Archive for Due diligence review

At the price of building more than 20 Panama Canal cost projects, what might due diligence suggest about India’s $124 billion railway strategic plan?

Based on past performance, will execution on time and within budget actually occur? Or another “bridge too far” expectation?

Within four years? Likely impossible within that timeline

Who is giving them such technical advise?

======

Bloomberg headline tonight asks: Asia’s Oldest Railroad Needs $124 Billion. Who’ll Foot the Bill? Feb 24, 2016

The superlatives are dazzling: India’s railway is the fourth-largest in the world, the oldest in Asia and carries about as many passengers daily as Australia’s population.

But it is old, less reliable now, and has been losing market share to highway mode bus, truck, and auto. ( So reports my professional associate David Burns)

Its grand new rail projects are now about a decade behind schedule. What is different going forward?

To read the entire article, pleae go to bloom.bg/1KKYgFx

Anurag Kotoky is the journalist –

Prime Minister Narendra Modi now wants to spend 8.5 trillion rupees ($124 billion) through 2020 on new tracks, India’s first bullet trains and modern stations. The unanswered question for companies such as General Electric Co. and Alstom SA, which are hoping to gain from the revamp, is where all the money will come from.

Railway Minister Suresh Prabhu may shed some light on that in his railroad budget speech on Thursday.

Bloomberg reports that the sheer scale of the modernization task is daunting. A looming wage increase of 320 billion rupees makes the task of funding investment even tougher —

The India railway network already spends most of its revenues on operating costs. It does not generate much free cash for reinvestment.

The railways may seek to sell land, export trains to Asia and Africa and sell advertising space while curbing costs, to cope with the wage burden and find funds for investment.

Fare increases are unlikely, people familiar with the matter said last month. Fare increases are often political suicide for the railway leadership

FUNDING SOURCES?

Here are some of the highlights from Prabhu’s railway funding speech:

•No passenger-fare increase to keep costs down for the poor
•Explore options for land, such as using some to generate solar power
•Market borrowing of about 200 billion rupees in the year starting April 1
•Considering possibilities for international and multilateral funding
To set up special purpose vehicles to implement high-speed train projects

India Rail,accounting is a bit vague. Claims a profit. Hard to prove.

The plan intends to improve its implied existing operating ratio by two points from 92 to 90

The Times of India|The Economic Times reports the following statistics:

* Expect saving of Rs 8,720 this year

* Operating ratio at 92% FY17 as against 90% in current year

* Traffic revenue targetat Rs Rs 1.85 lakh crore

* Capital plan of Rs 1.21 lakh crore

* Expect revenue growth of over 10% this year

* Commission 2,800km of new tracks in next year, almost 30% higher than last year

* Railway electrification increased by 50%; 2,000km route to be electrified next

* Railways to get Rs 40,000 crore budgetary support from the government

* Rs 30,000 crore is the loss on subsidizing passenger fares

* 20% less accidents this year. No specifics on how to reduce this.

MARKET ANTICIPATION?

Bloomberg reports that some India railway-related stocks have already rallied ahead of the budget speech, though project execution remains a risk, said Ashish Kejriwal, an analyst with Elara Securities Pvt. in Mumbai. Here are some of the stocks which could be in play as Prabhu speaks: * Titagarh Wagons Ltd. — Wagons and freight manufacturer * Texmaco Rail & Engineering Ltd. — Manufacturer of freight cars * Kalindee Rail Nirman Engineers Ltd. — Signaling system provider Closing

OBSERVATION

In American terms, the $124 billion is equivalent to maybe the current cap ex valuation of two Union Pacific’s — —- without any realistic type Union Pacific operating income pro forma expectations offered yet by any professionals as due diligence oversight.

Not impossible. But certainly a huge financial feasibility challenge.

Who will risk the capital under such circumstances and under what terms?

