths, and additional stations to the requirements of the essentially non-coal trafficthe requirements of the essentially non-coal traffic

8

Steps before embarking on PPP – technical & operational performance standards

study confirmed technical feasibility (reconstruction of bridges & track)study confirmed technical feasibility (reconstruction of bridges & track) Infrastructure: Infrastructure:

rehab to be undertaken with new materials rehab to be undertaken with new materials min. capacity 18-ton axle loads and 60 km/h train speedsmin. capacity 18-ton axle loads and 60 km/h train speedsconstruction and renewal tolerance in line with UIC specifications construction and renewal tolerance in line with UIC specifications Track to be maintained as per international (AAR) standardsTrack to be maintained as per international (AAR) standards11

installation of signaling and modernization of communication systemsinstallation of signaling and modernization of communication systems Operation: Operation:

less than 2% of track under speed restrictionless than 2% of track under speed restrictionaverage kilometers between locomotive failure not less than 100,000average kilometers between locomotive failure not less than 100,000Availability of locomotives 85% and wagons 90% Availability of locomotives 85% and wagons 90% time between demand and supply of wagons – less than 2 daystime between demand and supply of wagons – less than 2 daysworking ratio (operating cost/revenue < 70%, etc.)working ratio (operating cost/revenue < 70%, etc.)

1) Track Safety Standards, Federal Railroad Administration, Title 49, Part 213, February 1996 for Passenger Trains – speeds 60mph

9

Steps before embarking on PPP – economic viability

major major benefitsbenefits of rehabilitating BRS comprise (in order of magnitude): of rehabilitating BRS comprise (in order of magnitude):reduced transport costs (shift from expensive road & barge transport reduced transport costs (shift from expensive road & barge transport to rail)to rail)generated traffic (net value added first order)generated traffic (net value added first order)additional rail revenue (non-domestic traffic)additional rail revenue (non-domestic traffic)generated traffic (net value added second order)generated traffic (net value added second order)poverty alleviation (e.g. increased economic activities & employment) poverty alleviation (e.g. increased economic activities & employment)

and increased mobility and increased mobility

major major costscosts of rehabilitating & operating BRS comprise (in order of of rehabilitating & operating BRS comprise (in order of magnitude):magnitude):

maintenance & operationmaintenance & operationinfrastructure investment costs infrastructure investment costs investment in feeder roadsinvestment in feeder roads

10

Steps before embarking on PPP – economic viability

PV of total benefits: $ 288 millionPV of total benefits: $ 288 million PV of total costs: $ 225 million PV of total costs: $ 225 million NPV (benefits – costs) = $ 63 million NPV (benefits – costs) = $ 63 million ERR at 18%, greater than opportunity cost ERR at 18%, greater than opportunity cost of capital (12-15%)of capital (12-15%) Robust analysis: ERR between 10%–23% Robust analysis: ERR between 10%–23% within confidence interval of 90% using Monte Carlo within confidence interval of 90% using Monte Carlo simulation simulation

11

Steps before embarking on PPP – PPP structure

GOM applied for IDA loan to be on-lent to concessionaire GOM applied for IDA loan to be on-lent to concessionaire WB supported GOM through Technical Assistance (for structuring bidding WB supported GOM through Technical Assistance (for structuring bidding process, preparation, negotiation and award of concession) process, preparation, negotiation and award of concession) 49% GOM share of which 16% to be offered to public49% GOM share of which 16% to be offered to public

CFM CFM (GOM sole shareholder)(GOM sole shareholder)

WWB B

GOMGOM

RITES/IRCONRITES/IRCON(India)(India)

CCFBCCFB(Concessiona(Concessiona

ire)ire)

4949%%

5151%%

IDA IDA creditcredit

Joint Venture Joint Venture

on-on-lending, lending, $ 105m $ 105m of IDA of IDA creditcredit

CFM share will CFM share will eventually eventually diminish diminish to 33% (IPO for to 33% (IPO for remaining 16% remaining 16% envisaged envisaged

12

Steps before embarking on PPP – financial viability

Project Financing Amount (USD m)

EQUITY FINANCING Equity – RITES & IRCON (51%)

10.07

Equity – CFM (49%) 9.67

Sub Total Equity 19.74

DEBT FINANCING IDA 104.5

Government of India – LOC 22.62

Commercial Loan 2.82

Loan from Promoters 0

Sub Total Debt 129.94

INTERNAL CASH GENERATION

Machipanda Cash Flow 2.78

Total 152.46

1) Debt Service Cover Ratio (net operating income over annual debt service)

13

Concession Features – selection of concessionaire

award methodaward method: International Competitive Bidding (ICB) : International Competitive Bidding (ICB) first pre-qualification repeated to adjust for changed conditions, final first pre-qualification repeated to adjust for changed conditions, final

