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THE ARLANDA AIRPORT RAIL LINK – LESSONS LEARNED FROM A SWEDISH PPP CONSTRUCTION PROJECT

THE ARLANDA AIRPORT RAIL LINK – LESSONS LEARNED FROM A SWEDISH PPP CONSTRUCTION PROJECT. Lars Hultkrantz, Urban Karlström, Jan-Eric Nilsson. www.vti.se. VTI presentation sv 0503 / sid2. Uppsala. A – the four-track section B – the Arlanda extension, including under-ground stations

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THE ARLANDA AIRPORT RAIL LINK – LESSONS LEARNED FROM A SWEDISH PPP CONSTRUCTION PROJECT

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  1. THE ARLANDA AIRPORT RAIL LINK – LESSONS LEARNED FROM A SWEDISH PPP CONSTRUCTION PROJECT Lars Hultkrantz, Urban Karlström, Jan-Eric Nilsson www.vti.se VTI presentation sv 0503 / sid2

  2. Uppsala A – the four-track section B – the Arlanda extension, including under-ground stations C – the north-bend extension C Arlanda Airport B A Stockholm C The Project

  3. The process towards project start • First proposal in 1987; initiated political process leading to… • …competitive procurement in 1993-94 with • prequalification (more than 30 companies) • final bidding (four consortia) • The incumbent’s consortium came second • The contract was awarded to Arlanda Link Consortium • NCC, Siab och Vattenfall • Mowlem and GEC Alsthom

  4. Contractual structure • Life-cycle contract, i.e. the entrepreneur builds and maintains infrastructure and operates services. • 45 + 10 year contract. • (Much of) investment costs are supposed to be paid for by ticket revenue. • The government could cancel the contract after 15 years (i.e. 2010).

  5. Was this a good project design • … financially? • … economically? And is there something to learn from the perspective of industry organisation?

  6. Construction costs, million SEK

  7. Comment on costs • No price level adjustment due to low inflation/ downturn in business cycle. • Information about costs for building section C is not available • the amount paid to the consortium. • The ex ante and ex post projects were different, in particular with respect to station and tunnel design.

  8. Costs and funding • Total costs for section B SEK 2700 million • ”conditional loan” from government SEK 1000 million • SEK 1100 million in commercial loans • SEK 600 million risk capital • In addition, the consortium got SEK 850 mkr to build section C.

  9. Costs; conclusions The private consortium accepted the full cost risk; It designed the investment in order to balance investment costs against future maintenance costs. Has this enhanced cost efficiency? The government • could ”save” SEK 1,7 billion • did not have to face any cost overruns • and the project was on time!

  10. Revenues • Investment costs are to be paid by ticket revenue. • The Consortium carries the full revenue risk. • It faces harsh competition from busses. • Revenues decided by • Price • Number of passengers. • No. of passengers strongly depends on no. of airline passengers.

  11. Table 2: Million Arlanda airline passengers. 1990 forecast and outcome.

  12. Market share (%) for different modes of transport to and from Arlanda. Based on surveys made by Luftfartsverket.

  13. No. of passengers with A-Train; actual numbers and 1993/94 forecast*.

  14. Poor revenues due to… • External changes affecting the whole air transport market. • Is it efficient to transfer the full revenue risk to the concessionaire? • The pricing policy: • A priori expectation a price a par with busses, but • Bus SEK 90 (40 minutes); • A-Train SEK 190 (20 minutes).

  15. A-Train’s poor financial result • For year 2004 (2003) • revenues SEK 402 (359) million • operating costs SEK 314 (310) million • net financial costs SEK 155 (100) million. • The balance – SEK 68 (51) – added to the company’s debt.

  16. Economic aspects • More congestion and higher environmental costs than if p=mc for using tracks. • Much traffic on the road that could/should be lured over to use train. • Other train operators are charged for using tracks and station. • No inter ticketing, meaning that it is costly to combine standard railway tickets with the A-Train fare. • No coordination with commuter train services, in spite of that this is a different market segment

  17. But… • What if lower fares would improve the financial result? • What if A-Train could negotiate a deal with SL over commuter services?

  18. The search for an efficient industry structure • Europe; vertical separation, subsidies, competition on or for track access. • America; vertical integration, competition between (some) class A freight operators; limited and subsidised passenger services. • Is the Arlanda solution, an island of integration in a sea of vertical separation, viable?

  19. This would require… • A large and captive (no outside opportunities) market in order to pay for costs. • No interest from “outside traffic” in using the facilities. • Malmbanan fits better in on these criteria, • … but Arlanda could possibly be fixed?

  20. To conclude • Transparency problems! • Private money and improved (?) cost efficiency may be paid for by reduced allocative efficiency. • How could PPP deals be designed in order to safeguard overall efficiency improvements?

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