Fitch: Light Rail Revival Brings Greater Complexity to PPPs

(The following statement was released by the rating agency) Fitch Ratings-London-May 21: Renewed global interest in trams and other types of light rail, and extensive use of public-private partnership (PPP) structures to finance their development highlight unique or exacerbated risks of those transactions compared to typical PPPs, Fitch Ratings says. A number of risks, including obtaining relevant permits and relocation of utilities, the addition of rolling stock and integration of various systems, can lead to project delays and cost overruns. However, none of these risks are insurmountable and they can be managed with appropriate risk allocation between the public and private sectors, structuring and counterparty selection. We assess these risks and mitigants when we rate light rail PPPs. The appeal of light rail as a solution to pollution and congestion issues in urban areas continues to increase worldwide, with 13.5 billion journeys made on this form of transport annually. However, the large upfront costs of light rail projects make funding challenging due to budgetary constraints, so regional and local governments often use PPPs, enabling the transfer of significant risk elements to the private sector. These projects carry the risks inherent in all PPPs (e.g. roads or social infrastructure), such as revenue, debt structure and financial metrics, as well as risks that are unique to light rail. Projects' location in heavily built-up areas with significant communication and utility infrastructures means obtaining relevant permits, and relocation of utilities can lead to delays and cost overruns. For example, the unexpected discovery of 1,000 underground utility and service cables in Sydney, Australia, delayed construction of that city's light rail project. These risks can be managed through advanced steps to facilitate permits and approvals, and active participation by a private sector developer and a public sector guarantor in finding solutions at the execution stage. Delivery of rolling stock and the subsequent integration of control, signalling, crossings, electricity and other systems is another technical risk unique to light rail. Standard off-the-shelf solutions provided by a contractor and system integrator with successful records of delivering similar rolling stocks and systems carry lower risks than customised stock delivered and integrated by less experienced counterparties. The same considerations apply to delivery and integration of non-rolling stock infrastructure, such as rail beds, rails, platforms and station constructions. Operational light rail projects also face specific risks, including the need to maintain replacement parts, given the level of complexity in systems and technology. However, the global track record suggests that ongoing exposure to performance of the original rolling stock manufacturer has been managed well. For example, Italian firm AnsaldoBreda continued to supply rolling stock even after experiencing financial troubles and a subsequent change in ownership. Light rail integration with other transportation, such as other public transport, cars, bikes and pedestrians is another focus of operating risk assessment. Lack of full integration could lead to service delays and incidents that could result in payment deductions and bad press, leading to lack of system acceptance. Appropriate integration during the planning stage should mitigate these risks. Operating costs exceeding original cost projections is one the key risks a light rail PPP faces during the operating period, as with other PPP projects. We assess exposure based on three factors: scope of work for which the project company is responsible (i.e. running the trains versus maintaining the stations); cost predictability based on similar projects; and cost volatility and structural projections, including the ability to absorb increased costs through creditworthy third parties, contingencies and other mitigants. Risks in Light Rail PPPs /a Availability-Based Projects Rating Criteria /a Contact: Scott Zuchorski Senior Director, Infrastructure +1 212 908 0659 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Ian Dixon Managing Director, Infrastructure +44 20 3530 1815 Tatiana Kordyukova Senior Analyst, Fitch Wire +44 20 3530 1954 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. 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