PLANNING?  THAT HAS NOT BEEN SET UP YET

While presenting the Railway Budget for 2016-17 in Lok Sabha on Thursday, Union Railway Minister Suresh Prabhu announced that the Indian Railway intends to set up a Railway Planning & Investment Organisation for developing a National Rail Plan to draft medium (5 years) and long (10 years) term corporate plans and identify projects which will fulfill the corporate goal.

 

Sent from my iPhone

Roads are gradually eroding rail freight dreams as China builds out the initial modern highway sections of its New Silk Corridor initiative.

Dreams of a bold new Chinese financed silk corridor giveaway are behind the scenes taking execution shape. Lots of it will be a financed highway network growth.

EVIDENCE?  Kazakhstan, rather than Mongolia, is the first link west from China as construction of the first phase HIGH CAPACITY paved highway network is actually underway.

Started slowly after 2009, a modern multiple lane truck capable highway network already links western China and much of eastern Kazakhstan. Journey’s from local villages to sub regional cities with this geography have been shortened by the first improved highways in some cases from ten hours to less than three.

Slowly construction appears to be improving and expanding the older lane and a half width Soviet road network during 2014-2016 — gradually spreading west towards Western Europe.

Not unexpectedly, the first links were east into China. Because China wrote the checks and bought the Kazakhstan resources and commodities.

Under the label WE-WC, the Western Europe to Western China corridor funding is opening up high valued goods logistics to more and more short, Mid distance, and yes even long distance trucking. Rail freight now sees much more truck/road competition for the Asian freight market share.

Where have we seen this before? Ah yes, the Eisenhower sponsored US Interstate Highway program some 60 + years ago. And in India as highways are being improved faster than India’s railway capacity is.

The early benefits are for linking the shorter to mid length Western Asia communities together. Think Baltimore to Philadelphia. Think Berlin to Warsaw. These short to mid distance lengths of haul less than 500 kilometers are expanding sub regional trade and commerce ties. Not as glamorous as in Berlin to Beijing, or long distance Philadelphia to Los Angeles. But critically important to jump start local region growth.

LONG DISTANCE EURASIA SURFACE FREIGHT TODAY IN 2016

And as one traveling journalist (Wade Shepard) points out in his published works, lots of wine and other valued goods are moving as much as 5,000 to 8,000 kilometers between central China into central and Western Europe. Mostly by trucks.

Trucking is considered more reliable. With low driver wages, not much more expensive than what is charged by the national rail companies. Truckers often charge less than 7 cents US equivalent per ton-km. Service in either direction takes as little as 7 to 9 days by truck.

Rail can cost 10 cents or more per ton-km and take 14 to 21 days.

Trucking to an east coast China port and then by giant 18,000 TEU vessel can take between 25 to 29 days. Longer if the shipper opts to pay an even lower price. But the truck/ocean price paid is overall less than 4 cents per ton-km. Sometimes less. Which is why the water option according to most experts is calculated at a whopping better than 95% range.

Trucking at maybe a 4% market share.

Rail freight at 1% or less. I am ignoring air freight.

=======

For more, read Wade Shepard @vagabondjourney.  He cites the following.

China’s “New Silk Road” A massive infrastructural and political project that’s overtly opaque, extremely relevant, and globally important that spans across a massive swath of geography. Capital cost to build might be in the three trillion dollar equivalent range. No one is sure. Closely guarded state secret.

Even the route and the physical capacity details are sketchy. Shepard’s travel out into the Asian “boondocks’ shows that although there are currently many contrasting versions of the actual routes, the vision behind this plan is to build a network of rail lines, highways, logistics centers, and new cities connecting China with Central Asia. And yes, with Europe

Geo-politically, it’s already fairly well under constructed. Certainly the highway portion is.

Though it’s being developed somewhat quietly, this project and its broader implications will be one of the big global stories of the coming decades. But a lot of it will be highway based changes. It’s much more than a railroad story.

