Archive for feasibility assessments

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?

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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

Competition. Gaining competitive advantages as the new player.

Lessons for railroaders in fighting against trucks for freight market share. i

Weaker player can often win.

By innovation that changes the rules, the smaller force can more than ofen win.

The lesson is from a close reading of the competition phenomenon in a book authored by  Malcolm Gladwell in 2013.  Titled: David and Goliath: Underdogs, Misfits, and the Art of Battling Giants.

Suppose you were to total up all the wars over the past two hundred years that occurred between very large and very small countries. Let’s say that one side has to be at least ten times larger in population and armed might than the other.

How often do you think the bigger side wins?

Most of us, I think, would put that number at close to 100 percent for the big guys. A tenfold difference is a lot.

But he found that the larger force only won about two-thirds to three quarters of the time.

A political scientist Ivan Arreguín-Toft did the calculation a few years ago. His big versus little sample came up with was 71.5 percent of the time the big guys won.

Still– about a third of the time, the weaker country won.

INCREASING THE ODDS

Arreguín-Toft then asked the question slightly differently. What happens in wars between the strong and the weak when the weak side … refuses to fight the way the bigger side wants to fight.

Perhaps like the American revolutionary generals, they used a lot of unconventional or tactics. (Read more about that in the book First Salute).

CHANGE TACTICS, and the weaker party’s winning percentage climbed from less than a third to about two thirds (63.6 percent for those who want more precision).

Railroads in North America in the past won in select markets by changing their tactics against more numerous highway network and numbers of trucks.

Longer, heavier axle loading and double stacked container train TECHNOLOGY INNOVATION converted the Chicago-LA 2,000 mile long origin/destination 70% truck market share for high value truck load commodities to a 70% rail share over about a decade.

Want proof?  Check my calculations by reviewing ICC footnotes in railroad merger cases back in 1992 period.

The western railroads worked selectively to change its intermodal business model between 1984 1990.  It worked. The change was largely technology driven.  some culture change too.

Meanwhile, the European rail industry so far has not followed this model change.  Three decades after the North Americans took on the bigger truckers by changing the rules, the Europeans and South African railroads have not yet learned the lesson.

Smaller market size railroads can win more than half of the time.  But it takes innovative leaders to do it.

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.

Coal Industry Seeks Unusual Partner in the UN Green Climate Fund for poorer nations’ energy needs

If you cannot beat them, try to join them… …in order to help the poor nations achieve desperately needed energy supply.

Yes, from environmentally harmful coal.

The coal industry, viewed as a key contributor to global warming, is seeking a once-improbable collaborator They are trying to work with a fund set up under United Nations climate negotiations.

With more than 2,000 new coal power stations planned or being built in Asia to Africa, the UN Green Climate Fund should help finance making the plants more efficient, according to Mick Buffier, the chairman of the World Coal Association.

New coal technology can cut climate-warming gases by about a third per unit of power, though it adds about 50 percent to the $315 million cost of a 500-megawatt plant in China, the group said.

The Green Climate Fund is meant to channel climate-related aid from industrial nations to developing countries. Bangladesh alone said it needs $16.5 billion in the 20 years through 2030 to ensure its plants will use so-called “super-critical” clean technology.

At the same time, older funding sources like Citigroup Inc. announced on Monday that it will cut back on financing for coal projects.

To read the entire article, go to bloom.bg/1N1eoA3

Interesting leadership observations offered to the railroad industry

Those who were at the keynote Railway Interchange 2015 address by retired Navy SEAL Robert O’Neill heard this leadership message.

Mr O’Neill held the crowd’s attention with his humor and stories of war, including headline making raids that resulted in the rescue of Captain Richard Phillips in April 2009…

His message to attendees about the topic of success & leadership was one that translates from the theater of war to the operations of an office or a railroad:

Never quit. That is his personal mantra.

O’Neill touched on several main points when developing a “never quit” attitude. 1) developing people skills, 2) knowing the difference between over planning versus being prepared, and 3) removing emotion from the decision-making process.

His advice — to keep moving forward through challenges

To recognize that all stress is self-induced

To recognize that failure is a great learning tool.

He also noted that keeping a sense of humor helps.

Lessons there for all of us

Another Bridge Too Far Rail Scheme? // Europe into N. Am. Via Russia!

siberiantimes.com/business/investment/news/n0160-plans-for-new-transport-route-unveiled-to-link-pacific-with-atlantic/

We may have missed this probable last great rail plan proposed earlier this year.  But it is still on the Internet for all to read.