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

14

Concession Features – key contract features

concession fee:concession fee: $ 2 million entry fee $ 2 million entry fee $ 1 million fixed fee per annum from year 11 to 25 (indexed from take $ 1 million fixed fee per annum from year 11 to 25 (indexed from take

over date to USA CPI) over date to USA CPI) variable fee from year 6 onwards: 3% of turnover for traffic up to 300 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 million ntkms, 5% for traffic in between 300 million and 1 billion ntkms ntkms and 7.5% for traffic above 1 billion ntkms and 7.5% for traffic above 1 billion ntkms

tariff setting:tariff setting: Concessionaire free to set tariffs Concessionaire free to set tariffs

dispute resolution:dispute resolution:by parties in good faithby parties in good faithreferral to technical expert if parties unable to resolve tech. disputereferral to technical expert if parties unable to resolve tech. disputearbitration in accordance with Rules of Conciliation & Arbitration of arbitration in accordance with Rules of Conciliation & Arbitration of

International Chamber of Commerce as last resort International Chamber of Commerce as last resort

15

Concession Features – key contract features

termination clausestermination clauses: covered Company & Conceding Authority Defaults: : covered Company & Conceding Authority Defaults:

risk management:risk management:De-mining riskDe-mining riskcommercial risk (traffic risk)commercial risk (traffic risk)construction riskconstruction riskVAT riskVAT riskforce Majeureforce Majeurepolitical riskspolitical risksforeign exchangeforeign exchangeeconomic situation of neighboring countrieseconomic situation of neighboring countries

16

Concession Features – key contract features

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

17

Procurement during Implementation

IDA funds on-lent to concessionaire for Sena Line rehabilitation IDA funds on-lent to concessionaire for Sena Line rehabilitation as the concessionaire was selected through ICB, in compliance with WB as the concessionaire was selected through ICB, in compliance with WB procurement rules, he is generally free to choose his own procurement procurement rules, he is generally free to choose his own procurement

methods for goods, works and servicesmethods for goods, works and services obligation of IDA is to ensure the agreed procurement plan is fully obligation of IDA is to ensure the agreed procurement plan is fully

complied with and there is efficiency, transparency and fairness in the complied with and there is efficiency, transparency and fairness in the adopted procedures. adopted procedures.

18

Monitoring & Evaluation

concession agreement stipulates that concessionaire shall achieve concession agreement stipulates that concessionaire shall achieve recognized international performance norms for railway services agreed recognized international performance norms for railway services agreed between conceding authority and concessionairebetween conceding authority and concessionaire

failure to achieve such will result in financial penalties to be drawn from failure to achieve such will result in financial penalties to be drawn from the Performance Security for Maintenancethe Performance Security for Maintenance additionally, WB, CCFB and the Borrower have agreed on Project additionally, WB, CCFB and the Borrower have agreed on Project

Development Objectives, outcomes & end of project results which would Development Objectives, outcomes & end of project results which would be monitored through agreed performance indicators and intermediate be monitored through agreed performance indicators and intermediate output targets during project implementation (five years) output targets during project implementation (five years)

19

Implementation Status

Sena Line:• De-mining & bush clearing – 100%

completed• Formation preparation – 17%• Track laying – 13%• Sleeper Plant at Dondo – 15-18,000

sleepers per month • Another Sleeper plant to be ready by

August, 2007 at Mutarara• Rehabilitation work on two major

bridges commenced• Supply of ballast – key constraint • About 3000 personnel working • Interim freight operation expected by

January, 2008 - Beira-Marromeu

20

Key Success Factors

Invest considerable time and effort in conceptualizing and finalizing Invest considerable time and effort in conceptualizing and finalizing project designproject design

Socio-economic justification essential before structuring PPP and Socio-economic justification essential before structuring PPP and finalizing financing arrangementsfinalizing financing arrangements Beira Railway Project is a unique case of accommodating uncertainty Beira Railway Project is a unique case of accommodating uncertainty of coal concessionof coal concession Full involvement of key Government officials and decision makers Full involvement of key Government officials and decision makers

essential every step of the way to concession award and implementationessential every step of the way to concession award and implementation No negotiations allowed on any of the terms and conditions of No negotiations allowed on any of the terms and conditions of concession agreement clauses after biddingconcession agreement clauses after bidding All elements of procurement, including domestic preference and local All elements of procurement, including domestic preference and local industry involvement, agreed up-frontindustry involvement, agreed up-front Flexibility during implementation essential to overcome unforeseen Flexibility during implementation essential to overcome unforeseen difficultiesdifficulties Aggressive marketing and optimum utilisation of resources to make Aggressive marketing and optimum utilisation of resources to make

Machipanda Line profitableMachipanda Line profitable

21

CCFB expresses it’s gratitude CCFB expresses it’s gratitude to GOM, WB and above all to to GOM, WB and above all to

the generous people of the generous people of Mozambique for their help and Mozambique for their help and

support.support. THANK YOUTHANK YOU