There are also large scale pipeline and maritime project details. You might scan his research papers for more of his local color field reports. Jim Blaze Sent from my iPad ==============================

Riding the New Silk Highway: New Road Connects Europe and Asia   //by Wade Shepard @vagabondjourney

Another story of how during good times so little due diligence is done on projects

 

THE REST OF THE STORY?  This railway due diligence alert is from the Middle East.

Previous sound second opinion advise  ABOUT THIS ETIHAD Railroad project from David Burns was apparently “dismissed”.Instaed, a huge capital cost project was approved.

Today, the same project he warned about is “in economic limbo”.

David participated in the early on market analysis for this railway and made the mistake at an important meeting of saying, in front of several “big guns”, that there might be a maret sizing issue.  Fo example, this then proposed railway might have a chance of being viable if it built inexpensively and with second hand locomotives and rolling stock.

That due diligence alert did not go over well.   Times were economically good back then. Why rock the boat?

Basically the only traffic on the railway is aggregate and that could go by water.

It appears that they are now realizing it.

Today’s headline is that Etihad Rail suspends Stage 2 tendering.  In a news report circulating in January 2016 and Written by Keith Barrow

ETIHAD Rail confirmed on January 26 that it has suspended tendering for the construction of the second phase of the UAE’s national railway network in a move which is likely to deal a significant blow to the GCC Railway project.

Stage 2 involves the construction of 628km of new lines, encompassing the line from Ghweifat on the Saudi border to the Omani frontier near Al Ain together with links to the UAE’s three principal ports at Khalifa, Jebel Ali near Dubai and Mussafah.

The project has an estimated price tag of around $US 11 billion.

Etihad Rail says it has informed bidders that tendering will be suspended while it reviews “the most appropriate options for the timing and delivery of this phase of the project.”

“Etihad Rail is one of the biggest and most complex infrastructure projects ever undertaken in the UAE,” says Etihad Rail chariman HE Nasser Alsowaidi.

In December the UAE’s Federal Transport Authority (FTA) granted Etihad Rail final safety authorization for Stage 1

The 264km Shah – Habshan – Ruwais line, clearing the way for the start of commercial operations on the first phase of the network. Etihad Rail says the decision to suspend tendering for Stage 2 will not have any impact on its preparations for the launch of operations on the first phase.

=================================

It appears that they are now finally realizing that Mr Bruns rendered sound due diligence counsel.  Other project leaders should take note.  Always get and at least consider a second opinion.

The Big Short. Next movie version may cover Africa as a series of bad bond deals might unravel // Get a second opinion

EUROBOND FEVER

A few years ago, many African governments started issuing Eurobonds (bonds issued in a foreign currency) as a way to raise money. Nigeria, Zambia and Kenya are just a few to have tested their money-raising luck on global markets. Interest payments on some of these Eurobonds are due this year..

Important point… ….- most of those payments have to be paid in US dollars. That’s not great if your local currency has lost up to half of its value against the dollar.

Any one short these bonds?

Many investors have become increasingly worried about the ability of some African governments to repay their Eurobonds… …the credit ratings of many countries have been sliding to near-junk and junk status.

Need evidence?  CHECK OUT the related BBC report

Zambia issued its first Eurobond in 2012 at 5.4%. When they did, copper prices had already been falling. Where was the due diligence?

Falling copper prices, a power crisis and a credit rating downgrade now mean that investors who willingly lent money to Zambia in 2015 ignored the reality that these deals would actually be more risky than it had been in 2012.

When the country issued its third Eurobond last year, the rate was 8.5%. Now Zambia has to make those increased interest payments from declining tax revenues. And with much more expensive dollars. This will not end well.

Other projects from mines to railways and ports badly need due diligence second opinions.  When they don’t get them, buyers should beware.  Or the next Academy Award nominated best movie could be about you.

This includes massive mine/rail projects in Namibia, Botswana, South Africa, Senegal, and Mali…    …to name a few.

Most of these strategic plan paper projects lack due diligence pro forma assessments of their long term Income Statement outcomes against traffic risks projections ofrevenue volume being unrealistic.  Always get a second opinion.