// Plans for new transport route unveiled to link Pacific with Atlantic

By The Siberian Times reporter23 March 2015

“New cities and industries could be created from construction of high-speed railway and motorway routes spanning whole of country”reads the story line.

At a meeting of the Russian Academy of Science, the head of the Russian Railways Vladimir Yakunin presented the idea for the Trans-Eurasian belt Development (TEPR).  That was back in th Spring.

Politicians fostered the concept  “as a powerful and versatile transportation corridor that would join up to other networks and reach from the Atlantic to the Pacific, via the heart of Siberia and the Far East.”

Me?  I think it is a really bad idea.

The suggested plan has zero published economic feasibility supporting it. Just a lot of political leaders and academics. No shippers are clamoring to use the route? Why pay for the suggested long land route rail services where super sized container ships are far cheaper?

It reads like “Just another great plan, wrapped In golden chain” so to speak.

And it’s lead RZD rail supporter is no longer in that promoting job as the summer ends.

The admitted rough capital cost estimate from supporters is in the TRILLIONS of dollars.  Yet back in the spring, without documentation, Mr Yakunin of RZD insisted to reporters that the economic returns would outweigh these investments.

Viktor Sadovnichy, rector of the Moscow State University, said the network would help the Far East and Siberia feel more in touch with the rest of the world.

Or is the entire scheme simply economic nonsense?

So far, no one is advancing the cash to build it. It is just another wish list railroad idea. Investors should beware.

Stunning graphs on resource capital project spending is a “wake up call” for planners

From mines around the world to the dependent rail and port projects, the changing global economics commodity cycle suggests a downer “Bear” market for projects that add to global capacity and output.

This down cycle could last from a short 2 to 3 years OR AS LONG AS 7 or more years. Strategic Planners to to rethink their now outdated assumptions from supporting logistics projects in diverse places like Mozambique, Botswana, Mongolia, Brazil, and even in the Canadian/Alaska Yukon region.

What ever capital plans for building the supporting ports and railways they had developed by big engineering companies — the underlying due diligence economic assumptions are now likely “under water” so to speak.

Billions and billions of proposed dollars in drawing board completed project engineering can no longer pass an economic feasibility test for recovery of he rail project capital P&I.

Instead these industry planners should brace themselves for at least another two years of shrinking budgets and outlays. The earliest signs of a “subdued” resource recovery might not be until early in 2018 say some experts.

But even this prediction might be too bullish. Why? Because metal prices have already fallen 12% further than they did during the bear market in the 1990s. In that bear market, capex only recovered to its pre-crash (1997) level after seven years (2004),” according to Mark Fellows.

Mark Fellows, director of consulting for a mining research firm reports that “while sustaining capital expenditure is down 13% since the peak in 2012, capital expenditure on new developments has been even harder hit.” “Spending on brownfield expansions is down 25% while greenfield project expenditure has plummeted by nearly one third” on a global basis.

Mr Fellows concludes this by comparing the current 2013-2015 downturn to the previous bear market in mining which ran from 1997 to 2002. He therefore argues that the current witnesses global capex cutbacks are far from over.

The report is published by SNL Metals and Mining. DOLLARS OF PROJECT EXPANSION PLANS AT RISK

The report finds that total capital spending across all mining companies has declined by around $70 billion since the 2012 peak to just over $150 billion forecast for this year. As one business case example, the project investment at BHP Billiton this year will be $10 billion below its 2013 peak. The world’s number one miner only has four projects in the works, two of which are almost complete, compared to 18 mine and infrastructure developments just two years ago.

In a Mining.com press story by Frik Els on 21 September 2015 titled: “This is the scariest mining chart you’ll see today”, the investor alert numbers are brought out visually.

This is another piece of economic trend evidence in my blog’s strategic theme of changing times for traffic that feeds the dreams of massive new rail freight projects.

“a Bridge Too Far” analysis?

Only the strongest as low cost per ton-kilometer cost new rail projects might be competitive.

Too many rail projects on the drawing boards are simply under designed as to the necessary competitive productivity to prosper as investment grade scenarios. Trains would be too small because they often lack big train technology design features of the most successful resource rail carriers. Axle loads too small. Train lengths too short. Clearances too shallow. Net to tare wagon rates are too low

Too many are now ill advised rail schemes. “Schemes” in North American business language generally means a buyer beware concept plan”.

In Africa alone, I estimate that as many as two thirds of “announced” rail line freight projects may be too risky to build as currently designed around old market demand and old post World War-2 rail engineering standards. That could mean as much as $25 to $34 billion of “schemes” seriously require a second due diligence look just in Africa.