Back to the Future for the UK rail structure? // 2015 review

Was the British Rail privatization effort ever successfully completed. Or just a juggling of the accounting books?

What do you think? Here is an interesting review in part from Zthe Economist in early October 2015 //

The original Railtrack company actually according to many economists was partially re-nationalized when financial oversight shifted to the replacement Network Rail company within about a decade of the initial change.

More passenger riders? Yes. At more public subsidy? Yes.

Is that success?

Quite a few in the UK don’t think it was successful. Note this from The Economist on 3 October 2015 Railways “Gravy trains” Why Labour’s plans to renationalise the railways are so popular

FEW topics get Britons as hot under the collar as the state of the country’s railways. When trains are delayed—at the slightest hint of snow, or when leaves fall on the track—passengers fire off furious letters and tweets. According to polls by YouGov, more than half of Britons would like the government to take the railways back under state control.

This makes Labour’s plan for a publicly run “People’s Railway”, affirmed at its conference this week, a popular policy as well as a radical one.

By some measures Britain’s railways are booming. Since the network was privatised in 1994, the number of train journeys taken each year has doubled. The growth in passenger-kilometres travelled has been among the fastest in the European Union.

BUT… …the service has become far more expensive, with rail fares now 24% higher in real terms than in 1995.

And as well as being pricey, the service is often uncomfortable: 22% of passengers commuting into London and 16% of those travelling into Manchester have to stand.

// The Economist writes that …”passenger frustration also reflects the fact that privatisation was rushed through and in many ways flawed.” When British Rail, the monolithic state operator, was broken up in the 1990s the government stringently followed a European directive to separate the tracks from the trains.

The idea was to boost competition by ensuring that different train operators could whizz up and down the same stretches of track.

But in some circumstances this led to inefficiencies, with employees of privately run train companies doubling up against those from Network Rail, the state-owned company which controls all 20,000 miles (32,000km) of track. Investment has risen since privatisation, but so has government subsidy…

The subsidies adds up to around £4 billion ($6 billion) a year.

According to a report published in 2011, costs per passenger-kilometre have hardly improved since 1996.

And Network Rail is in disarray. The company, which was brought on to the government balance-sheet in 2014 with £34 billion of debt, is due to publish three reports over the next six months looking at how it can be restructured.

Read the column in full at: www.economist.com/news/britain/21669057-why-labours-plans-renationalise-railways-are-so-popular-gravy-trains

Restructuring Overview // opinion column from India on India Railways

Bravo!

A gutsy but professionally focused opinion column points out why modernizing the vast but bureaucratic Indian Railways may be a hopeless task.

It’s about politics and the self preservation of jobs and management roles while facing objections from other land users. It is not just a technology fix that is needed.

Here are just a few points that illustrate the issues.

1) BROKEN MARKETING TACTICS

The government has so far lacked the will to increase passenger fares because it is an unpopular suggestion. Instead, they hike up the cost of freight transport to subsidize passenger rides. What India gets as a result is a vicious cycle: Companies (shippers) choose to transport goods via highways because doing so by train has become too expensive and inefficient. That results in a lack of the expected cash flow freight subsidy funding needed to make rail improvements for passenger rail. And to the extent possible by bus or auto, the rail commuters leave the railways for highways.

2) CUT UP THE RAILWAY INTO MORE BUT SEPARATE ORGANIZATIONS

One ever popular policy suggestion is to minimize the Ministry of Railways power by making the Indian Railways two independent organizations—one responsible for the track and infrastructure and another for operating the trains. But some do not see that restructuring happening anytime soon. Furthermore, it did not work out well when tried in the UK. Why would it work in India?

It might be better to just fire everyone in charge today and hire an all new monopoly provider.

3) TAKING FOREVER

“If nothing changes, it will take them 100 years just to build the Dedicated Freight Corridor,” say some professional observers. For example, the government hasn’t even started looking at people and land relocation plans in urban area for an alternative, high-speed railway network.