Africa is not alone. The billions in proposed rail engineering in the Canadian Yukon/Alaska region also need serious market demand re-examination. If not by the project sponsors, then certainly by the investors they will approach. Brazil, Mongolia, Swaziland, Senegal — all of their rail design and expected market traffic assumptions need serious review for their current planning.

For more, log onto Mining.com

Chart Sources: SNL Metals & Mining

Greenfield cap ex spending chart

Bear market recovery projection for commodities chart

Update on Ethiopia’s Light Rail System as it starts operating // Sept 2015

Multiple reports confirm the start of light rail service in the capital of Ethiopia on 20 September 2015.  The start of service on Line #1 is actually relatively close to the promised service date.  Funding approved in 2011 assumed a two year construction timeline.

The 16.9 km north-south Line 1 line links Minelik Square with Kality and has 23 stations. A 17.4 km east-west line from Ayat to Tor Hailoch is also due to open soon. The two routes share a 2.7 km section between Lideta and Stadium.

This light rail service which includes elevated sections and tunnels, runs from Addis Ababa’s main industrial area on its southern fringe, through the trading district of Merkato to the historic center of Piazza.

I had a chance to review the affidavit Addis Ababa light rail construction process in the capital back in the summer of 2013.  Project construction and the logistics handling of imported rail materials was well organized by the Chinese company.  The track ballast section and some early rail laying were substantial as to the engineering design and initial construction delivery of product in the field.

One of the tunnel projects was a huge physical undertaking.  Well done when I inspected it.  No question that the Chinese companies can build rail projects very well according to plans.

PLANTING THE C”AN DO” FLAG IN FRONT OF AFRICAN RAIL PLANNERS

The east-west light rail line skirts the African Union’s headquarters.  This location marks a great advertising opportunity of the Chinese capabilities with this line placement in front of the African wide headquarters.

Both light rail lines are built by China Railway Engineering Corporation (CREC).

CNR Changchun (now part of CRRC Corporation) has supplied a fleet of 41 low-floor vehicles, which have a maximum speed of 70km/h.

DEAL FINANCING TERMS

China is financing 85% of the $US 475 million project. It is a loan. Not a grant.

The government agreed to borrow the funds in June 2011 from the Export-Import Bank of China.  The to be paid back rate was at the 6-month Libor interest rate plus 2.6 percent and a grace period of three years.  This from Ethiopian Finance Ministry data.

State-owned contractor China Railway Engineering Corp. was the recipient of the export financing.

The financing of the remaining 15% is arranged from other sources by the Ethiopian government.

ON-GOING MAINTENANCE

The 39-station network will be maintained by CREC and Shenzhen Metro Group under a $US 116m five-year contract.

The Ethiopian client for the continuing rail service is the Ethiopian Railway Corporation (ERC).  The ERC rail company is a government corporation with a very small staff.

TRAIN OPERATIONS

The first three to five years of light rail train operation will also be by the Chinese and not the ERC.

At one point back in 2013 the Ethiopians sent out a global request for a  consultant team to build up the Ethiopian internal organization into becoming a world class operating management team.  Then they could take on train operations management themselves.  But that internal skill building process so far appears to not have happened.

Instead of internal managers inside the  Ethiopian Railways Corp, the light rail service will be run day to day by Shenzhen Metro Group.  For at least five years.

LIGHT RAIL TRAFFIC FORECAST

The light rail total system may eventually carry 60,000 passengers an hour, according to project manager Behailu Sintayehu.

Passenger FARES will be subsidized

The maximum one-way fare on the network is about $US 0.29 to $0.30 (cents).

The light rail line operating costs is projected to be about 1.5 billion birr a year to run. Fare box revenues will not cover all of that annual operating cost.

“The government is subsidizing this transportation system. This is not for commercial purpose, it’s for the public” said a local official source to reporters.

Sources also reported that the subsidy to allow such low passenger fares will in the long term have to come out of “expected” freight operating profits from the not yet completed new standard gauge international railroad line.

This cross subsidy practice might be a logical strategy if trucking companies subsidized the passenger buses on highways But they do not.  In the long term of daily rail to truck competition, this creates an advantage for truckers.  It is incredible how state planners historically are blind to this integrated transportation fact of competition economics.  The Ethiopians are no exception to such economic flaws in policy thinking. As the become better trained in economics, this may change their thinking.

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MORE INTEL about this light rail system

THE LONG DISTANCE LINE

The freight and intercity passenger train new railway construction underway will connect the Ethiopia capital city with the port of neighboring Djibouti.

Service there may begin sometime in 2016 say current reports from Bloomberg.