Heck, the Dedicated Freight Corridor execution is already about a decade delayed. That is about the professional in charge lifetime of the current leadership generation (at about 10 to 15 years as the top people in an organization).

TICK TICK TICK The clock is ticking.

So little is happening.

Read the column at: www.citylab.com/commute/2015/10/what-it-will-really-take-to-fix-indias-railways/408664/ Sent from my iPad

Reports shows just how poor Brazil’s transport infrastructure is. // Two decades of progress hope — wasted on things like global soccer get them this

Something to reflect upon from a Bloomberg global news story on Oct 7, 2015

Two decades of promised growth and investment. Much of it wasted.

Now Brazil is forced to compete against nations like Mexico who have far superior road and highway infrastructure that move their supply chains. What a shame. What a mistake. Where was the oversight due diligence during all of those years?

================

Gerald Lee, a former airline executive, thinks he can help ease one of Brazil’s most-absurd problems: “How do you ship large quantities of goods fast from the nation’s manufacturing hub when there’s not a single usable highway in or out of town?” Barge it down the Amazon River for a ten day transload supply chain. That is the best he can make out of a bad situation.

What happens is that products like TVs made in deep-in-the-jungle Manaus float down the Amazon River by barge to the Atlantic Ocean port town of Belem. From Belem, the goods go on trucks for pothole-filled delivery runs, many of them to distribution centers in Sao Paulo, about 1,600 miles away — and 10 days later.

MEXICO WINS

That can be more than twice as long in time as an 18-wheeler traveling a similar distance from Mexico City to the U.S. road-and-rail hub of Kansas City, Missouri. Or to even closer Houston.

When people criticize Brazil’s transportation infrastructure for being among the worst in the world, behind even Ethiopia’s, this is what they’re talking about.

Manaus, the nation’s only tax-free zone and home to 40 percent of its computer and electronics manufacturing, is just one of many reasons the World Bank says companies in Brazil spend more on logistics than in the U.S.  Moving many of Brazil’s exports can take twice as long as out of Mexico.

This was going to be fixed. But it never was.

How long will the needed investments take? No one is saying. I professionally would expect about 15 to 20 years.

The funding for long promised roads and railways is uncertain.

Heck, one point two years ago Brazil was promising foreign aid to help build Ethiopia railways. Unbelievable? Fact is often stranger than fiction.

To read the entire article, go to bloom.bg/1hrwCiI

So cheap that neither Bureaucrats at FAA or the Pilot Union Can Holdback Cockpit Video Forever….

Technology smallness and it’s cheap cost will overwhelm the opposition

“Resistance is futile”

Railway trains too.

From a Bloomberg report on Oct 8, 2015

It was after 11 p.m. on March 30, 2013, when the Alaska Department of Public Safety helicopter lifted off near Talkeetna, north of Anchorage, after rescuing a stranded snowmobiler. Freezing rain was changing to heavier snow, and visibility was decreasing. Within minutes the chopper had crashed, killing its pilot, a state trooper, and the person they’d been sent to rescue. Usually, investigators from the National Transportation Safety Board have to guess what went wrong in such situations. But when they examined the chopper’s charred wreckage, they found a treasure in the ashes: a cockpit video recorder.

The footage, from a camera mounted on the ceiling behind pilot Mel Nading, ruled out mechanical problems or ice as factors in the crash. Rather, investigators could see that Nading was confused. He allowed the helicopter to slow and start rocking back and forth, then reached out and reset the device that should show whether the craft is flying level—a decision that sealed his fate, making it “very unlikely that he would regain control of the helicopter,” the NTSB said in its report.

In the dark, without an accurate reading, Nading had no way of knowing which way was up. “It really gave us the insight that this pilot was spatially disoriented,” says John DeLisi, the NTSB’s chief aviation investigator.