Trains on this inter-nation line might also be operated by a Chinese contractor instead of by the local Ethiopia rail organization.  Too early to tell yet. There is no published report on the success or timeline of building such skills inside the Ethiopian Rail Corp organization.

The long distance line will be standard gauge (1435mm) track.  But not 33 metric ton or doublestack container train capable.

The Ethiopians have settled for a lesser freight train capacity that they received from the Chinese builders rather than adopting the North American commercial and engineering big train technology standards — and having the Chinese contract companies modify their engineering build to standards. The result will give the Ethiopian rail company a rail freight haulage capability equivalent to a 40 to 50 year old post WW-2 North American operating performance. This means missing their chance to become the best of class within the African world of freight railroads.

POWER SUPPLY

Electric power to supply these light rail and intercity train sets in a more dependable manner is to come from the Chinese financed Gibe III hydropower dam’s reservoir set for operation in 2016.  The reservoir has started filling, with its 1,870 megawatts capable of almost doubling Ethiopia’s generating capacity. This will presumably allow for a dependable service day to day performance using straight electric locomotives rather then modern diesel-electric locomotives.

MISSED DOUBLESTACK CONTAINER OPPORTUNITY

With electric power from overhead wires catenary systems, the overhead clearance for doublestack container trains could be restricted.  This overhead wire electric system as currently designed as to height above the top of the rails is another rail marketing (commercial business competition) flaw that could have improved.  How? By increasing the wire height to more than 6.7 meters above the top of the rail.  That would allow doublestacking container trains to have a far superior cost per container advantage in direct competition with highway trucking.  In the US that rail rate advantage can be as large as 50 cents to $1.40 per container moved kilometer.

These simple manmade engineering design changes would have given the resulting rail line a superior economic advantage against long haul trucking.

S. Africa Rail Gauge Conversion Policy Change Announced by Government

Sep 22, 2015 report…

South Africa now has a government transport policy to plan out a widening of the country’s existing railway tracks to international standard gauge. The geographic scope covers as much as 20,000 kilometers (12,427 miles) of track just in South Africa.

This scope would take decades to physically complete. It might cost as much as 1.5 trillion rand ($110 billion),

Cape Gauge existing track width between the inner sides of two rails is 1067mm as a design. Standard gauge design width is 1435mm.

South Africa Transport Minister Dipuo Peters announced the policy to reporters on Tuesday. The gauge conversion would bring the network in line with about 60 percent of other countries, boost capacity and reduce transportation costs, she said.

In response, Transnet Acting Chief Executive Officer Siyabonga Gama said that while the company supports a move to standard gauge, the policy “needs further investigation” to determine its viability. “We did an assessment and we found out that if we had to create 15,000 kilometers of track, we would need up to 1.5 trillion rand,” he said in an interview after the announcement. “It would be a very expensive exercise.”

STRATEGIC FLAW

The assumption is so far that almost all tracks would be converted to 1435mm. Economically, it is more likely that only the strategic high traffic volume density routes and some feeder lines would financially justify the expense of conversion. .

The economic benefits come from more stable train operating wagon movements and possible high clearance doublestack container train economics. Containers stack two high on rail cars cut the expense by as much as 35% to 45%. Stack container trains have been operating successfully in the United States for 30 years. Two decades!

Stack trains cannot physically be operated on Cape Gauge or Meter gauge tracks.

Regardless of the eventual network size, the project could take decades to fully complete. A place to start might logically be between one of South Africa’s premier container sea ports and the Johannesburg regional market.

Meanwhile, much of Africa’s rail planning is already focused on standard gauge 1435mm track for all new railway projects. Ethiopia and Kenya just as two eastern African examples.

Minister Dipuo Peters strategic announcement is simply acknowledging a prudent rail modernization approach for South Africa.

Bravo!

To read the entire article, go to http://bloom.bg/1KxjCiS Sent from the Bloomberg iPad application.

Honolulu rail transit capital budget at about a 19% higher cost

Once budgeted at a capital cost of $5.26 billion, the project engineers now estimate a 19% over run. That is above and beyond whatever contingency percentage they had built into the project bid. Contingencies typically range from 5% to 12% at the final engineering bid stage. The total cost overrun is cumulatively close to a one-third range.

Would the project had been approved by the legislators and government administrations if they foresaw tis kind of project cost change?  Maybe not.

The project construction problems have added another year of delay.   2020 will now be the earliest completion date for the entire system.

At over $6 billion, the Honolulu system is about the same capital cost of the upgraded Panama Canal project due to open sometime in 2016.

http://www.staradvertiser.com/news/breaking/20150915_Honolulu_rail_shortfall_now_projected_at_over_1_billion.html?id=327783761 Sent from my iPad