“Without that video, we would have been looking at a pile of burned-up wreckage, trying to figure out what caused the erratic flight path that led to this crash

Since 2000, the NTSB has recommended that the Federal Aviation Administration require cockpit cameras. The Air Line Pilots Association, North America’s largest flight crew union, has opposed the change, arguing that video can be misleading, especially where it’s not clear whether a pilot is fighting a malfunction or causing a plane to lose control. The money spent on cameras would be better invested in training and other safety measures, the union says. “Cameras in the cockpit will not prevent a single accident,” ALPA President Tim Canoll said in a statement.

The problem for the union is that video equipment has become so cheap that cameras are increasingly common in aircraft. That’s made their benefit more than theoretical.

After the Talkeetna accident, Alaska’s public safety agency began requiring pilots to receive instrument training every 90 days so they’d be able to navigate in whiteout conditions. (Nading hadn’t had such training since 2003.)

“Video recorders in the cockpit can provide information that would not otherwise be available,” says NTSB Chairman Christopher Hart. “Simply put, more information is better. And video, by its nature, has proven to be a rich source of it.”

OVERCOMING RESISTANCE BY OTHER AGENCIES

An FAA spokesman referred to letters the agency has sent the NTSB saying that it has no plans to revise its policy on cockpit cameras. At least one U.S. lawmaker, Florida Republican Representative John Mica, says he’ll push for a cockpit video requirement next year, when Congress is scheduled to pass legislation reauthorizing the aviation agency.

The bottom line: The spread of cockpit video technology is boosting the NTSB’s push to make it standard in aircraft. T

in rail trains too.

To read the entire article, go to bloom.bg/1OofeKn

Here is how BNSF is growing // with a shift to Stack Trains

Much of the world operates railroads that lack the necessary vertical clearances and the standard 1435mm heavy axle track gauge that allows for double stacking international goods in huge containers.

The World counts containers as 20-foot long boxes. In North America the standard is a whopping 53 feet long box.

Thirty years of big train progress in North America has given the Mexican to Canada rail companies the market ability to sustain self financed rail growth as coal shipments drop in the modern world

What is your railroad doing to adapt?

This story is found in a Bloomberg report.

Railroads are already winning more of this so-called intermodal business here across North America. Rail shipments of containers grew 15 percent over the last decade That offset the traffic losses as other cargoes, such as coal and ores have dropped in some cases by 11 percent to as much as 20 percent in the eastern US coal area.

Intermodal traffic is actually growing on the US railroads by about double GDP and also by about twice the rate of truck over the highway mode. Even with a somewhat slower US economic growth this year— intermodal rail freight is up 2.3 percent in 2015, the Association of American Railroads reports.

But persuading shippers to switch still isn’t always easy to do. It has to be significantly cheaper per trailer or container mile if rail rather than by highway in order for it to be a better transport deal for shippers.

Shippers decide. Not politicians. At least in the US markets.

It is strictly a matter of economics. While it might be cheaper by ton-mile to send freight by rail, it generally takes just a bit longer in time and a bit more in distance rather than by straight trucking from origin to destination.

There is also a cost of transferring containers onto the trains and then back to trucks for final delivery.

All of this geography of intermodal makes it difficult to compete with direct trucking on trips of less than about 600 miles here in North America. That is confirmed in an interview with Larry Gross, a partner at FTR Transportation Intelligence. Trucks are more punctual and flexible. They generally will always be quicker than by a truck to rail to truck intermodal substitute.

For more about the successful private BNSF rail investment report, log onto:    www.bloomberg.com/news/articles/2015-10-07/buffett-bets-on-rail-superhighway-to-beat-trucks-as-coal-fades

Mind numbing, jaw bone breaking numbers

A Bloomberg commodities index that tracks returns from 22 raw materials has fallen 50 percent since a 2011 high

Down BY HALF!

Not by a crummy 3% to 5% . Or even Ten percent

By a jaw breaking 50% range.

Who is getting fired for these numbing numbers? Where was the due diligence? ————

What did your strategic plan assume?

To read the entire Bloomberg report, go to bloom.bg/1MKPHrc